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On 28 June 2019, the Monetary Authority of Singapore
(“MAS”) announced that it will issue up to five digital
banking licenses 1. This was a revolutionary move by
the MAS as digital bank licenses were extended to
non-bank players and allowed banks to operate in Singapore with
minimal physical presence. The MAS recognises that the
banking landscape is undergoing a fundamental transformation driven
by three key forces: (i) pervasive mobile internet access; (ii) the
rise of big data; and (iii) the growth of platform ecosystems as a
major new business model in finance. Hence, the digital banking
framework was introduced to retain Singapore’s position as one
of the leading financial centres in Asia, and to allow for greater
competition and spur greater innovation in finance.
The MAS hopes that competition and innovation from
digital banks may be able to better serve the needs of society and
the economy in the following ways: (i) financing the growth of
infrastructure in emerging Asia, and increasingly of
climate-resilient, low-carbon investments; (ii) financing growth
enterprises and small-medium enterprises (“SMEs”); (iii)
reducing costs and improving convenience for consumers; (iv)
helping people to plan early and achieve financial security in
their later years; and (v) creating good jobs in the finance
sector. 2
The digital banking framework is in addition to any digital
banks that Singapore banking groups may already establish under the
existing internet-only banks (“IOB”) framework. Under
the IOB framework introduced in 2000,
Singapore-incorporated banking groups can set up banking
subsidiaries to pursue new business models, including IOBs.
This allows a bank to decide whether it wants to engage in such
activities within the bank or through a separate subsidiary.
Singapore-incorporated banks can also choose to have a
joint-venture partner in setting up the subsidiary, so long as the
Singapore-incorporated banking group retains control over the
venture. 3
1. What is a digital bank and how does it differ from a
traditional bank?
A digital bank can offer similar services to traditional banks,
except that it is only allowed to operate one physical place of
business. Unlike traditional banks, a digital bank will not have
physical branches, automated teller
machines (“ATMs”) or cash
deposit machines (“CDMs”), and all
banking services will be done online.
2. Who is allowed to operate a digital
bank?
Currently, the MAS has awarded 4 digital bank licenses
to the following applicants: 4
(a) Digital Full Bank
- A consortium comprising Grab Holding Inc. and Singapore
Telecommunications Ltd. - An entity wholly-owned by Sea Ltd.
(b) Digital Wholesale Bank
- A consortium comprising Greenland Financial Holdings Group Co.
Ltd, Linklogis Hong Kong Ltd, and Beijing Co-operative Equity
Investment Fund Management Co. Ltd. - An entity wholly-owned by Ant Group Co. Ltd.
In considering the applicants for digital bank
licenses, MAS would have considered whether the
applicants had a strong value proposition and innovative digital
business model to offer digital banking services. 5
3. What are the types of digital bank licenses
available?
There are two types of digital bank licenses under the digital
bank licensing framework – a digital full bank
(“DFB”) license and a digital wholesale
bank (“DWB”) license.
What are the key differences between DFBs
and DWBs?
The key differences between DFBs and DWBs are the type
of banking activities which they can carry out and the type of
customers they can offer their products and services to.
Digital Full Bank License 6
|
Digital Wholesale Bank License
|
|
|---|---|---|
| Permissible activities | All banking businesses | Only the proposed business(es) outlined in its application,
although it may subsequently seek approval to expand its business scope 7 |
| Deposit restrictions | No restrictions on deposits |
|
| Other products and offerings to customers | All types | Businesses and non-retail customers only, although MAS may
allow offerings to retail customers on an exceptional basis 8 |
Are DFBs allowed to offer the same services as
traditional full banks?
A full functioning DFB is allowed to offer the same
services as a traditional full bank. However, to minimise risks to
retail depositors, permissible activities of a DFB will
be phased in via a two-stage process. A DFB will first
commence business as a restricted DFB, which is subject to
restrictions on deposits and product offerings. A
restricted DFB also has a lower minimum paid-up capital
requirement compared to a full functioning DFB. Once a
restricted DFB has met all the relevant milestones and
has been assessed to pose no significant supervisory concerns, it
will progress to a full functioning DFB.
While MAS does not pre-determine a time period within
which a restricted DFB must progress to a full
functioning DFB, it generally expects a DFB to be
fully functioning within 3-5 years from commencement of business.
9 A high-level summary of the phased approach is set out
in the following diagram.
Source:
https://www.mas.gov.sg/-/media/Annex-A-Digital-Full-Bank-Framework.pdf
4. How do you apply for a digital bank
license?
Applications for a digital bank license must be made to
the MAS during the stipulated application period. The
first application period took place between 29 August 2019 and 31
December 2019. As the Singapore market is relatively small, only
four digital bank licenses have been awarded for
now. MAS will continue to monitor market developments and
review the need to issue more digital bank licences in the future.
16
Applicants for the DFB or DWB license must
meet the following requirements 17:
(a) Track record. At least one entity
in the applicant group has 3 or more years of track record in
operating an existing business in the technology or e-commerce
field.
(b) Fit and proper criteria. The
following persons are fit and proper 18:
- applicant group and their directors;
- substantial shareholders 19 and 12% controllers
20 of the proposed digital bank; and - directors and executive officers 21 of the proposed
digital bank, when identified 22.
( c ) Capital
requirements. Demonstrates the ability to meet the
applicable minimum paid-up capital requirement at the onset and the
minimum capital funds requirement on an ongoing basis. This can be
done by submitting a written confirmation from shareholders of the
proposed digital bank on commitment of funds.
(d) Value proposition. Provides clear
value proposition, incorporating the innovative use of technology
to serve customer needs and reach under-served segments of the
Singapore market.
(e) Sustainable business
model. Demonstrates that the proposed digital
bank’s business model is sustainable. The applicant must
provide a five-year financial projection of the proposed digital
bank, which must show a path towards profitability. The assumptions
of the financial projection must be reviewed by an external and
independent expert.
(f) Orderly exit plan. Submits a
feasible plan that can facilitate the orderly exit of the proposed
digital bank.
(g) Commitment from
shareholders. Shareholders of the proposed digital
bank commit to providing a letter of responsibility and a letter of
undertaking that MAS may require in respect of the
operations of the proposed digital bank.
Digital Full Bank License
|
Digital Wholesale Bank License
|
|
|---|---|---|
| Who can apply |
|
|
| Minimum paid-up capital | S$1.5 billion | S$100 million (this is the same as existing wholesale
banks) |
5. Are digital banks regulated differently from
traditional banks?
Generally speaking, DFBs are subject to the same regulatory
requirements as existing full banks, whereas DWBs are subject
to the same regulatory requirements as existing wholesale banks.
These include requirements relating to technology risks,
money-laundering and terrorism financing risks, and the conduct of
non-financial businesses.
As an existing digital bank license holder, what are my
ongoing regulatory requirements?
Banking Act 1970 (“Banking Act”)
(a) Minimum capital requirements
All banks including digital banks are required to meet the
prescribed minimum paid-up capital requirement and minimum capital
funds requirement on an ongoing basis. Digital banks will also be
subject to the risk-based capital adequacy requirements set out
under Notice 637 (Risk Based Capital Adequacy Requirements for
Banks Incorporated in Singapore). 23
(b) Changes in shareholding
Any person who wishes to become a substantial shareholder, 12%
controller, 20% controller or indirect controller of a licensed
bank will be required to obtain prior approval from the
Minister-in-Charge of MAS 24. In particular
for DFB applicants, any in-principal
approvals (“IPA”) granted
by MAS would be on the basis of the shareholding
structure provided to MAS at the application stage. As
such, if the change in the shareholding no longer meets the
eligibility criteria for Singaporean control, the IPA may
be revoked.
© Overseas expansions
Pursuant to section 12(3) of the Banking Act, a DWB is
required to obtain MAS’ approval to open a new branch,
agency or office in a place outside Singapore.
Risk Management
Digital banks should refer to MAS’ Framework for Impact
and Risk Assessment of Financial Institutions to better understand
how MAS assesses the impact of financial institutions
25, and the types of risks that are generally applicable
to financial institutions.
(a) Anti-Money Laundering (AML) and Countering the Financing
of Terrorism (CFT)
Financial institutions operating in Singapore are required to
put in place robust controls to detect and deter the flow of
illicit funds through Singapore’s financial system. Such
controls include the need for financial institutions to identify
and know their customers (including beneficial owners), to conduct
regular account reviews, and to monitor and report any suspicious
transaction. 26
Digital banks will be subject to the same AML/CFT and
sanctions-related requirements applicable to the incumbent banks,
including MAS’ Notice 626 on Prevention of Money
Laundering and Countering the Financing of Terrorism and its
corresponding guidelines 27.
(b) Technology Risk
MAS has issued a set of Guidelines on Risk Management
Practices – Technology Risk 28 which sets out
technology risk management principles and best practices to guide
the financial institutions to establish sound and robust technology
risk governance and oversight, as well as maintain IT and cyber
resilience. MAS has also issued Notice 644 (Notice on
Technology Risk Management) 29 on the requirements on
maintaining high availability, recoverability, data protection and
incident reporting, and Notice 655 (Notice on Cyber Hygiene)
30 on the essential measures that banks must take to
mitigate the growing risks of cyber threats.
Furthermore, in the wake of recent SMS-phishing
scams, MAS and the Association of Banks in
Singapore (“ABS”) are also
introducing a set of additional measures to bolster the security of
digital banking. 31
© Outsourcing Risks
As a digital bank may from time to time enter into arrangements
with third party service providers to outsource certain business
and support functions, it is also required to have in place the
relevant governance and risk management processes to identify and
manage the risks arising from these outsourcing arrangements.
Digital banks should refer to MAS’ Guidelines on
Outsourcing 32 that sets out MAS’ expectations
of a financial institution that has entered or is planning to enter
into an arrangement to outsource any of its business functions to a
service provider.
Conduct of non-financial businesses
In September 2017, MAS sought public feedback on its
proposal to refine its anti-commingling framework for banks in two
key aspects: (i) to streamline the conditions and requirements for
banks to conduct or invest in permissible non-financial businesses;
and (ii) to allow banks to engage in the operation of digital
platforms that match buyers and sellers of consumer goods or
services, as well as the online sale of such goods and services.
Digital banks should, when planning to conduct any non-financial
businesses, consider MAS’ Consultation Paper and Response
to Feedback Received on its Review of Anti-Commingling Framework
for Banks 33, which sets out MAS’s policy
towards banks’ conduct of non-financial businesses.
Securities and Futures Act
2001 (“SFA”) / Financial
Advisers Act 2001 (“FAA”)
Digital banks will also be expected to meet the relevant
regulatory requirements under the SFA and
the FAA and submit the relevant forms where it intends to
carry out regulated activities under
the SFA 34 or financial advisory services
under the FAA 35. When submitting the relevant
form, the digital bank is not required to resubmit information that
was already provided in its application to set up a digital bank
(unless there have been any changes to the information previously
provided).
6. Regional Developments
Hong Kong
Digital banks are termed as “virtual banks” in Hong
Kong, and defined as “a bank which primarily delivers retail
banking services through the internet or other forms of electronic
channels instead of physical branches”. 36 As at 31
December 2021, the Hong Kong Monetary Authority has issued a total
of 8 virtual bank licenses. 37
Malaysia
On 2 July 2021, Bank Negara
Malaysia (“BNM”) announced
that it had received 29 applications for its digital banking
license and is set to issue up to 5 digital banking licenses in
early 2022. 38 Similar to Singapore’s approach
towards DFBs, BNM implements a phased approach
towards its digital banking license holders, such that a simplified
regulatory framework is applied during its initial three to five
years of operations, to allow the license holders to demonstrate
its viability and sound operations, and for BNM to
observe attendant risks. 39
Indonesia
The Financial Services Authority (Otoritas Jasa
Keuangan) of Indonesia issued new regulations in August
2021 to introduce its digital bank regulatory framework, which
allows for digital banking to be carried out by way of an
establishment of a new digital bank, or a transformation of an
existing conventional bank into a digital bank.
Philippines
The Central Bank (Bangko Sentral ng
Pilipinas) of the
Philippines (“BSP”) issued its
Guidelines on the Establishment of Digital Banks in December 2020
for the inclusion of “Digital Banks” as a distinct
classification of banks and to set out its corresponding licensing
framework in its existing Manual of Regulations for Banks. Similar
to Indonesia, the guidelines allow for the establishment of a new
digital bank, or the conversion of an existing bank to a digital
bank. 40 However, BSP announced that as at 1
September 2021, it would stop accepting applications for digital
banking licenses for 3 years, to allow the authorities to monitor
the digital banking industry. The number of digital banking
licenses issued will be capped at 7. 41
This article has been produced for general informational
purposes only. The information contained in this article should not
be construed as legal advice and is not intended to be a substitute
for legal counsel on any subject matter. No recipient of this
article should act or refrain from acting on the basis of any
contents in this article without seeking appropriate legal or other
professional advice.
Footnotes
1
https://www.mas.gov.sg/news/media-releases/2019/mas-to-issue-up-to-five-digital-bank-licences
2
https://www.mas.gov.sg/news/speeches/2019/banking-liberalisations-next-chapter-digital-banks
3
https://www.mas.gov.sg/-/media/Digital-Bank-Licence/FAQs-on-DFB-and-DWB-Licences.pdf?la=en&hash=6883
4
https://www.mas.gov.sg/news/media-releases/2020/mas-announces-successful-applicants-of-licences-to-operate-new-digital-banks-in-singapore
5
https://www.mas.gov.sg/news/speeches/2019/banking-liberalisations-next-chapter-digital-banks
6 The information in this table is presented on the
assumption that the DFB is a full
functioning DFB.
7 Generally, the permissible activities for a digital
wholesale bank are outlined in the Guidelines for Operation of
Wholesale Banks published by the MAS on 31 July
2008.
8 Non-retail customers refer to individuals who fall
within the definition of “accredited investor” under the
Securities and Futures Act 2001. MAS does not expect
a DWB to serve retail customers, such as providing
financial advice to these individuals. On an exceptional
basis, MAS may allow such offerings, provided that there
is a strong nexus and is necessary to the applicant’s core
offering(s) to the non-retail segment. An applicant with plans to
provide any of such offerings should highlight accordingly in its
application, and explain how there is a strong nexus and is
necessary to the specific core offering(s) to the non-retail
segment.
9
https://www.mas.gov.sg/-/media/Digital-Bank-Licence/Eligibility-Criteria-and-Requirements-for-Digital-Banks.pdf?la=en&hash=57410B76A3359791816B0A0BD592DF8EF2D37B33
10 Wholesale deposits will not be subject to the
aggregate deposit cap once the restricted full bank’s paid-up
capital reaches $100m (in line with wholesale bank’s minimum
paid-up capital).
11 The Deposit Insurance Scheme will protect non-bank
depositors (including individuals and sole proprietorships) in the
event of a bank’s failure by covering
the SGD deposits placed with a member bank, for up to
S$75,000 per depositor per member bank.
12 6.5% CET1 Capital Adequacy Ratio (CAR), 10%
Total CAR, 2.5% capital conservation buffer (CCB), up to 2.5%
countercyclical capital buffer (CCyB).
13 100% net stable funding ratio, 100% liquidity coverage
ratio.
14 Interested parties can refer to the Schedule to the
Securities and Futures (Capital Markets Products) Regulations 2018
for potential scope of permissible investment products that can be
offered.
15 Interested parties can refer to MAS Notice
635 Unsecured Credit Facilities to Individuals and Banking (Credit
Card and Charge Card) Regulations 2013 for reference.
16
https://www.mas.gov.sg/-/media/Digital-Bank-Licence/FAQs-on-DFB-and-DWB-Licences.pdf?la=en&hash=6883
17
https://www.mas.gov.sg/-/media/Digital-Bank-Licence/Eligibility-Criteria-and-Requirements-for-Digital-Banks.pdf?la=en&hash=57410B76A3359791816B0A0BD592DF8EF2D37B33
18 See Guidelines on Fit and Proper Criteria.
19 “substantial shareholder” has the same
meaning as in section 81 of the Companies Act. It generally refers
to any person who will have a voting interest of at least 5% in the
proposed digital bank.
20 “12% controller” means a person, not being a
20% controller, who alone or together with his
associates:
a holds not less than 12% of the total number of issued
shares in the proposed digital bank; or
b) is in a position to control voting power of not less
than 12% in the proposed digital bank.
Please refer to section 15B of the Banking
Act.
21 “executive officer”, in relation to a
company, means any person, by whatever name described,
who:
a) is in the direct employment of, or acting for or by
arrangement with, the company; and
b) is concerned with or takes part in the management of
the company on a day-to-day basis.
Please refer to section 2 of the Banking Act.
22 The proposed digital bank’s board of directors and
team of executive officers need not be fully formed at time of
application.
23
https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulations-Guidance-and-Licensing/Commercial-Banks/Regulations-Guidance-and-Licensing/Notices/MAS-Notice-637-effective-1-January-2022.pdf
24 Sections 15A and 15B of the Banking Act
25
https://www.mas.gov.sg/-/media/MAS/News-and-Publications/Monographs-and-Information-Papers/Monograph—MAS-Framework-for-Impact-and-Risk-Assessment.pdf
26
https://www.mas.gov.sg/regulation/notices/notice-626
27 https://www.mas.gov.sg/regulation/notices/notice-626
and
https://www.mas.gov.sg/regulation/guidelines/guidelines-to-notice-626-on-prevention-of-money-laundering-and-cft-for-banks
28
https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulatory-and-Supervisory-Framework/Risk-Management/TRM-Guidelines-18-January-2021.pdf
29
https://www.mas.gov.sg/-/media/MAS/Notices/PDF/Notice-MAS-644.pdf
30
https://www.mas.gov.sg/-/media/MAS/Notices/PDF/MAS-Notice-655.pdf
31
https://www.mas.gov.sg/news/media-releases/2022/mas-and-abs-announce-measures-to-bolster-the-security-of-digital-banking
32
https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulatory-and-Supervisory-Framework/Risk-Management/Outsourcing-Guidelines_Jul-2016-revised-on-5-Oct-2018.pdf
33
https://www.mas.gov.sg/publications/consultations/2017/consultation-paper-on-review-of-anti-commingling-framework-for-banks
34 Form 26- Notice of Commencement of Business lodged
pursuant to Regulation 14(4) of the Securities and Futures
(Licensing and Conduct of Business) Regulations by persons exempt
from holding a Capital Markets Services License under section
99(1)(a), (b), ( c ) and (d) of the SFA
35) Form 26 – Notice of Commencement of Business
lodged pursuant to Regulation 37(1) of the Financial Advisers
Regulations by persons exempt from holding a Financial
Adviser’s License under Section 23(1)(a), (b), ©, (d) and
(e) of the FAA
36
https://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2018/20180530e3a2.pdf
37
https://www.hkma.gov.hk/eng/key-functions/banking/banking-regulatory-and-supervisory-regime/virtual-banks/
38
https://www.bnm.gov.my/-/bnm-receives-29-applications-for-digital-bank-licenses
39
https://www.bnm.gov.my/documents/20124/938039/20201231_Licensing+Framework+for+Digital+Banks.pdf
40
https://www.bsp.gov.ph/Regulations/Issuances/2020/c1105.pdf
41
https://www.bloomberg.com/news/articles/2021-08-19/philippines-set-to-close-digital-bank-applications-for-3-years
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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