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FinTech Control Tower By DIGITAL CHALLENGER BANKS A D E S I R E A D R E A M A V I S I O N N o v e m b e r 2 0 2 0 1 Champions arent made in gyms. Champions are made from something they have deep inside them a desire, a dream, a vision Muhammad Ali After speaking with over 40 founders and venture builders over the past few months, what is clear is the drive, passion, motivation, vision and optimism they live by. The title of this report seeks to encapsulate this spirit, coming from a quote of the boxer Muhammad Ali BCG FinTech Control Tower 2BCG FinTech Control Tower It has been five years since Singapore started its Smart Financial Centre journey, and four years since the set up of the Singapore FinTech Association (SFA). Today, Singapore is one of the leading FinTech hubs in the world with 1,000 FinTech firms employing over 10,000 people. Every four out of five FinTech firms operating in Singapore are a member of SFA. There are three defining characteristics of the Singapore FinTech ecosystem. First, Singapore is one of the most open countries to talent, and attracts entrepreneurs from all over the world to start their journey or set up a new regional base for their growing venture. Second, the majority of FinTech firms are B2B-oriented, due to Singapores position as a leading international financial centre and more than 7,000 MNCs residing here. Third, most of the FinTech firms operate beyond Singapore, either regionally due to the growing emerging economies or internationally to support the business of international banks. The new Digital Bank License regime will likely define the next phase of FinTech development in Singapore. We have much to learn from Digital Challenger Banks from other countries. We also foresee many of the successful Digital Bank License applicants in Singapore partnering with existing FinTech firms rather than creating from scratch. Further, the new digital banks will look to scale beyond Singapore. The Singapore FinTech Association and BCG Expand FinTech Control Tower have come together to produce a Digital Challenger Banks“ reference guide, to help you navigate the exciting and dynamic Digital Challenger Banks landscape in Singapore and the region. Hock Lai Chia, President, Singapore FinTech Association Pauline Wray, Managing Director, Global Lead BCG Expand FinTech Control Tower Foreword 3 BCG Expand FinTech Control Tower (FCT) is a research focused unit developed jointly by the Boston Consulting Group (BCG) and Expand Research. The FCT identifies initiatives, technologies, and companies that matter most in todays FinTech ecosystem and assess their impact. This is completed using our internal platform that can ingest data from multiple sources and apply a proprietary taxonomy combined with a rigorous framework, resulting in a highly accurate and globally complete FinTech dataset. We engage directly with financial institutions, regulators, industry stakeholders and innovators, putting us at the forefront of the latest research and FinTech trends SFA is a cross-industry and non-profit organization. Its purpose is to support the development of the FinTech industry in Singapore, and to facilitate collaboration among the participants and stakeholders of the FinTech ecosystem in Singapore. The SFA is a member-based organization with over 800+ corporate members. It represents the full range of stakeholders in the FinTech industry, from early-stage innovative companies to large financial players and service providers. To further its purpose, the SFA also partners with institutions and associations from Singapore and globally to cooperate on initiatives relating to the FinTech industry. The SFA have signed over 60 international memorandum of understanding (MoU) in more than 40+ countries and are the first U Associate organisation to be affiliated with National Trades Union Congress (NTUC). For further information visit singaporefintech/ Singapore FinTech Association Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCGs diverse, global teams bring deep industry and functional expertise and a range of perspectives to spark change through leading-edge management consulting as well as data science, technology and design, digital ventures, and business purpose. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization to deliver results that help our clients thrive Boston Consulting Group BCG Expand FinTech Control Tower 4 This document has been developed in partnership with BCG Expand FinTech Control Tower a subsidiary of the Boston Consulting Group and the Singapore FinTech Association The report covers five sections: A taxonomy of Digital Challenger Banks Global growth trends Regional variances and regulatory drivers Go-to-market strategy Singapore and potential future state The FinTech Control Tower defines Digital Challenger Banks as providers challenging the incumbent landscape. The report does not cover digital-only initiatives from traditional banks This report is informed by interviews with founders of Digital Challenger Banks, senior executives at local incumbents, perspectives of regulators and the Singapore FinTech Association, the primary industry body headquartered in Singapore About this document BCG FinTech Control Tower 5 Table of contents BCG FinTech Control Tower 6 Executive Summary 7 The go-to-market strategy of Digital Challenger Banks is primarily driven by the maturity level of their market and entity type: start-ups or corporate-backed. Consequently, they have different product strategies, launching with either a transactional or credit business. Few Digital Challenger Banks are currently profitable. For the ones that are, interest income and their ecosystem strategy are key drivers Executive Summary Digital Challenger Banks have become a global phenomenon and are poised to disrupt the status quo in Southeast Asia BCG FinTech Control Tower Since 2015, there has been a 200% increase in the number of Digital Challenger Banks globally, of which 45% are in Americas, 35% are in EMEA and 20% are in APAC. Four models of Digital Challenger Banks may be observed: they are differentiated by 1) ownership of a banking license 2) partnership model and 3) entity, where they are either FinTechs or corporates that are not from the financial services sector Landscape Strategy Singapore is first in SEA to issue Digital Bank licenses, enabling non-traditional providers to enter the banking sector. Successful applicants will offer strong value propositions combining non-financial and financial services. They tap into a fast-growing region that will be the sixth-largest economic block globally by 2030. With a significant part of the population remaining unbanked, the opportunity for new banking providers is tremendous Different models of Digital Challenger Banks are prevalent in each region, in part influenced by policymakers. While regulatory initiatives are driven by different factors, two main approaches to licensing are observed. Regulators either adopt vehicles to facilitate the existing licensing process, or provide Digital Bank / Virtual Banks regulations tailored for a new breed of firmsRegulatory Singapore difficult to obtain a bank license Durbin Amendment allows some Neobanks to charge higher interchange fees Availability of Banking-as-a-Service providers partnering with FinTechs to go-to-market Presence of Digital Bank licensing regime with an open path to application Mobilisation approach allowing firms that do not meet the full requirements on day one to apply e.g. lower upfront capital requirements Lower interchange fees, incentivizing firms to launch credit products that require licensing Presence of Digital Bank licensing regime with a calibrated approach that encourage entry of well-resourced Non-FI firms e.g. high capital requirements Presence of Super-Apps / Tech Giants with financial services expertise 21 Regulators are increasingly active in bank licensing, facilitating the entry of new players Source: BCG Fintech Control Tower New Bank Start-Up Unit Virtual Banking Guidelines ADI Restricted License Special Act on Internet Only Banks Internet-Only Bank Guidelines Privately owned Banks License Payment Bank License Digital Bank License to be granted Draft policy on Digital Banking License Draft Guidance for the Licensing of Digital Banks First Islamic Digital Banking License 2014 2016 2017 2019 2018 Specialized Banking License 2020 22 Draft stage Regulators approach is split between a dedicated and a non- dedicated licensing framework for Digital Challenger Banks Source: BIS; BCG Fintech Control Tower Most jurisdictions apply existing banking laws and regulations to Digital Challenger Banks, which face the same licensing procedures and requirements as traditional applicants. However, there may be initiatives designed to facilitate market entry of these new banks, such as the New Bank Start-Up Unit in the United Kingdom Some jurisdictions have specific licensing frameworks designed for Digital Challenger Banks, where licensing requirements can differ from traditional banks. These include restrictions around physical branches, ownership, sustainability of businesses plans and technology-related elements Dedicated Licensing Framework Non-Dedicated Licensing Framework 23 Non-Dedicated Licensing Framework Dedicated Licensing Framework Licensing Requirements Cap on the number of licenses granted - - - - Controlling stake owned by locals - - - - - Possess track record in technology - - - Viable Minimum capital adequacy and liquid holdings; Product and services offerings Specific legal restrictions on the: Maximum size of deposits; Business which is limited to simple credit and investment product, Deposit accepted from the public Time fra me The Authorisation is granted for a period of 12 months The RADI license can be granted for a maximum period of 2 years Expected to be fully functional within 3-5 years from commencement of business UNITED KINGDOM New Bank Start-Up Unit AUSTRALIA Restricted Authorized Deposit- Taking Institution (RADI) License SINGAPORE Digital Full Bank License Initiatives launched to facilitate entry of Digital Challenger Banks Source: BCG FinTech Control Tower Optional mobilisation phase which allows new banks to partially operate before becoming fully authorised. After this transitional period, if successful, new banks are granted with a full banking license. If not, the authorisation is removed New banks can apply for a restricted license, i.e. an authorization granted for a transitional period during which they will perform a limited range of business activities governed by a smaller set of regulatory requirements. If successful, new banks are granted with a full banking license (ADI license). If not, they must cease all activities and liquidate their business. A Digital Full Bank (DFB) has to pass through a phased-in approach where it can perform activities on a limited scale with restrictions on business scope and deposit-taking activities, but does not have to meet the paid-up capital requirement in full. This transitional period will demonstrate the applicants ability to meet its commitment remaining 60% are fee-based Commissions from marketplace model contributes around 1% of total fee income Cost to run an account reduced to 1530 2017 2018 20202016 2019 Source: BCG FinTech Control Tower, company annual reports, press releases 44 Cop yri gh t 20 20 by Bo sto n C on su lti ng G ro up . A ll r igh ts re se rve d. 36 58 79 115 165 -30 -37 -86 -47 -60 -88 -129 11 19 27 361 2 3 4 3 5 7 0.8 0.6 0.5 Important event/ strategic moves Tinkoff has strong focus on profitability since launch and are seeking to create a Super App of financial and lifestyle services Financial Year Total Income (Bn Rub) Total Expense (Bn Rub) Profit (Bn Rub) Selected Highlights 2014 2015 20182013 20172016 2019 Primary product was Credit card, providing interest income and interchange fees Cost to income ratio is 35.6% Customer acquisition expense was cut by 17% resulted in 30% drop in new credit card issued Provision for loan impairment increased by 62% 33% of total revenue comes from non-credit business lines 12% of net income are fee based whereas 88% are interest based Customer acquisition expense increased by 46% 21% of net income are fee based whereas 79% are interest based Cost to income ratio increased to 43.2% 18% of net income are fee based whereas 82% are interest based Increased customer acquisition expense by 82%, following the financial crisis Higher operating expense driven by investments into new financial marketplace 3% of net income are fee based whereas 97% are interest based Cost to income ratio is 39% Tinkoff first launched with credit card only in 2007 Russian financial crisis Launched current account and payment services Launched several new business lines, transition into online financial marketplace Launched Tinkoff Mobile Obtained full brokerage and depository services license Launched Russias first Super-App New credit cards issued in the year (M) Total current account (M) Note: Tinkoff was launched in 2007 Source: BCG FinTech Control Tower, company annual reports, press releases 88 40 36 240 88 1.8 45 Cop yri gh t 20 20 by Bo sto n C on su lti ng G ro up . A ll r igh ts re se rve d. 6,748 10,030 14,870 -828 -2,140 -5,010 -7,272 -584 402 1,448 1,448 3,950 226 -10,718 2,449 5 20 60 100 200 Total customer (in M) Important event/ strategic moves WeBank is highly profitable and pursuing an Open Banking ecosystem approach Financial Year Net Operating Income (M RMB) Net Income (M RMB)Operating Expense (M RMB) Interest based income became main profitability driver as split between fee based and interest- based income became 36% and 74% Cost to income ratio at 34% Split between fee based and interest based income is 88% and 12% Split between fee based and interest based income is 77% and 23% Cost to income ratio is 52%Selected Highlights Split between fee based and interest based income is 66% and 34% Invested significantly in R company reports; bank investor presentations; BCG FinTech Control Tower 7,752 4,667 4,564 OCBCDBS UOB 26% 16% 21% 37% Others DBS OCBC UOB Income of SG incumbent banks in 2020H1 (SGDM) SG incumbent banks own 63% of local market share in loans SG incumbent banks have invested in digital banking Launched digital banking solution DBS Digibank in Singapore in March 2016 Launched Digibank in India in April 2016 and in Indonesia in August 2017 Launched mobile payment app OCBC Pay Anyone in 2014 Launched mobile-led banking solutions in Indonesia and Malaysia, and has plans to set up a digital bank in Indonesia Launched digital banking app UOB Mighty in November 2015 Launched digital bank TMRW in Thailand in February 2019 and Indonesia in August 2020, with plans to also launch in Sing
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