RETAIL BANKING | Staff Reporter, Singapore

Singapore's digital-only banks face uphill battle to reach sustainable profits

Poor performance of earlier neobanks have cast a doubt on their ability to gain income.

Singapore’s upcoming digital-only banks face an uphill climb in order to achieve sustainable profitability. The odds are against them due to customers’ banking preferences and the strong positions of incumbent banks—whilst the poor showing of their earlier neobank peers casts a shadow on their reliability.

The Monetary Authority of Singapore (MAS) unveiled four successful applicants for the licenses to operate digital banks in the Lion City last December 2020. Successful applicants include an entity by Shopee-operator Sea Limited; a consortium made up of Grab and Singtel; an entity owned by Chinese fintech giant Ant Group; and a consortium comprising of Greenland Financial Holdings Group.

The four entities see challenges ahead in making a profit, securing funding, and even obtaining clients, based on trends seen in earlier virtual banks in other markets.

Banking customers reportedly still prefer to be served on an omni-channel basis through both online apps and face-to-face interactions at physical branches, which incumbents feature compared to the challenger neobanks’ digital-only proposition, according to UOB Kay Hian analyst Jonathan Koh.

Virtual-only banks in the region also notably failed to shine during the COVID-19 pandemic. In contrast, other web-based and remote services such as online shopping, online gaming, video streaming and food delivery took off.

In fact, the incomes of digital-only challenger banks’ have fallen sharply during the COVID-19 pandemic.

“The drop in consumer spending and overseas travel has resulted in a steep decline in fees, which is their main source of revenue—transaction fees,” Koh noted.

Digital-only banks’ weakness also centere on their inability to generate revenue, and they are described as “persistently loss-making” by Koh. Their loss per customer deteriorated from $16.1-$96.7 (€10-60) pre-pandemic to $32.2-$120.95 (€20-75) post-COVID-19.

Whilst incumbent brick-and-mortar banks’ profit per customer also fell during the pandemic, they have the advantage of having multiple sources of income compared to digital-only challenger banks that are reliant on transaction fees.

Competing with incumbent brick-and-mortar stores will also be a challenge for digital-only banks, as incumbents can easily outspend digital-only challenger banks on technology. Incumbents can just copy popular features introduced by digital-only banks, according to Koh.

Loss of funding has also become a problem for many of these neobanks.

“The party years have ended and investors have started to closely scrutinise the profitability of digital-only banks,” Koh said, noting that many early-stage fintechs struggled to attract funding in 2020.

A separate report by KPMG found that total global investment activities in fintech dropped by 66% on in the first half of 2020.

The drying up well of funds has posed as a problem for neobanks Monzo and Xinjia Bank. Australian neobank Xinjia Bank closed down in December 2020 after just gaining said license a year earlier, stating that raising capital has become impossible due to the COVID-19 pandemic.

Meanwhile Monzo, considered one of the top digital only banks in the UK, warned in its annual report that its ability to continue is a concern and is subject to material uncertainties. In the same report it revealed that it raised funds at a 40% discount to the previous valuation in June 2020.

Monzo and another UK-based bank, Revolut, were also plagued with complaints from customers whose accounts were frozen during the lockdown. Hundreds of customers complained that they could not access their funds as their accounts were frozen without notice—an episode of poor customer service that will affect customers’ perception on reliability of digital-only banks, according to Koh.

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