A Guide to Digital Bank Regulation in Singapore

You may have heard about digital banks generally, or even that Singapore has allowed a limited number of organisations to operate as digital banks here, and are curious about what this means for you. You may also be the owner of an organisation looking to apply for a digital banking licence in Singapore.

In both cases, this article will cover the following topics which may be able to address some of the common questions that one may have on the subject:

• What are digital banks and how do they differ from traditional banks?
• Who is permitted to operate a digital bank?
• What are the types of digital bank licences currently available?
• How to apply for a digital banking licence
• Are digital banks regulated differently from traditional banks and what are the regulatory requirements involved?

What are Digital Banks and How Do They Differ From Traditional Banks?

Digital banks are institutions that offer the same banking services as traditional banks, except that they operate entirely online, without any physical infrastructure. This includes not having any physical branches, automated teller machines (ATMs) or cash deposit machines (CDMs).

As the name suggests, all banking services offered by digital banks are done digitally (i.e. online), and customers can access these services from their computers or smartphones.

Who is Permitted to Operate a Digital Bank?

Currently, the Monetary Authority of Singapore (MAS) has awarded Singapore’s first four digital bank licenses to the following applicants:

1. A consortium comprising Grab Holding Inc. and Singapore Telecommunications Ltd.
2. An entity wholly-owned by Sea Ltd
3. A consortium comprising Greenland Financial Holdings Group Co. Ltd, Linklogis Hong Kong Ltd, and Beijing Co-operative Equity Investment Fund Management Co. Ltd.
4. An entity wholly-owned by Ant Group Co. Ltd.

These four licensees were chosen out of 21 applicants including e-commerce companies, technology and telecommunications firms, and financial-technology firms such as Razer, ByteDance Technology, Xiaomi Finance etc. MAS considered all of the applications and selected the eventual licensees based on the following criteria:

• Whether they have a strong value proposition and whether they have a plan and ability to incorporate innovative use of technology to serve customer needs and reach under-served segments.
• Whether they are able to maintain a digital banking business that is prudent and sustainable;
• Their growth prospects and other contributions to Singapore’s status as a financial centre.

What are the Types of Digital Bank Licences Currently Available?

There are currently two types of digital bank licences under the digital bank licensing framework:

1. A digital full bank (DFB) licence; and
2. A digital wholesale bank (DWB) licence.

The main difference between the two types of licenses pertains to the type of banking services that they can provide, and the customer pool that they can offer their services to. 

However, even for licensees which have been awarded a DFB licence, they will commence operations as a restricted DFB, before becoming a full functioning DFB. There is no fixed time period before a restricted DFB becomes a full functioning DFB, but the estimated length of the transition phase, as provided by MAS, is 3 to 5 years from the commencement of its operations. The purpose of this transition phase is to minimise the risk to retail users, as well as to generally guard against the risk of a qualifying but untested business model. Thus, during this transition phase, the performance of the restricted DFB will be assessed by MAS, which will look out for the strength of the internal controls, track record of compliance with regulations, sustainability of the business etc.

As mentioned above, the differences between a DFB (full functioning DFB and restricted DFB) and a DWB are broadly summarised in the following table:

How to Apply For a Digital Banking Licence

Regardless of whether you are thinking of applying for a DFB licence or a DWB licence, the general application process is the same. The two steps in the application process are:

1. First, you need to fill in the Application Form which can be downloaded from the MAS website. In the application form, you will have to provide information like the background information and financial information of your institution, and documents like a letter from your home country’s supervisory authority approving the establishment of a digital bank in Singapore etc. 
2. Next, you have to email your application to Digital_Banks@mas.gov.sg during the stipulated application period. You can find out more about the timelines for the application on the MAS website.

However, there are certain requirements that you will have to meet before you are even eligible to apply for a digital banking licence. These requirements are:

• For DWBs, applicants must be incorporated in Singapore. As for DFBs, applicants must be anchored in Singapore, controlled by Singaporeans, and headquartered in Singapore. Whether an applicant is anchored in Singapore will be assessed by MAS based on the following factors:
  • Whether the DFB and its parent entity publicly identify Singapore as their home country.
  • Whether the DFB’s parent entity’s global head office is in Singapore.
  • Whether the effective management of the DFB and its parent entity is situated in Singapore.
  • If the DFB has no parent entity, whether the shareholder with the largest shareholding and has effective control over the DFB is a Singaporean individual or entity that fulfils the conditions above.

• At least 1 entity in your applicant group must have 3 or more years of track record in operating an existing business in the technology or e-commerce field.

• The following persons must be fit and proper, in accordance with the MAS Guidelines on Fit and Proper Criteria:
  • The applicant group and their directors.
  • The substantial shareholders of the proposed digital bank, and controllers holding not less than 12% of the total number of issued shares of the proposed digital bank or are in a position to control voting power of not less than 12% of the proposed digital bank.
  • The directors and executive officers of the proposed digital bank.

• You will have to demonstrate your ability to meet the applicable minimum paid-up capital requirement at the onset and the minimum capital funds requirement on an ongoing basis. You can do this by submitting a written confirmation provided by your shareholders on their commitment of funds.
  • The minimum paid-up capital for a full functioning DFB is S$1.5 billion. However, as DFBs start out as restricted DFBs, the minimum paid-up capital required is S$15 million, which will be progressively increased.
  • The minimum paid-up capital for DWBs is S$100 million.

• You must demonstrate how your applicant group will satisfy the selection criteria discussed above, and to do so, must:
  • Provide a clear value proposition, incorporating the innovative use of technology to serve customer needs and reach under-served segments of the Singapore market;
  • Demonstrate that the proposed digital bank’s business model is sustainable;
  • Provide a 5-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; and
  • Submit a feasible plan that can facilitate the orderly exit of the proposed digital bank. This plan must include details such as what will trigger the digital bank to exit the market, what strategies/solutions it intends to implement when exiting the market, and how this will play out in different hypothetical scenarios.

• The shareholders of the proposed digital bank must also 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.

Are Digital Banks Regulated Differently From Traditional Banks?

DFBs are subject to the same regulatory requirements as existing full banks, while DWBs are subject to the same regulatory requirements as existing wholesale banks. Full banks and wholesale banks refer to two types of existing traditional banks – just like the difference between DFBs and DWBs, full banks can provide the full suite of banking services to the public, whereas wholesale banks can provide all banking services except Singapore dollar retail banking activities.

The requirements that apply to the existing banks, DFBs and DWBs generally relate to cyber security, money-laundering and terrorism financing risks, and the conduct of non-financial businesses. These requirements are set out in the Banking Act and are captured in the Notices and Guidelines published by MAS, which can be found here for full banks, and here for wholesale banks.

The main regulatory obligations of existing banks, which would also apply to digital banks, span the following key areas:

• Anti-Money Laundering and Countering the Financing of Terrorism Requirements: A digital bank must comply with the requirements in the MAS Notices on Prevention of Money Laundering and Countering the Financing of Terrorism. This includes having systems in place for risk assessment and mitigation, record keeping and customer due diligence.
• Risk Management Practices – Technology Risk: A digital bank must abide by the technology risk management principles and best practices set out by the MAS. This is to guide the financial institutions to establish sound and robust technology risk governance and oversight, as well as maintain IT and cyber resilience.
• Other related regulations also include:
  • Putting in place frameworks and processes to identify critical system failures which could cause significant disruption to the operations of the bank or access to the bank’s services;
  • Maintaining high availability, recoverability, data protection and incident reporting for such critical system failures; and
  • Adopting measures to improve and ensure the digital bank’s cyber hygiene (i.e. the health, and security of the bank’s users, devices, networks, and data).
• Outsourcing: The Guidelines on Outsourcing sets out MAS’ expectations of a bank that has entered or is planning to enter into an arrangement to outsource any of its business functions to a service provider. The guidelines include that the bank should have a framework to evaluate the risks and materiality of all outsourcing arrangements, and have a proper approval chain for outsourcing arrangements, among others.

Additional regulatory requirements

Additionally, in light of SMS-phishing scams that have become prevalent nowadays, MAS and the Association of Banks in Singapore are also introducing a set of additional measures to bolster the security of digital banking. Broadly, these measures require banks to have in place measures to prevent and detect scams, and how incidents will be handled in the event of a scam. Specifically, banks will be required to implement measures like:

• Removing clickable links in emails or SMSes to customers.
• Having more frequent scam education alerts.
• Sending notifications to existing known contact channels whenever there is a request to change a customer’s contact information.
• Providing an emergency self-service “kill switch” for customers to suspend their accounts quickly if they suspect their bank accounts have been compromised. 

If a digital bank intends to carry out certain regulated activities or financial advisory services, it would also have to meet the relevant regulatory requirements under the Securities and Futures Act (e.g. having measures in place to provide monthly statements of account to customers and deposit customers’ assets into a separate custody account) and the Financial Advisers Act (e.g. having measures in place to carry out due diligence exercises to ascertain whether the marketed product is suitable for the target customers ).

More information about what these activities regulated under the Securities and Futures Act or financial advisory services entail, or how one can go about applying for the relevant licences, can be found on the MAS website. 

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While there are some differences between digital banks and traditional banks, the regulations that apply to both are largely identical, some of which have been summarised above.

If you are looking to apply for a digital bank licence or are considering setting up a digital bank, you should consult a lawyer with expertise in banking and finance-related matters for further advice or information on digital banking licences and the regulatory obligations of digital banks in Singapore. The lawyer will also be able to assist you with the preparation of your application for a digital banking licence if you decide to apply for one and ensure that your application satisfies the selection criteria so as to maximise your chances of successfully obtaining the licence.