Singapore’s new digital banks appear to have made a strong start. TrustBank’s CEO recently announced it has onboarded 10% of Singaporeans – over 500,000 customers – since it launched last September, whilst GXS Bank is already approaching its $50 million deposit cap. There is obviously an appetite for these new banks, but is the pie big enough in Singapore? BCG estimates that in 2022 just 5% of neobanks worldwide were profitable, and various factors suggest it could be even tougher for Singapore’s neobanks to reach this goal. That said, digital banks are innovative by nature and there are many ways for them to win.

The cost of success

In regional neighbours such as the Philippines, which have high unbanked populations, the purely digital model has made it possible (and potentially profitable) for challengers to go after a large untapped market. However, only 2% of Singapore are unbanked, meaning challengers face the costly and challenging task of stealing the lunch of traditional banks.

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This difficulty is compounded by the sticky nature of banking. Customers tend not to switch bank accounts often and only if they are strongly compelled, but people in Singapore are generally happy with their banks. In fact, an SMU study found high customer satisfaction amongst customers of DBS, Citibank, OCBC, and UOB, which have kept up with changing consumer behaviour and digital trends and made major improvements to their online and mobile offerings. 

Another key issue is trust. The third Banking Trust Index for Singapore found customer trust in banks is built on demonstrable initiatives and efforts to safeguard against scams and handle data breaches with integrity. The incumbents have had decades to build their reputation and credibility in this way, and it will be a significant challenge for new entrants to catch up.

To overcome these challenges, digital banks tend to use big marketing campaigns and attractive offers, such as sign-up bonuses and high-interest rates on deposits, to incentivize sign-ups. Whilst successful, this approach is also expensive and unsustainable in the long term.  

The digital advantage

Fortunately, digital banks have several advantages in the search for profitability. Firstly, they are unencumbered by the technological limitations of traditional banks. Whilst incumbents are making good progress on digital transformation, they still have significant legacy technology infrastructure which is expensive to run and limits their ability to move quickly. In contrast, most neobanks are built entirely on cloud infrastructure, meaning they don’t have to invest in their own expensive hardware and pay teams of IT personnel to maintain it, and can instead dedicate more resources towards growing their share of the pie.

Being built on the cloud also enables digital banks to make the most of the Open Banking model. Instead of developing their technology in-house, which is slow and expensive, neobanks can pick from the best fintech solutions on the market and build a tech stack tailored to their needs. The cloud enables banks to implement and test very quickly, getting to market – and revenue – much faster. The agility of the cloud then enables them to implement new products and services easily as they seek to accelerate their revenue generation. Tonik, the first pure-play digital bank in the Philippines, is a great example of this. Built on the cloud with an open-core banking platform from Finastra, Tonik quickly acquired deposit account customers following its launch in 2020. It has since added a range of personal and business loans, helping it to generate revenue and drive towards profitability.

Modern fintech solutions also mean lower operating costs, for instance by introducing automation and process efficiency. They can also improve customer acquisition and retention by leveraging data analytics and machine learning to gain insights into consumer behaviour and preferences, enabling banks to tailor their offerings and marketing strategies to individual customers.

Depending on their license conditions, digital banks can also be able to leverage their banking licences to raise extra revenue through Banking as a Service (BaaS). In simple terms, BaaS enables a licensed bank to allow other organizations, including banks and non-banks, to provide financial services based on their infrastructure. This would bring customers to them, driving revenue without the normal expenses of customer acquisition. BaaS is already making a significant impact in Asia, with Finastra’s BaaS 2022 outlook study finding that nine in 10 senior banking executives in APAC had already been implementing BaaS solutions or were planning to. 

A final aspect that has enormous potential to benefit banks’ profitability (and indeed many types of organizations) is AI, which has taken centre stage in 2023 with the rapid emergence of generative AI. AI is of course not a novel concept and is already being utilized in the finance sector, but the ability of generative AI to deliver astonishingly competent results (with the right prompts in the right scenarios), has highlighted how far AI has come since banks started to introduce simple customer service chatbots. Banks will now be looking at a wave of potential opportunities across the entire value chain, from information security and money laundering prevention to customer experience and backend support. 

Rome was not built in a day and the first few years for any digital bank will be spent building infrastructure and raising awareness. Singapore’s digital banks face particular challenges differentiating themselves in an already strong field, but the new entrants in this category are well placed to leverage technology and innovation to gain customers and accelerate their revenue growth, whilst keeping their costs low.

The article titled “Meeting the profitability challenge for Singapore’s neobanks” was contributed by John Guest, Managing Director, APAC, Universal Banking, Finastra

About the author

John Guest, MD, Finastra APAC

John Guest is Managing Director, Universal Banking, APAC for Finastra, based in Singapore. Additionally, John acts as a mentor and advisor to regional fintech startup organisations.

John’s domain expertise is global digital banking transformation, with over 20 years in financial software sales and consultancy. This follows more than a decade in UK Retail and Business banking.

John holds an Associateship from the Chartered Institute of Bankers, and a Post Graduate Diploma in Digital Business from the EMERITUS Institute of Management, in collaboration with Columbia Business School and MIT Sloan.