SINGAPORE — Grab Holdings Ltd and Sea Ltd have been lobbying the Monetary Authority of Singapore (MAS) to lift a cap on deposits at new digital banks backed by them to sustain their businesses.
According to Malaysia’s Sunway University economics professor Dr Yeah Kim Leng, the larger the deposits garnered, the greater the ability of the bank to sustain its business model.
Yeah said banks gather deposits and extend loans to borrowers, ensuring that the interest earned surpasses administrative and operational expenses, while also generating a profit margin that exceeds the targeted return on shareholders’ equity.
“It is not surprising that the digital banks are requesting for an increase in the deposit limit.
“The interest income and other returns from the banks’ treasury and investment activities have to exceed the returns pay to the depositors,” he told The Online Citizen Asia (TOC).
Both banks are approaching the S$50 million limit and have been lobbying MAS to review its stance, according to The Straits Times.
Thus, the sooner the deposit cap is lifted, the greater the cash flow they have to enable their growth.
Besides, digital banks need cash to rapidly upgrade their technology and cybersecurity.
According to a McKinsey report on 2 Sept 2022, digital banks have business models that are significantly different from those of traditional banks.
Rather than differentiating themselves on the quality of their relationship managers and a portfolio of complex products, digital banks emphasise user experience and product simplicity.
McKinsey partner André Jerenz said digital banks would have more success by modeling their approaches and capabilities on leading tech companies such as Google and Amazon than on traditional banking operations.
“This includes building and continually innovating their technology platforms with the latest advancements, hiring the best developers, and quickly bringing new products to market and refining them over time based on customer insights,” he said.
Another McKinsey partner Henning Soller said traditionally, banks had to hire the best traders and relationship managers to get the business up and running.
“Today, the requirement has changed to hiring the best people who can manage technology. This is no small challenge, and it must be reflected both in technical talent capacity and in bank hiring policies,” he said.
Meanwhile, Kunal Galav, the global head of partnership development and advisory at Mambu, a financial software company, said digital banks had to invest in innovation and revenue-generating activities to meet the expectations of business stakeholders and end customers, whose patience is limited.
While the deposit cap during Grab & Singtel’s GXS Bank and the Sea Group’s MariBank first two years of operation is meant to safeguard consumers’ interests, the lenders see the restriction – that has meant applications for their savings accounts are by-invite only – as curbing their lending ability.
Time is also ticking for these digital banks owned by non-financial firms to boost scale, given they had to show a path towards profitability within five years during their application process.
A spokesperson for Grab’s GXS Bank reportedly said it neared the regulatory cap “within months” of launching its savings account, and the waitlist to open such an account “continues to grow organically every day”.
The bank, which also introduced a loan product in April, has been improving its infrastructure to ensure it can scale up quickly and securely, said the spokesperson. It has been engaging the regulator on its progress, the spokesperson told The Straits Times.
Digital banks also have the same deposit protection as traditional banks as they are part of the Singapore Deposit Insurance Corporation’s (SDIC) Deposit Insurance (DI) Scheme.
The SDIC insures all Singapore dollar-denominated deposits placed with a DI Scheme member, with the deposits capped at S$75,000 per depositor per financial institution, if a digital bank fails.
Yeah said deposit insurance companies would gain higher insurance premiums, if the deposit cap was lifted, it also means higher risk to SDIC if the digital banks fail.