Knowledge Highlights 10 September 2019

Applications for new digital bank licences will be accepted by the Monetary Authority of Singapore (“MAS”) from 29 August 2019 to 31 December 2019. MAS announced in June 2019 the extension of digital bank licences to non-bank players through the issuance of up to two digital full bank (“DFB”) licences and three digital wholesale bank (“DWB”) licences. Proposed digital banks (“Applicants”) are able to apply for both types of digital bank licences with MAS assessing each application on its own merits.

MAS expects to announce the licences awarded in mid-2020, with successful applicants commencing business by mid-2021.

Assessment criteria

On 29 August 2019, MAS released the eligibility criteria and requirements for digital banks. To be eligible for a digital bank licence, the applicant’s business track record, fit and proper shareholders, directors and management, capital commitment, a clear value proposition and a sustainable business model must meet the eligibility criteria. Additionally, applicants for the digital full bank licence must be anchored in Singapore, controlled by Singaporeans and headquartered in Singapore.

Once the above criteria are met, eligible applicants will be assessed by MAS in the following terms:

  • Value proposition of the applicant’s business model, incorporating the innovative use of technology to serve customer needs and reach under-served segments of the Singapore market that differentiates it from existing banks. MAS will also consider the ability of the applicant to implement the proposal and to contribute to Singapore’s growth as a global financial centre. 
  • Ability to manage a prudent and sustainable digital banking business, including the level of understanding of key risks in a banking business, and strength of its regulatory compliance and risk management plans. MAS will also consider the reputation, track record, financial strength and commitment of the applicant’s shareholders. 
  • Growth prospects and other contributions to Singapore’s financial centre, such as the jobs it will be bringing to Singapore, its commitment to develop the skills of the local workforce, the capabilities (including technology) it will be locating in Singapore, the headquarter functions it will be anchoring here as well as its regional expansion plans.

Application form issued by MAS

Applicants must complete the application form issued by MAS, which comprises the following sections:

  • Background information
  • Financial information
  • Plans for proposed digital bank
  • Risk management plans
  • Exit plan
  • Any other information
  • Documents to be submitted
  • Declaration

Applications which are incomplete, including failure to submit relevant documents, will be rejected and will not be eligible for consideration. MAS may require an applicant to furnish additional information after the submission of the application. Applicants should also promptly communicate any changes to its submitted information to MAS. Misrepresentations or omissions of material facts may be grounds for rejection.

Key guidance in MAS FAQs

In addition to the eligibility criteria and requirements for digital banks, MAS has also issued FAQs on DFB and DWB licences providing clarification on the digital banking process and requirements. Some of the information provided by MAS is highlighted here. 

Shareholders and shareholding structure of digital banks

MAS confirms that banks, local or foreign, can participate as shareholders of a digital bank. Local banking groups may take minority stakes in a DFB or a DWB while foreign banks can take minority stakes in a DFB or any stake in a DWB. MAS states that having banks as shareholders does not automatically confer an advantage or a disadvantage to an applicant as MAS will assess the value proposition of each applicant on its own merits.

MAS reminds that any change to a digital bank’s shareholding structure will require the prior approval from the Minister-in-Charge of MAS. For a DFB, it is important to note that any In-Principle Approval (“IPA”) granted by MAS would be on the basis of the shareholding structure represented to MAS during the application. MAS may revoke the IPA if the change in shareholding structure results in the digital bank not meeting the eligibility criterion on Singaporean control. 

Submission of financial projection

MAS requires an applicant to submit its financial projection for the first five years of the proposed digital bank’s operations. The applicant should indicate when the proposed digital bank is expected to break-even if it is not within the first five years. While MAS does not specify a definitive time period by which the proposed bank must break-even or achieve certain level of profits, an applicant with a financial projection showing a consistent or increasing trend of net loss will not meet the requirement to demonstrate a path to profitability. 

Minimum paid-up capital requirement to be met within 12 months of IPA

While minimum capital requirements are required under the Banking Act, applicants do not need to have met the relevant amount of paid-up capital at the point of application. They must, however, be able to show a firm and ready source of funds at the time of application. DFB applicants must submit with their applications a reasonable plan to build up the S$1.5 billion of capital required to become a full functioning DFB.

All digital banks must meet the minimum paid-up capital requirement within 12 months of receiving an IPA letter from MAS. Only upon meeting this requirement, and other conditions which will be set out in the IPA, will a digital bank receive its licence and be able to commence business. 

Business model to demonstrate innovative use of technology

Digital banks are expected to differentiate themselves from existing banks by incorporating the innovative use of technology to serve customers’ needs and reach under-served segments of the Singapore market. MAS states that digital banks should operate more nimbly using new technology stacks with a lower cost structure than traditional banks. Applicants are not expected to have fully-built and deployable technology at the point of application, but MAS does require the provision of high-level IT plans, such as proposed architecture diagrams of critical systems of the bank, at the point of application.

Key management at point of application

While a proposed digital bank need not have hired its full management team at the point of application, MAS requires an applicant to have at least hired a Chief Executive Officer with candidates for Chief Risk Officer, Chief Finance Officer, Chief Technology Officer and Chief Information Security Officer identified and ready to be recruited. The CEO should be hired at the point of application as MAS deems it critical for this designated person to be able to demonstrate at the onset how he will be driving the digital bank’s business proposal and value proposition.

Provision of letter of responsibility and letter of undertaking

MAS requires shareholders of the proposed digital bank directly holding at least 20% of its shares to provide a written confirmation at the point of application that it commits to providing a letter of responsibility (“LR”) and a letter of undertaking (“LU”) in respect of the operations of the proposed digital bank. MAS reserves the right to additionally require a written confirmation from any other shareholders.

The LR and LU must be furnished to MAS prior to the issuance of the digital banking licence.

DFB requirement of Singaporean control

In relation to the requirement that the single largest shareholder of an applicant for a DFB is Singaporean, MAS will consider shareholdings owned by the Singaporean and his related parties as a single stake. Where the Singaporean and his related parties do not hold an absolute majority stake, MAS will consider whether the stake is sufficient to allow him to have effective control of the digital bank. MAS states that, generally, it will not consider joint ventures (“JVs”) where a small number of foreign-controlled stakes form the majority, notwithstanding the largest shareholder being Singaporean.

DWB able to expand banking business out of Singapore

A DWB is able to expand its banking business outside of Singapore if MAS’ provides its approval pursuant to the Banking Act. MAS will take into consideration the DWB’s ability to manage its existing business in Singapore and the risks of the proposed overseas business, before approving the new overseas place of business. For avoidance of doubt, the DWB will also have to apply to the host jurisdiction’s regulator for a licence to operate as a bank.

DWB corporate governance requirements

A DWB is required, at the onset, to meet existing corporate governance requirements of a locally-incorporated wholesale bank, including having at least five board directors, a majority of the board to comprise independent directors, and at least one third of the board to comprise Singaporeans or permanent residents of Singapore.

Business to commence within 12 months from receipt of IPA

MAS states that where a digital bank is unable to commence business within the 12-month period, the bank should inform MAS ahead of time of the reasons for the delay and request an extension of the validity of the IPA.

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