The trio of banks that dominate Singapore's financial sector are preparing their defenses against an influx of digital lenders, as the city-state puts itself at the forefront of the fintech revolution in Southeast Asia.
DBS Group Holdings, Oversea-Chinese Banking Corp. and United Overseas Bank are intimately connected to Singapore's stellar growth following its independence in 1965 and their acronyms are familiar to generations of customers.
But the cozy relationship between the banks and their clients is about to change. By year's end, the Monetary Authority of Singapore is expected to award licenses to new digital lenders who will challenge the status quo. The winners could even be announced next week, when Singapore holds its annual fintech festival.
The change will let nonfinancial institutions vie for a slice of the country's banking market, worth almost $2 trillion. The central bank's stated purpose in issuing the new permits: to create a "resilient, competitive and vibrant" industry.
A range of local and overseas fintech and internet giants, including China's ByteDance -- owner of video-sharing platform TikTok -- and Alibaba Group Holding's Ant Financial, have entered into partnerships to bid for five virtual banking licenses.
Singapore is one of the first countries in the Association of Southeast Asian Nations, or ASEAN to issue such permits. The Philippine central bank, Bangko Sentral ng Pilipinas, on Nov. 26 said it will also allow such banks to be set up.
Worldwide, the number of "neobanks" competing in the virtual space has grown at a compound annual rate of 27% to more than 200 since 2010, with a fifth based in the Asia-Pacific region, according to a report published in November by the Singapore FinTech Association.
The report noted incumbent local lenders together hold a 63% share of the market for loans -- a commanding lead that could shrink if new digital players make inroads in the city-state by offering virtual services that promise a seamless experience.
"This experience of remote, convenient, easy-to-use and consume 24/7 services is now the expectation of consumers from banking," said Mohan Veloo, vice president for global solutions engineering at F5, a cloud services provider. "This has led to digital transformation being a top priority for Singapore's banks in recent years."
Indeed, the incumbents have tried to "self-disrupt," evolving into digitally focused lenders by pouring billions of dollars into technology. Singapore's legacy lenders have come under increasing pressure to transform their operations as the current low interest rate environment and the COVID-19 pandemic dampen their earnings prospects.
The banks saw their net profits fall between 12% and 40% on the year for the three months ended September, weighed down by the health crisis and bad loan provisions as many companies had difficulty meeting payment obligations.
DBS, OCBC and UOB have pledged to make digitalization a core part of their business transformation efforts and are spending a lot of cash to do it. DBS, the biggest of the three and Southeast Asia's largest lender, has spent 4.4 billion Singapore dollars ($3.3 billion) over the last four years on technology. It has been working to integrate tech into its business far longer, introducing internet banking in 1997.
In September, DBS, said it was tapping artificial intelligence and big data to beef up its virtual offerings. It hopes predictive technology will allow it to proactively offer suggestions to customers on how to more effectively manage their money or cut losses on investments.