With light regulations and other strong government support and initiatives, Singapore has become one of the most progressive fintech hubs in the region.
But while fintech innovations have — continues to — flourish in the country, it is important to consider both the upsides and caveats of this wave of disruption for incumbents and stakeholders in the industry.
In this year’s Financial Stability Review (FSR), Singapore’s central bank Monetary Authority of Singapore (MAS) highlighted that fintech innovations create more transparent and accurate financial risk assessment models, allow SMEs and consumer to access capital easily, and help mitigate financial shocks to the market by encouraging decentralisation and diversifying of financial risks.
On the flipside, fintech also exposes the financial markets to new risks. These include operational risks such as cybercime and operational vulnerabilities created by third-party providers, which could be exploited by nefarious agents.
Also, macrofinancial risks such as excess volatility could also amplify shocks to the financial markets, stated the report.
“Technologies that increase the speed and volume of financial transactions could lead to greater volatility and instability. Automated transactions based on common algorithms could lead to herding behaviour that could increase volatility,” it added.
That said, automation through technologies such as AI could save financial institutions up to 30 per cent in operational costs. These costs translate to around 10 to 20 per cent of their operating income (for Asian banks).
New financial models, products and platforms could help financial institutions grow their customer base — and in some cases, help them access previously hard-to-reach markets. These could include mobile banking apps and cashless payment platforms.
The report highlighted how DBS strengthened its market reach to underserved markets such as Indonesia and India via its DBS Digibank app.
Through these platforms and products, banks’ net profits could hit 5 to 15 per cent.
But financial institutions who are slow to adopt these new technologies and digitise its services could see their income erode — by as much as 5 per cent.
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They would also have to compete with fintech companies who help customers adopt alternative payment platforms, which would undercut bank fees collected from credit and debit cards. Banks would then have to lower Merchant Discount Rates (MDR) that they charge for bank card payments in order to remain competitive.
MAS predicts that within the next two years, fintech payment channels will increase to 5 to 10 percent, and by the fifth year, the figure should hit 20 to 50 per cent,
The rise of digital banks that offer more attractive deposit rates could also pose a threat. A McKinsey report in 2014 estimates that at least 56 per cent of Singapore customers would be willing to shift to a pure play digital bank.
Additionally, a mismanagement of fintech innovations and a poor understanding of how to safeguard against these new risks could also destabilise their business.
The report said that traditional financial institutions have the resources and customer base to attract talent and collaborations with fintech companies.
On the other hand, banks laden with legacy systems could render them “less nimble” and as a result, make the switch to digital systems more complicated.
“In sum, as Fintech continues to develop, a bank that can build distinct digital capabilities, leverage on them and integrate them into its business model would be better placed for success,” said the report.