Incumbents have to act now in order to be prepared for the digital bank launch in Singapore by 2021. The New Digital Banks (NDBs) aim to launch customer-centric, differentiated products to meet their lifestyle goals along with simple and superior user experience. The new age customers expect transparency and frictionless experience from their banks. The incumbent banks should leverage the trust and relationship built with their customers over the years. They should re-evaluate their strategy, invest in understanding customers’ needs and enable a digital experience that is at par with leading technology players in the market. Incumbents should take timely action by choosing a viable option to position their business ahead of competition and disruption!

1. 1
Impact of digital banks on incumbents
Impact of digital
banks on incumbents
Need for banks to re-evaluate their
business model and customer
retention strategies
January 2020

2. Impact of digital banks on incumbents
2
Authors:
Varun Mittal
EY Global Emerging Markets
FinTech Leader
Ernst & Young Solutions LLP.
Neena Antal
Director, Digital
Ernst & Young Advisory Pte. Ltd.
Akshay Tatke
Manager, Strategy & Operations
EY Corporate Advisors Pte. Ltd.
Impact of digital banks on incumbents
2

3. 3
Impact of digital banks on incumbents
About this report
Contents page
Incumbents have to act now in order to be prepared for the digital
bank launch in Singapore by 2021. The New Digital Banks (NDBs)
aim to launch customer-centric, differentiated products to meet
their lifestyle goals along with simple and superior user experience.
The new age customers expect transparency and frictionless
experience from their banks.
The incumbent banks should leverage the trust and relationship
built with their customers over the years. They should re-evaluate
their strategy, invest in understanding customers’ needs and enable
a digital experience that is at par with leading technology players
in the market. Incumbents should take timely action by choosing
a viable option to position their business ahead of competition
and disruption!
1
Digital banking landscape in Asia-Pacific
2
Digital banking landscape in Singapore
3
Key focus areas of the NDBs
4
Impact on the existing customer base of incumbents
4
6
8
12

4. Impact of digital banks on incumbents
4
Regulators are driving competition through new
digital banking licenses and framework in the region.
The digital banking landscape in Asia-Pacific (APAC) has seen major
advancements since 2015. The regulators in the region have been
opening up financial services markets to non-financial institutions
(FIs) as well. The aim is to create new digital banks (NDBs) with
innovative models and solutions to meet the customer demands and
cater to the underserved segments.
Impact of digital banks on incumbents
Korea Financial
Services Commission
accepted applications
in 2015, and by 2017,
the first batch of
NDBs in Korea were
launched
Taiwan Financial
Supervisory
Commission granted
three digital banking
licenses in 2019,
which will be launched
in 2020
Monetary Authority
of Singapore (MAS)
accepted applications
in December 2019, to
grant second full and
three wholesale bank
licenses in 2020
Hong Kong Monetary
Authority accepted
applications in 2018,
issued eight licenses and
by December 2019, the
first NDBs in Hong Kong,
“ZA” was launched
Bank Negara Malaysia
released the Expectation
Draft in December 2019,
to accept digital banking
applications by end
of 2020
Digital banking landscape in Asia-Pacific
4

5. 5
Impact of digital banks on incumbents
The NDBs are fundamentally different from the incumbents across their business and operating models.
They are more customer-centric and focus on delivering state-of-the-art features to engage and retain them.
To compete in this dynamic and demanding environment, incumbent banks need to think differently
about their business and operating models to “keep the lights on”, while also transforming and innovating
at speed.
Furthermore, regulators have been supporting innovation and trying to be a part of the change rather than
disrupting it. They have been putting in stringent customer security measures as well to ensure that above
all, customers are protected. We predict that the presence of digital banks is set to grow with the support
from regulators in the region.
1. In this paper, the digital bank licenses granted by the regulators will be referred as New Digital Banks or NDBs
NDB: key features
Business model
Operating model
Technology
Talent
1. Target micro-segments
2. World-class customer experience
3. Simple products, pricing and transparency
4. High degree of personalization
5. Embed in daily life of target segments
1. No or limited branch network
2. Design process for “no ops”
3. Aim to achieve low 30s cost-income ratio
4. Mobile-only, virtual or robo-led servicing
5. Leverage non traditional data for credit assessment
1. Configurable core banking
2. Built on today’s leading technology practices
3. High leverage of cloud and open application program interface (API)
4. High leverage of artificial intelligence and machine learning
5. High degree of automation
1. High proportion of engineers and design professionals
2. Multi-disciplinary teams working together
3. Flat, non-hierarchical structures
4. Employee value proposition for entrepreneurs and millennials
5. Values or purpose-focused

6. Impact of digital banks on incumbents
6
Competition in the market is heating up with the
issuance of up to five digital bank licenses by MAS
in 2020.
On 7 January 2020, MAS announced that a total of 7 and 14
applicants will be competing for the full bank and wholesale bank
license respectively. The five NDB licenses, in addition to the
internet banking framework introduced in 2000, will create a
digitally enabled ecosystem. The NDBs are expected to:
1. Promote innovative business models and develop strong digital
capabilities
2. Enhance the resilience, competitiveness and vibrancy of the
banking sector
3. Add diversity and strengthen Singapore’s banking system
4. Increase distribution of banking services to the underserved
segments of the market
Impact of digital banks on incumbents
Digital banking landscape in Singapore
6

7. 7
Impact of digital banks on incumbents
Slowdown in economic growth puts pressure on margins
With overall Singapore gross domestic product (GDP) growth rate slowing down in 2019 and loan growth
rate reducing to 0.5% against 3% in 2018, incumbent banks are expected to struggle with maintaining
profit margins and lowering cost-income ratios. Technology players are offering cutting-edge and fast
services to the current customer base in Singapore that is digitally mature and tuned in to the digital
ecosystem to get more value for their money. The competition between NDBs, technology players and
incumbent banks to get a larger share of this overbanked customer’s wallet will heat up the market in
coming years.
Source : Euromonitor and FITCH
Solutions Macro Research 2019
5.6%
3.0%
0.5%
20182017 2019
Singapore banking
sector sees a declining
year-on-year loan growth
rate, indicating a need
for innovative products
or alternate data to
access credit worthiness
of current customer base

8. Impact of digital banks on incumbents
8
NDBs will leverage on the distribution network, data
richness and brand awareness of the consortium
members to create unique propositions.
Most NDB applicants already have a huge customer base and are
a part of the customer’s day-to-day life. They have no legacy in
terms of technology, operations and products that would limit their
product proposition and speed to market. The NDBs will fill in the
void that incumbents have left open by not responding fast enough
to meet the digital experience needs of the customers.
The different digital bank players bring one of the following three
differentiators to the table that could give the NDBs an edge over
the incumbents.
Access to large customer base with multiple touch
points on a daily basis passing the toothbrush test
Data on multiple touch points during the day and
leveraging it to create personalized propositions
Strong brand awareness in the market, with a
base of loyal customers open to try the new digital
banking products
Impact of digital banks on incumbents
Key focus areas of the NDBs
Distribution
Data
Awareness
8

9. 9
Impact of digital banks on incumbents
The NDBs are aiming to create new value propositions by focusing on selected
customer segments, offering differentiated products supported by the latest
technology, to offer great user experience to entice the customers.
• Initial focus in serving
underserved segments
• Gradually shift scope to
cover the “massive middle”
• Offer new and innovative banking
products
• Developing new technology
capabilties and methodologies to
offer products in a new way
• Differentiated and seamless
banking experience
• Building an extensive
ecosystem to provide
non-banking services
Customer
segments
Customer
products
Customer
experience
Customer segments: serving the traditionally underserved segments
The NDBs will focus on targeting the underserved retail and wholesale sub-segments through the effective
use of technologies. Over time, they will broaden their scope towards the “high-value pool” segments, which
are reasonably well served by the incumbent banks.
Retail Wholesale
3. Micro SMEs refer to corporates that has an annual revenue of less than S$1 million and/or with less than 10 employees
• Over 200,000 individuals taking up
short-term or event-based work
• Traditionally ineligible for
credit, and lack personalized
insurance coverage
• Over 1 million digitally native
young millennials, heavily
influenced by lifestyle platforms
• Expect a banking experience that
is truly differentiated
• Potentially 100,000 young
businesses that lack financial
history and track record
• Require digital management tools
due to lack of resources
• 120,000 businesses that may
not possess assets for collateral
• High frequency, low volume
transactions often cause short
term credit challenges
Gig economy
participants
Digital
natives
Young
MSMEs3
Asset light
SMEs

10. Impact of digital banks on incumbents
10
Customer products: differentiation aimed at solving key pain points4
Products offered by the NDBs s are expected to be more innovative, following in the footsteps of successful
global case studies. These products will be tailored to address current customer pain points. The new banks
will aim to become a one-stop shop for lifestyle or business needs of their target segments.
Customer experience: legacy-free, new age banking experience4
The NDBs will launch world-class user experience at the get-go to onboard and engage customers.
Cutting-edge technology is expected to be embedded across banking processes, whether customer facing or
at the back-end. The banking stack will be more reliable, available, secure and seamless, acting as a day-to-
day platform for both retail and SME customers.
4. Above products and customer experience features are representation of key area that NDBs will play in and is not complete
nor exhaustive.
5. EY analysis on revenue pools for various products in Singapore market
• Revenue pool of
approximately S$11b5
• Alternative credit underwriting
for wider eligibility, faster
approvals, cheaper credit
• Personalized and secure cards
linked to customer lifestyles
• Revenue pool of
approximately S$3b
• Simple one-click micro
investments, removal of
minimum investment barriers
• Digital financial advice with real-
time investment alerts
• Revenue pool of S$186m
• One-stop market place with an
extensive network of merchants,
incentives and deals
• Flexible payment terms
leveraging technology
• Revenue pool of S$5.9b
• Bite-sized affordable insurance
premiums and premium-based
packages to attract millennials
• Event driven coverage and
pricing for enhanced relevance
Lending and
cards
Payments
Investments Insurance
• Personalized offerings
• Profile and situation-specific
• Right place and at the right time
• Frequent interactions
with customers
• Increased touchpoints,
incentivizing customers to login
• Goal-oriented savings and offers
• Digitally-enabled advisory
• Meeting customers’
non-financial needs
• Frequent interactions
with customers
• Increased touchpoints,
incentivizing customers to login
Personalized
and
contextual
Delightful
Lifestyle
based
Engaging

11. 11
Impact of digital banks on incumbents
11
We see an emerging trend of ‘FinLife’, the coming together of
financial services and lifestyle to enable seamless customer
experience and innovative financial products.
“
Varun Mittal
EY Global Emerging Markets FinTech Leader

12. Impact of digital banks on incumbents
12
The new age banking customer is deeply influenced
by the engaging user experience offered by digital
platforms that have woven themselves seamlessly in
their lifestyles.
Today’s customers expect their financial services providers to offer
a similar digital experience like those offered by lifestyle platforms.
These customers are dynamic in their quest to select the right
platforms that serve them personally, and are open to switching
to platforms that offer a better overall user experience. They seek
personalized recommendations, offers and financial advice to
ensure maximum savings and more value for their dollar. As a result,
they expect their financial products to be embedded as part of the
daily lifestyles.
Impact of digital banks on incumbents
Impact on the existing customer base of the
12
Fulfilling these new-age customer demands is exactly how the NDBs expect to win market share in the
competitive banking landscape of Singapore. There will be an impact on the existing customer base of the
incumbents, and some customers will move with their money and relationships to NDBs.

13. 13
Impact of digital banks on incumbents
NDB foray matrix
Banks’ propensity to earn revenue
High
Low High
CustomerSatisfaction
3
1
4
2
incumbents
Characteristics 1. Indifferent 2. Flight-risk
3. Happy
minimalist
4. Profitable
loyalist
Usage of banking
services
Free basic services
such as savings
account
Longer term
products such as
mortgages
Transactional
services and
rewards
Consider bank as
one-stop financial
shop
Engagement with
bank
Rarely interact Interact at time of
need
Frequent
interaction
Deeply engaged as
part of day-to-day
life
Stickiness Low Medium Medium High
Potential hook Financial advice
with lifestyle
linked products
Personalized
services like wealth
Attractive offers
on low margin
products
Simple and user
friendly digital
products
The new crop of digital banks aim to fulfil these
customer expectations by building a legacy-free,
slick user experience on both online and offline
fronts, and gradually increasing their market share
at a faster pace than the incumbent banks.
The NDB foray matrix below depicts the incumbent
bank’s existing customer segments that are likely to
move to the NDBs, in addition to the underserved
customers of the market. The segmenting
approach is based on two key parameters:
a) customer satisfaction or happiness, and
b) the amount of revenue the banks can earn from
the customers.

14. Impact of digital banks on incumbents
14
To penetrate into incumbents’ customer base, NDBs will rely on a combination of differentiated products and
the customers’ likeliness of using these products in comparison to its traditional alternative.
Customer-product mobility matrix
Customer’s propensity to switch
High
Low High
Potentialtodifferentiate
14
11
8
3
47
5
13
9
10
Illustrative products
1. Savings accounts 8. Payments
2. Deposits 9. Forex
3. Micro loans 10. Insurance
4. Term loans 11. Wealth and investments
5. Mortgages 12. Treasury management
6. Overdrafts 13. Advisory services
7. Credit and advances 14. Value added services
1
2
6
12
The NDBs are expected to focus on products that lie close to the fourth quadrant, offering maximum
differentiation through innovation, while also enticing customers to switch from incumbent banks. Whereas,
products in the first quadrant will see less innovation, proving to be more challenging to excite customers to
switch from their primary banks in the initial years.
Existing banks have been acting as the primary bank for their customers for many years and have built a
strong brand that their customers can trust with their money and financial needs. The NDBs will have to
offer differentiated products and be agile in the coming years to win the trust of the customers.
According to a recent survey, its quite evident that up to 70% of the young banking customers are open to
try products and services offered by NDBs.6
This puts the incumbents at a juncture where they would need
to devise strategies to increase the stickiness of their customer base by offering innovative and personalized
solutions, along with managing the profitability and margin pressure. Status-quo might not be an option any
more!
6. Source: J.D. Power 2019 Singapore Retail Banking Satisfaction Study

15. 15
Impact of digital banks on incumbents
Incumbents have to take action now, given that doing nothing is not a viable
option anymore.
There are multiple options that incumbent banks can choose from and formalize their strategy to compete
with the NDBs and increase the top-line. Below are the four main approaches that banks can take to protect
and increase their customer base in the current market.
Incumbent banks have a short time frame to realign their strategy and focus on
execution to compete with digital banks.
MAS aims to award the digital bank licenses by June 2020 and the NDBs should most likely be operational
by Q2 in 2021. This gives the incumbent banks a limited time frame to design and implement their
strategic plans in next 12 to 18 months. The banks should take advantage of their existing customer
database to deepen the current relationship by meeting their expectations, and respond to their needs in a
speedy manner.
Defensive and targeted offering to protect their price, product
and segments
Implementationeffort
Easy
Complex
Create new digital front-end channel, but most of the
operations and technology remain similar as current
Create a digital-only offering by acquiring or partnering with
firms to deliver innovative solutions
Create a digital-only bank with current license with separate
operations, technology stack and potentially brand
Targeted digital
offering
Create new digital
front-end
Grow in-organically or
partner
Launch NDB using
existing license
1
2
3
4
Identify areas
of impact or
growth
Create new
strategic options
to defend and
expand
Build and
roll out
12–18 months

16. Impact of digital banks on incumbents
16
Impact of digital banks on incumbents
Contact us
Nam Soon Liew
EY Asean Regional Managing Partner
Ernst & Young Advisory Pte. Ltd.
nam-soon.liew@sg.ey.com
Brian Thung
EY Asean Financial Services Leader
Ernst & Young LLP
brian.thung@sg.ey.com
Anshuman Singh
EY Asia-Pacific Financial Services
Digital Leader
Ernst & Young Advisory Pte. Ltd.
anshuman.singh@sg.ey.com
16

17. 17
Impact of digital banks on incumbents
Chris Lim
Partner
Advisory – Risk and Regulatory
Ernst & Young Advisory Pte. Ltd.
chris.lim@sg.ey.com
Neena Antal
Director, Digital
Financial Services
Ernst & Young Advisory Pte. Ltd.
neena.antal@sg.ey.com
Stuart Last
EY Asean Financial Services
Transaction Advisory Services Leader
EY Corporate Advisors Pte. Ltd.
stuart.last@sg.ey.com
Varun Mittal
EY Global Emerging Markets
FinTech Leader
Ernst & Young Solutions LLP
varun.mittal@sg.ey.com
Li Yun Seah
Partner
Financial Services
Ernst & Young LLP
li-yun.seah@sg.ey.com

18. Impact of digital banks on incumbents
18
Notes

19. 19
Impact of digital banks on incumbents

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