Singapore: SMEs are at the heart of the digital challenge

By Rashmi Kumar

As a compact city-state with an emphasis on both high-tech and banking and finance, Singapore serves as a great example for what happens when fintechs and traditional banks collide.

An EY survey this year of about 22,000 individuals in 20 markets globally found that 23% of the respondents had used fintech in Singapore last year versus 15% in 2015. A global average of 33% of those surveyed had adopted fintech, which EY projects will increase to 52%, mostly driven by South Africa, Mexico and Singapore.

Money transfer and payment apps are the most widely used digital offerings, and are set to gain further momentum, according to EY. It also forecasts that the number of users of borrowing and financial planning apps will more than double.

This would be worrying news for banks anywhere, but in Singapore, where the bank lending market is deep, the banking community has good reason to be alarmed. More than 400 fintech enterprises had set up base in the city-state as of November 2017, and many of them are offering lending services to customers.

That’s where traditional banks could feel some pressure. But is a big shift in lending likely, and what are the banks in Singapore doing to fight back?

One sector where banks must tackle competition from technology companies is in their offerings to small and medium-sized enterprises (SMEs).

That is not surprising, given the prevalence and importance of such companies. Of the 220,100 enterprises in Singapore in 2017, 99% were SMEs, defined as firms with operating receipts of less than S$100 million ($72 million) or employing not more than 200 workers, according to Singapore’s department of statistics.

Banks tend to avoid small businesses if their accounts are unaudited because it is more difficult to assess their creditworthiness. Traditional banks prefer lending to businesses that can provide collateral and have an established track record with audited accounts.

That creates a niche market into which peer-to-peer lending platforms and tech firms have stepped.

Take the example of Singapore-based platform MoolahSense, which connects SMEs that are seeking short-term loans with prospective investors. As of early September, the firm, which has been in operation for about three years, had provided total funding of S$65.1 million and had 14,326 registered investors.

Its co-founder and chief executive, Lawrence Yong, tells Asiamoney that he has seen a positive response from SMEs that welcome new avenues of funding. “We target very specific areas of financing: working and short-term working capital loans,” he says. “A lot of companies and businesses have rendered services but the buyers cannot pay their invoices for, say, 90 to 100 days. Small businesses are not flush with cash, and this inhibits their growth and capacity to take up new projects.

“We’re addressing these problems for SMEs in the short-term financing area – typically one year or less – because banks are generally not interested in this part of the supply chain. Because of their cost structures or business models, they can incur higher costs to process short-term products, which cuts into their profitability. So they tend to focus more on other products, like long-term loans.”

Banks are paying attention, however, and are finding ways to adapt.

Lawrence Loh, group head of business banking at UOB, says his bank wants to get closer to its clients.

“Fintech firms now offer lending services on their platform. Where are we going to play?” he asks. “We are really focused on our customers and we understand we need to work closely with fintechs and tech companies right now. Traditionally, we have been working with customers one to one. But this approach is not sustainable; we need to be in the ecosystem to be at the heart of where our customers operate, and to help SMEs.”

UOB is doing this in many ways, Loh says. It has joined forces with the Infocomm Media Development Authority in Singapore to help small businesses improve their digital capabilities. Under the programme, called ‘SMEs go digital’, UOB will provide products such as bridging loans to help defray costs associated with investing in digital capabilities.

In April, the bank announced a new business called Avatec, a joint venture with China’s Pintec Technology Holdings. It aims to combine the bank’s skills in southeast Asia with the Chinese partner’s abilities in big data. And in early August, when announcing its first-half results, UOB unveiled a new, mobile-only digital bank targeting savvy Generation Y and Z customers, which will be active in Singapore, Malaysia, Indonesia, Thailand and Vietnam.

The bank has partnered with Google, Spring Singapore, International Enterprise Singapore and other groups to help Singapore’s SMEs expand internationally.

“Working with fintech firms is not the typical focus of an SME bank,” adds Loh. “But we’re doing this because it’s important. We want to be leaders in digital in SMEs. And why we are doing digital lending is because SMEs have called out to us to offer them these things.”

Several Singapore-based bankers told Asiamoney there is a challenge to their business from firms that are technology companies first, but that offer financial services – so-called techfins. To counter this, some banks are finding ways to work with the technology firms, such as Google or Tencent, as partners.

At OCBC, for instance, the bank hooked up with Israeli fintech ThetaRay to improve the bank’s operational efficiency and accuracy in detecting suspicious transactions. It is also working with local telecommunications company StarHub; the two firms are investing S$6 million in research and technology over 12 months. They will also share data insights; if users register to the partnership, they agree to have their personal data shared between OCBC and StarHub. 

DBS signed cross-referral agreements with MoolahSense and peer-to-peer lender Funding Societies in April 2016, the first Singapore bank to collaborate with these lending platforms.

Under the terms of the tie-up, DBS will refer some of the smaller businesses that it is unable to lend to its two partners. In return, the platforms will refer borrowers that have completed two successful rounds of fundraisings to DBS for larger commercial loans and other offerings, including cash management.

Veiverne Yuen, co-founder and chief investment officer at Tryb Group, a Singapore-based firm that invests in fintech firms, says there is definitely some concern among banks in terms of their ability to serve the lower end of the market, for which they may have to bear higher maintenance costs.

“But they have taken huge steps to ramp up – banks all across the region are pushing a strong digitalization agenda and are also looking to partner with promising fintechs to serve the last mile,” he tells Asiamoney.

Thanks to partnerships such as the ones signed by DBS, SMEs are able to gain access to capital at all phases of their growth.

For instance, Funding Societies features a video on its website from Nelson Ng Hsueh Chin, who works for World Snack, an online snacks marketplace in Singapore. Chin says in the video that he found out about the lending platform on Facebook, and found working with Funding Societies “straightforward” and “easy”.

When asked how long it would take to arrange a loan through the firm, Chin says it has been “the fastest” so far, and took place following a background check of his business.

“It is one additional channel to raise funds and their rates are quite reasonable,” he adds.

MoolahSense’s Yong admits that SMEs – assuming they are bankable in the first place – generally incur lower borrowing costs from banks than from fintech firms and lending platforms.

“Platforms like ours have a higher risk premium, compared to bank financing,” he says. “So, we’re not directly competing with banks in price – we are augmenting the financing sphere for SMEs. Before platforms like us, the costs with traditional financing were exorbitant. Now SMEs can procure capital at a reasonable cost, and they can have sufficient carry to make profits.”

Where disruption is more visible is in the payments services market.

A host of providers have sprouted up in Singapore in recent years; these include 2C2P, which helps companies accept payments from more than 620 million banked and unbanked customers in southeast Asia, as well as Red Dot Payment, a Singapore-based online payment service provider.

Piyush Gupta, chief executive of DBS, says the most visible shift for him has been in the payments space, where the likes of ride-sharing company Grab and logistics services provider Visa Pay play big roles. Gupta reckons the only credible firm right now that has reach is Grab, which has a number of digital wallets available.

“But wallets don’t make anyone any money,” says Gupta. “So, the question is: can you build a financial services business on top of the wallet? That remains to be seen. Alibaba did it in China by moving to lending and insurance, etc.”

Gupta warns that it won’t be easy to emulate Alibaba.

“That’s the holy grail for many of these fintech firms – to build a financial services business on top of their wallets,” he says. “But it is not as easy. It’s true in China because of regulatory arbitrage, and the delta between what they can offer versus others was a lot. So, they got a lot of traction. But in markets outside China, it has not been that easy for techfins to build a financial services platform.”

But Gupta is still preparing DBS for such a shift eventually.

The bank has put digital reinvention at the core of its agenda over the last three years, winning it numerous accolades, including the world’s best digital bank award from Euromoney this year, and Asiamoney’s award for Singapore’s best digital bank for 2018.

If Alibaba comes to Singapore, Gupta says, he will need to start thinking about “what we can do to ourselves that Alibaba may do to us. We can build our own fate and get ahead of the game”.

He admits a big threat to banks such as DBS is not from fintech firms, which are still trying to build up scale, but from techfins such as Alibaba, Tencent Holdings, Lufax, Google and Amazon. But their strategies mean the impact on Singapore, with a population of just 5.6 million, may be limited, at least for now.

“Two things are key [with techfins],” he says. “One is, given the nature of their ambitions, they tend to focus on large markets, say by demographics, like China, India or Indonesia. So, the city-states are not the highest in their priority. Now obviously there is some advantage to be in Singapore, but how much are they going to burn in being in Singapore?”

“The second is, if you can disrupt yourself and create the same superior value proposition, and if the delta between the tech firm and you is not huge, then there’s not much reason for customers to shift. What we have been really focused on is being ahead of the game.”

By revamping its technology infrastructure when it comes to payments, lending or the whole customer experience, Gupta reckons there’s not much of a difference between what DBS can offer and what clients can get from another fintech firm.

“So far [we have] been somewhat successful, and there has not been much erosion of market position from them.”

This leads to the next question: why are fintech firms thriving in Singapore?

Kuldeep Singh, Citi’s head of markets Asean and head of strategic growth and investments, attributes the growth to a “very supportive regulator” in the Monetary Authority of Singapore.

MAS has built a regulatory sandbox that enables financial institutions and fintech firms to experiment with innovative products or services in the production phase, while having safeguards to preserve the soundness of the overall financial system.

“If I want to set up a fintech development hub anywhere in Asia, there’s no place I’d rather do it than in Singapore,” says Singh. “It’s not merely a place to write code, but develop applications. The ecosystem is already here.

“I am of the view that rather than trying to compete with Hong Kong for China business, which is Hong Kong’s natural advantage, Singapore should focus on other areas that are more compelling and play to its strengths.”

Singh Says that Singapore’s capabilities in information technology, data science and engineering that were used in traditional industries are being repurposed for fintech, the impact of which is seeping into the institutional market. “There are lots of relevant capabilities that exist in Singapore,” he says. “This is one of the key things about Singapore’s role in the future markets landscape. It is not about challenging other jurisdictions for listings, but it’s about new types of activities, and you can see evidence of that mindset in the adoption of robotic process automation in Singapore banks, which is really high.

“But there is more. Companies have used grants from the government to set up tech incubator and innovation hubs. This is very compelling for the future. No other jurisdiction has it or is doing it at this scale. Singapore has a natural advantage and a compelling story, which you don’t find elsewhere in the region in the institutional space.”

Singapore’s push on fintech has been evident over the years. In September 2016, the city-state and Switzerland agreed to expand their cooperation in fintech. In June 2017, MAS and the Association of Supervisors of Banks of the Americas (Asba) signed a memorandum of understanding to bolster fintech ties.

This June, India’s department of economic affairs and MAS said they would strengthen cooperation in financial innovation between India and Singapore through the establishment of a joint working group.

And in August, MAS and the Singapore Exchange announced a collaboration to develop delivery-versus-payment capabilities for settlement of tokenised assets across different blockchain platforms. They have picked Singapore fintech firm Anquan, Deloitte and Nasdaq as the technology partners.

“Fintech is a new area in Singapore, so the regulator is also catching up on new innovations and the new ideas that fintech firms bring to the market,” says Yong of MoolahSense. “There’s a natural tension as a lot of the laws were written decades ago and are still part of the statute; it can take a long time to change laws. “In the midst of this legal mumbo-jumbo, to find a space where fintech firms can operate without falling on the wrong side of regulation is key,” he adds. “The regulator is aware of that and is open-minded to taking that into consideration, but execution and implementation are important.”

Tryb Group’s Yuen adds: “Singapore is an easy place to set up business, for which credit needs to go to the infrastructure that the Singapore government provides. There is strong support from the government for entrepreneurs, and on the regulatory side, the MAS has a fintech regulatory sandbox mechanism, which is very conducive. Firms also use Singapore as a launch pad to capture broader opportunities in Asean.”

Gupta at DBS reckons Singapore has a “definite legitimate claim” to being the most transformed international financial centre.

“The whole ecosystem around financial sector transformation is driven not just by fintechs, but it’s a whole national effort,” he says. “Singapore gets behind it and brings everything to bed. And with the help of the central bank and the whole infrastructure that has been created, it moves the needle – be it in national-level payments or trade finance structure or national utility for KYC [know your customer]. The fintech has been built out and has been massively successful.”

The banks are not just seeing how they need to revamp their own operations to compete with technology firms, but also finding ways to make them their clients.

Selene Cheng, Asia head of eFX solutions, corporate, at Citi, points out that a lot of fintechs have a presence in Singapore and offices in the city-state to service Asean clients. Fintech firms in Singapore are also keen to grow in the region.

“Our success with fintechs says a lot,” Cheng tells Asiamoney. “These are the disruptors in the industry – they are the ones using the latest tech. If Citi is not able to service them as clients then it means we are not keeping up. Many of these biggest players are our clients. That says something about how fast we have evolved to keep up with them.”

In most cases, however, working together appears to be key. In this way, banks can leverage the technology firm’s capabilities, while fintech companies can fall back on banks’ financing capabilities and balance sheet.

“The problem with the new fintech firms is that while they can create an interesting product, bringing it out to the market is a challenge,” says Gupta. “And therefore, we find fintech firms collaborating with banks. They work with banks as banks have the customers. They can still do the lending through the bank, which will use the fintech firm’s services. And this to a large extent is happening in Singapore. So all the fintechs – be it for securities or for underwriting, or payments – they try to collaborate with banks and use their distribution techniques.”

Yong at MoolahSense agrees, saying that banks and fintech firms are different animals, with different strengths and weaknesses.

“Banks are stable, but one of their weaknesses is nimbleness,” Yong says. “Fintech firms, on the other hand, are more nimble because we have less stakeholders than in a bank. So it makes sense to marry them both and for fintechs to partner with banks. We’re not substitutes to banks or direct competitors, but we complement them by expanding the sources of finance available to SMEs.”