Singapore’s digital banks dangle incentives to win new customers — is it sustainable?

SINGAPORE — Digital retail banks in Singapore do everything to win new customers.

Trust Bank and GXS Bank — two online retail banks that launched last year — are offering lower fees, more incentives and waiving minimum account balances to win over customers from brick-and-mortar banks.

But how profitable is this in the long run?

“It’s a huge return, but there’s no way that’s sustainable. It has to be subsidized somehow,” Zennon Kapron, founder and head of research and consulting firm Kapronasia, told CNBC.

Unlike traditional banks — which DBS, OCBC and UOB — which operate physical branches and ATMs, digital banks operate entirely online.

The city-state issued four digital banking licenses in December 2020.

Two digital full bank licenses were obtained Grab–Single cells GXS Bank and Sea Groups MariBank, which serves private customers. The other two wholesale digital banking licenses were taken by Ant Group’s ANEXT Bank and Green Link Digital Bank, which cater to SMEs and other non-retail segments.

GXS Bank currently offers its service to customers and employees by invitation only, while MariBank is only available to Sea Group employees.

Trust Bank, on the other hand, did not have to jump through hoops to apply for a separate digital full banking license as it is backed by the banking giant Standard Charteredwhich secured one additional full banking license to establish a subsidiary to run a digital bank.

Trust Bank, a partnership between Standard Chartered and Singapore’s largest supermarket chain FairPrice Group, appears to have made progress since its launch on 1 September.

Trust Bank claims to have reached more than 450,000 customers and achieved a 9% banking market share in Singapore within five months, based on data shared with CNBC.

New credit card customers receive vouchers worth 25 Singapore dollars ($18.80) to spend at FairPrice supermarkets and can continue to collect reward points when they buy food there. In their first month of launch, Trust issued almost 60 tonnes of rice and over 11,000 breakfast sets – each worth more than S$2according to the bank.

The bank would not disclose its customer retention rate or profit margin to CNBC.

“While it is common in the market today to offer high-ticket and large rewards that are either complex to understand or have a poor experience, Trust offers simple, easy-to-understand rewards that are always tangible, help reduce the cost of living and most importantly, are in real time,” Dwaipayan Sadhu, CEO of Trust Bank, told CNBC via email.

“It’s useful for a short-term customer acquisition story but it will be a big challenge to get those customers to come back,” Kapron of Kapronasia said.

Trust Bank does not charge any annual fees or charges for foreign transactions, cash advances or card switching to credit card customers. It also does not require a minimum balance for its savings account, unlike traditional banks.

Its rival GXS Bank also does not require minimum balances for savings account holders, currently the only product the bank offers. GXS is a consortium between ride-hailing and food delivery giant Grab and Singapore’s largest telecom provider Singtel.

The company says it’s targeting the “underserved segment” — which includes gig economy workers, the self-employed and those new to the workforce.

The bank has removed certain fees, such as lower fees typically charged when the balance drops below the minimum daily average.

The bank has “a low cost to acquire and low cost to serve,” its CEO Charles Wong told CNBC.

“As a digital bank, we are not burdened with the cost of maintaining a physical network such as branches or physical ATMs, resulting in cost savings on our overheads,” explained Wong.

In addition, Grab and Singtel have a combined customer base of over 3 million and the bank is “leveraged on (the) two retail giants.”

“We also do not provide gifts to customers. When you sign up, you sign up because it is relevant to you or because you are a Grab or Singtel customer and it will make it easy for you to make payments,” says Wong.

“Yes, you get additional rewards when you spend which makes sense because you spend within the ecosystem.”

However, GXS Bank expects its earnings to be largely driven by interest income, Wong said.

A 2022 analysis of Simon-Kucher revealed that 25 of the largest neobanks, also called digital banks, found that only two of them — less than 10% — have achieved profitability. It also showed that a majority earned less than $30 in annual revenue per customer.

Kapron said traditional banks that offer credit card products hand out welcome gifts, such as travel luggage or Apple watches, because they expect to be profitable after a certain period.

These banks have already calculated how much they have to spend to get a customer, and expect to recoup the costs when the customer starts missing payments or incurring interest, he explained.

Observers have previously raised questions about the need for digital banks in a largely unbanked population, where only 2% lack bank accounts.

There is also strong competition among the more established traditional banks.

“If you look at DBS Bank, it’s not like their digital offerings are (expletive),” said James Tan, managing partner of Quest Ventures, a Singapore-headquartered VC firm.

Tan said he signed up for Trust Bank to see how different it will be from traditional banks. “I found no difference,” he told CNBC, adding that he eventually closed his Trust Bank account.

“I think the digital banks would have a higher success rate if we were in a severely underbanked place like the Philippines,” Tan said.

Kapron added that it will be difficult for these banks to make an impact, especially in the retail banking sector in the Singapore market.

“The market is just overbanked and the differentiation between these new digital banks doesn’t really move the needle much in terms of what they offer.”

“Until that happens, you have bags of rice, high promotional discounts or rewards, which are useful for acquiring customers, but how do you keep them coming back?” Kapron asked.