Opening banking development maybe the bigger disruptor in Singapore’s financial sector than virtual lenders, according to DBS Group Research, highlighting challenges such as market demographics or slow profits.

Even at S$220 billion ($160 billion) to S$243 billion – around a quarter of Singapore’s customer loan base – DBS believes that the digital banking opportunity may only play out to be the second-greatest disruptor in the industry.

Backed by the Monetary Authority of Singapore’s (MAS) efforts in application programming interface (API) and facilitation of data portability, open banking and is expected to outshine digital banking, according to a «Business Times» report citing DBS analyst Lim Rui Wen.

By consolidating banking, insurance and investment information across financial institutions onto a single platform, open banking could drive easier comparability and a higher level of competitiveness in the industry, Lim said.

Slow Profits

In contrast, digital banks are expected to turn a profit slowly even if they do manage to grab a 1-5 percent market share of the unsecured retail and SME (small and medium-sized enterprise) loan market in the initial years.

In addition to greater efforts to develop sticker business, many are also expected to shoulder early losses from higher fixed deposit rates designed to lure new customers.

Unfavorable Demographics

The report underlined several factors that make Singapore a relatively less attractive market for digital entrants including a well-banked population with already limited adults with 3.2 million individuals aged 20 or above.

«We do not expect main bank accounts to be switched away from incumbents just yet,» said Lim.

«We believe that a platform-based model is likely to deliver higher profitability and is much more scalable, requiring less capital and operational expenses, compared to a traditional deposit-taking and lending banking business model,» said Ms Lim.

Only One Survivor?

Despite the relatively gloomy outlook, Lim believes that there is a scenario where both open and digital banking players can prosper (the MAS has shortlisted the initial 21 applicants to 14).

«A win-win situation is possible where banks in Singapore collaborate with new digital banks to capture new market opportunities, resulting in a broader banking market overall,» said Lim.