Grab Holdings and gaming company Razer will need to demonstrate how their millions of users can help them generate profits if the two technology firms are to win one of Singapore's coveted digital banking licences.
That is because the Monetary Authority of Singapore (MAS) is emphasising more on profitability and strong capital requirements than some other regulators in inviting fintech firms into banking.
Both Grab and Razer have expressed interest in submitting separate bids for one of the five digital banking licences on offer, part of a government strategy announced earlier this year to strengthen competition in financial services.
"The Singapore requirements on digital banks will mean that profitability will have to be a key consideration" for potential applicants, said Mr Zennon Kapron, managing director of Singapore-based consulting firm Kapronasia. He added that to succeed, "they will need to achieve scale very quickly".
That is a particular challenge for Grab and Razer, two of the highest-profile technology firms interested in the licences. Razer and Grab's Singapore ride-hailing unit have consistently reported losses in recent years.
In its guidelines, MAS said financial projections that show a consistent or increasing trend in net losses will not meet its requirement of demonstrating "a path to profitability." It said it may consider favourably any applicant whose financial projections show an earlier break-even year.
The UK requires new banks to present a plan setting out their business viability and how they will make money. But digital banks in the UK have been more focused on acquiring customers than generating profits, Mr Kapron said.
Singapore will be looking at the profitability of the core businesses as well as of the new banking operations, said Mr Varun Mittal, an associate partner with consultancy firm EY in Singapore.
Though Grab does not release financial statements for its Cayman Islands-based holding company, accumulated losses of its Singapore ride-hailing unit GrabTaxi reached $228.9 million last year, according to the latest filings to Singapore's Accounting and Corporate Regulatory Authority. Hong Kong-listed Razer reported accumulated losses of US$225.3 million (S$305 million) as of June 30.
MAS is also stricter than other regulators in its capital requirements. MAS plans to award two full bank licences and three wholesale licences limited to serving corporate clients only - the first licence requires capital of $1.5 billion, the second $100 million. Hong Kong has set HK$300 million (S$52.2 million) as the minimum for virtual banks. In the UK, it can be as low as £1 million (S$1.8 million).
"The profitability path can be difficult, especially when that comes on top of the MAS' very stringent regulatory capital requirements," said Ms Andrea Choong, a banking analyst at CIMB Securities in Singapore. The new digital banks will also face margin pressures from the need to attract customers by offering more attractive deposit and lending rates than the incumbent banks, she added.
Mr Mittal said although it is unclear which type of licences Grab and Razer are seeking, any applications could be helped by cementing partnerships with other larger firms with a track record of profits.
Grab has been discussing the formation of a consortium with Singapore Telecom and insurance firm Great Eastern Holdings. Another consortium under discussion involves local tycoon Ron Sim's V3 Group, stored-value card maker EZ-Link and property giant Far East Organization.
Grab's other advantage is the share of payment transactions it has built up under its GrabPay brand from ride-sharing users and local merchants, said Ms Valerie Law, an analyst who publishes on the Smartkarma plaftorm. GrabPay and other financial operations are likely to be folded into the digital bank if Grab gets a licence, she said.
Grab does not disclose the number of its users but said its app has been downloaded onto more than 166 million mobile devices. Razer Pay's e-wallet had one million registered users in Malaysia as of June 30; it started testing in Singapore earlier this year, according to its interim report.