RAM Ratings Sophia Lee: We do not expect digital banks to compete with unsustainable rates as they are required to prove their profitability and sustainability to the central bank in order to maintain their licences."
THE Covid-19 pandemic has triggered a spike in the use of technology and digital channels for payments and banking transactions.
With the movement control order (MCO) which began on March 18 and with the current conditional MCO, many prefer to conduct banking transactions digitally.
Fitch Ratings said on Friday that it noticed many major banks across the region have reported a surge in online banking activities since the onset of the pandemic.
As an example, it cited Bank Rakyat Indonesia (Persero) Tbk to have reported around 88% year-on-year growth in Internet banking activity in the first quarter of the year.
“We expect this trend to persist even after the outbreak subsides, as customers who were used to cash-based and over-the-counter transactions maintain their newly adopted habits. This, coupled with the greater adoption of open banking architectures in some jurisdictions, would force banks to innovate more quickly or risk falling behind, ” Fitch said.
The pandemic, according to analysts, will inadvertently spur more fintech players to complement the incumbent banks in the development of digital banking in the country.
Despite the tough economic conditions, these non-bank and technology players are taking a long term view of the bright prospects of the digital banking space.
Furthermore, digital banking offers good revenue streams and lower cost of operations in the long run.
One of the latest entrants is Sunway Bhd
which plans to build a financial technology (fintech) ecosystem and to secure a digital banking licence with the purchase of a 51% stake in Credit Bureau Malaysia (CBM).
International technology and telecommunications company Green Packet Bhd has also expressed its interest for a digital banking licence.
Recently, the telco announced a venture with China Internet giant Tencent as its local partner for an AI-enabled electronic know-your-customer (e-KYC) product.
e-KYC is a fundamental block in banking today, more so with new entrants into the market who need to prove to banking regulators that their systems are using the latest technology to weed out illegal monies entering the banking system.
Boost, Grab, TNG Digital, Razer Pay, BigPay, Axiata Group, property firm Paramount Corp Bhd and US-founded financial start-up MoneyLion Inc are other players which are also vying for a digital banking licence.
On the banking side, CIMB Group, Affin Bank Bhd, Hong Leong Bank Bhd, AMMB Holdings Bhd and Standard Chartered Bank Malaysia Bhd, are among those that have signalled interest in a digital banking licence.
Bank Negara is expected to issue up to five digital banking licences after the end of the consultation period for its exposure draft on the Licensing Framework for Digital Banks on June 30 this year.
KPMG expects a high number of applicants for the five digital banking licences to be issued in the country on the back of lower entry requirements in minimum capital and significant market opportunities.
According to KPMG Malaysia head of financial services Adrian Lee, successful applicants will be those who practise financial inclusion to help the underserved and unserved segments to rebuild themselves financially.
Meanwhile, Shankar Kanabiran, a financial services advisory partner at EY Malaysia was reported as saying that the current crisis will delay the award of digital banking licences but at the same time, it will also highlight the importance of digital and social-distant banking.
When the country begins its post-pandemic rebuild, digital financial services will be a high priority to help the economy recover, he says, adding that a change in mindset is already happening and that is only going to further speed up.
So will building a fintech business amid the current economic climate coupled with lower interest rates offered by traditional banks pose a challenge?
A spokesperson from Sunway tells StarBizWeek that: “ Diversification into new growth sectors is part of our long-term plan. We are aware of the current economic landscape, however, we are optimistic about the mid to long-term prospects for digital banking, especially for those with the right ecosystem support.
“Digital banks leverage technologies to further improve efficiency through frictionless automated systems, offer seamless and convenient user experiences as well as lower operational costs. In this case, big data will also be very useful to match the right customers with the right products.
Besides offering attractive lending rates, the spokesperson says digital banks can offer simpler application procedures and faster processing times that can encourage higher take-up rates, and perhaps innovative lifestyle product support.
The group’s current finance-related ecosystem consists of a money-lending and hire-purchase business, an invoice factoring business and cross-remittance business. These businesses are currently much smaller than the group’s property development, healthcare, construction businesses.
As to how Sunway is preparing for its venture into the digital banking space in view of the requirement of new skill sets and added risk associated with this venture, the spokesperson adds: “We are able to achieve this because we understand the key success factor for each of these businesses.
“Before we venture into digital banking, we have completed our due diligence by meticulously carrying out industry research, ensuring that we have enough resources as well as being able to manage any risks that are present with every business venture.
“From our in-depth studies, we are able to understand the key success factors for the digital banking business.
To minimise the risks in digital banking, the group is also open to working with both established local and foreign companies which have the right expertise.”
The group also typically ventures into businesses that are synergistic with its current business structure and it sees digital banking having such synergistic value, the spokesperson notes.
With more technology companies joining the digital banking bandwagon, will this pose a threat to traditional banks ?
RAM Ratings co-head of financial institution ratings Sophia Lee says while they are disruptors relative to traditional banks, their impact on the Malaysian banking sector will be limited in the next three years, given the regulatory restrictions on asset size, of not more than RM2bil each.
Digital banks are expected to spur more innovative deployment of technology in the financial sector, she adds.
Lee says: “The aggregate assets of the five digital banks would only account for 0.3% of the industry’s. Moreover, the central bank requires digital banks to focus on financial inclusion to address the market gaps in the underserved and unserved segments. This will temper head-on competition with traditional banks in the mass retail and SME sectors.”
The debut of digital banks, she says, may affect the unsecured retail lending (i.e. personal loans and credit cards) and micro enterprises segments of traditional banks.
However, Lee says these represent the smaller segments of most commercial banks in Malaysia, comprising a respective 8% and 5% of the banking system’s loans.
“Given digital banks’ focus on the underserved and unserved segments, a large proportion of their customer bases may not be traditional banks’ target customers. Where there are overlaps in areas such as deposit products and personal loans, margin compression may intensify, ” she adds.
On digital banks’ profit performance, she says like most start-ups, it is likely to be constrained in the early years. This, she adds, is due to the hefty initial outlay to develop their ecosystem and the need to build up scale by occasionally offering promotional rates amid the competitive business landscape.
“Digital banks will also be subject to the same regulatory framework as commercial banks, although capital adequacy and liquidity requirements will be simplified in the initial years.
“All said, we do not expect digital banks to compete with unsustainable rates as they are required to prove their profitability and sustainability to the central bank in order to maintain their licences, ” Lee notes.
She also highlighted that Bank Negara is now allowing banks to digitally sign on or on-board customers via e-KYC.
Sophia says: “e-KYC will enable banks to digitalise their on-boarding processes, to enhance convenience and reach as well as reduce their cost of providing financial services.
“Individuals will be able to open bank accounts through online and mobile channels instead of having to present themselves at bank branches.
“Notably, most Asean countries have been utilising eKYC to digitally on-board customers in recent years.”
