Long road ahead for digital banks

Bank Negara had in April said that five consortiums, out of 29 applications, were successful in obtaining digital bank licences in Malaysia.

IT’S been eight months since the announcement of Malaysian digital banking licences and the stage has been set for these lenders to commence their business, as early as next year.

However, there will be hurdles aplenty.

Industry observers say one of the main barriers will be having to win the trust of people.

And what’s certainly not helping is the increasing number of digital scams in recent times.

Additionally, compared with traditional brick-and-mortar banks, cash burn rates are high at Internet-based lenders while their coffers are typically emptier, especially for those without the strong backing of established partners.

Over in Singapore where three digital banks have already started business, things have not been rosy.

One digital lender has reportedly even put its launch on hold.

MIDF banking analyst Samuel Woo points out that most digital banks “don’t have the best survival track record.”

“New digital banks have a tough time facing established brick-and-mortar players, given the lack of brand recognition, track record of success and higher customer acquisition costs,” he tells StarBizWeek.

“I also think the heavy restrictions that Bank Negara placed upon these digital banks in their crucial beginning years will also be a dampener, and it’s unlikely that these banks will make any noticeable dent in the local banking space until many years down the road,” Woo adds.

“Needless to say, Malaysian digital banks will have a tough time – it will be interesting to see how they attempt to poach market share, and if there will be any significant compromise in the process.”

RAM Ratings co-head of financial institution ratings Sophia Lee reckons the immediate challenge for these digital banks would be to find the right talent.

However, she also points out that while the challenge for new digital banks includes building a reputation, creating trust and driving adoption and usage of digital financial services among the underserved and unserved segments, digital banks (such as Grab and Shopee for example) also have their own sizeable ecosystems to leverage on as a start. “Some of the digital banks’ consortium partners already have prior experience in providing financing to micro, small and medium enterprises or MSMEs, gig workers as well as the Bottom 40 group.

“In addition, using non-conventional methods to onboard customers such as data analytics and artificial intelligence would give these digital banks an edge as these customers would have been unable to get credit facilities from traditional banks without proper documents or credit history,” she says.

Given the high reliance on technology, cyber security risks will be an important area of focus for digital banks as failure in this area could cause substantial reputational harm, she adds.

Former investment banker turned private investor Ian Yoong Kah Yin concurs that it will be no walk in the park for digital lenders in Malaysia, much like its counterparts.

“They will have to overcome tough competition from traditional retail banks which have strong branding, established online banking systems and customers’ inertia loyalty, especially in the initial two to three years of operations,” he says.

Digital banks will also have to spend “a lot of money” to market their products, Yoong adds.

Demand for online banking

Despite the numerous opinions, consumer behaviour across Asia-Pacific does point towards a strong preference for mobile and online banking.

Perhaps this is why the push for digital banks – essentially, lenders with zero physical presence – by central banks the world over, remains strong.

According to a report written by consultancy group McKinsey & Co’s analysts, “the use of digital banking in Asia-Pacific has entered a stage of acceleration, fuelled largely by innovations launched in emerging markets.”

Citing a McKinsey survey, they say adoption of digital banking in emerging markets has caught up with that in developed markets. “Between 2017 and 2021, the share of consumers in Asia-Pacific emerging markets actively using digital banking increased sharply, rising 33 percentage points from 54% in 2017 to 88% in 2021.”

RAM’s Lee says considering the ubiquity of smartphones and high digital adoption and market readiness, digital banking is fast becoming a norm.

“Based on Bank Negara statistics, Internet banking (conducted by individuals) and mobile banking transactions jumped a respective 40% and 290% to RM1.2 trillion and RM800bil over the last two years, boosted by the Covid-19 crisis.

“Incumbents are seen upping their game by digitising existing banking operations and investing in new capabilities to ensure long-term market relevance. Some banks are also leveraging the agility of fintech players through partnerships to accelerate their progress,” Lee adds.

She says in terms of profit performance, digital banks will be constrained in the early years in view of the hefty initial outlay to develop their ecosystems, market their products and create scale by occasionally offering promotional rates in a competitive operating environment.

“Digital banks will be subjected to the same regulatory framework governing commercial banks but capital adequacy and liquidity requirements will be simplified during the foundational phase.”

For those that survive the initial years of operations, there will be benefits.

Yoong cites UK digital lenders Monzo Bank and Starling Bank that are expected to report profits in 2023 after about eight years of operations, as examples.

“It is likely that two to three of the digital banks in Malaysia will also be profitable in the same time frame,” Yoong says.

“Malaysia is the second country in South-East Asia to issue digital banking licences. It is a bold and likely, rewarding move by Malaysia,” he adds.

In April, Bank Negara said five consortiums out of 29 applications, were successful in obtaining digital bank licences in Malaysia.

These were consortiums comprising Boost Holdings Sdn Bhd and RHB Bank Bhd, GXS Bank Pte Ltd (a venture between Grab Holdings and Singapore’s SingTel) and Kuok Brothers Sdn Bhd, one by Shoppe’s owner, Sea Ltd and YTL Digital Capital Sdn Bhd, another comprising AEON Financial Service Co Ltd, Aeon Credit Service (M) Bhd and MoneyLion Inc and lastly, a consortium led by KAF Investment Bank Sdn Bhd.“Following this announcement, the successful applicants will undergo a period of operational readiness that will be validated by Bank Negara through an audit before they can commence operations. This process may take between 12 to 24 months,” Bank Negara says.

Under the central bank’s ruling, digital banks are required to adhere to an asset threshold of not more than RM3bil for three to five years.