Digital banks in Malaysia: Prospects and lessons from China
By Dr Chow Yee Peng
ON APRIL 29, 2022, Bank Negara Malaysia (BNM) announced the five digital banking licence winners from the 29 applications received, namely a consortium of RHB Bank Bhd and Boost Holdings Sdn Bhd; a consortium led by YTL Digital Capital Sdn Bhd and Sea Ltd; a consortium led by GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd; a consortium led by KAF Investment Bank Sdn Bhd; and a consortium of MoneyLion Inc, AEON Financial Service Co Ltd and AEON Credit Service (M) Bhd.
Currently, the successful applicants are undergoing a period of operational readiness that will be subject to BNM’s validation via an audit before they are permitted to commence operations and this process may require 12 to 24 months.
So, will the competitive landscape of the Malaysian banking sector be materially altered by the presence of these digital banks?
Digital banks may possess a competitive edge over traditional banks because companies within each consortium can leverage on each other’s strengths in terms of existing customer base, technological know-how and financial resources to offer a wider range of financial services through a digital interface like an app.
Although there may be similarities between the financial products and services offered by both traditional and digital banks, the latter’s digital architecture has some clear advantages in terms of speed, cost, convenience and customer outreach.
Learning from the experience of China, a world leader in digital banking, digital payments and e-commerce, McKinsey & Company reports that merely five years after their launch, Ant Group-supported MYbank has more than 20 million small and medium-sized enterprise (SME) clients while Tencent-backed WeBank has served about 200 million customers.
Over a short span of time, digital banks in China captured more than 7% of the country’s online SME loans and approximately 5% share of the unsecured consumer loan market.
Nonetheless, digital banks in Malaysia are not expected to disrupt the banking sector but instead can co-exist with their brick-and-mortar counterparts. Moreover, due to regulatory restrictions imposed by BNM’s licensing framework, where the digital banks’ assets are capped to RM3bil during the foundational phase, it is unlikely for these new entrants to become major competitors of the incumbent banks within the next five years.
According to Fitch Ratings, due to these regulatory restrictions, the total balance sheets of the digital banks will account for less than 1% of the overall banking system’s balance sheet in the medium term. Furthermore, digital banks have to overcome the issues of scepticism and lack of trust among some consumers, who are still more comfortable dealing with traditional banks.
In order for both types of banks to co-exist harmoniously, several measures have to be taken. First, digital banks should focus on fulfilling the primary reason for their existence, which is to fill the market gaps in the underserved and unserved segments, rather than competing for a slice of the traditional banks’ market share.
Based on lessons from China’s digital banks, MYbank has developed a “3D” approach (Digital Financing, Digital Skills and Digital Community) to overcome the issue of unequal access to capital encountered by female entrepreneurs.
Ant Group reports that about 80% of their female-owned SME clients have obtained their first-ever loan from MYbank, indicating that MYbank is able to reach out to underserved and unserved customers. Hence, digital banks are expected to advance financial inclusion further and narrow the digital divide among different strata of Malaysian society.
Second, digital banks should offer a truly differentiated customer value proposition that will result in positive financial performance, such as seamless digital onboarding, attractive pricing, round-the-clock customer support and speedy loan approval and disbursement. Besides, digital banks should plan to scale to reach sufficient customers for business sustainability. For instance, MYbank has revolutionised China’s SME financing via its “3-1-0” model, where borrowers can complete their online loan applications within three minutes, obtain loan approval within one second and with zero human intervention.
Moreover, some of the major digital banks in China adopt chatbots to handle approximately 80% of customer inquiries. It is, therefore, anticipated that by overcoming geographical barriers, promoting more personalised financial solutions and reducing transaction costs, digital banks in Malaysia can offer society greater opportunities to participate in the economy via the adoption of digital technology in their daily transactions.
At the same time, a solid plan for continuous digital transformation must be in place for the traditional banks to remain competitive in the digital era. This is especially critical for traditional banks that are burdened with legacy channels and conservative cultures. Hence, more investments should be made in building digital channels and capabilities as well as in cultivating the right culture for innovation.
In addition, digital banks in Malaysia should pursue strategic cooperation with various parties, including cross-border cooperation. Take, for example, the case of Asia Digital Bank (ADB), which was founded under the strategic collaboration among Nanjing Zijin Investment Group Co Ltd, Labuan International Business and Financial Centre and Labuan Financial Services Authority. Through this China-Malaysia cooperation, ADB obtained the first digital banking licence for investment bank in Malaysia.
In a joint meeting between ADB and Malaysia-China Business Council held in 2021, it was reported that Malaysia and China were seeking opportunities to cooperate in digital finance and the digital economy. Precisely, ADB was looking for ways to help the Malaysian government by leveraging its resources in digital finance while assisting Malaysian firms in innovating and growing in this area.
Subsequently, ADB established various strategic cooperation or partnerships such as with Huawei Technologies (Malaysia) Sdn Bhd to develop asset digitalisation solutions like the cloud-based A-Bank Super Wallet App as well as with China Mobile Communications Association’s metaverse council to jointly explore the new digital finance and trade ecosystem in the metaverse era.
To conclude, as Malaysia continues to embark on the process of transforming its banking sector by welcoming the entrance of new digital banks, these digital challengers with innovative business models are expected to enhance the depth and breadth of banking products and services offered to Malaysian society.
Together with the traditional banks, this new phase of banking liberalisation holds great potential to further strengthen the resilience of the country’s banking system in the new digital finance era.
Dr Chow Yee Peng is a Senior Lecturer at Tunku Abdul Rahman University College.
The views expressed here are entirely the writer’s own.
The SEARCH Scholar Series is a social responsibility programme jointly organised by the Southeast Asia Research Centre for Humanities (SEARCH) and the Centre of Business and Policy Research, Tunku Abdul Rahman University College (TAR UC), and co-organised by the Association of Belt and Road Malaysia.
