The growth of Digital Banking in Malaysia seems stifled and unexciting with the market share hitting over 2% of total banking transactions since 2022 in comparison with the traditional, brick and mortar financial institution transactions.
In a recent discussion held exclusively between BusinessToday and Bloomberg Intelligence, Singapore, digital banking in Malaysia is seen to be growing at a snail’s pace with apparently a not so bright future due to a seemingly high regulation and procedures.
Bloomberg Intelligence states that although the take up rate remains low in Malaysia, the silver lining is that banking projections show that the industry envisages a growth rate of 15 to 20 per cent from 2019 to 2025.
Bloomberg Intelligence Senior Equity Research Analyst, Banks Sarah Jane Mahmud said with Digital Banks, differentiation is essential to reach the high numbers of the unbanked population within Southeast Asia – which is seen to be at 70%.
The Rise of Digital Banking in Singapore
To draw a backdrop on demand seen in Malaysia, the rise of digital banks in Singapore, led by Standard Chartered’s Trust, poses only a modest threat to the profitability of the island-state’s incumbent banks. DBS, OCBC and UOB, forced to accelerate their digital transformation during the pandemic, are in a good position to defend their 65% deposit-market share and foster asset growth.
Sarah said Trust Bank, with a full banking license since its inception via major shareholder Standard Chartered, has a competitive edge vs. peers. Unlike GXS Bank and MariBank, Trust has never been subject to a deposit cap, allowing it to grow faster, and has more exposure to potential customers via its backing by NTUC, the owner of supermarket giant FairPrice.
Trust won an 88% digital-bank market share in its first four months, with over S$640 million in deposits, rising to over S$1 billion by May. The license also allows Trust to more readily diversify its services, including insurance, and income streams.
Though net interest income tops peers’, Trust’s high-cost base limits near-term profit growth. Yet, with 600,000 customers as of end-August, some 12% of Singapore’s adult population, Trust could be on target to break even by 2025.
Bloomberg Intelligence Senior Equity Research Analyst, Banks Sarah Jane Mahmud
Trust Bank Outpaces Peers in Net Interest Income
DBS, OCBC and UOB are unlikely to see a material impact of the lifting of the retail-deposit cap on GXS and Maribank in June to S$75,000 from S$5,000. But the move could allow these digibanks to compete on a stronger footing with Trust. Customers are more likely to maintain their primary account with an incumbent bank, using digibanks for their secondary or tertiary accounts.
Second, even if all five digital banks held a joint S$40 billion in deposits, they’d only have a 5% market share vs. the 65% held by the traditional trio, which totalled S$529 billion at end-2Q. GXS and MariBank were initially subject to an aggregate cap of S$50 million, to be lifted as they transition to a full bank. The higher caps — the same as Singapore’s deposit-insurance limit – suggest they continue to operate in a regulatory sandbox.
Sarah added, it’s important to note that leveraging technology and innovation, GXBank hopes to serve the needs of the unserved and underserved individuals, as well as micro and small-to-medium enterprises (MSMEs). Additionally, the digital-only bank will support customers’ needs through various channels including a bank app and 24/7 customer support via multiple platforms.
In contrast Only 2% of Singapore Residents Are Unbanked
Singapore banks, forced to strengthen their digital services during the city’s coronavirus “circuit breaker”, are in a good position to defend market share. During the pandemic, DBS’s digital-asset trading service DDex and UOB’s mobile-only bank TMRW were launched in Singapore, Sarah added.
Modernising legacy platforms requires hefty short-term disbursement, with OCBC set to spend S$300 million in 2023-2025 as part of its seven-year digital plan. Digital banking offers a long-term opportunity to boost efficiency and margin. DBS may have a first-mover advantage; since its digital journey began in 2014, its share of income from e-banking has soared to 82%.
Singapore has five digital banks: Trust; Grab- and Singtel-backed GXS; MariBank; Ant’s wholesale bank ANEXT; and wholesale bank Green Link, owned by the Greenland Group and Linklogis.
Saturated Singapore Market Might Stifle Growth
In relation to Singapore, Digital banks could see limited earnings prospects and might, like GXS, need to look at regional expansion. With only 2% of the population unbanked, they could struggle to win retail-deposit market share. High interest rates to lure savers — 2.68% at GXS vs. the 0.48% average — aren’t sustainable on a large scale or over the long term, especially as lending growth weakened to 5.5% year-on-year in the first seven months, Sarah said.
Meanwhile, trust in traditional banks remains strong, with DBS atop the Customer Satisfaction Index at 75.9/100 despite its digital debacle. The banks are eyeing Malaysia as GXS’s licensed digi-bank JV with the Kuok Brothers, GX Bank, won approval on Sept. 1 to start operations. Sea Ltd, the tech giant behind MariBank, is expected to launch a digital bank with conglomerate YTL by April 2024.
Indonesia to be US$8.6 Billion Vanguard of SEAsia Digital Banking
Bloomberg Intelligence Technology Industry Analyst Nathan Naidu said Indonesia’s digital-banking sector might grow quicker than most countries in Southeast Asia and reach US$8.6 billion by 2025, as traditional lenders like Bank Rakyat and big tech companies such as GoTo leverage the regulator’s unique regime and tap the unbanked. Yet competition could rise as foreign-ownership rules make the market ripe for M&A.
Bloomberg Intelligence Technology Industry Analyst Nathan Naidu
BCA, BTPN, Big Bank Peers Poised to Protect Position
Indonesia’s big banks are well positioned to defend their 85% deposit market share and grab a slice of the country’s growing digital-financial-services revenue.
Spurred by a provision to allocate 30% of lending to micro, small and mid-sized businesses by July and the government’s end-2024 90% financial-inclusion goal, most have branchless-banking initiatives. Some have launched digital-only banks like BCA’s Blu which saw 205% loan growth 1H vs. 1H22, Bank BTPN’s Jenius and Bank Rakyat’s Bank Raya.
Others have developed online-banking platforms like Bank Mandiri’s Livin’ whose user base rose 55% in a year. Supported by a wide agent network — over 666,000 in Bank Rakyat’s case – brick and-mortar banks are poised to extend digital services in the most remote areas.
Nathan said Indonesia’s digital-financial-services revenue could see a faster 34% compound average growth rate in 2019-25 vs. other Southeast Asian countries except perhaps Vietnam.
“We think this will chiefly be a result of the Financial Services Authority’s unique regulatory approach. Unlike Singapore, Malaysia, the Philippines and soon Thailand, it has no bespoke digital-bank regime.
“For digital banks to rise there need to a cut in red tape and easing compliance headaches for new entrants, typically tech giants like GoTo and Grab. Yet with higher capital requirements for new digital banks (10 trillion rupiah vs. 3 trillion for a conventional lender), it could be more time and cost-effective for new entrants to purchase a smaller, struggling brick-and-mortar bank, leverage its customer network and transform it into a digital bank while avoiding the higher capital charge.,” Nathan added.
Digital Banks to Bloom in Southeast Asia, Despite Risks
A recent Bloomberg Intelligence polls on Sept 26 cited that digital banking is set to forever change Southeast Asia’s financial-services industry. Indonesia presents companies with the biggest potential for growth via digital channels, according to 70% of the audience at Bloomberg Intelligence’s Sept 26 digital-banking event in Singapore.
This is chiefly due to its young, digitally-literate population, coupled with its light-touch regulatory regime.
Regulatory change elsewhere in Southeast Asia, however, was voted as the biggest challenge facing the region’s digital banks, with diverse rules from one country to another making it difficult to engage in cross-border business and scale up, Nathan said.
The rise of Digital Banking in Malaysia
The COVID-19 pandemic has changed consumer and business behaviour, demanding more digital delivery and cost-effective financial solutions. The adoption of mobile and online banking has increased significantly, with mobile banking transactions rosing to RM800 billion in 2021. This is an opportunity for banks, credit unions, and other financial institutions to embrace the benefits of digital banking.
Digital banking is all forms of financial services, transactions and operations that are only available online.
BNM Licensing Framework
The issuance of the Policy Document on Licensing Framework for Digital Banks seeks innovative applications of technology in the financial sector. It also aims to support the country’s unserved and underserved market segments through innovative business models by offering banking products and services that address the specific needs of the underbanked population.
Bank Negara Malaysa (BNM) included a three to five-year foundational phase, as well as the submission of a five-year business plan. During the foundational period, all licensees must maintain a minimum of RM100 million in capital reserves unimpaired by losses, and the total size of assets must not exceed RM3 billion at all times. Furthermore, licensees must comply with all regulatory criteria applicable to an existing licensed bank or licensed Islamic bank by the end of the fifth year from the date of operation, as well as reach a minimum amount of capital reserves of RM300 million unimpaired by losses.
Benefits of Digital Banks
One of the advantages of digital banking is giving customers the freedom to bank whenever, wherever and however they want, and it only gets better with features such as real-time assistance and personalised services. Digital banks provide real-time assistance by delivering instant support through tools like chatbots to scale their customer support.
Meanwhile, a complete grasp of customers’ behaviour through data and insights collected made hyper-personalisation possible, enabling digital banks to recommend products and services that match their needs. Therefore, banks, credit unions and other financial institutions that provide digital banking experiences will gain an upper hand in the competitive landscape as digital banks have agility, personalisation and enhanced user experience advantages.
This ability to collect alternative data can also be used to enhance credit scoring and credit reporting. Alternative data can provide lenders with valuable customer insights to help them offer better financial services to the unbanked and underserved segments. Digital banks, however, allow non-traditional ways to do credit scoring. By collecting data such as consumer spending behaviour through digital channels like e-wallet apps, digital banks can create their own alternative credit data, and make use of them to rate an individual’s creditworthiness before denying or approving an application.
Digital banks are much cheaper to operate compared to incumbent banks. Operational costs such as physical branches maintenance fees and labour costs incurred by traditional banks are not applicable to digital banks. Hence, digital banks are able to offer cost-effective financial services to retail customers and the underserved business community such as individuals from lower-income groups. By immensely improving their financial well-being, BNM believes that not only will the underbanked community be taken care of, but it will also promote an inclusive financial sector, fostering the growth of Malaysia’s economy.
Digital banks are expected to further advance financial inclusion. By adopting digital technology more widely for everyday transactions, a consumer can significantly increase opportunities for society to participate in the economy – by overcoming geographical barriers, reducing transaction costs and promoting better financial management.
Bank Negara Malaysia, in line with the nation’s Financial Sector Blueprint 2022-2026 said they will continue to work with the financial and fintech industries and relevant stakeholders to continuously enhance access to financial services throughout the country and across all segments of society.
The statement was made by the previous Governor last year soon after the Central Bank announce the five successful applicants for the digital bank licences as approved by the Minister of Finance Malaysia under the Financial Services Act 2013 (FSA). The licensed digital banks include a consortium of Boost Holdings Sdn. Bhd. and RHB Bank Berhad, a consortium led by GXS Bank Pte. Ltd. and Kuok Brothers Sdn. Bhd; and a consortium led by Sea Limited and YTL Digital Capital Sdn Bhd.
Digital banking Licenses were also issued under the Islamic Financial Services Act 2013 (IFSA) to a consortium of AEON Financial Service Co., Ltd., AEON Credit Service (M) Berhad and MoneyLion Inc.; and a consortium led by KAF Investment Bank Sdn. Bhd.
Three out of the five consortiums are majority-owned by Malaysians namely Boost Holdings and RHB Bank Berhad, Sea Limited and YTL Digital Capital Sdn. Bhd. and KAF Investment Bank Sdn. Bhd.
Impact to customers
Digital banks are in a prime position to promote financial literacy to the unserved and underserved communities. Digital banks could provide education, advice and guidance in various forms which create awareness of responsible use of suitable financial solutions. This ultimately will boost their financial health.
The impact on SMEs
Digital banks will leave an impact on SMEs by offering more accessible loans, and in contrast to traditional banks, will take a more borrower-centric approach to banking, offering personalised financial solutions, fast approval and disbursement of funds, simplified lending processes, competitive pricing and at a lower cost to the SMEs.
The future of digital banking in Malaysia
The existence of digital banks will affect the way we bank and the way we manage a consumer’s finances, including everyday banking transactions and operations, credit scores, personal finance, insurance, investments, loan applications and many more. Though digital banks in Malaysia will focus on serving the unserved and underserved markets such as the B40 groups and micro-SMEs, we believe that each digital bank will offer a unique proposition that is relevant to the needs of the community.
BNM envisions the emergence of digital banks will boost the growth of the country’s economy, support the transformation of the financial ecosystem to meet the future economic needs of the nation, and promote a sustainable and inclusive financial sector in Malaysia.
