Big future for digital banks but hurdles need to be crossed

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PETALING JAYA: Malaysia has the right ecosystem to nurture digital banks but there are challenges ahead to successfully implement such a banking system.


The interest in such banks has been overwhelming with more than 40-50 applicants having shown interest in the five digital bank licences up for grabs in Malaysia.

It will not be a surprise if the number of applicants increase once Bank Negara Malaysia (BNM) releases the full guidelines, said Gopal Kiran, risk advisory director of financial services at Deloitte Malaysia.

However, Gopal said there were obstacles that digital bank applicants might face, from formulating the right digital bank strategy right up to implementation.

“(There are) challenges in keeping the cost low for customer acquisition,” he told FMT.

“With the many traditional banks and upcoming digital banks, customers will have multiple banking partners to choose from.

“Providing a cost-effective digital solution to reach the unserved and underserved population (is also a challenge) as most (Malaysians) stay in rural areas, including one-third in Sabah and Sarawak.”

Apart from identifying partners who can deliver a strong customer base and distribution network, Gopal said applicants should also understand and consider investing in cloud services by collaborating with the right players in order to keep technology costs relatively low.

News that Singapore has approved four digital bank applications this month has ramped up the pressure on Malaysia to also issue licences of its own, especially with the news coming just days after BNM had announced that it was in the final stages of producing a digital banking framework.

BNM’s core requirement of a digital bank is to improve financial inclusivity. The move to introduce digital banks is poised to help SMEs, gig-economy workers and those in the lower end of the B40 group overcome the many challenges they face in obtaining financial assistance through traditional banks – such as the lengthy and tedious processes to obtain loans.

“If the digital bank plans to offer products and services to those who are not served by existing financial institutions, it needs to be cognizant of why existing financial institutions are unable or are unwilling to serve these customer segments,” pointed out Adrian Lee, Head of Financial Services at KPMG Malaysia.

“Customers are often turned away from existing financial institutions due to higher credit risks, meaning that the customer will not repay their loans.


“So, if the digital bank’s loan book solely consisted of ‘underserved’ customers, we can expect that a larger proportion of their loans would face defaults, which would mean the digital bank would struggle to be self-sustaining.”

Lee noted that “another interesting hurdle” that digital banks will have to face is in building trust with Malaysian households and businesses, especially as the type of companies looking to go into digital banking are not known for providing financial services.

Apart from communications giant Axiata, other big players who have expressed interest in a digital banking licence in Malaysia are popular ride-hailing app Grab and gaming company Razer.

Both Grab and Razer also submitted bids for the digital banking licence in Singapore, with Grab being among the four successful applicants.

Conglomerate Sunway Bhd, property firm Paramount Corp, US-based financial start-up MoneyLion Inc and tech firm Green Packet Bhd are also reported to be interested in a digital banking licence in Malaysia.

Judging by recent statistics, it is easy to see why companies are scrambling to join the digital bank race.

Malaysia has a sizeable group of digitally-savvy and young millennials who embrace technology, mobile and internet penetration rates are quite high in Malaysia, and there is a good adoption of digital financial services.

Internet user penetration reached 90.8% in 2019 and is expected to grow to 97.5% by 2022.

Meanwhile, a survey by PwC last year revealed that 74% of Malaysians are interested in becoming virtual bank customers while 77% are interested in additional services provided by banks beyond financial products.

Earlier this month, Bank Negara Malaysia noted the country’s sustained push towards e-payments with a 47% increase in the volume of transactions made via the Internet and mobile banking and a 260% increase in active e-wallet users between August 2019 and 2020.

“Digital banking anchors customer empowerment,” explained Goh Lim Thye, a senior economics lecturer at Universiti Malaya. “It’s a timely response to the increasing consumer demand for online access while also promoting financial inclusion.” – FMT

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