The Malaysian Insight

BANK Negara Malaysia (BNM) is set to announce the five recipients of the first digital banking licences in Malaysia, which may potentially redefine the financial services sector in the country.

The introduction of digital banks means that Malaysians can expect customisable banking services right at their fingertips, especially for underserved customers.

In its licensing framework for, BNM said digital banks would enable the application of technology to uplift the financial wellbeing of individuals and businesses.

To get a better picture of digital banks and what they will bring to the Malaysian financial sector, The Malaysian Insight spoke to Ridzuan Aziz, a board adviser for the Fintech Association of Malaysia.

Unlike conventional banks, digital banks do not have a physical presence but are still able to provide all the facilities of a regular bank, Ridzuan said.

“Digital banking in the overall set is a new business model for banking where it deploys technology throughout the business process.

“The core banking, business solutions and customer facing processes, all three components are digitalised, making it cost effective, customer centric and it allows customers to customise services to be delivered by the bank,” Ridzuan said.

How is it different from online banking?

When it comes to internet banking, Ridzuan said the transaction will usually be done using a mobile device or machine provided by the bank such as an automated teller machine (ATM) or cash deposit machine and is only limited to certain services.

“Mobile banking uses the internet to deliver that service. The difference is digital banks don’t have any physical presence, no branches, no brand, no cash deposit machines or ATMs,” he said.

“What they do is leverage existing infrastructure and use the Malaysian Electronic Payment System ATMs to facilitate customers who want to transition to digital banks.”

While digital banks will not have a physical presence, customers need not worry about getting in touch with the banks regarding any of their concerns, Ridzuan said.

“There will be a responsible person managing issues and concerns for the bank’s customers as that is part and parcel of regulatory requirements. There will be no mystery on who owns the bank, or the location of its headquarters,” he said.

Since BNM’s announcement on the licensing framework, it has received close to 29 applications, but only five will be chosen.

Among the 29 applicants are Axiata and RHB Bank consortium, AirAsia’s BigPay consortium with Malaysian Industrial Development Finance Berhad and Ikhlas Capital, Southeast Asia’s super app Grab-Singtel consortium, Sea Group-YTL consortium, and Aeon Credit Service and Aeon Financial Services, among others.

Those who are awarded the digital banking licence must comply with the Financial Services Act and Islamic Financial Services Act regulation.

Benefits of digital banks

One of the biggest benefits of having a digital banking system is that it allows for customisable services over a wide range of products.

Digital banks will have the same full range of credit facilities as a regular incumbent bank.

“This is a banking business model that is not a standard product. The basic services like loans, lending will be available and some of the applicants offer holistic services including insurance, micro investments as well as financial advice as part of their operations.

“What they want to do is customise the level of services instead of standard products. Even the type of savings account will be customised to improve livelihood.

“Digital banks want to educate by doing, sharing with customers that if they want to save, this is how you do it and they will take you on that journey,” Ridzuan said.

Besides customisable services, digital banks are also cost-effective to run with a small workforce compared to regular banks.

“Based on existing digital banks in the UK, Hong Kong and Singapore, most will have between 2,000 and 3,000 employees when they become a mature organisation compared to traditional banks with around 15,000 employees.

“Traditional banks use infrastructure that costs between RM600 million and RM1 billion to run the bank. For digital banks this can be reduced by 65% to 70% and can be translated to cheaper products,” Ridzuan said.

Who are digital banks targeting?

The main customer base of digital banks are those aged 18 and above, early graduates, young families and individuals wanting to start their own business as well as small- and medium-sized enterprises, Ridzuan said.

“Incumbent banks are not interested in these types of customers. From a return of investment perspective, these customers don’t give the best return.

“The focus is more on those who are not yet served by the traditional banks or those who are underserved by traditional banks.”

However, all this does not mean digital banks are stealing customers away from traditional banks.

“The moment the licences are awarded, it will take the digital banks between 12 and 18 months to implement their plan to start operations.

“Traditional banks won’t feel the pinch in terms of customers moving. It won’t be an overnight transition.

“The customer will want to analyse benefits and risks. This must be made clear to create awareness.”

Main criteria for digital banks

BNM has listed five main criteria for applicants, chief among them is to drive financial inclusion, including ensuring quality access and responsible usage of financial services.

Digital banks must also maintain assets thresholds of no more than RM3 billion in the first three to five years of its foundation phase.

It must comply with the Financial Services Act and Islamic Financial Services Act regulations, offer meaningful access and responsible, affordable financial solutions and safeguard the integrity and stability of the financial system through capital funds of RM100 million at the foundation phase.

The central bank is also looking at three types of digital banks among the many applicants.

It is looking for specialist digital banks to target specific customers with tailored products, ecosystem players that leverage brand, channel footprint and pre-existing customers from non-banking services as innovative basic banking providers who offer simple products for everyday banking. – February 10, 2022.