Digital banking: Transforming the local landscape
Digital banks are expected to further advance financial inclusion. By adopting digital technology more widely for everyday transactions, we can significantly increase opportunities for our society to participate in the economy – by overcoming geographical barriers, reducing transaction costs and promoting better financial management.
— Tan Sri Nor Shamsiah, Bank Negara Malaysia Governor
THE Covid-19 pandemic has hastened the need for digital change, especially within the banking sector which saw its traditional system rapidly change via the offering of more digital products to adapt to consumers’ shifting behaviours.
But traditional banks can only go so far with this digital change. With the rise of fintech tools, the idea of a fully digital bank offering products through its digital channels, is quickly being accepted in most major economies.
Across Asia, several countries have already introduced digital banks into their financial system.
Hong Kong awarded its first digital banking license in 2019 and today has eight virtual banks. In Southeast Asia, Singapore recently awarded digital banking licenses to four entities while the Philippines had also recently awarded digital bank licenses to six entities.
Plans are underway to introduce digital banks in Vietnam and Thailand.
Closer to home, Bank Negara Malaysia (BNM) last year unveiled its intention to award up to five new digital bank licences to drive further innovation in the market to support the unbanked, underserved, and micro-SME segments.
Malaysia’s financial sector now stands at the dawn of a new digital era with announcement of five entities being awarded Malaysia’s first five digital bank licences just earlier this month.
The five entities that will pioneer the digital bank sector here are a consortium of Boost Holdings Sdn Bhd and RHB Bhd, a consortium led by GXS Bank Pte Lte and Kuok Brothers Sdn Bhd, a consortium led by Sea Ltd and YTL Digital Capital Sdn Bhd, a consortium of AEON Financial Service Co Ltd, AEON Credit Service (M) Bhd and MoneyLion Inc, and a consortium led by KAF Investment Bank Sdn Bhd.
“Digital banks are expected to further advance financial inclusion. By adopting digital technology more widely for everyday transactions, we can significantly increase opportunities for our society to participate in the economy – by overcoming geographical barriers, reducing transaction costs and promoting better financial management,” said Bank Negara Malaysia Governor Tan Sri Nor Shamsiah.
“Digital banks can help individuals and businesses gain better access to more personalised solutions backed by data analytics. As businesses move online, digital banking also provides a safer and a more convenient way to transact,” she added.
Following this announcement, the successful applicants will undergo a period of operational readiness that will be validated by BNM through an audit before they can commence operations. This process may take between 12 to 24 months.
Generally, the concept of digital banks have been received positively by economists and financial experts.
“We welcome the inclusion of digital banks into the financial sector as while it will likely stir the operating landscape of traditional banks in the long term, it is a necessary step in developing our national maturity in accepting new evolutions (and improvements) in collusion with global standards,” said the research team at Kenanga Investment Bank Bhd (Kenanga Research)
“The Malaysian banking industry is at the dawn of a new era, with the awarding of these inaugural digital banking licenses,” said the research team at Public Investment Bank Bhd (PublicInvest Research).
While the new digital bank licenses would mean that new banks will be entering the financial sector, these new digital banks are not expected to be an immediate risk to traditional banks.
Instead, they are expected to compliment as well as push traditional banks to innovate their systems further, to better serve the market.
“We reckon it will be a while before they are able to challenge the incumbency of the traditional banks however, many of the latter also having already embarked on prior digitalisation and/or digitisation initiatives on their own in-step with the evolving landscape.
“Digital banks’ primary focus on the un-served and underserved segments may come at the expense of profitability, though it must be noted that they are also likely have greater cost advantages.
“Short-term volatilities notwithstanding, expected rate normalisation this year and economic recovery will bring about asset quality improvements, loans growth and margin expansions, all of these medium-term boons to the sector,” PublicInvest Research.