Encouraging innovation
IT is also worth noting that in its Licensing Framework for Digital Banks, BNM defined a digital bank to be a bank that operates wholly or almost wholly through digital or electronic means.
As such, BNM prohibits licensed digital banks from having physical bank branches. Instead, it allows digital banks to establish physical offices only for administrative purposes. Customer transactions can only be facilitated online, and not through the physical offices.
“Digital banks are unique, as they combine the speed and agility of a fintech with the stability and trustworthiness of a traditional bank.
“However, while they are similar in many aspects, it is important to distinguish between digital banking and existing online banking services offered by traditional banks,” RHB Investment Bank Bhd’s research team (RHB Research) said.
“While digital banking has increased in popularity across the globe and region, a number of Malaysia’s larger incumbent banks including Malayan Banking and CIMB did not apply for the digital banking license.
“This is because their existing banking license already allows them to conduct online/mobile banking operations. The larger incumbents are, as such, putting their trust in their own digital capabilities to weather through the forthcoming digital storm,” it added.
“We think competition from new entrants via the digital banking license is likely to be limited, as BNM stated that the purpose of the digital banking license is to target market segments that are underserved.
“New entrants in the immediate term will likely focus on the micro and SME community, as well as unsecured lending and selected offerings of wealth management products – in our view.
“While this would not be immediately disruptive for incumbent banks, digital banks with partners that have good ecosystems can grow to become a threat.
“We believe incumbent banks that have taken steps to digitalise their operations will be better positioned to fend off potential competition from these new digital banks.
“These include taking a very holistic approach through addressing a consumer segment that is tech-savvy, and additional steps taken to go beyond just the consumer market by extending digital offerings to corporations in the commercial segment, which in turn draws in new businesses,” RHB Research said.
“That said, we do not view such awards as disruptive for the conventional banks, despite expectations of continued erosion on the payment side of the business – which is not unexpected, as the handling of those transactions is not all that profitable,” it said.
It also pointed out that the introduction of the five new digital banks are not likely to overcrowd the banking industry in Malaysia, given the asset size limit of RM3 billion on digital banks during the three to five years foundational phase to minimise the risk to the stability in the banking sector.
Serving underserved markets
Digital banks’ pure digital play can also reach market segments that are underserved by the traditional system.
According to BNM, the licensing of these new players with innovative business models is expected to add dynamism to the banking landscape to serve the economy and contribute to individual wellbeing.
“This includes expanding meaningful access to and responsible usage of suitable financial solutions for the underserved and unserved market segments,” it said.
“In our view, the move to digital banking is a positive development for Malaysia, benefitting both consumers and enterprises alike,” Fitch Solutions Country Risk & Industry Research (Fitch Solutions) said in its commentary.
“Firstly, digital banks remove the need for individuals to head to traditional physical branches to complete their transactions. This increases convenience for consumers, who are increasingly looking for a faster and easy method of payments and banking.
“Secondly, digital banks will benefit businesses, especially small and medium-sized enterprises (SMEs), as they can enjoy easier access to loans, more competitive borrowing rates, and quicker fund approvals and disbursements.
“Margins will be more attractive for digital banks as they will not be investing as much in physical infrastructure and people. Additionally, as digital banks utilise data analytics to generate insights regarding consumer behaviour, businesses can gain better access to more personalised solutions for consumers.
“Thirdly, digital banking is better placed than traditional channels to serve financially underserved segments such as gig economy workers or rural residents, who may lack the credit history to receive loans, to access a wider variety of financial services. This can help to improve financial inclusivity, and is in fact one of the objectives of the digital banks being established in Malaysia.
“Finally, the move increases competition and consumer choice in a market dominated by large financial services players that have had little incentive to develop more sophisticated services and lower costs to consumers.
“We expect to see considerable innovation in the breadth and complexity of financial services over the next five to 10 years.
“The downside risk is that not all of these new businesses will survive to maturity as a poor choice of business model, lack of capitalisation and the dominance of just one or two players could see some investments fail to pan out,” it explained.