Malaysia’s growing digital adoption
WITH the coming of these new banks in Malaysia, how ready is the market in accepting these digital banks?
According to Fitch Solutions, digital banking is expected see high demand in Malaysia, given the numerous advantages that it offers to consumers and enterprises and the rising digital literacy of the country.
“More broadly, the growth of Malaysia’s financial technology (fintech) market will be underpinned by strong regulatory support and positive demographic factors, namely the large youth population, high levels of urbanisation, and a growing middle-class.
“High levels of smartphone penetration, together with the widespread availability of reliable mobile broadband networks, also provide tailwinds for the uptake of mobile-centric technologies,” it said.
“The Covid-19 pandemic has also accelerated the transition towards digital transformation, with digital banking expected to see the greatest rate of growth as most new digital applications and processes will, to varying degrees, be transaction-based.
“As consumers’ needs become more sophisticated and ‘digitalfirst’, we expect businesses will need to adopt new technologies to respond to these changing needs.
“Banking is a case in point: at Fitch Solutions, we forecast a steady increase of 55 and 128 per cent in both the number of mobile money accounts and mobile money transactions respectively in Malaysia over the next decade,” it added.
Aligned with the growing trend towards digital banking, Fitch Solutions believe that the five groups of companies awarded the digital bank licences are well-positioned to seize this market opportunity to become a viable digital bank in the long run given their individual strengths and capabilities.
Sharing this sentiment, RAM Ratings also believe that these five new banks will stand to gain from the spike in digital adoption, spurred by the pandemic.
“Considering the ubiquity of smartphones and high digital adoption and market readiness, the market potential for digital banking is bright,” RAM Ratings co-head of Financial Institution Ratings Sophia Lee, said.
RAM Ratings pointed out that the increasing internet penetration and use of smartphones are driving market growth in digital banking.
Based on BNM statistics, internet banking (conducted by individuals) and mobile banking transactions jumped a respective 40 and 290 per cent to RM1.2 trillion and RM800 billion over the last two years, boosted by the Covid-19 crisis.
“We expect the entry of digital banks to spur financial innovation and accelerate the digitalisation of financial services.
“Unlike traditional banks, digital banks offer financial products and services through digital and electronic platforms (online and mobile applications).
“Their value proposition is delivering simpler, faster and more convenient solutions to consumers. The issuance of not one, but two Islamic digital bank licences to provide a shariahbased option to consumers also surprised on the upside and affirms Malaysia’s commitment and role as an established global Islamic finance leader,” RAM Ratings said.
“By utilising technologies based on artificial intelligence or other forms of predictive algorithms along with big data analytics, digital banks may undertake alternative assessments of credit risks to enable greater financial inclusion,” Lee added.
“As such, those who are unable to access financing products from traditional banks due to the lack of standard documentation or credit history could stand to gain.”
This may also fuel competition in the unsecured retail lending (personal loans and credit cards) and micro enterprise segments of traditional banks (which represent about seven and four per cent of the banking system’s loans, respectively).
Digital banks will be subject to the same regulatory framework governing commercial banks but capital adequacy and liquidity requirements will be simplified during the foundational phase.
“It is paramount that traditional banks re-evaluate their current digital offerings to keep up with accelerated digitalisation to ensure long-term market relevance.
“Traditional banks can pursue digital transformation under the existing licensing framework without a separate digital banking licence.
“Incumbents are seen upping their game by digitising existing banking operations and investing in new capabilities,” Lee commented.