Digital banking not redundant: Expert
Key benefits for established lenders include ability and opportunity to offer unique value propositions, widen reach to underserved or mass segments and greater agility and speed to go-to-market or launch new products
PETALING JAYA: The participation of established banks in digital banking has its benefits although their current banking licence already allows them to offer products through digital means, said Ernst & Young Advisory Services Sdn Bhd financial services advisory leader Shankar Kanabiran (pix).
“Based on what we have seen of other digital banks operating in other jurisdictions, even though the incumbent banks can offer the majority of the products digitally without a digital bank licence, the key benefits that banks can gain from participating in new digital banks are the ability to offer customers unique value propositions and experiences; opportunity to leverage wider digital distribution networks to reach the underserved or mass segments; as well as greater agility and speed to go-to market or launch products with the new technology stack,” Shankar told SunBiz.
In December 2019, Bank Negara Malaysia announced plans to issue up to five digital bank licences after releasing its licensing framework, which is set to be finalised by the first half of this year. The race for digital bank licences is expected to intensify as a number of players have expressed their interest.
On allowing non-banks to become digital banks, Shankar said potential aspiring digital banks would come from diversified industries like telecommunications, insurers, retailers, super-apps, asset managers, fintechs, be it as either a primary applicant for the licence or a consortium partner.
“It is a positive sign as it will enable the creation of new business models and innovative ways of offering products, reaching customers, managing risks and so on.
“We have seen some of these unique models by similar entities like Kakao in other jurisdictions. However, what needs to be fundamentally addressed have to do with data protection and security, how the compliance and regulatory aspects are managed and how product manufacturing is carried out, to ensure customer interests are protected while promoting innovation.”
Shankar noted that the entry of new digital banks will create more competition in the market, which has been seen in Hong Kong where the Hong Kong Monetary Authority issued eight licences and some of the nonapplicant incumbent banks are already offering higher deposit interest rates and lower financing rates.
“For some of the incumbent banks, the right strategy to be adopted and to be thought through sufficiently is how they can target different customer segments, revenue pools or potential customers, without cannibalising those customers within their existing banking infrastructure.”
This leaves the incumbent banks/players with multiple strategic options, such as creating new digital front-end, fast tracking digitalisation, creating digital-only bank with existing licence, joining a consortium of digital licence applicants to offer platforms/products, strengthening existing relationships. At least one or more of these options are currently adopted by incumbent banks in different countries.
In Shankar’s view, there are primarily six different capabilities required to launch a digital bank, which are capital, customer/distribution, brand, banking technology and operations, risk management and financial product design.
Singapore will be issuing five digital bank licences this year, comprising two digital full bank licences that can serve both retail and corporate customers, and three wholesale bank licences that are limited to non-retail clients. The Monetary Authority of Singapore has received 21 applications and successful applicants will be announced in June. The new digital banks are expected to start operating by the middle of 2021.