Digital banks could spur wave of M&As

KUCHING: With Malaysia fast approaching the dawn of digital banks, heightened competition within this space could lead to a rise in mergers and acquisitions among traditional financial players looking to tap into this.

To recap, Bank Negara released its first “Licensing Framework for Digital Banks” on December 30, 2020, spelling out its key requirements for participation within this new space.

During the six-month application period as of June 2021, Bank Negara has received a total of 29 applicants with a healthy mix of fintech institutions, ecommerce providers and even conglomerates vying for one of the five digital bank licenses on the table.

“As we had expected, a fair share of bidders come in the form of consortiums to pool expertise and resources into a new business venture,” commented researchers with Kenanga Investment Bank Bhd (Kenanga Research) in a special report.

“The debate over whether traditional banks should bid for a digital banking license has been long standing, to which most banking representatives pointed out that most consumer banking transactions are already performed digitally and technological investments are a periodic norm to enhance operating efficiency.

“However, it still stands that conventional products and risk management approach, while tried and test, could be outdated if digital banking methods prove more favoured by the public.”

In its opinion, Kenanga Research believed heightened competition from figital banks could lead to possible consolidation within traditional players.

In the near-term, the target markets of digital banks of micro-loans are beyond the radar of most banks.

However, it is possible that as their presence matures in the long-term, they could aim towards targeting larger sized conventional products such as personal loans and even hire purchases.

“There has always been talk that there are “too many” banks in Malaysia and the entry of digital banks could possibly be the catalyst as the demand for greater efficiency and competitive edge will weed out redundancies,” it continued.

“Hence, we anticipate traditional banks to have to further evolve into a pseudodigital business model where conventional platforms like bank branches, ATMs and client servicing could serve as a more complementary role.”

Whether the five digital banks will prosper within the next a few years, Kenanga Research said that remains to be proven.

“However, their injection into the financial markets cannot be ignored as market forces will always be competitive and consumers will always align to providers which cater best to their needs. Investors and corporations alike will observe the developments with great interest.”

Within the Asia Pacific region, Hong Kong’s new entrants such as Standard Chartered Bank-backed Mox Bank will likely serve as a specimen for Malaysian digital banks, having just launched in September 2020 in the middle of the Covid-19 pandemic.

In six months, Mox Bank is said to have gained 90,000 new customers and expects to breakeven in 2024. This is in spite of surprisingly modest deposit rates of 0.65 per cent, indicating how successful a digital bank could be with the right product and strategies in place.

ZA Bank, Hong Kong’s first digital bank, could also be a notable precedent, having launched in March 2020 but now commands the largest share of over 300,000 accounts within a year and has begun offering insurance products on top of its usual banking facilities to SMEs.