On September 1, 2023, the first of five licensed digital banks went live in Malaysia. In the short term, the impact of these digital banks will be modest, given their regulatory constraints and narrow focus. But they represent a new force that should generate at least one new major banking group that can match the incumbent big three of Maybank, CIMB and Public Bank.
The first bank is GX Bank, a subsidiary of Singapore-based GXS Bank, a joint venture between Grab and SingTel. Kuok Brothers is also a shareholder.
Pei Si Lai, CEO of the new entity, says the purely digital banks have to create new ways of working, introduce new technology, build businesses on alternative data, and become scalable. They have to do so while operating under heavy restrictions.
“We are in the kiddie pool,” Lai said at a conference. “That means we have guardrails in place, but we have space to test and learn, without impacting the general financial industry.”
Swimming in the kiddie pool
GX has big ambitions: Lai says the goal is to develop a digital bank that can export its model to other markets.
But for the next three years, the digital banking sector is going to remain very small. That is by design. Bank Negara Malaysia, the central bank, built the regime to remain niche, so that the banks can experiment with alternative-data scoring models, remote onboarding, and other features without putting the overall banking industry at risk.
How small? The five banks’ deposit bases are each capped at RM3 billion ($640 million). Collectively they will account for about 1 percent of the total bank deposit base. Just one incumbent bank, Maybank, reported RM640 billion ($137 billion) of retail deposits in 2022, about 48 times greater than the top limit of the five digital-only banks.
Bank Negara issued the licenses in April 2022, giving them a two-year deadline to launch. The other four players must go live by April 2024. They are all battling for staff and fighting over vendors, mainly global fintechs they need to assemble the necessary components. There aren’t enough homegrown fintechs or engineers to enable these banking startups to build their own stacks, at least not before their launch deadline.
They are Boost, the fintech arm of telco Axiata, in partnership with RHB Bank; Sea (Shopee, Sea Money, etc) and YTL, a family-run infrastructure conglomerate; Japanese conglomerate Aeon (supermarkets and malls, along with financing and credit arms); and KAF Investment Bank, a local investment bank and brokerage. Aeon and KAF are licensed for Islamic digital banks.
No threat to incumbents
Bank Negara has created this category of banks in order to tackle the problem of underserved consumers and small businesses. It is not, as some people suggested to DigFin, to get the incumbents to digitalize. The incumbents are already digital.
“Anything a digital-only bank can do, we can do,” said Shailesh Grover, chief digital innovation officer at Hong Leong Bank.
Kanags Surendran, head of digital and personal segments at CIMB, adds that more than 90 percent of transactions the bank facilitates are digital, of which four out of five are conducted on mobile phones. “Consumers have leapfrogged web-based banking,” he said.
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True, the incumbents still struggle with basic operational habits, siloed data, and legacy systems. But Bank Negara’s problem with the big banks such as Maybank, CIMB and Public Bank is that they have put digitalization towards retaining their market share and making it more profitable, rather than address the underserved.
The new digital-only banks will have to accept those deposit caps for three years. Without a deposit base, their lending will be constrained. They will be forced to rely more on fee income from payments and other transactions, but that only makes money if there’s lots of volume.
Innovate to survive
This does not mean these banks are irrelevant. It just means that going live is the start of a period of experimentation, rather than a head-to-head competition.
“The industry is becoming more instant and more personalized,” said Lai. “We need technology that can enable iteration as we learn how to serve this target segment.”
Because these banks are mandated to go after the under-served, they will be learning how to use digital-only tools for customer onboarding, servicing, and credit assessment.
They hope to attract customers by being easy and convenient, especially by getting rid of paperwork. The incumbents still lack holistic pictures of their customers, so someone applying for a new product, be it a card or a loan, are treated as if they are strangers.
The incumbents may also have digital capabilities, but their staff have been trained in an environment of box-ticking and rote processing, so the experience is not comparable to, say, shopping on an e-commerce platform.
The new crop of banks is hoping to create a cloud-based, super-efficient business that focuses on customer rather than product. They are to use the next few years to hone their credit scoring systems, and become experts at turning alternative data into profitable ways to lend.
Today, the ‘underserved’ customer is a cost to banks, which is why the incumbents ignore this segment. The goal of Bank Negara is to use digital-only banks to transform these people and businesses into ‘financially included’.
Although Bank Negara has a schedule to ‘graduate’ the digital banks to full-fledged lenders, what it really wants to see mature is the customer base. By the time it lifts the restraints on the digital banks, the ‘underserved’ should be on their way to becoming normal clients. Then the digital banks will have to hope their superior customer experience and, maybe, some customer loyalty will enable them to grow.
That’s the hope. But how big is the underserved, and what percentage of these people will become bankable?
Financial inclusion only makes sense if there is scale. Malaysia has a small population of about 34 million people. According to Bank Negara, 96 percent of Malaysians have a deposit account. This isn’t Indonesia.
Another sense in which this isn’t Indonesia: the credit terms available for the underserved in Malaysia are not piratical. According to Fitch, unsecured loans in Malaysia charge interest rates of 15 percent to 18 percent. Digital banks can probably offer more attractive loans, but probably not a lot more attractive.
The scope for growth is in financing. Only 45 percent of SMEs has access to finance, including credit cards. Only 42 percent of consumers have insurance or takaful (Islamic insurance) cover. Although cash remains the dominant form of payment in Malaysia, since Covid, the portion of people with a digital account (bank or fintech) has risen to 74 percent.
Facing the e-wallets
The e-wallet providers have become major players following the pandemic, led by CIMB-backed Touch’n’Go, Grab and Boost, along with mid-sized providers such as BigPay, Alipay, and WeChat Pay. The new digital banks either have to incorporate these into their offering (ie, GX Bank will leverage Grab Pay) or take them head-on.
As value-storage facilities, the e-wallets have limits on account size, and they are uninsured. But they are already ubiquitous in the cities, and they offer many of the same transactional services that the digital banks need to provide. The e-wallets even have toes in the credit waters, with products such as buy-now, pay-later loans.
The silver lining for digital banks is that Covid catalyzed use of digital wallets, with Bank Negara reporting 42 percent of Malaysians used these for the first time since Covid. This makes people receptive to other digital financial services, so the new banks will be pushing against an open door.
The best case
Bank Negara’s goals for financial inclusion aren’t about opening a bank account, but encouraging elderly, rural and low-income people to trust digital apps, take steps to protect themselves with insurance, and improve financial literacy. All-digital banks will be expected to make inroads with these metrics, but that’s not the same thing as running a profitable bank.
At some point, the digital banks will have to face the incumbents, which are capable of innovating to meet the threat, if that’s what a new digital bank can become. The top banks are very profitable and have resources to respond.
The best case for the newcomers is that one of them wriggles their way to a credible size and joins the top ten. That will require finding the right balance between keeping a lid on costs while attracting enough customers to hone their decisioning engines. If one digital bank can do that, while transforming a portion of the population from ‘underserved’ to ‘included’, then Bank Negara can declare the licensing regime a success.