Digital banks heighten competition in crowded sector

Besides stiff competition, the entrance of non-bank players, like e-wallets, is sucking millions from banks

by HARIZAH KAMEL & ASILA JALIL / pic by TMR FILE PIX

THE issuance of five digital banking licences — for both conventional and Islamic banking — would heighten rivalries in the sector, which is already seeing thinning margins and challenging profits.

Malaysia will issue the digital banking licences after the draft exposure of licensing framework for digital banks was announced recently, according to Bank Negara Malaysia (BNM).

The central bank said the framework will form part of the series of measures adopted by BNM to enable innovative application of technology in the financial sector.

Besides stiff competition, the entrance of non-bank players, like e-wallets, is sucking millions from banks and transferring into these new payment mediums.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the move by BNM would intensify the competitiveness in the banking sector as non-traditional players gradually make inroads into the industry.

He said current lenders would need to consider inorganic growth strategies to further develop their business with the entrance (of digital banks).

“This would mean mergers and acquisitions, as well as going abroad and having strategic partners could be some of the key strategic areas that would help propel banks’ profitability.

“The way we see it, digitalisation is just an enabler to the business. It is undoubtedly a musthave infrastructure and, as in other investment endeavours, one needs to establish the payback period, the internal rate of return and the net present value for every digitalisation initiatives,” he told The Malaysian Reserve (TMR).

He added that banks have to “think big” as customers are more sophisticated and savvy in terms of the products and services provided to them.

MIDF Amanah Investment Bank Bhd senior analyst Imran Yassin Yusof said the establishment of digital banks in the country would not impact traditional banks in the short term.

He said digital banks would be limited in the type of activities they could do based on the exposure draft issued by the central bank.

He said the amount of asset threshold of not more than RM2 billion in the initial three to five years of operations for these banks is a small amount.

“We don’t see it (digital bank) as a threat. In fact, we think it’s more of a complement because digital banks might be able to serve areas that traditional bank cannot or would not go into, such as micro lending,” he told TMR.

He did not rule out that e-wallet players may apply for digital banking licence as the exposure draft also stated that digital banks will be required to maintain minimum capital funds unimpaired by losses of RM100 million during the foundational phase and RM300 million thereafter.

“That is a high enough barrier to limit some of the smaller players. So, we need those (players) a little bit more established, with a strong investor backing, and that’s why I think these players would fit the bill,” he said.

Malaysia currently has 26 commercial banks, where 18 are licensed foreign banks and eight are local.

But the advantage of a digital bank is its cost effectiveness compared to high capital and expensive to run brick-and-mortar traditional banks.

The proposed digital banking framework would look at how these banks can offer banking products and services to address market gaps in the underserved and unserved segments.

BNM said the digital banks are expected to offer meaningful access to consumers, as well as promote responsible usage of suitable and affordable financial solutions.

The country’s banking regulator said it has adopted a balanced approach to enable admission of digital banks with strong value propositions, while safeguarding the integrity and stability of the financial system.

It also stressed on the need to protect depositors’ interests, taking into account that such digital banks have not operated in a full financial and economic cycle.

BNM has set an asset threshold of RM2 billion in the initial three to five years of operations. BNM said this will function as a “foundational phase” for the licensees to demonstrate their viability and sound operations, and for the bank to observe performance and attendant risks.

Digital banks must also comply with the requirements under the Financial Services Act 2013 (FSA) or Islamic Financial Services Act 2013 (IFSA), including relevant requirements that comprise standards on prudential, business conduct and consumer protection, as well as on anti-money laundering and terrorism financing, said BNM.

It said during the foundational phase, licensed digital banks will be subject to a more simplified regulatory requirement, relating to capital adequacy, liquidity, stress testing and public disclosure requirements.

Subsequently, digital banks will be required to maintain minimum capital funds unimpaired by losses of RM100 million during the foundational phase, and RM300 million thereafter on the minimum capital funds.

The exposure draft is issued together with the application procedures for new licences under FSA and IFSA.