Banking on digital banks

One of the Celcom invited guest playing her phones during the launching of Celcom First by Celcom Axiata Berhad at G Tower on December 23, 2014 in Kuala Lumpur. A 'First' (celcom new plan name) of its kind personalised Internet and call plan that is set to boost the standard of customer experience to the next level and lets costumers discover a whole new world of exclusivity and VIP treatment. - Pic by : Hafzi Mohamed / TMR.

The e-banking services enable existing banks to scale down their branch networks, manpower costs and requirements

pic by TMR FILE

THE DIGITAL economy continues to make inroads into our lives for better or for worse. In the past week, Malaysia announced plans to issue licences for the establishment of digital banks to interested parties likely by the end of the year.

Bank Negara Malaysia (BNM) issued an exposure draft on the licensing framework last week which stated up to five licences may be issued to qualified applicants to offer conventional or Islamic banking services in the country.

To operate a digital bank won’t be cheap. The central bank has slapped a RM100 million initial paid-up capital and their asset base will be curtailed under a RM2 billion limit for the first three to five years to manage the risk exposure to the wider economy and act as a learning curve period to all in the business.

The central bank stated the proposed digital banks will need to offer banking products and services to address market gaps in the underserved and unserved segments.

Basically, the central bank wants the new digital banks to serve this niche in the local banking system.

“Such digital banks are expected to offer meaningful access to and promote responsible usage of suitable and affordable financial solutions to financial consumers,” the BNM press release stated.

The underserved and unserved segments, from the sounds of it, are the portion of the population that existing banks don’t want to do business with or can’t service due to various reasons.

The Global Findex Database of the World Bank stated as at 2014, about 81% of Malaysian adults had an account with a financial institution compared to 61% average globally.

If the number is reliable, the target market for the proposed digital banks is relatively small and limited to people with some level of sustained access to the Internet.

So, what would be the motive for the promoters of digital banks and can they make a profit from this move?

As it stands, the conventional and Islamic banking business is very competitive with business margins compressing and driving banks to offer e-banking services to squeeze for every ringgit and sen.

The e-banking services enable existing banks to scale down their branch networks, manpower costs and requirements as well.

The smaller foreign-owned Islamic banks, for example, have had a tough time in the local market due to the intense competition and lack of brand recognition.

Will the digital banking space also be about scale as the retail banking and e-commerce space is increasing?

From a user’s perspective, how safe will one’s deposits be with the digital banks from the threat of hacking and data leaks? Will the deposits be insured by the Malaysia Deposit Insurance Corp?

Examples abroad suggest digital banks could make a profit after a few years due to their lower cost base.

Prospective bidders now need to very carefully decide are the returns worth the RM100 million in unimpaired capital BNM wants to start the business and RM300 million thereafter?

Bhupinder Singh is the corporate desk editor of The Malaysian Reserve.