Several players are vying for digital banking licences in Malaysia and firming up their entry strategies even before the central bank has finalised its policy for the sector in the country.
Due to the disruptions caused by COVID-19 outbreak, Bank Negara Malaysia has extended the consultation period for the Exposure Draft on Licensing Framework for Digital Banks until June 30, 2020.
The regulator first announced in December 2019 that it aims to finalise the policy document by the first half of 2020.
Bank Negara did not respond to a DealStreetAsia’s query on whether there will be a new timeline on the issuance of the policy document and the award of licenses, but it is widely expected there will be a delay.
Malaysia’s move comes at a time when regulators across Asia are opening up the banking industry to digital players, encouraged by higher smartphone penetration and better internet connections.
Central Banks and consumers also hope that digital banks, helped by advanced technology, could promote innovation and bring financial inclusion to underserved segments.
In Malaysia, apart from e-wallet operators, tech companies and financial institutions, diversified conglomerate Sunway Group and property developer Paramount Corporation Bhd, were said to be interested in applying for the digital banking licenses.
Ride-hailing and digital payments group Grab, budget airline AirAsia, telco Axiata, gaming company Razer, telecom and tech firm Green Packet Bhd, which operate e-wallets, lenders including CIMB Group, Affin Bank Bhd, Hong Leong Bank Bhd, AMMB Holdings Bhd and Standard Chartered Bank Malaysia Bhd, are reportedly among the companies in the race.
Nearer home in Singapore, the Monetary Authority of Singapore (MAS) said Thursday (June 18), 14 of the 21 digital bank applications met the eligibility criteria and will progress to the next stage of assessment. MAS announced in January that it has received the 21 applications for the two full digital banking licenses and three wholesale digital banking licenses. It will extend the assessment period for the award of digital bank licences. Successful applicants will be informed in the second half of 2020 instead of June 2020 as originally intended.
In the region, Hong Kong issued eight virtual banking licences last year in a move seen to shake up mainstream banking.
More players are likely to join the fray for the five digital licenses in Malaysia compared to Singapore due to the lower entry requirements in minimum capital and significant market opportunities locally and in the region, audit and advisory firm KPMG said in a report last month.
According to Malaysia’s draft proposals, digital banks will have to offer products and services to address market gaps in “underserved and unserved” segments and maintain RM100 million ($23.52 million) in capital initially to be increased to RM300 million ($70.56 million).
Meanwhile, in Singapore, the minimum capital required is at S$15million ($10.77 million) during the entry phase; S$1.5 billion ($1.08 billion) within three to five years for digital full bank and S$100 million ($71.81 million) for a digital wholesale bank.
“There will be a lot of applicants in Malaysia. We have spoken to a number of players. There’s a lot of interest,” PwC Malaysia Financial Services Strategy Director Dr Paul Francis said in an interview with DealStreetAsia.
Based on his experience in Singapore, he said a lot of people went through the process of understanding the cost and opportunities but decided not to apply later. He expects a similar trend in Malaysia. Potential applicants may also rethink their move post the virus crisis, he added.
What kind of opportunities do contenders see?
The lower regulatory entry barrier, decent profit margins, substantial size of financing gap, untapped market segments, success stories of digital banks in other countries, are some reasons why many players are keen to apply for a digital banking licence in Malaysia.
Sunway Group, a diversified conglomerate, in April, expressed its interest when it announced its plan to acquire a 51 per cent stake in credit reporting agency Credit Bureau Malaysia.
Sunway president Chew Chee Kin told DealStreetAsia the group is in talks with potential partners to form a consortium that will have the talent, wider distribution network, capital and knowhow to bid for the licence. Sunway Leasing started as a money lending business and expanded to online remittance (Sunway Money) and invoice factoring (Sunway Credit).
Sunway is eyeing its customers, suppliers and contractors from its business ecosystem as its core target market. Sunway has interests in real estate, construction, trading and manufacturing, building materials, healthcare, retail, hospitality, theme parks and education.
Listed property developer Paramount Corporation Bhd, another potential contender, is waiting for the final framework to evaluate the potential and prospects of the digital banking business, its CEO Jeffrey Chew said in an email response.
The company has provided its feedback to Bank Negara after reviewing the draft proposals on digital banking although it is yet to officially announce its interest.
The company had picked a stake in Open Learning Ltd, an online learning platform, even as it explores other digital businesses. “We have also been mulling on the application of a property crowdfunding peer-to-peer licence,” Chew, former CEO of OCBC Bank (Malaysia) Bhd, added.
Meanwhile, Hong Kong-listed gaming firm Razer wants to build the world’s first global youth bank addressing the unmet financial needs of the millennial segment, Razer chief strategy officer and Razer Fintech CEO Lee Limeng said.
He shared that the company, which had provided feedback to Bank Negara on the licensing framework in February, has been approached by various potential strategic partners who are keen to team up with the firm.
He said the COVID-19 outbreak has brought to surface many challenges and funding gaps within the existing financial system that a digital bank will be well-positioned to address.
The firm, which also operates e-wallet RazerPay, has already submitted its application for the Singapore digital full bank licence and it will evaluate other possible licenses in the region, where it already has a strong following.
TNG Digital, owned by CIMB Group’s Touch ‘n Go and Ant Financial, said it has yet to decide on the venture into the digital banking arena at the moment.
“But it (digital banking) will be tabled for future discussion. As of now, our platform is equipped and ready to enable banking management products without the digital banking license,” it said in an email reply to DealStreetAsia.
The company operates TnG e-wallet, one of the largest e-wallets in Malaysia, with 9 million registered users and 135,000 merchant acceptance points.
Meanwhile, it is understood that Grab has earlier studied the digital banking framework proposal and submitted its recommendation to the regulator.
It is, however, not known whether Grab still plans to apply for a digital license in Malaysia, in view of the COVID-19 pandemic. In Singapore, Grab has teamed up with telco Singtel, forming a consortium to apply for a digital full bank licence in the city-state. Grab will have a 60 per cent stake in the consortium entity while Singtel will hold a 40 per cent stake.
When contacted, Grab declined to comment on whether it plans to apply for the digital banking license in Malaysia but shared its view on the impact of COVID-19 on digital banking.
“Digital payments are seeing a huge increase in demand; the current COVID-19 situation has spurred the need to go cashless. We are already seeing consumers preferring e-payments for hygiene and convenience, and merchants looking to digitise their services and sign up for e-payments,” Grab Financial Group co-head and senior managing director Reuben Lai told DealStreetAsia.
Non-traditional financial institutions are entering the digital banking fray. Here are some potential applicants for the Malaysian license:
Potential applicants Shareholders/Investors Businesses Key Partnerships and Activities in Financial Services
Grab Softbank, Temasek, CIC, Toyota Motor Corp,
Ping An Capital, Microsoft Corp, among others
Ride-hailing, Food Delivery Partnered with Singtel and applied digital banking license in Singapore; reviewed digital banking framework draft & provided feedbacks
Axiata Digital Mitsui & Co, Axiata Telecom operates Boost e-wallet, with 5 million registered users in Malaysia, Indonesia; talking to eleven potential partners, including banks, to jointly bid
TnG Digital CIMB, Ant Financial Toll road transactions, e-wallet operates Touch n Go e-wallet with a userbase of 9 million, 135,000 merchant acceptance points.
BigPay AirAsia Aviation operates BigPay e-wallet which comes with a BigPay MasterCard, launched international remittance service Sept last year
Sunway Group Jeffrey Cheah and family, Employees Provident Fund Board Real Estate, Conglomerate established Sunway Leasing, money lending business, offers finance related services through Sunway Money, invoice factoring service through Sunway Credit, recently acquired a majority stake in Credit Bureau Malaysia.
Green Packet Green Packet Holdings Ltd, Puan Chan Cheong telecommunications, media & tech firm operates kiplePay e-wallet, partnered Bank Islam to provide cashless payment last year; assessing suitors, buying Singapore-based e-KYC specialist firm Xendity
Paramount Corporation Bhd Teo Chiang Quan, Southern Palm Industries,
Southern Edible Oil Industries (M),
Southern Realty (Malaya),
Banting Hock Hin Estate Co
Property Developer reviewed framework draft & provided feedbacks to Bank Negara
Razer Min-Liang Tan, Lim Kaling E-sports gaming hardware manufacturer/e-sports and financial services provider, reviewed framework draft & provided feedbacks to Bank Negara
Sources: Companies’ annual reports, RAM ratings, media reports
Axiata Digital, a subsidiary of telco Axiata Group, said it sees massive potential for digital banking as there is still a large unbanked and underserved population in Malaysia, including micro-small and medium-sized enterprises, overseas foreign workers, millennials, gig-economy participants.
The group has “evinced interest to foray into digital banking”, but the time frame depends on Bank Negara’s final policy on the licence, its CEO Mohd Khairil Abdullah told DealStreetAsia in an interview in February. Axiata Digital operates e-wallet app Boost, with 5 million registered users.
Khairil said the unit economics of serving diverse segments would become positive as technology would drive down acquisition, distribution and underwriting costs for a slew of financial products. This will then open up major segments of the population that today are not well served by banks, he added.
Nearly 74% of Malaysian respondents expressed interest in becoming a customer of a virtual bank, per a PwC survey. Malaysians are open to new technologies but data protection has been cited as a key concern, the results showed.
Meanwhile, KPMG Malaysia’s survey in 2019 -2020 showed 77% of the respondents view digital banks as the next evolution in financial services and 82% will open a bank account through online platforms as long as they are regulated by Bank Negara.
Francis expects digital banks could be looking at taking up to 10% of the deposits in the financial system, depending on the niche these banks managed to capture.
Total deposits in Malaysia stood at RM1.99 trillion ($465.31 billion), as of April 2020, according to data from Bank Negara’s latest Monthly Highlights and Statistics.
Banking business still profitable though profitability declining
Although profitability has been declining, banking has been a fairly lucrative business in Malaysia. Between 2010 and 2018, the average return on equity (ROE) of banks in Malaysia stood at 14.8%, Bank Negara’s report Financial Stability Review – First Half 2019 showed.
But their profitability has been on a moderating trend in the current decade. While the pre-tax profits of the banking system have grown steadily over the years, banks’ ROE and return on assets (ROA) have largely trended below the current decade average since 2014, it said.
“Banking is a profitable business, once you get to build the scale. Banks in Malaysia are always profitable. That’s why many are interested to apply for a digital license,” a former chief executive of a foreign bank told DealStreetAsia.
Malayan Banking Bhd (Maybank), the largest lender by market capitalisation listed on the local bourse, raked in RM8.2 billion ($1.92 billion) profits in 2019. Its ROE stood at s return on equity was 10.9%. It has 2,629 retail branches worldwide.
The smallest listed bank by market capitalisation, Affin Bank Bhd’s net profit stood at RM487.77 million ($114.36 million) last year. Its ROE stood at 5.42% and it has a network of 110 branches in Malaysia.
The success stories of digital banks overseas such as Ant Financial’s MYBank and Tencent’s WeBank, both of which turned profitable one year into operations, could probably encourage more applications.
“Ant Financial’s businesses are still growing, the business model is still developing. There is still room to grow, but the company has already been valued at more than $100 billion,” an analyst told DealStreetAsia.
Early this year, Ant Financial shares were offered privately at levels which value the Chinese financial giant at $200 billion, Reuters reported. In 2018, Ant Financial, operator of China’s biggest online payment platform by market share, Alipay, which owns MYBank, has raised $10 billion from investors, valuing the firm at $150 billion.
HSBC, one of the largest banking and financial services organisations in the world, with operations in 64 countries and territories, has a market capitalisation of £77.17 billion ($96.16 billion), based on its trading price of 379.25 on London Stock Exchange, at press time.
In Brazil, Nubank challenged the country’s oligopolistic financial market and is now the sixth-largest financial institution in Brazil.
At the core of the success of digital banking is technology such as Artificial intelligence, Blockchain, Cloud Computing and Data Analytics (largely referred to as “A,B, C, D,” of digital banking) that can help distribute products at lower operational costs while keeping defaults in check.
In China, the average cost for a WeBank customer per account per year is as low as 3.60 yuan ($0.50), as compared to 20 yuan ($2.83) to 100 yuan ($14.15) for traditional banks, according to media reports.
But before digital banks can enjoy economies of scale and profits, they need to build trust and rapport with consumers, build scalability and compete with established banks.
It is worth noting that Tencent’s WeBank, China’s first digital bank that started in December 2014, serves more than 60 million customers. That is, in part, how it could lower operational costs significantly.
Challenges and limitations to growth
Unlike China, which has a huge population, digital banks in Malaysia may face scale-up challenges as Southeast Asia is a fragmented market.
Cross-border regional expansion in Southeast Asia may not be as straightforward as compared to the Euro Zone where member countries are regulated by European Central Bank.
In terms of challenges, Razer’s Lee said each country in Southeast Asia is in different phases of opening up the financial systems to non-traditional players and will have differing objectives and timelines.
“Adding to that is the presence of incumbents in each country, which means there will be strong competition in the space,” he said.
Some incumbents have also been actively digitising their operations, including the country’s largest lender Maybank Bhd.
In a commentary published last month, RAM Ratings said, “while digital banks are disruptors relative to traditional banks and will intensify competition, their impact will be limited in the next three years given the regulatory restrictions on their asset size, i.e. not more than RM2 billion. On the whole, the assets of the five digital banks would only represent 0.3% of the industry’s.”
Additionally, their profitability is likely to be constrained in the early years given the hefty initial outlay to develop the ecosystem and the need to build up their scale by occasionally offering promotional rates amid a competitive environment, the credit rating agency said.
Digital banks will also be subject to the same regulatory framework as commercial banks, although capital adequacy and liquidity requirements will be simplified during the initial years.
Sunway’s Chew said with digital banks breaking into new territories, the challenge is to find the suitable blue ocean strategy for business expansion and financial growth.
These ‘challenger banks’ may also need to offer better interest rates to attract deposits. Although offering financial services purely through electronic channels instead of physical branches allows them to save costs, new entrants may need to spend more on digital marketing and advertising, a veteran banking senior executive told DealStreetAsia.