
The financial landscape within Malaysia has taken a significant turn with the recent emergence of digital banks. These digital banks are redefining how banking services will be delivered and accessed while challenging the traditional banking model.
Recently, Malaysia has seen the launch of three new digital banks: Aeon Bank, GX Bank, and Boost Bank. Additionally, two more digital banks are on the way—a consortium led by Sea Limited and YTL Digital Capital Sdn Bhd, and another consortium led by KAF Investment Bank Sdn Bhd. This will bring the total number of digital banks in Malaysia to five. Notably, GX Bank has already onboarded 100,000 customers within just two weeks of operations. This rapid growth signals a strong appetite and quick adoption of digital banking services, raising concerns among investors of listed banks in Malaysia.
Overview of digital banks in Malaysia
According to Deloitte, a digital bank is a financial institution that offers financial services solely through a digital platform. There are currently 3 digital banks in operation in Malaysia:
- AEON Bank is the first Shariah-compliant digital bank launched in Malaysia. It offers a wide range of digital banking services, including deposits, savings pots, budget tracking, fund transfers, and more. Additionally, AEON Bank leverages its parent company’s strong retail presence and enables the bank to offer a fast-track rewards program linked to customer spending within the AEON ecosystem.
- GX Bank is the first of the five digital bank license applicants to receive approval to commence operations. GX Bank focuses on offering a user-friendly digital banking experience with innovative financial products and robust security features. In addition to its high savings rate of 3% p.a. daily interest, another notable benefit is its unlimited 1% cashback on all user spending.
- Boost Bank is the first digital bank primarily owned by Malaysians. It leverages the established reputation of Boost, a popular digital wallet in Malaysia, to offer comprehensive mobile banking services. The bank features an integrated digital wallet, extensive local partnerships, and advanced personal finance management tools. It also offers a high savings rate of up to 3.6% p.a. in daily interest.
Pros and cons of digital banks
With the recent surge in digital banks launching in Malaysia, it’s essential to understand the benefits they offer. Digital banks offer several unique advantages, including alternative credit assessment methods and fully digital onboarding processes. They also provide a seamless, entirely digital account opening experience; while some traditional banks allow you to open an account online, some still require you to visit the branch when the online application is submitted.
Additionally, digital banks often have lower fees and higher interest rates compared to traditional banks. For instance, GX Bank offers a daily interest rate of 3% p.a., which surpasses Maybank’s fixed deposit rate of up to 2.7% p.a. This is possible due to the lean operational model and lower operating costs of digital banks.
However, digital banks also have limitations, such as the lack of personal interaction, potential security concerns, and a more limited range of products compared to established banks. For elderly individuals or those unfamiliar with mobile apps, there can be a steeper learning curve, and it may take time for them to become comfortable with using digital features. Additionally, as new entrants to the market, digital banks may find it challenging to quickly capture a significant market share from well-established traditional banks.
Targeting different market segments
According to the World Bank, 88% of Malaysians were considered part of the banked population in 2021, which is already relatively high. Therefore, which segment should digital banks target? An exposure draft by Bank Negara Malaysia suggests that digital banks should focus on addressing market gaps in underserved and unserved segments. This implies that digital banks may not pose a significant threat to incumbent banks, as their products and target markets will likely differ.
But who exactly are the underserved and unserved segments? According to Kelvin Lee, a financial services assurance partner at PwC Malaysia, these segments in the Malaysian banking sector typically include small and medium enterprises (SMEs), micro-SMEs, and the bottom 40% of the income group (B40). These groups often face difficulties accessing traditional banking services and financial products due to factors such as lack of collateral, limited credit history, or geographic constraints. Research conducted by Bain in 2019 found that 55% of the adult population in 2018 was either unserved (15%) or underserved (40%).
Risks and scalability concerns for digital banks
While traditional banks heavily rely on credit scores derived from conventional data sources like credit bureau reports and financial statements, digital banks are targeting underserved and unserved segments, such as SMEs, micro-SMEs, and the B40 income group, who often lack extensive credit histories or collateral. This focus on these segments does indeed imply a potentially higher default risk due to the limited financial background and credit history of the customers. As a result, digital banks may face a greater risk of defaults, which could, in turn, increase their bankruptcy risk.
To address this challenge, digital banks leverage alternative data sources and employ advanced data analytics to develop more comprehensive credit scoring models. These models often draw from various data points, including utility payments, e-wallet transactions, social media profiles, location tracking, and behavioral patterns, among others. While these alternative credit scoring methods can promote financial inclusion, they also come with new risks, as the underwriting processes involved are relatively unproven and may not always accurately assess creditworthiness.
In Malaysia, digital banks are subject to an asset cap of RM3 billion for the first three to five years of operation. This cap is designed to mitigate potential risks and observe the performance of licensed digital banks within a controlled environment during their initial years. However, the asset cap also poses challenges for digital banks in achieving economies of scale, a crucial factor in the banking sector. With limited assets and customer bases, digital banks may struggle to generate sufficient revenue and profits, making it difficult to sustain operations and further expansion. This could potentially hinder digital banks’ ability to compete effectively with established traditional banks with more considerable assets and customer bases.
The fifth perspective
The rise of digital banks in Malaysia represents a paradigm shift in the banking industry. While these digital-only entities pose some challenges to traditional local banks, they also present opportunities for collaboration and coexistence.
Digital and traditional banks cater to different audiences, with digital banks appealing primarily to digitally inclined customers and underserved segments. In contrast, traditional banks retain a strong customer base among those who value personal interactions and established brands. However, traditional banks are also embracing digital transformation and adapting to changing consumer preferences, as seen with offerings like Maybank’s MAE e-wallet. I believe for the Malaysian banking industry to thrive, it is essential for both digital and traditional banks to collaborate and coexist, fostering a more inclusive and customer-centric financial ecosystem.