RAM Rating Sdn Bhd (RAM Ratings) has noted in a commentary that although digital banks may spur financial innovation and accelerate the digital transformation of the Malaysian banking landscape, their impact will be limited in the next three years. This is due to the restriction on the asset size of the digital banks, which is curbed at less than RM2 billion, which account for only 0.3% of the industry asset.
“Bank Negara Malaysia (BNM) also requires digital banks to focus on financial inclusion to address the market gaps in the underserved and unserved segments. This will temper the head-on competition with traditional banks in the mass retail and SME markets,” said RAM Rating’s co-head of Financial Institution Ratings, Sophia Lee, in a statement released in conjunction with the commentary.
The digital banks may also see their impact and profitability constrained during the early years due to the substantial expenses in developing their ecosystem. There is also a need to spend on occasional promotional rates so that they can grow amidst the competitive business environment.
Adding to this, digital banks are required to obey the same regulatory framework as commercial banks, which will also check their growth. This is despite simplified capital adequacy and liquidity requirements that are set during the initial three to five years.
“That said, we do not expect digital banks to compete with unsustainable rates as they are required to prove their profitability and business sustainability to maintain their licences,” said RAM Ratings.
According to the credit rating agency, digital banks also have the advantage of lower operating costs because of the reduced need for human intervention. It can also make use of artificial intelligence, big data analytics, and other predictive algorithms to offer alternative assessment of credit risks, thus allowing more people to benefit from its financial products. This would include at least 8% of the unbanked adult population in Malaysia, as well as SMEs without access to traditional financing options.
Ultimately, digital banks will have a more meaningful impact on the banking industry in the long run, particularly for traditional banks that fail to improve their digital offerings in time.
BNM has previously announced that it will be issuing up to five digital banking licences. Several parties have expressed interest thus far, including Axiata, Sunway Group, Razer, Grab, and AirAsia. Hong Kong-based investment banking firm, AMTD, has announced that they, too, are seeking to apply.