Malaysia has finally joined regional peers in the digital banking revolution, after its central bank announced last week that it has granted digital banking licences to five applicants.

However, the new challengers are unlikely to shake up the banking sector, according to rating agency Fitch, which sees their path to financial viability to be “a long and trying ascent”.

In a note, Fitch says it expects the five digital banks to occupy a “niche role” in the market. “We believe there is a long-term future for digital banks in Malaysia, particularly in tackling certain niches. These tend to revolve around underserved clientele, such as lower-income consumers and micro and small enterprises that lack the collateral or cash flow required by banks to qualify for credit,” it notes.

Bank Negara Malaysia (BNM) has awarded the licences to a consortium of Boost Holdings and RHB Bank; a consortium led by GXS Bank and Kuok Brothers; a consortium led by Sea Limited and YTL Digital Capital; a consortium of AEON Financial Service, AEON Credit Service and MoneyLion; and a consortium led by KAF Investment Bank. The first three will be licensed under the Financial Services Act 2013, while the last two will be licensed under the Islamic Financial Services Act 2013, BNM says.

In its commentary, Fitch says it believes each bank consortium is “well-resourced with the potential to become a viable digital bank in the long run”, but there are “considerable” execution risks.

Regulatory limits

One reason the rating agency does not see the five banks challenging their traditional counterparts is the regulatory limits placed on their activities.

The Malaysian central bank’s licensing framework caps the digital banks’ assets at 3 billion ringgit (US$688 million) during the foundational phase, which they cannot exit until at least mid-2026, and potentially as late as mid-2029.

“This means aggregate digital bank balance sheets will be less than 1% of the system in the medium term under even the most bullish assumptions,” Fitch says.

The digital banks will also have to work on building scale: data from BNM shows that of the 8% of the Malaysian population that remains unbanked, majority have little or no income, which suggests they are not likely to become bankable simply because of renewed competition or better digital services.

Moreover, the rating agency sees major local banks as able to quickly pivot to respond to any challenge posed by the challenger banks.

“The large banks’ incumbency advantage is unlikely to be eroded within the medium term, even if competition intensifies at the margin in areas that the digital banks choose to compete in,” says Fitch.

Potential market

Nonetheless, the Malaysian digital banks have the potential to develop products specifically in areas where their potential market is, such as payday loans for gig workers or supply-chain financing for e-commerce merchants.

Digital banks can also be active in less capital-intensive areas. These include payments, remittances, distribution of third-party investment and insurance products as well as selective lending “where there are synergies with their parent ecosystems”.

And since the digital banks are being set up amid an economic recovery, they have a “decent prospect” of growing their balance sheets in the initial years, Fitch says.

“However, economies of scale will be elusive amid the size cap and competition is likely to be acute. Near-term asset-quality risks are high, as the banking sector is emerging from a period of extensive debt relief. Digital banks that adopt loose underwriting standards to grow market share may encounter distressed borrowers clutching at the nearest lifeline, leading to adverse credit selection,” it adds.

Financial inclusion

Of the five consortiums that won the digital bank licences, three are majority-owned by Malaysians, specifically Boost Holdings and RHB Bank; Sea Limited and YTL Digital Capital; and KAF Investment Bank. The central bank received 29 applications, both from domestic and foreign companies.

Following the announcement, the BNM says successful applicants will undergo a period of operational readiness to be validated by the regulator. After passing the audit, the banks can commence operation. The process could take from between 12 to 24 months. 

BNM governor Nor Shamsiah says the central bank expects digital banks to further advance financial inclusion.

“By adopting digital technology more widely for everyday transactions, we can significantly increase opportunities for our society to participate in the economy – by overcoming geographical barriers, reducing transaction costs and promoting better financial management,” she says.

Nor Shamsiah adds that digital banks can help individuals and businesses gain better access to more personalized solutions backed by data analytics, and as businesses move online, digital banking can also provide safer and a more convenient way to transact.

Malaysia follows Indonesia, the Philippines, Singapore and Thailand in issuing licences for digital banks, or banks without a physical branch network in place.