MSMEs, individuals the biggest beneficiaries of digital banks

Digital banks should give due attention to both the underserved and unserved segments of the economy, which was the main reason BNM approved their licences

by AZALEA AZUAR 

MICRO, small and medium enterprises (MSMEs) players are the biggest beneficiaries of digital banks as they are able to operate at a lower cost. 

Universiti Kuala Lumpur Business School economic analyst Assoc Prof Dr Aimi Zulhazmi Abdul Rashid attributed this to success stories of small businesses in China which flourished with digital banks securing over 7% of the country’s online small and medium enterprises (SMEs) lending and about 5% of the consumer unsecured market. 

He also stressed that digital banks should give due attention to both the underserved and unserved segments of the economy, which was the main reason that Bank Negara (BNM) approved their licences. 

Apart from MSMEs, Aimi Zulhazmi said gig workers will also benefit from digital banks as they do not require hefty documentation such as payslips. 

“Considering the cost and benefits, even large corporations would switch to digital banks if the latter could provide cheaper rates than traditional banks. 

“However, digital banks are quite small and could not provide large financing or even syndicating,” he said to The Malaysian Reserve (TMR). 

He added that digital banks are also highly unlikely to attract large corporations since BNM’s licensing framework imposed asset growth restriction of only RM3 billion within the next five years. 

At the end of April 2022, BNM awarded five digital banks licences, upon approval by the Ministry of Finance (MOF). 

Three out of the five consortiums are majority-owned by Malaysians, namely Boost Holdings Sdn Bhd and RHB Bank Bhd; YTL Digital Capital Sdn Bhd; and KAF Investment Bank Sdn Bhd. 

Aimi Zulhazmi said these banks are still undergoing preparation and have yet to be audited by the central bank. 

It might take between 12 and 24 months before their services are available to the public. 

“Malaysians look forward to digital banking, hoping to take advantage of cheaper financing rates, faster approval turnaround and anticipated higher savings rates. 

“This may be influenced by the success of digital banking in other countries especially China, where banks like Ant Group-sup- ported MyBank and Tencent Holdings Ltd-backed WeBank are doing very well,” he added. 

Despite the positive reception towards digital banking, Malaysians also remain cautious as the number of cybercrimes increase.

In 2020, approximately 17,000 cybercrime cases were reported and more than 20,000 in 2021, with a total loss of RM560 million. 

As at February last year, 3,273 cases were reported involving losses of RM114 million. 

Digital Banks to Compete with Conventional Banks

Investment banker turned investor Ian Yoong Kah Yin said digital banks in Malaysia will need to brace for tough competition against traditional commercial banks which already have a strong branding and established online banking systems. 

“Digital banks will have to spend a lot to market their products. 

“They will most likely offer free gifts and promotional items for account opening and higher-than-market interest rates for savings accounts and fixed deposits,” he told TMR. 

Digital banks also have the potential of bridging the digital divide between poorer communities with the introduction of a digital currency. 

However, Yoong believed that these banks will benefit individuals rather than businesses as traditional banks have large balance sheets and digital banks may have difficulty funding mid-sized and large corporations. 

“Malaysia is the second country in South-East Asia (SE Asia) to issue digital banking licences. It is a bold and most likely rewarding move. The online banking services offered by commercial banks in Malaysia are most likely second or third in SE Asia,” he added. 

The Rise of Online Banking Post-Pandemic

Due to the Covid-19 pandemic, both individuals and businesses had no choice but to adapt to digitisation in order to survive, due to its contactless nature. 

The banking industry was not spared from the new normal. 

Association of Banks in Malaysia (ABM) ED Kalpana Sambasivamurthy observed that during the past two years, customer walk-ins had decreased as more preferred online transactions. 

She also noticed that the need to physically visit banks has dropped as more customers find that using electronic payments is easier, including for shopping, bill payment and other transactions. As a result, banks continue to rev up their online offers for customers’ seamless experience. 

Lazada Malaysia has recorded an 80% increase in orders in 2020 compared to pre-pandemic levels, where its fastest-growing month showed an almost 120% sales uplift year-on-year (YoY). 

Google’s e-Conomy SE Asia 2020 report also revealed that e-wallet transactions increased to an average 25% post-Covid while Boku Inc also said that consumers in SE Asia prefer to use e-wallets. 

This shows the increase in digital payments due to its convenience. 

The Mushrooming of e-Wallet Merchants

BNM’s Annual Report 2021 has revealed that e-payment transactions increased by 30.2% to 7.2 billion transactions in 2021 compared to 5.5 billion transactions in 2020. 

Consumers seemed to prefer e-payment methods since they are safer and more convenient, while cashless payments accounted for about two out of every three card transactions in 2021, up from one out of every two card transactions in 2020. 

“In general, card transactions, both contact and contactless, registered a growth rate of 30.9% in 2021. This is twice the five-year average pre-pandemic growth (16.4%). 

“Online banking transactions registered a 41.5% increase to 3.5 billion transactions (2020: 2.5 billion). Similarly, e-wallet transactions increased by 74.4% to 1.1 billion transactions (2020: 0.6 billion). More merchants are also accepting e-payments,” the central bank said in the report. 

On the other hand, merchant registrations for the DuitNow QR service rose 59.4% to 1.1 million as at end-2021, from 0.7 million merchant registrations as at end-2020. 

BNM also aimed to adopt the ISO 20022 standard which will facilitate greater risk management, improve payment efficiency and offer value-added services to customers. 

The transition will be conducted in phases. The Real-time Electronic Transfer of Funds and Securities (Rentas) system will support both ISO 15022 and ISO 20022 standards in Phase 1, which takes place between June 2022 to 2024. 

The second phase will commence in July 2024 where all financial institutions will have to completely adopt the new standard. 

BNM has also looked into modernising domestic payment systems which include the rollout of the Real-time Retail Payments Platform (RPP) which will bring cheaper, faster and more convenient payment services. On the other hand, 80% of Malaysia’s cross-border payments are settled through a correspondent banking arrangement. 

However, the challenges with these cross-border payments are the higher cost, slower speed, limited access and insufficient transparency. 

Through Internet banking, users are able to perform common transactions such as transferring funds from either their own accounts or to a third party’s account. 

They are also able to conveniently repay their loan and outstanding card amounts or even make payments to relevant parties, such as utility bills and assessment tax. 

History of Malaysia’s Electronic Banking

Malaysia’s electronic banking was first introduced in the form of ATM as early as the 1980s. 

In June 2000, BNM approved for domestic banks to offer a full range of products and services over the Internet. 

Malayan Banking Bhd (Maybank) became the first bank to offer Internet banking services followed by Hong Leong Bank Bhd. 

It was only after January 2002 that locally incorporated foreign-owned banks were allowed to operate online banking. 

The Journal of Internet Business explained that Malaysian banks are better off perfor- mance-wise compared to Thailand. 

“Although still nascent, development and improvement are taking place thus changing the face of the banking industry in both countries. Low level of connectivity and concern over the security contribute to impede the growth,” it said. 

The study revealed that Maybank has topped the chart for being the most resilient and excellent Internet banking service, offering 28 different services, while Siam Commercial Bank offers 27. 

However, Malaysian banks do not offer any sort of language options compared to Thailand since English in Malaysia is widely accepted. 

“Overall, the researchers found Malaysian banks are more sophisticated and better in offering Internet banking to their customers. In the future, with the help of technology advancement, the gap would soon narrow,” it said.

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• This article first appeared in The Malaysian Reserve weekly print edition