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Digital banks have much to do

KUALA LUMPUR: There are many challenges in digital banking and the five successful applicants for the digital bank licence from Bank Negara should be prepared to not see profits in the first three years of operations, according to Ng Zhu Hann.

Ng, the CEO of Tradeview Capital, a licensed fund management company, explained that one challenge for the new digital banks is to build a client base, which would incur high client acquisition costs.

“So, unsurprisingly, the list of the five successful applicants has many big tech names – Grab, Shopee and Boost – with eCommerce, e-wallet, ride hailing platforms and super apps, and these can immediately tap on their existing database.

“The Aeon-led consortium also has a solid client database, with their decades of experience in consumer financial services,” he said.

Ng pointed out that the client acquisition cost for these four successful applicants would be much smaller, compared to other parties with different business backgrounds.

On Friday, Bank Negara announced that the five successful applicants for the digital bank licences were the consortiums of Boost Holdings Sdn Bhd and RHB Bank Bhd; GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd; and Sea Ltd and YTL Digital Capital Sdn Bhd; as well as under the Islamic Financial Services Act 2013, a consortium of Aeon Financial Service Co Ltd, AEON Credit Service (M) Bhd and MoneyLion Inc; and a consortium led by KAF Investment Bank Sdn Bhd

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

GXS Bank is the digital bank joint venture of Nasdaq-listed Grab Holdings Ltd and Singaporean telecommunications conglomerate Singtel.

New York-listed Sea Ltd is the parent company of eCommerce platform Shopee.

Also, it should be noted that under the licensing framework for digital banks issued by Bank Negara on Dec 31, 2020, they are expected to offer banking products and services to the “underserved or unserved market wholly or almost wholly through digital or electronic means”.

The central bank also noted that such digital banks “have not operated through a full financial and economic cycle. This calls for a balanced approach that enables admission of digital banks with strong value propositions whilst safeguarding the integrity and stability of the financial system as well as depositors’ interests.”

Under the licensing framework for digital banks, the requirements for up to five years from its start of operations include maintaining at all times a minimum amount of capital funds of RM100mil unimpaired by losses; and ensuring that its total size of assets do not at all times exceed the limit of RM3bil.

By the end of the fifth year, a licensed digital bank should achieve a minimum amount of capital funds of RM300mil unimpaired by losses, or else it would need to implement its exit plan from the business.

Ng pointed out that Bank Negara has been very prudent in its approval process.

“If you look at fintech services like Nubank (Brazil), Chime (United States), Kakao Bank (Korea) – they all went through the same strict compliance process,” he said.

Ng explained that there was a misperception that a digital bank had very low operating costs because they don’t have physical branches and a huge headcount, unlike conventional brick-and-mortar banks.

“However, like conventional banks, digital banks also need to account for regulatory and compliance costs regarding issues like prevention of money laundering, tax evasion, etc. Similarly, you need to deal with data theft and cybersecurity risks which also incur high costs.”

He also pointed out that unlike conventional banks, digital banks face higher non-performing loans (NPLs) risks, given that they have a mandate of catering to the “underserved or unserved market”.

“I view the digital bank scheme as more of a social capitalism initiative,” said Ng.

Citing the example of Kakao Bank, Ng said a key strategy for a digital bank to become profitable within a few years would be the ability to leverage on an exisiting ecosystem or control mechanism where the risks of NPLs can be contained.

“For example, let’s say you have a Grab Bank – it disburses loans but the funds can only be used within its ecosystem of services. In this way, the risks can be ring-fenced,” he said.

Kakao Bank, which was listed in South Korea in August 2021, became profitable in 2019 after less than two years in operation.

Kakao Bank and Kakao Pay are both affiliates of South Korean Internet company Kakao, known for its KakaoTalk instant messaging service.


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