RAM Ratings: Digital banks will spur financial innovation, but pose limited threat to traditional banks

Published on 27 May 2020.

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The entry of digital banks is expected to spur more financial innovation and accelerate the digital transformation of the Malaysian banking industry. While digital banks are disruptors relative to traditional banks and will intensify competition, their impact will be limited in the next three years given the regulatory restrictions on their asset size, i.e. not more than RM2 bil. On the whole, the assets of the five digital banks would only represent 0.3% of the industry’s.

“Bank Negara Malaysia 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,” highlights Sophia Lee, RAM Ratings’ co-head of Financial Institution Ratings in conjunction with the release of RAM’s latest commentary, Digital banks will spur financial innovation, not yet a threat to traditional banks.

Digital banks have been sprouting up throughout the world in the last decade amid regulators’ push for greater financial innovation and financial inclusion, as well as the ubiquity of smartphones among increasingly more tech-savvy customers. The popularity of digital banks is mainly attributable to their focus on delivering simpler, faster and more convenient solutions to consumers. Bank Negara Malaysia’s (BNM) issuance of up to five digital banking licences has attracted various potential applicants including technology companies, fintech players and financial institutions vying for a slice of the digital banking pie. 

Unlike traditional banks, digital banks offer their financial products and services through digital and electronic platforms (i.e. online and mobile apps). As such, digital banks have the advantage of significantly lower operating costs given the reduced need for human intervention and without any physical branches. By utilising technologies based on artificial intelligence or other forms of predictive algorithms along with big data analytics, digital banks may undertake alternative assessment of credit risks to enable greater financial inclusion. Potential beneficiaries include the 8% of unbanked adult population in Malaysia as well as small and micro enterprises that are unable to access traditional bank financing.

Nonetheless, digital banks’ profitability is likely to be constrained in the early years, similar to most start-ups, given the hefty initial outlay to develop their ecosystem and the need to build up scale by occasionally offering promotional rates amid the competitive business environment. Digital banks will also be subjected to the same regulatory framework as commercial banks, although capital adequacy and liquidity requirements will be simplified during the foundational period (of between three and 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. 

Some of the larger banks in the region - such as DBS Bank and CIMB Bank - have gleaned experience through running digital-only operations in India (DBS), Indonesia (DBS) and the Philippines (CIMB) in recent years. Most Malaysian banks’ digital ventures to date have predominantly involved payments rather than lending. One of the main hurdles has been the absence of a BNM-approved digital identity-verification process. Notably, the central bank will soon allow eKYC (electronic know-your-customer) solutions for the digital on-boarding of individuals in the financial sector. This will enable banks to digitalise the on-boarding process to enhance convenience and reach, besides reducing the cost of providing financial services. 

In the longer run, digital banks may have a meaningful impact on the banking landscape, especially for traditional banks that do not innovate or strengthen their digital propositions quickly enough. In a rapidly evolving digital environment, banks are investing in and accelerating their electronic and digital strategies to stay competitive. Some are already offering lifestyle services via mobile apps. With the introduction of eKYC, more financial products are envisioned to be offered digitally. Notably, banks participating in BNM’s regulatory sandbox have pilot-tested some of their digital offerings. We anticipate the banking sector to undergo further digital transformation in the longer term.

RAM’s commentary, Digital banks will spur financial innovation, not yet a threat to traditional banks, can be downloaded from www.ram.com.my.



Analytical contact
Sophia Lee
(603) 3385 2619

Media contact
Padthma Subbiah
(603) 3385 2577


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Publication Date Published Category
Sector Commentary: Malaysian Banking Sector - Digital banks to spur financial innovation, not yet a threat to traditional banks 27-May-2020 Commentaries View PDF