What Do Digital Banks Offer Customers Compared To Traditional Banks?
Even as we speak, banks around the world are going digital. Just recently, five new applicants have obtained digital bank licenses in Malaysia.
This is exciting news as digital banks have the potential to be a game changer in the world of finance. But none of these digital banks will be open to the public for at least the next two years or more.
All five digital bank licence winners have to undergo a period of operational readiness audited by Bank Negara (BNM) in the next 12 to 24 months.
Who are behind Malaysia’s five new digital banks?
|Sea Limited and YTL Digital Capital||Sea Limited is known for being the holding company for Shopee and SeaMoney, while YTL Corp is amongst the largest companies listed in Bursa Malaysia and is into utilities.|
|KAF investment bank, MoneyMatch, Carsome, Jirnexu||Led by KAF Investment Bank, this consortium consists of well known Malaysian startups and is largely considered a dark horse in this race.|
|GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd||This is essentially a Grab-led digital bank consortium that will be targeting local micro-SMEs and other financially underserved segments such as gig economy workers.|
|Boost Holdings and RHB||Boost and RHB have partnered up to create greater access for financial inclusion digitally amongst the underserved and unserved segments.|
|Aeon Credit, Aeon Financial Services and Money Lion||This is a 45%:45%:10% joint venture between Aeon Credit, it’s parent company Aeon Financial services and MoneyLion Inc. MoneyLion will be the main AI, data analytics and tech provider for the digital bank.|
However, despite their potential, will digital banks really revolutionise the market the way we think it will? In the meantime, the existing banks will be busy ramping up their digital banking services.
What is the difference between digital banks and traditional banks?
For the most part, there aren’t that many significant differences between digital banks and conventional ones. Both can offer banking services such as deposits, withdrawals, transfers, investments, loans, etc.
What truly separates the two is that conventional banks have a physical presence in the form of the head office and its branches. On the other hand, digital banks can operate with just the head office.
While you can also do online banking with traditional banks today, here’s what digital banks in Malaysia will offer based on the licences awarded by BNM:
Address the needs of underserved and unserved customer segments
According to research conducted by Google, Temasek Holdings and Bain & Co., about half of Southeast Asia’s nearly 400 million adults do not have a bank account. In Malaysia, about 14% out of the adult population (totalling 22 million in 20219) are unbanked while another 41% are underbanked (meaning they may have a bank account but have not bought investment products or applied for credit services with the bank).
This totals over 12 million Malaysians who can benefit from the services offered by digital banks, which they may be able to access using e-wallets or digital apps without having to go through the process of opening a bank account in a traditional bank.
Better products that cater to underserved segments
Conventional banks tend to receive a very large number of bank account and loan applications, especially from aspiring entrepreneurs and SMEs. These banks are usually the first place that these businesses go to in order to secure financing. However, financial products offered by traditional banks come with terms and conditions that many customers, especially those running small or micro business and working gig jobs, find hard to meet.
These customers often have limited credit histories, so digital banks using data analytics to perform credit scoring based on alternative data might be able to help close financing gaps. This can help boost higher SME and startup participation rates in the market, thus accelerating economic growth.
Personalised financial management tools
Having their customers fully online from the start allows digital banks to personalise services for their customers and help them keep tabs on their spending or ways to build micro savings.
Whether they have taken micro loans, purchased wealth products via an e-wallet or signed on a loyalty scheme for purchases, the digital bank can help them track and better manage their financial commitments.
What’s are the problems customers may face when using digital banks?
A digital bank’s greatest strength is also its weakness.
Its reliance on technology to provide greater convenience also means that it is susceptible to technological issues. Users may sometimes find their bank’s website down, or maybe an update might cause a glitch to occur, bringing the whole system down. This can be devastating for those who need access to their bank accounts or financing urgently, such as SMEs.
For those of us who have a bank account in a traditional bank, we can walk into any branch and talk to someone to sort out any problem we face in using their services. With a digital bank, there may be no physical bank branch in your town or state and your call on the customer contact number may or may not reach an actual person who can help sort out your problem.
As the world relies more on technology, we will begin to see more and more attempts to take advantage of it as well. In fact, there are daily attempts to steal money, crash computer systems and disrupt capital markets in the financial sector.
In Malaysia, BNM has guidelines and best practices for the banking industry to address cybersecurity incidents. Digital banks will need to make cyber security a priority in every step of their operations to ensure customers are confident of using their services. While bank encryptions tend to be top notch, any hacking attempt could potentially still cause some damage.
In a Malaysian context, digital banks are likely to have a strong and long-term future, especially with regards to filling certain niches and underserved segments. As such, they are likely to be more active in less capital-intensive areas.
However, digital banks are not likely going to be a major competitor for conventional banks in the short-term. This is due to the regulatory limits that are currently being placed on them. BNM’s licensing framework caps the digital banks’ assets at RM3 billion (US$688 million) during the foundational phase. Unfortunately, digital banks cannot exit this phase until at least 2026. If they are particularly unlucky, they could be stuck in that phase until 2029.
Since digital banks are being set up amidst an ongoing economic recovery, the potential for growth is high in the coming years. Whatever the case, the future of these banks looks promising.