With Bank Negara due to award up tofive digital banking licenses in 1QCY22, werecently hosted a knowledgesharing session with regards to the nature of Digital Banks(DBs)and what it means to the industry going forward. The session was helmed by Kenanga Investment Bank’sDr.SekarJaganathan,Director of Digital Strategy,SarahLim Fern Chieh, Head of Digital Strategy & Business Development,andIan Lloyd, resident Fintech Specialist.We gleanedfrom the in-depth session a clearer distinction of what set DBs apart from traditional banks, particularly with regards to the possible outreach and various product offerings made seamless,enabled by data analytics.In this piece, we also share thelessonsand strategies from the various global examplesin what is unchartered territory for us. At least for the near term, we believe localDBswill have to heavily depend on partnershipsand collaborationsto build a sizeablecustomer base. While the near-term focus will likely be to fulfil Bank Negara’s aspirations to better serve the un(der)banked and un(der)served markets in the rural and lower income groups, their long-term presence could contend with larger traditional banks in attracting customers with flexible offerings that could stir the dynamics of the market.

Embracing technology. The idea of digital banks(DBs) revolves beyond the concept of “branchless banking”, but further explores technological applications including customer on-boarding, risk management and control, developing products, solutions and many more. We have seen that traditional banks are progressively incorporating more digital capabilities into their ecosystem to reach out to customers (more commonly, through mobile apps) and to improve the efficiency of back-end processes. However, physical intervention is still core within its operations, reflective in the cost structure of banks where manpower is the largest component of operating cost (c.55%- 70%). Additionally, the absence of manpower and physical establishments translate to a much leaner cost structure for DBs as opposed to traditional banks.

Conventionally, banking activities are initiated and conducted with the presence of a physical office/branch. This also plays into the penetrative ability of the banks where some players are dominant in certain regions due to the absence of competition and ease of doing business. However, the decision to establish a new branch is often due to strategic or economic reasons, such as if it would be best to focus on a more populous, higher income region to achieve a stronger turnover and economies of scale of operations to be profitable. This often means the population of lower income groups in certain sub-urban and rural areas could have less access to basic banking facilities (i.e. savings deposits), which also stems from low financial literacy. Hereby arises the definition of an un(der)banked market. Adding to this, un(der)served customers could exist whereby while basic banking facilities are accessible, the limitations of conventional evaluations and loan assessment criteria could a customer’s access to financing.

Our speakers offer that this term should also encompass consumers and targeted micro-SMEs that require only smaller sized borrowings as opposed to that offered by conventional personal business loans. Possibly, banks have avoided providing these products due to lack-of-scale inefficiency, granted they consume similar man-hours and resources needed to process loans of higher value. Further, there is a greater risk is usually attached to these lower ticket size accounts as cash flows and repayment capabilities are highly uncertain. Alternatives available in the market are through credit cards and financing instalments offered by non-banking institutions or seek funding from personal means. We are beginning to see the emergence of such products in the form of “Pay Later” programs offered by e-commerce platforms but these usually only extend to retail goods and purchases, not available for business transactions.

Source: Kenanga Research - 21 Sept 2021