What Malaysia’s Digital Banking Licenses Tell Us

At the end of April, the Malaysian central bank awarded five digital banking licenses after receiving applications from 29 candidates. The announcement, which was delayed by a month, provides some clarity on what Malaysia’s digital finance ecosystem will look like in the coming years. And there weren’t a lot of surprises. Viable digital banks need two things: a large existing user base, and lots of capital. Singapore set the precedent in 2020 when full digital banking licenses were awarded to a subsidiary of Sea Limited and a partnership between Singtel and Grab.

Sea got its start as an online gaming giant that parlayed its massive user base into a successful listing on the New York Stock Exchange, and has branched out into other e-commerce activities such as retail. Though the stock has come back down to earth in recent months, during the pandemic user growth exploded which pushed the company’s valuation sky-high. Grab is a ubiquitous ride-hailing and delivery app, and Singtel is a Singaporean blue chip that holds a dominant position in the region’s telecommunications industry. Taken together, they have lots of users and access to capital which means they are well-placed to open new frontiers in digital banking.

It is not terribly surprising then that Sea (which brought Malaysian conglomerate YTL into the mix) as well as Singtel-Grab (which brought billionaire Robert Kuok on as a partner) were also awarded digital banking licenses in Malaysia. Mobile payment system Boost, in partnership with RHB bank, was also awarded a license. Boost is a subsidiary of Malaysian telecom major Axiata. Licenses were also awarded to a group backed by KAF Investment Bank and to a consortium that includes AEON Financial Services and fintech company MoneyLion.

The logic at play here is clear: companies with lots of existing mobile, gaming, delivery, retail, and online payment customers are teaming up with deep-pocketed partners to offer a wider range of financial services to their user bases. The convenience of bundling all of these services together via a digital interface like an app is expected to give them an edge over incumbent brick and mortar banks. In this sense, Malaysia’s awarding of digital banking licenses hews pretty closely to Singapore’s, while also ensuring that local companies like Axiata and tycoons like the Kuok brothers have a role.

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However, Singapore’s experience with digital banking so far also suggests cracking this sector might be quite challenging. Of the four companies awarded digital banking licenses by the Monetary Authority of Singapore in 2020, only one is open for business as of this writing. Grab has meanwhile seen its stock get pummeled since debuting on the Nasdaq at the end of 2021, which suggests investors are not yet convinced its digital banking ambitions, whether they are in Singapore or Malaysia, will sufficiently compensate for its other loss-making operations.

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There is also the question of what value a digital bank adds to the financial system. In my mind, the biggest advantage they have over traditional banking is expanding access to financial services to the unbanked. In Malaysia, about 15 percent of the population in unbanked, often in rural or under-developed areas. This is where digital banking could have the biggest impact, and several of the 29 applicants bidding for a license appeared to be aiming for this niche.

I was curious to see if any of them would make the cut, but the licenses primarily went to more conventional recipients: tech unicorns and telecom giants and their conglomerate and banking partners. That makes a certain kind of sense, since these customer bases will likely be more profitable than a digital bank focused on the provision of rural credit, but it does give us some hint about what the priorities are as the digital banking landscape in Southeast Asia takes shape.

Artmotion China

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