The relative paucity of fintech startups from the five winning consortia (MoneyMatch is an exception) shows that BNM is taking a cautious approach to digital banking, consistent with the needs of what is already a relatively well-banked country. According to the World Bank, 92% of Malaysian adults have a bank account, which is the highest rate in Southeast Asia after Singapore.
The size of Malaysia’s actual underserved market, located largely in the rural parts of the country, is a matter of debate. Consultancy Oliver Wyman, for instance, estimates that just 39% of Malaysians are eligible for bank loans. For its part, Bain & Company estimates that 55% of Malaysia’s adult population is unbanked or underbanked.
To serve that market, BNM is counting on Grab, Sea Group and Axiata Group’s Boost to put their much-touted big data acumen to the test. “Digital banks can help individuals and businesses gain better access to more personalized solutions backed by data analytics,” BNM Governor Tan Sri Nor Shamsiah said in a statement.
Twice victorious
The results of Malaysia’s digital banking race show, that to a certain extent, what works in Singapore also works in Malaysia. Grab-Singtel and Sea Group now respectively hold digital bank licenses in both countries. At a minimum, the ability of these firms to win licenses in Southeast Asia’s foremost financial center helped their prospects in neighboring Malaysia.
For Grab, the victory is an important piece of good news in what has been a challenging stretch for the company. The Singaporean super app’s shares have struggled since its December 2021 SPAC on the Nasdaq, as market capitalization has fallen nearly 82% over that period. Grab went ahead with the listing just as investor ebullience about high-flying but loss-making tech companies was cooling. Grab lost US$3.6 billion in 2021 and US$1.1 billion in the fourth quarter alone, though revenue rose 44% to US$675 million for the full year.
With GXS Bank, Grab-Singtel will likely first aim to offer digital banking services to their significant existing user base in Malaysia. As of late 2020, about 62% of Malaysia’s population (20 million registered users) used Grab’s services in Malaysia, including ride-hailing, food delivery and digital financial services.
Unsurprisingly, a veteran of the financial services industry is leading the bank. CEO designate Pei Si Lai has 25 years of financial services experience and most recently served as Standard Chartered Malaysia’s country head of consumer, private and business banking.
Similarly to Grab's stock, Sea Group’s share price has plummeted over the past half year – a decline of almost 81% – amid the tech slowdown, so winning a digital banking license in Malaysia is an important signal to investors that the company remains focused on ultimately profitable endeavors. Where Sea differs from Grab is in its overambitious international expansion, which includes India, Brazil and Europe as well as most of Southeast Asia. With growth in its profitable gaming unit Garena slowing, e-commerce (Shopee) continuing to burn cash and its fintech unit still far from achieving profitability, Sea’s triumvirate of digital services looks less unassailable than before.
For its digital bank in Malaysia to succeed, Sea will probably have to cut some expenses elsewhere, lest it run into capitalization problems. Per BNM’s requirements during the “foundational phase” of a digital bank’s first three to five years, a licensee must maintain a minimum amount of capital funds of RM100 million (US$22.8 million) unimpaired by losses. Sea lost US$1.5 billion in 2021.
Made in Malaysia
Though Sea Group’s consortium is technically majority owned by Malaysians – its partner YTL Digital Capital is based in Kuala Lumpur – Sea has made a name for itself as a Singaporean company and that shapes how the digital bank is perceived, regardless of the shareholding structure.
In contrast, Boost and RHB’s digital bank is very much rooted in Malaysia and is arguably the best positioned of any digital bank in Malaysia to thrive. Boost is one of the most prevalent e-wallets in Malaysia, with more than 9 million users, and is accepted by more than 200,000 merchants. RHB Bank is an established incumbent lender whose net profit in 2021 grew 28.82% annually to RM2.62 billion from RM2.03 billion a year earlier. The digibank should give Boost the opportunity to move beyond payments into higher margin segments of financial services, like savings and credit, which it had previously been unable to offer.
Meanwhile, the winning consortium led by Malaysia’s KAF Investment Bank is notable for the inclusion of a prominent fintech startup, the remittances provider MoneyMatch. This consortium is focusing on Islamic banking, a nascent but growing segment for Malaysian fintech, and its license was awarded under Malaysia’s Islamic Financial Services Act 2013. MoneyMatch now plans to pursue its Series B funding with targeted funding of US$8 million to US$10 million. With the capability to offer digital Islamic banking services in Malaysia, MoneyMatch should have no problem reaching its fundraising goal.
We can’t all be winners
Undoubtedly, the biggest loser of Malaysia’s digital banking race is the aspiring super app Capital A. Until January known as AirAsia, the firm rebranded in a bid to position itself as a digital services company instead of an airline. Capital A applied for the digital banking license through its e-wallet subsidiary BigPay.
In some respects, BigPay’s failure to win a Malaysia digital banking license is unfortunate. The problem with many digital banks is that the marketing is better than the actual products, but BigPay – taking advantage of AirAsia’s massive airline passenger customer base – might have been able to bundle travel and banking services to offer customers a distinct value proposition.
Alas, it was not meant to be. Undoubtedly, BNM did not look favorably on Capital A’s financial situation. In January, the Malaysian Stock Exchange classified the company as a “Practice Note 17,” or PN17, company, meaning financially distressed. The exchange can delist PN17 companies if they cannot regularize their finances within a set time frame. The stock exchange made this move even though Capital A won shareholder approval for a rights issue to raise RM1 billion in November and in December raised RM336.5 million through a share placement.
Capital A narrowed its net loss to RM3.12 billion in 2021 from RM5.11 billion the previous year, but its revenue during 2021 also fell to RM1.73 billion from RM3.27 billion, according to a company filing with the Malaysian Stock Exchange.
Both Grab and Sea Group lost more money than Capital A in 2021, but they are more established in digital financial services and have deeper pockets than the erstwhile AirAsia. It is thus no surprise that they won digital banking licenses and Capital A did not.
Meanwhile, one fintech that lost its bid for a Singapore digital banking license also came up short in Malaysia: iFAST, a Singapore Exchange-listed wealth management fintech. Its focus on wealth management rather than broader banking services was likely a disadvantage, given BNM introduced digital banks to support financial inclusion.
Limited disruption
Because Malaysia is a relatively mature banking market, the impact of digital lenders will likely be less overt than in less-developed markets like Indonesia and the Philippines. In the former, where 92 million adults are unbanked, tech giants and conglomerates are working in tandem to buy up incumbent banks and transform them into digital lenders. This trend could significantly reshape Indonesia’s banking landscape. In the Philippines, where 50 million adults are unbanked, heavyweight fintechs like GCash (backed by Alibaba) and Voyager Innovations (backed by Tencent) are also shaking up the market.
By comparison, Malaysia has much less low-hanging fruit. Only about 1.76 million Malaysian adults are unbanked, though the underbanked market is probably much larger. If we take Bain & Company’s estimate (55% unbanked and underbanked) as an example, the market expands to about 12 million people.
Still, as Fitch Ratings pointed out in a recent research note, most of Malaysia’s unbanked people have little nor no income. That does not augur well for their potential as customers and suggests that digital lenders could be busier trying to persuade those who already have bank accounts to switch over than onboard those not yet in the formal financial system.
At the same time, some research suggests that Malaysians are content with their current banks. A 2019 survey by the Association of Banks in Malaysia (ABM), made up of 26 lenders that operate in the country, found that 81% of Malaysian bank customers are satisfied with their banks. “Staff behavior underpins the reason for satisfaction scores and is the key reason attributed to high satisfaction,” ABM said in a statement.
The sheer size of incumbents and regulatory limitations on digital banks will also ensure that the online lenders do not threaten traditional banks anytime soon. BNM's licensing framework caps the digital banks’ assets at RM3 billion during the foundational phase, which lasts until at least mid-2026 and possibly several years longer.
Compared to big incumbents’ asset size, that amount is a drop in the bucket. MayBank, the largest Malaysian bank, has total assets of RM888.2 billion. CIMB, the second largest, has total assets of RM621.9 billion.
Ultimately, Malaysia’s digital lenders will likely do best catering to customers already in their respective ecosystems, to which they can offer tailored banking services that may not necessarily be a substitute for existing bank accounts, but an addition. Target customers could include Grab’s passengers and drivers, Shopee’s e-commerce buyers and sellers, and users of the Boost e-wallet.
Subsidies will be necessary to bring customers onboard, and profitability may take years to reach. But if the digital banks – and their deep-pocketed backers – are willing to be patient, they can eventually carve out a niche for themselves.