On 31st December 2020, Bank Negara Malaysia (BNM) unveiled its digital banking guidelines which almost immediately garnered interest from 40 parties. In this new guideline, the central bank will be issuing up to 5 digital bank licenses in 2022, with the deadline for submission on 30th June 2021.

During a chat with Fintech Fireside Asia, Suhaimi Ali, Director, Financial Development and Innovation at BNM shared the central bank’s vision for Malaysia’s digital banks.

When designing the framework, Suhaimi said that the central bank is cognizant of the fact that these upcoming digital banks have not gone through the full economic cycle.

In order to allow innovative players to come into the fray while simultaneously protecting the financial stability, they included a foundational phase which requires digital banks to maintain at all times a minimum amount of capital funds of RM100 million and ensure that its total size of assets does not at all times exceed the limit of RM3 billion during this phase.

A major area of focus during BNM’s assessment will be the long-term sustainability of applicants’ business model.

“We want the applicants to conduct a robust assessment and think through about their business model before they submit their application to us,”

Suhaimi said.

The central bank will take under consideration how well an applicant anticipates its growth, its profit drivers and sources of income, and the strength of capital support considering that it can take a while before a digital bank turns a profit.

BNM also requires applicants to submit an independent external review on the feasibility of their business plans to ensure that the assumptions are realistic.

Digital Banking Archetypes

When asked about whether there are any specific examples of digital banks operating in different markets that our local applicants should seek to emulate, Suhaimi broke it down to three types of digital banks that they are hopeful to see enter the market:

“Specialists” which targets a specific segment of customers to target their product offerings, which could include serving SMEs by employing technologies like alternative credit scoring;

“Ecosystem Players” which leverages their brand, channel footprint, and existing customer base from their non-banking businesses;

“Innovative Basic Banking Providers” which offers simple products for everyday banking but use technology to gain in-depth customer insights and offer hyper-personalisation.

There are also hopes that this new generation of banks will challenge the status quo by introducing new ways of delivering financial products, simplifying banking products and services, as well as make finance more approachable to customers overall. This could potentially translate to increased financial inclusion.

Islamic digital banking is another area that BNM hopes digital banking contenders will be looking to tap into – “an interesting proposition that would be unique to Malaysia”.

He added there are huge potentials to deploy technologies including alternative data and smart contracts to areas such as investment intermediation, trading and financing instruments, to enhance transparency and traceability, as well as ensure compliance.

While BNM is looking forward to digital banking applicants with an Islamic finance play, Suhaimi said that there won’t be quotas allocated specifically for Islamic digital banks.

Managing Risks of New Digital Banks

“The team at Bank Negara, we thought deeply about the risks and benefits and how this will actually affect the orderly function of the financial system,”

Suhaimi said.

Despite the opportunities promised by Malaysia’s forthcoming digital, branchless banks, Suhaimi said that these business models also bring in new risks which are oftentimes not well understood, adding that this new breed of banks has not been tested against full economic cycles citing recent failures as an example.

While Suhaimi did not specifically point to an example, the most recent prominent case was Australia’s Xinja who had its banking license revoked.

With the entrance of bigtech players, the risk could also be potentially heightened as well.

“This rate of growing too big too fast, is especially prevalent with the entry of bigtechs who typically already have large customer bases and their own ecosystems of services and which can scale up rapidly, could potentially … disrupt the orderly functioning of the finance sector,”

he explained.

He also added that certain facets of digital banks could also introduce new forms of risk.

“The extensive use of cloud and their third-party providers which may give rise to supervisory challenges, especially in the areas of cybersecurity, data security, and our ability to provide effective oversight on these kinds of third-party arrangements.”

Suhaimi ended the session by announcing that BNM will be bringing back the MyFintech Week on 24th January 2022 to 28th January 2022.

He said the central bank will be unveiling the financial sector blueprint during Malaysia’s Fintech Week. Suhaimi is hopeful that the digital banking license assessment will be completed by then.

The topics will include; talent, sustainability, financial inclusion, digital infrastructure, investment products, future-proofing the Malaysian economy, and more.

More details about MY Fintech Week 2022 will be shared in due time.

The full interview session can be found below, if you enjoyed this content please consider subscribing to our YouTube Channel