MALAYSIA’S digital banking industry is shaping up with two new players getting approval to start operating.

       Boost-RHB Digital Bank as well as AEON Credit Service (M) Bhd’s AEON Bank Bhd will join Grab-led GXBank, which started operating in the fourth quarter of last year. Two more are expected to enter the fray soon.

       Despite this, industry players remain cautious, saying it’s too early to gauge the impact on the Malaysian banking sector. It is possible, however, to gain some insights from the trends in other countries.

       Since Hong Kong’s digital banks arrived four years ago, none has been profitable, suggesting they have had little impact on the market. It is the same in Singapore with five digital or online-only banks which started over the past one year.

       Granted, it has not been that long, but observers say it’s not easy for digital lenders to make money as customer loyalty and trust are crucial.

       Digital banks need to do a lot of subsidising and promotions, which lead to high costs and compressed margins. They are also sometimes curtailed by their parent companies as the latter may focus on other key business areas such as food delivery or e-hailing.

       What will the situation be in Malaysia, which is fairly well-banked?

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       Digital banks will undoubtedly put pressure on the traditional banks, but Kenanga Research does not anticipate any meaningful impact for now. In a recent research note to clients, it says online-only lenders will need high-yielding deposit structures to attract consumers.

       Take GXBank for instance. You can open a savings account with them and earn a 3% interest per year, which is paid daily. This is higher than the 1% or so rate offered by most big traditional banks.

       Yield-chasing customers may find this compelling, but will they switch? Time will tell. (PIDM covers GX account holders for RM250,000, just like traditional bank account holders.)

       Early entrants

       While digital banks in Hong Kong and Singapore are in the red, there are some that have made it. These are mainly Chinese and South Korean start-ups that entered the market early.

       One of South Korea’s first digital banks, Kakao Bank, registered hundreds of thousands of customers within 24 hours of starting operations in 2017. Within two years, it was making money.

       Founded by Kakao Talk, a popular messaging app in South Korea, the bank was successful because it filled a void in the market.

       Banking was largely a brick and mortar business then and borrowing rates were high with few choices. Kakao provided fresh alternatives which the market embraced.

       Malaysia’s digital banks come at a time when global and local banks have undergone significant changes. Intense competition has given customers more choices.

       Furthermore, incumbent banks have also entered the digital sphere, making it harder for pure online banks to stand out. One of the easiest strategies seems to be competing on rates, but this will result in lower profits.

       Notably, while digital banks are supposed to target the underserved businesses and individuals, meaning those who do not have the necessary information and documents to open accounts, borrow money and so on, observers predict that the banks’ biggest customer base will eventually consist of those who are currently banked.

       For now, it’s all eyes on the digital players and how they will strategise in this competitive industry.

       This article first appeared in Star Biz7 weekly edition.