PETALING JAYA: Digital challenger banks, which benefitted from the accelerated digital shift caused by the Covid-19 pandemic, are set to keep growing via innovative low-cost offerings, while steadily building market share and widening their product base, according to Moody’s Investors Service.
“Around half of the 20 largest challenger banks are profitable. They are financial technology (fintech) firms with a banking licence and their speciality is leveraging technology to dramatically lower costs and improve the client’s experience.
“Their streamlined operations and tech focus cut time and costs and allow personalisation of products at scale.
“We expect the challengers to continue to gain in scale and stature,” said Petr Paklin, vice-president and senior analyst at Moody’s.
Challenger banks are defined as fintech firms that hold a banking licence.
Despite fast-growing adoption of online banking across the globe, challenger banks struggle to achieve primary bank account status, particularly in developed countries.
Monetary tightening may also mean that venture capital becomes less abundant in the months to come, while shortcomings in compliance may result in regulatory fines and slower customer growth, according to Moody’s.
However, it pointed out that the challenger banks’ low-cost online model and multi-million customer base offers strong potential for cross-selling and further revenue growth.
The global rating agency said they would build market share through continued expansion, while gradually broadening their product mix.
The aggregate assets of the 20 largest challenger banks tripled to US$319bil (RM1.34 trillion) between 2017 and 2020, according to Moody’s estimates, while their aggregate customer base jumped to 610 million from 167 million.
WeBank and XW Bank in China outperformed the Chinese banking sector in 2020 with return on average equity of 27% and 15%, respectively, compared with 12% for the sector.
Rakuten Bank in Japan, Tinkoff in Russia and OakNorth in the UK also outperformed their sectors in 2020, it added.
Meanwhile, Bank Negara is expected to issue five digital banking licences in the first quarter of 2022.
The central bank said it had received 29 applicants for a digital banking licence when the application period ended in June 2021.
In terms of the percentage of new consumers to digital services by geography, data from Google e-Conomy Report 2021 and Association of Banks Malaysia showed that Malaysia ranked highest in digital growth from non-metro areas in the region.