Next Wave of Financial Services – Digital Banking in Malaysia

Digital Banking in Malaysia – Ashley Gwee Chai Lian

Bank Negara Malaysia (“BNM”) had, on 27 December 2019, issued an exposure draft on the licensing framework for virtual banks (“Exposure Draft”). It has been indicated that BNM will be issuing up to five licenses to qualified applicants to establish digital banks to conduct either conventional or Islamic banking business in Malaysia.

So, what does digital banking mean and what these digital banks do?

Digital banking is not a new concept and that basically involves digitalization of  traditional banking activities, including deposit, withdrawal and transfer of monies etc, that historically were only available to customer when physically inside of a bank branch. A digital bank will provide its services exclusively through the use of electronic documentation, real-time data and automated processes where it does not have physical branches and does not require customers to be physically present.

Several digital-only financial institutions have already been launched and established in Asia Pacific, such as South Korea, Taiwan, Hong Kong, Indonesia, and the Philippines. Singapore is set to join the league in licensing digital-only banks very soon and it is reported that the Monetary Authority of Singapore will issue up to five licenses – two digital full bank licenses that permit retail banking and three wholesale bank licenses by the middle of this year.

Unlike in Singapore where two types of digital bank licenses are introduced, BNM only offers 1 type of license. With Malaysia’s decision to open doors to digital banking, the “licensing of these new players with innovative business models is expected to add dynamism to the banking landscape to serve the economy and contribute to individual well-being. This includes expanding meaningful access to and responsible usage of suitable and affordable financial solutions for the underserved and unserved market segments”[1].  

The Exposure Drafts sets out, amongst others, the eligibility requirement and application procedures to be complied with by the applicant. Further, as a person licensed under Section 10 of the Financial Services Act 2013 or, as the case may be, the Islamic Financial Services Act 2013, digital banks will be required to comply with the requirements under the Financial Services Act 2013 or, as the case may be, Islamic Financial Services Act 2013, that comprises standards on prudential, business conduct and consumer protection, anti-money laundering and terrorism financing, etc. A more simplified regulatory requirement relating to capital adequacy, liquidity, stress testing and public disclosure requirements will be applicable to the licensed digital banks during the “foundational phase” – which are the initial three to five years of operations of a licensed digital bank. Notably, BNM takes cognisance of operational and systemic risks that digital banking is a new and untested business model in Malaysia where it requires the applicants to prepare an exit plan to ensure it is able to unwind without a significant impact on the financial system and consumers.

BNM aims to finalise the policy document by the first half of 2020 and application of license will be open upon the issuance of the policy document.

Comments

The regulator’s initiative in launching digital banking is welcomed as it seeks to raise the competitive bar in Malaysia and to address market gaps in the underserved and unserved segments. Business decisions would have to be made by both the challengers and existing traditional banks if they should apply for a digital banking licence fairly quickly with the fear of missing the boat. Traditional banks may have to rethink their business models, and whether are brick and mortar stores still viable or even necessary in the face of evolving consumer behavior.

Ashley Gwee Chai Lian
Senior Associate of Ismail Sabri Wee & Wong
(Kuala Lumpur Office)

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[1] Part A of BNM’s Exposure Draft on the Licensing Framework for Digital Banks