RAM: Greater competition in unsecured retail lending, micro enterprise segments with entry of digital banks

RAM Ratings co-head of Financial Institution Ratings Sophia Lee

RAM Ratings co-head of Financial Institution Ratings Sophia Lee

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KUALA LUMPUR (April 29): RAM Rating Services Bhd is of the view that the entry of digital banks may fuel competition in the unsecured retail lending and micro enterprise segments of traditional banks.

In a statement on Friday (April 29), the ratings agency said these segments represent about 7% and 4% of the banking system’s loans respectively, although the threat to incumbents in the near to medium term will be limited.

This is in view of the temporary asset threshold of RM3 billion for the first three to five years of a digital bank’s operations, as well as the licensing framework’s requirement to focus on driving financial inclusion to address market gaps in the underserved and unserved customer segments.

It added that digital banks are likely to target niche segments untapped by traditional banks, given the estimated digital banking market share of less than 0.5% of the banking system’s asset base.

Moreover, RAM said the profit performance of digital banks will be constrained in the early years, given the hefty initial outlay to develop their ecosystems, market their products and create scale by occasionally offering promotional rates in a competitive operating environment.

“It is paramount that traditional banks re-evaluate their current digital offerings to keep up with accelerated digitalisation to ensure long-term market relevance. Traditional banks can pursue digital transformation under the existing licensing framework without a separate digital banking licence. 

“Incumbents are seen upping their game by digitising existing banking operations and investing in new capabilities. Some banks are also leveraging the agility of fintech (financial technology) players through partnerships to accelerate their progress,” said RAM Ratings co-head of Financial Institution Ratings Sophia Lee.

RAM said the five digital bank players will benefit from the spike in digital adoption spurred by the pandemic, and that the prospects ahead for digital banking are positive.

“Considering the ubiquity of smartphones and high digital adoption and market readiness, the market potential for digital banking is bright,” she said.

The ratings agency said the increasing internet penetration and use of smartphones are driving market growth in digital banking, pointing out that internet banking by individuals and mobile banking transactions jumped 40% and 290% respectively to RM1.2 trillion and RM800 billion over the last two years, based on Bank Negara Malaysia’s statistics.

RAM added that the entry of digital banks is expected to spur financial innovation and accelerate the digitalisation of financial services, as these players’ proposition is delivering simpler, faster and more convenient solutions to consumers.

It said the issuance of two Islamic digital bank licences was an upside surprise, which affirms Malaysia’s commitment and role as an established global Islamic finance leader.

“By utilising technologies based on artificial intelligence or other forms of predictive algorithms along with big data analytics, digital banks may undertake alternative assessments of credit risks to enable greater financial inclusion. 

“As such, those who are unable to access financing products from traditional banks due to the lack of standard documentation or credit history could stand to gain,” added Lee.

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Liew Jia Teng