Fitch: Entry of digital banks won’t disrupt local banking landscape

Digital banks are not likely to become major competitors to traditional banks within the next five years because of regulatory limits placed on their operations, Fitch says.. – AFPpix: The digital bank licence winners in Malaysia are likely to assume niche market roles rather than disrupt the banking sector in the medium term, according to Fitch Ratings.

Fitch believes each consortium is well-resourced with the potential to become a viable digital bank in the long run. Qualities include broad consumer brand recognition, strong credibility of constituent shareholders, deep pockets to fund necessary investments and the likely availability of management know-how. Execution risks are considerable, but the ingredients to make a foray into the sector are present.

However, it noted that digital banks are not likely to become major competitors to traditional banks within the next five years, because of regulatory limits placed on their operations. BNM’s licensing framework caps the digital banks’ assets at RM3 billion during the foundational phase, which they cannot exit until at least mid-2026, and potentially as late as mid-2029.

“Competitive pricing is also a barrier. Malaysia is a well-regulated jurisdiction, with supervisory guidelines and prevailing practices that espouse responsible financing. The availability of unsecured financing at comparably low rates of 15%-18% is likely to set low benchmarks on what new entrants can realistically charge, which may not be adequate to compensate for the higher risk of lending to lower credit-quality customers.

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