Digital banks: What they are, who they help, and how they differ

KUALA LUMPUR (June 7): The rapid advent of internet connectivity has led to a new paradigm in money management, in the form of digital banks that exist entirely online.

Since the Covid-19 pandemic, more Malaysians have adopted the habit of going cashless, but until recently, banking transactions still required physically visiting a local branch.

Digital banks are set to change this, however, offering seamless access to financial services anywhere there is internet connectivity.

Online only

Unlike traditional banks, which require physical branches and lengthy application processes, digital banks are entirely virtual — from A to Z, all their process take place entirely on the customers smart device.

This aspect has made them especially popular among tech-savvy consumers, who are already able to appreciate the convenience of doing all their banking without ever having to visit a physical branch or join a queue.

From opening an account to applying for loans, everything is meant to be performed online with digital banks that all tout instant response and fast approvals as a differentiator from traditional banks.

Bank anywhere

Traditional banking customers will be familiar with the concept of a local branch, but digital banks are doing away with the notion entirely.

One key benefit is the ability to bank anywhere, be it at home or on the go, eliminating the need geographical barriers that may prevent some from gaining access to banking services.

This is particularly beneficial to those in remote areas, for whom access to a physical bank may be hours away. Digital banks would allow them to save on the time and money they previously would have to spend to reach the nearest bank branch.

In 2022, Bank Negara Malaysia (BNM) reportedly said digital banks would help unbanked and underbanked sections of society participate more in the increasingly digital economy.

Five approved banks

In April 2022, BNM announced five successful applicants for the digital bank licences as approved by the Finance Ministry.

They are Boost Holdings Sdn Bhd and RHB Bank Berhad; GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd; Sea Limited and YTL Digital Capital Sdn Bhd; AEON Financial Service Co, Ltd, AEON Credit Service (M) Berhad and MoneyLion Inc; and KAF Investment Bank Sdn Bhd.

Three out of the five consortiums are majority-owned by Malaysians namely Boost Holdings and RHB Bank, Sea Limited and YTL Digital Capital and KAF Investment Bank.

Of the five, GX Bank Bhd (GXBank) was the first to officially launch last November, while AEON Bank became the second on May 26 as Malaysia’s first Islamic digital bank. Yesterday, Boost Bank was the third when it launched to the public.

With the approval of the five digital banks, Malaysia joins other Asian countries such as Singapore, Indonesia, China, and Japan that already have digital banks running.

In the world, the Bank of Scotland was the first to provide electronic home banking services to its users dating back to 1985, while the Stanford Federal Credit Union located in California launched the first internet banking website in 1994.

Stiff competition

The rapid succession of digital bank launches have seen each trying to set itself apart from the crowd.

GX Bank set the bar initially by offering a 3 per cent interest rate on all money saved, along with an unlimited 1 per cent cashback on all spending as well as a waiver of all fees related to the issuance and use of its debit/ATM card.

For Grab mobile application users, GXBank offers 1.5x GrabRewards points for purchases made at Jaya Grocery retail outlets.

AEON Bank, being an Islamic digital bank, is touting Shariah-compliant as well as a rewards system that lets customers earn AEON Points at AEON supermarkets, which can be redeemed for cash and automatically credited into their AEON Bank Savings Account-i.

Boost Bank, the latest, has yet to announce its promotions. Axiata group chief executive officer and managing director Vivek Sood said at the launch that existing Premium Wallet users on the Boost eWallet application would have a seamless process opening and linking a Boost Bank account.

FD-like interest rates, no lock-in

In the initial scrum for market share, the digital banks are all offering elevated interest rates that match or surpass those paid out for fixed deposits at traditional banks.

GXBank is offering 3 per cent interest on any amount saved in one of its accounts, with daily payments.

For Boost Bank users, they can enjoy daily interest rates up to 3.6 per cent per annum, although this is only available users with the “Platinum President” rank for a limited period.

The highest at the moment is AEON Bank, which is offering 3.88 per cent profit rate annually for a limited time.

All three offer compartmentalised “savings jars” that allow customers to set aside savings for specific objectives, along with automatic deposits and target dates to ensure their savings plans are on track.

Potential pitfalls

One major hurdle the digital banks will face is earning Malaysians’ trust regarding the safety and security of performing all their banking transactions online, at a time when the country is already grappling with unprecedented financial fraud and scams.

According to the police, Malaysians lost a cumulative RM1.3 billion to online scams in 2023, nearly doubling since 2021.

The entirely virtual experience could also make it more difficult to obtain customer service in the event of problems, compared to a traditional bank customer who can visit their nearest branch for assistance. — Malay Mai