This article first appeared in The Edge Malaysia Weekly on June 7, 2021 - June 13, 2021

LAST week, Boost Holdings Sdn Bhd became the first financial technology (fintech) firm to announce that it had teamed up with a local bank — RHB Bank Bhd — to apply for one of five digital banking licences offered by Bank Negara Malaysia.

The development is significant as, thus far, no other local bank has officially thrown its hat into the ring. This could, of course, change as the June 30 application deadline draws near.

Attention will centre on whether CIMB Group Holdings Bhd, AMMB Holdings Bhd, Hong Leong Bank Bhd and Standard Chartered Bank Malaysia Bhd — basically, the banks that had previously shown interest in applying for a licence, potentially with a partner — will make any moves in that direction.

In an interview with The Edge, Boost CEO Sheyantha Abeykoon says he sees strong prospects for its planned digital bank with RHB, given that the underserved and unserved market in Malaysia is huge.

Bank Negara has made it clear that it would like digital banks to serve that segment, thereby improving financial inclusion in the country.

“Based on published data, there are close to 900,000 micro and small businesses. A large part of them, especially the micro businesses, do not have access to the full spectrum of financial services. On the retail consumer side, there are around 12 million people who also don’t have the kind of [access] that people at the top end of the spectrum would have,” he says.

“So, the market size is quite large and there is opportunity for all of us. The key [will lie] in the business model that each of us employs to try and serve these customers.”

Given that the two partners are in the midst of preparing their submission to Bank Negara, Abeykoon was unable to go into the specifics of the business model or plans for the digital bank. However, he points out that Boost is not new to serving the underserved segment.

Its fintech experience over the last few years has included running Aspirasi, a digital micro-financing and micro-insurance provider, as well as Boost, a top three e-wallet and lifestyle app in Malaysia.

“We have built our fintech businesses so far primarily focused on serving the underserved segment. We have over 250,000 merchants on Boost and about half of them are what we would classify as micro businesses. We have given out about 30,000 loans to small businesses under Aspirasi, and [these are mainly] to micro businesses that typically have no access to such services, possibly because the cost to serve them is too high for traditional banks,” he observes.

“So, without getting too specific, I can only say that whatever we’re servicing today would give you an indication of what we would service under the digital bank as well.”

On June 3, Boost, the fintech unit of Axiata Group Bhd, and RHB had inked a heads of agreement to form a consortium to apply for the licence. Subject to Bank Negara approval, Boost will own a majority 60% stake, while RHB will hold the remaining 40% in the digital bank, with a minimum issued share capital of RM100 million.

Meanwhile, Boost chairman Mohd Khairil Abdullah says the Axiata group would be open to pursuing a digital banking licence in other markets if the opportunity arises, particularly in Indonesia, where it has a sizeable presence. However, this may not necessarily be in partnership with RHB.

“It will probably be prudent for us to assess who the right partners would be in the other markets. The agreement so far [with RHB] does not cover digital banking in other markets, but that is something we could look into as well because, obviously, RHB does have a presence in some of these other markets,” he tells The Edge.

The timing for any party going into digital-only banking is interesting. While the Covid-19 pandemic has certainly accelerated digital adoption, it has also severely tested the nascent business models of digital-only banks. Some, such as Australia’s Xinja, have handed back their licence, citing Covid-19 as a reason.

Boost, however, is not fazed. Mohd Khairil says the group is looking at digital banking as a long-term investment. “It’s the long game that we’re looking at.”

Abeykoon adds: “We’ve been lending to the underserved sector since 2018, so we have run right through the Covid-19 cycle, giving loans to this sector, and our non-performing loan ratio is [just] 2.5%. So, we’ve had a real-life scenario of having our business stress-tested through this [rare] event and, in some ways, that puts us in a very strong position.”

He points out that Boost’s business model has been different from that of some of the digital banks that have recently suffered. For one, the latter were primarily serving markets that were already well served — in other words, they were not fulfilling a market void — and were, to some extent, competing with traditional banks from day one.

In addition, many took a deposit-first strategy and, to attract customers, had to compete on high rates, thus ballooning their cost base. It was only later on that they started offering overdrafts and charging interest rates, which is when revenue started to come in.

“In our case, there is already a void to be filled. In our model, we are leading from the lending side, the asset side of the book. So, we have revenues today because we are actually servicing customers and giving loans,” he points out.

“Actually, what the digital bank licence helps us with is the fact that we can get funding to grow the loan book even more, as it gives us the avenue to start mobilising deposits. So, it’s a very different business model altogether.”

Abeykoon says Boost’s approach in this digital banking venture is to work with partners within the Axiata and RHB ecosystem, particularly those with a captive customer base. “They could be people like Celcom [Axiata Bhd] or outside partners,” he says.

If approved by Bank Negara, the digital bank will start off with Aspirasi’s assets. Aspirasi has an outstanding loan book of RM70 million, according to Abeykoon. On whether RHB would be injecting any of its assets into the venture, he says: “There are some discussions, but right now I am not in a position to say.”

Asked how the two arrived at a 60:40 partnership, Mohd Khairil explains that while Axiata knew it needed a banking partner to fill capability gaps, it was also clear from the start that it needed to have control of the venture.

“This is because, if the digital bank is going to be run with the traditional banking mindset, then the chance of success for this bank might not be as high … as opposed to [our ability] to inject into it, the digital mindset. So, that became a key point of discussion with several of the banks,” he explains.

He shares that the group went through a process in which it had “multiple conversations with all the major banks”.

He says RHB stood out because it is “no alien when it comes to technology and digital innovation”, going by some of the products and services that it has launched. “Second, it had a very open perspective on how this bank was to be run, so that gave us confidence. So, the 60:40 is an outcome of discussion and negotiations … but the starting point was always that Axiata would be the largest shareholder.”

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