This article first appeared in The Edge Malaysia Weekly on May 23, 2022 - May 29, 2022

BANK Negara Malaysia may have awarded only five digital bank (DB) licences recently, but there are certainly more DBs coming into the market, especially in the Islamic space.

At least two standalone Islamic banks — Bank Islam Malaysia Bhd and Al Rajhi Banking & Investment Corp (M) Bhd (Al Rajhi Malaysia) — plan to set up their own digital banks with their existing Islamic banking licences, to compete in the new and more competitive landscape. These are expected to be launched as early as this year.

Meanwhile, AEON Credit Service (M) Bhd, which clinched one of the five DB licences issued by Bank Negara, wants to focus mainly on retail financing within the AEON ecosystem.

Its chief transformation officer Ajith Jayaram says the DB is expected to start off with deposit and financing products. Later, it will introduce wealth management and investment products. “[We’re aiming] to go to market in 12 to 18 months. Twelve months would be very early pilot testing and 18 months would be product rollout,” Jayaram tells The Edge in an interview.

Main Market-listed AEON Credit, a consumer finance company, won an Islamic DB licence as part of a consortium with its parent company AEON Financial Service Co Ltd (AFS) and fintech firm MoneyLion Inc as its technology partner. The only other recipient of an Islamic licence was a consortium led by KAF Investment Bank Sdn Bhd. AEON Credit and AFS will have a 45% stake each in their DB, with MoneyLion holding the remaining 10%.

According to Jayaram, much thought had gone into ensuring that the DB would complement, rather than compete with, AEON Credit’s existing business. As a consumer finance company, AEON Credit provides personal, motorcycle and used-car financing to customers who are predominantly from the bottom 40% income group (B40) and other underserved segments.

Considering that the upcoming DBs in Malaysia are required to focus solely on underserved and unserved segments, many have been wondering whether AEON Credit and the DB would end up competing for business.

Jayaram assures that this will not be the case. The whole reason AEON Credit had sought the DB licence in the first place was so that it could introduce products and services that it is currently not able to under its existing licence, he says. This includes wealth management as well as current account and savings account (CASA) products.

“Today, AEON Credit is already serving the underserved, but this is only in the lending segment. Our existing licensing does not allow us to do wealth management products, investment products or CASA. So, customers do not have a full financial lifestyle in AEON Credit. By providing wealth management, for example, [at the DB], you basically elevate or even complement AEON Credit’s existing business,” Jayaram says.

“It’s our goal that the new DB should complement AEON Credit’s business today. While there may be a certain level of overlapping customers, it’s limited, as we have segregated the customer profile and product segments between the DB and AEON Credit.”

Given that AEON Credit’s existing products are already shariah-compliant and a majority of its customers are Muslim, “it just made sense” to go for the Islamic DB licence, Jayaram says.

On its business model, he says the DB will focus on onboarding customers in AEON’s existing ecosystem. “The AEON group in Malaysia has had a retail presence of close to 40 years and, today, we probably have a footfall of about five million customers [visiting the mall]. And, we have about 4.4 million customers already in our ecosystem, on top of more than 2,000 suppliers, tenants and business partners. It only makes sense for us to combine these strengths and provide a lifestyle kind of bank for everyday customers,” he says.

While the DB will cater for both retail and small and medium enterprise (SME) customers, the primary focus will be on the former, as this is where its core strength lies.

“It’s important for us to address our customers’ pain points and provide innovative solutions. This gives us a chance to elevate customers who are at different stages of life,” Jayaram says.

AEON Credit anticipates the DB being profitable by the fifth year, if not earlier.

“Based on regulatory requirement, DBs need to break even within the first five years. For us, we know that it can be shorter than that, simply because we already have that captive [customer] base,” says Jayaram.

He points out that high marketing costs incurred to acquire customers are a main reason that many DBs around the world have yet to turn a profit. “The cost of [customer] acquisition is extremely high. So, one advantage that AEON and some of the other DB consortiums in Malaysia have is their [existing customer] base. The marketing cost will be much lower than the DBs that are trying to acquire customers,” he says.

In a report last week, Kenanga Research said the AEON consortium will be in “a favourable position” to launch its DB well within the 24-month timeline set by Bank Negara.

“With MoneyLion as the technology partner, its fintech know-how and platform could be built and localised accordingly. AEON’s large data pool of consumer spending and repayment habits are also essential components to enable the DB to implement effective targeted marketing strategies,” the research house said in the May 17 report.

It notes that MoneyLion, which has been operating a DB in the US since 2013, has an estimated 2.3 million customers. It reported revenue of US$114 million in FY2021 and, like most DBs, has yet to break even.

KAF Investment Bank has yet to disclose its plans for its DB, but observers say it is also likely to have a strong focus on retail customers. Its consortium comprises Moneymatch (a remittance player), Carsome (an integrated car e-commerce platform) and Jirnexu (owner of the RinggitPlus website).

KAF itself is a well-diversified financial services group with interests in money market activities, investment banking, stockbroking, fund management, unit trust and trustee services.

For its part, Al Rajhi Malaysia aims to launch its DB this year, its CEO Arsalaan Ahmed tells The Edge. “Our upcoming DB will be complementary to our existing business at Al Rajhi Malaysia because the two banks will focus on different segments of customers. The DB will focus on retail and SME [customers] and our existing bank will focus on the affluent, elderly, less tech-savvy and middle market/large corporates, financial institutions and investment banking,” Arsalaan says.

Asked why Al Rajhi Malaysia chose not to emulate what most banks are doing, which is to offer digital products and services on their own without having to set up a separate DB, he says: “The optimal way to grow our business, with our existing licence, is to adopt a greenfield project approach rather than merely digitising existing products and services, [which is] a path that we did not take.

“The objective for Al Rajhi Malaysia is to set up a separate digital bank, to provide a complete end-to-end digital bank experience for our customers, where they can be empowered by our state-of-the-art technology to achieve more in their life. [We] will have the advantage of charting a new journey on a blank canvas.”

Arsalaan adds that this approach also allows it to tap innovations without having to worry about legacy issues. He says the group is working with global consultancy firm Oliver Wyman and other digital experts to design and build the bank. It envisions providing customers with “disruptive, mobile-first, highly scalable banking services” in the form of a cloud-based digital bank.

Bank Islam declined to comment for this story. In an interview with The Edge last October, however, its CEO Mohd Muazzam Mohamed voiced hope that its DB, which is targeting the underserved segment, would be launched this year.

Asked for an update in January, he said: “Through our carved-out division, CDX, the digital banking proposition has recently concluded testing. [Right] now, we are at the tail-end of the discussion with the regulators for launching the digital banking proposition minimum viable product (MVP), which is expected soon.”

He says the MVP will undergo a period of intensive early feedback gathering to validate product-market fit and to ensure that customers have a good experience with the app.

Meanwhile, Kuwait Finance House (Malaysia) Bhd, another standalone Islamic bank, “is currently reviewing and assessing its digital strategy implementation”, its CEO Mohd Hazran Abd Hadi tells The Edge, when asked how it plans to compete with the upcoming DBs. “The aim is to position the bank among the various digital banking providers focusing on technology innovation in banking services, which will be accessible across all market segments.”

Bank Negara gave out conventional DB licences to a consortium of Boost Holdings Sdn Bhd (a subsidiary of Axiata Group Bhd) and RHB Bank Bhd; a consortium led by GXS Bank Pte Ltd (comprising Grab Holdings Inc and Singapore Telecommunications Ltd) and Kuok Brothers Sdn Bhd; and a consortium led by Sea Ltd (owner of the Shopee e-commerce platform) and YTL Digital Capital Sdn Bhd.

In a report last week, CGS-CIMB Research said digital banks could focus on a RM10 billion untapped value pool — akin to revenue — in 2023. “Ernst & Young estimated a total value pool of RM91 billion for banks (retail and SME customers) in 2023. Within this, we think the DBs could aim to take a share in the segments amounting to a total value pool of about RM10 billion, comprising RM3 billion of new SME loan customers and RM7 billion for underbanked and unbanked retail customers,” it said.

CGS-CIMB continues to have an “outperform” call on the banking sector. “We stick to our view that the emergence of new DBs will not materially alter the competitive landscape of the banking industry in the next three to four years, especially given the fact that the new DB licence winners will be limited to only focusing on the unserved and underserved segment and given the RM3 billion cap on asset size per DB within three to five years after incorporation,” it says.

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