Small banks in Malaysia, Singapore under threat as neobanks emerge

Small banks could lose market share as digital newcomers target underserved segments.

Small Malaysian banks are standing on shaky ground as Bank Negara Malaysia prepares to grant up to five digital banking licences this year. The entrance of digital players poses a threat to their market share given their modest franchises, according to a Fitch Ratings report, and digital banks may exploit their size and innovation to concentrate on underserved markets.

The sector has been struggling for the past few years, S&P Global Ratings analyst Rujun Duan told Asian Banking and Finance. Malaysia posted slow GDP growth in Q4 2019 that was forestalled by overnight policy rate (OPR) cuts in January and March, and the arrival of digital banks will only add more stress.

Big fintech players such as ride-hailing company Grab and gaming firm Razer have all expressed interest in applying for a digital licence. Even traditional banks joined in on the fray: local banking giants with large footholds in the market such as Maybank, CIMB Bank, and Hong Leong are also reportedly eyeing a license.

What makes small banks particularly at risk is their lack of market dominance to effectively defend themselves, noted Duan.

“What’s more, their limited financial resources also mean that they will likely struggle to shoulder the ongoing heavy IT investments required to stay ahead of the competition,” she added.

In addition, digital banks can push lending rates down and use their lack of physical presence to offer higher interest rates and attract deposits, according to S&P analyst Ivan Tan.

Singapore’s small foreign-owned lenders are also under the same threat even if they are already in the process of digitisation, a Moody’s report has revealed. This is owing to their insignificant operations in the Lion City which render them unlikely to benefit from the access to new digital investments. On the other hand, the country’s small domestic banks, including Malayan Banking Berhad and Industrial & Commercial Banking of China, have been taking advantage of a strong retail and SME customer base to cement their competitiveness, the report added.

Singapore is preparing for five digital banking licences to be up for grabs in 2020, with 21 applications submitted last year.

But there seems to be quite a silver lining as major domestic ASEAN banks are well-positioned to flourish in the fintech era. “They have two necessary advantages: the required resources to invest in technology and acquire start-ups; and a rich pool of customer data to harness the technology into a commercially viable product or app,” noted Tan.

Such major banks include Singapore’s big three: DBS, UOB, and OCBC, Moody’s said. For example, DBS has taken advantage of the country’s high Internet and smartphone penetration with its mobile wallet DBS PayLah!. UOB has followed suit with its all-in-one banking app Mighty Pay, whilst OCBC has two separate mobile banking and mobile payment apps.

Malaysia’s major banks have also followed suit, including OCBC, Hong Leong, CIMB, and RHB which all have mobile banking apps tailored for their clients’ needs.

On the other hand, to weather incoming competition, Fitch sees smaller banks coordinating with digital lenders with the former providing the balance sheet, capital and risk management and the latter taking care of the tech aspect. This is a strategy that has been widely accepted in Malaysia and elsewhere in the region, Duan said, but there is a potential risk of smaller banks sacrificing customer relationships.

“Big banks usually have better bargaining power to strike a deal to protect their own interests with such startups. The risk of giving up client ownership cannot be overestimated and may lead to marginalisation of those small lenders in the market eventually,” Duan said.

Duan cited the partnerships forged between Chinese rural commercial banks and tech giants AliPay and Tencent wherein the former would refer their clients to the latter for wealth management products and value-added services.

“Those small lenders become pure funding channels for fintech companies, and the banks’ deposit customers are probably viewing their banking relationship more embedded in Alipay or Tencent’s own product ecosystem, rather than with that small bank,” Duan wrote.

However, digital banks don’t seem to pose a long-term threat to domestic banks. As noted by Fitch, whilst Malaysia’s proposed end-point capital funds requirement of $73m (MYR300m) is lower compared to Singapore’s, the $490m (MYR2b) asset size cap per digital bank should contain the risk for now. Bank Negara’s stipulated three-to-five year foundational phase should also limit the growth of new banks, Duan added.

According to Tan, ASEAN regulators have taken a “measured approach” to onboarding digital banks. In Singapore for example, digital wholesale banking licence grantees cannot take individual deposits except for fixed deposits of at least $179,600 (S$250,000), whilst full digital banking licences will be issued in stages, and deposits will be capped at $53,880 (S$75,000) per depositor and $35.9m (S$50m) in aggregate.

Other regulators are expected to implement similar restrictions, both on capital and liquidity rules, on full digital banks to ensure an equal playing turf, Tan concluded.

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