Editor’s note: This interview is part of a Q&A series with some of the contenders vying for a digital banking license in Malaysia.

When National Co-operative Movement of Malaysia (Angkatan Koperasi Kebangsaan Malaysia Bhd, Angkasa) and Malaysia-listed conglomerate Boustead Holdings Bhd announced they have teamed up with one of the world’s largest independent insurance brokerage companies to apply for a digital banking license in Malaysia, the consortium’s proposal to build an Islamic digital bank has caught attention.

Malaysia is one of the leading global hubs for Islamic finance. The country is also at the forefront in the development of Islamic banking, Islamic capital market, and takaful (Islamic insurance). It has a strong and comprehensive Islamic financial system with a robust business-driven regulatory regime and legal framework, according to the country’s central bank Bank Negara Malaysia.

The consortium’s positioning as an Islamic digital bank could help it to stand out and differentiate itself from the other contenders. The central bank said it has received 29 applications.

A diverse range of parties has submitted applications for the digital bank license, ranging from banks, industry conglomerates, technology firms, e-commerce operators, FinTech players, cooperatives, and state governments. Notable applicants that have officially announced their applications include Grab-Singtel venture, Axiata-RHB consortium, Paramount-Star Media Group, iFAST Corporation Ltd, AirAsia’s BigPay-MIDF-Ikhlas Capital consortium, and AEON Credit Service (M) Bhd, among others.

Angkasa, Boustead and the insurance brokerage firm’s entities have collaborated under MyAngkasa Digital Services (MDS), a subsidiary of Angkasa. The consortium has also put together a host of strategic partners, including German digital banking provider Mambu, cloud solution specialist US-based Amazon Web Services, and licensed eMoney player MRuncit Commerce (MCash eWallet), along with other ecosystem partners. The consortium also claimed to have received full backing from the Ministry of Entrepreneur Development and Cooperatives (MEDAC) and Malaysia Co-operative Societies Commission.

“Angkasa has provided financial services for more than 40 years based upon a shariah-compliant, Islamic financial model. We want to preserve our ethical banking values and are delighted that our business partners share the same principles. We believed that the evaluation process would strongly be based on the strength and merit of the consortium partners, creative product innovation, technology engagement, financial stability, and the market that we serve,” MyAngkasa Digital Services Co-Founder and Executive Director Hudhaifa Ahmad told TechNode Global in an interview.

“Proposing for Islamic digital bank license might slightly give an advantage, but it will still be subject to the rigorous selection process that complies with Bank Negara requirements,” he said.

Another member of the consortium Boustead is a public listed conglomerate majority-owned by military retirement fund Lembaga Tabung Amanah Tentera (LTAT). The group is involved in various businesses including plantations, heavy industries, property, and pharmaceuticals, among others. The conglomerate, which serves as the investment arm of LTAT, directly holds 20.81 percent and indirectly holds 0.03 percent in Affin Bank Bhd, a listed banking group in Malaysia.

‘The independent insurance broker’ has also a solid footing in Malaysia as it has been providing comprehensive solutions since 1978 focusing on specialist insurance, reinsurance, takaful, and employee benefit solutions, MDS said then.

In the interview, Hudhaifa shared the opportunities the consortium sees in building a digital bank in Malaysia and what are the competitive advantages it has against other contenders vying for up to five digital banking licenses which are expected to be issued in the first quarter of 2022.

He shared his views on how digital banks in Malaysia will have an impact on the banking industry in the short term and long term. He also shared his views on the profitability path for digital banks, citing examples from other countries.

Below is an edited excerpt of the interview:

What are the opportunities MyAngkasa Digital Services (MDS) sees in digital banking in Malaysia?

MyAngkasa Digital Services (MDS) is the digital bank consortium entity led by Angkasa, Boustead, and a world-renowned independent insurance broker. MDS believed that digital bank is the best medium to serve Malaysians especially B40 underserved and unserved as well as within our very own cooperatives population.

This segment has long been deprived of getting the desired banking products as they were deemed unbankable due to factors ranging from high costs of service, out-of-service coverage, mismatched products and services, to credit worthiness-related issues.

With the evolution of technology, especially in mobile wallets, AI, data analytics, eKYC, blockchain, cloud services, robust digital security, compliance framework, and many others, the transformation of the banking industry is set to happen and digital banking that serves customers anytime, anywhere will be the future.

Digital bank is expected to reduce the standard cost of operations since it will not require brick-and-mortar establishments, lesser manpower, and limitless access to multiple product platforms which will entice customers and thus open up opportunity to extend the savings to its customers via enhanced customer experience to serve the targeted population towards the path of financial inclusivity to the entire B40s.

With more than half of our population falling into this category and the accelerated adoption of e-commerce by Malaysians during the global pandemic, MDS believes this would be an ideal business model that fits perfectly with our business philosophy.

What competitive advantage does MDS’s consortium have against other competitors? How will MDS plan to position the digital bank/enhance its current products should it be granted the digital bank license?

Angkasa is the apex for more than 10,000 cooperative movements in Malaysia, with nearly 7 million captive members. We have provided financial aid to the underserved and unserved masses for more than 40 years. We have the roadmap and knowledge required to serve the market well because we understand them better.

Our collaboration with Boustead will further strengthen the economic viability of the consortium as Boustead’s customers partly represent the same economic bracket. This will be the basis of how we will provide our banking services to the deserving Malaysian population.

Our business philosophy is to provide our customers with the best product available and enjoy a seamless experience when engaging with us. We are here for the long haul and providing customer satisfaction is the DNA that we nurtured as part of our work ethics. We have carefully selected our technology partners and devised a comprehensive environment that has future scalability and sustainability.

We will use our cutting-edge technology and deep experience to provide innovative products, tailor-made to give them personalized services that will elevate the joy of doing banking ethically, as and when they need it.

We want to give them the authority and power of managing their own financial needs because every individual has a unique and different necessity. With our partner’s extensive network and proven technology that we engaged in, our customers will be primed for the best banking experience they have ever wished.

We noticed the consortium’s proposal to build an Islamic digital bank. Does this give the consortium higher chances of getting the license?

Angkasa has provided financial services for more than 40 years based upon a shariah-compliant, Islamic financial model. We want to preserve our ethical banking values and are delighted that our business partners share the same principles. We believed that the evaluation process would strongly be based on the strength and merit of the consortium partners, creative product innovation, technology engagement, financial stability, and the market that we serve. Proposing for Islamic digital bank license might slightly give an advantage, but it will still be subject to the rigorous selection process that complies with Bank Negara requirements.

Bank Negara focuses on ‘underserved and unserved’ segments. How substantial are these segments? What’s MDS’s strategy or plans to serve these segments? What kind of technology/innovation does the consortium plan to introduce to serve these segments?

The underserved and unserved segments are very substantial as they represent a very large percentage of our population. These are the mass population with a banking account and limited access to innovative and customized banking products. They were deemed ‘unbankable’ and costly to maintain.

We do look forward to using our understanding of our captive customer behaviors and providing solutions that suited their needs and expectations. Our immediate focus will be serving our captive market of 7 million members and at least 10,000 cooperatives, most of which are in the unserved and underserved segments. We plan to leverage on our strengths in brand loyalty, wide distribution channel footprints of cooperative networks, and existing membership base to roll out a unique model of ‘sachet banking’ comprising innovative, simple daily banking products that suit our target segments such as dual savings, bite-size financing and a slew of digital financial management tools to support our customers in managing financial health and literacy awareness.

Given the wide range of applicants/consortiums, what criteria would Bank Negara emphasize or prioritize when granting a digital banking license?

Bank Negara has identified five key criteria for applicants to build their bidding case:

Firstly, must be in the best interest of Malaysia. The digital bank is committed to driving financial inclusion including ensuring quality access and responsible usage of financial services. This criteria is certainly unique for Malaysia as unlike European-based digital banks–also known as ‘Challenger Banks’ competing in the same space as incumbent banks–the central bank has put a clear emphasis on ensuring the focus is on unserved and underserved markets, driving towards financial inclusivity.

Secondly, the digital bank offers meaningful access through responsible usage of innovative financial solutions, specifically towards serving unserved and underserved segments.

Thirdly, demonstrate viability and sound operations with an asset threshold of not more than 3 billion MYR ($722.41 million) in the first 3 to 5 years (Foundational Phase).

Fourthly, comply with Financial Services Act 2013 (FSA) and Islamic Financial Services Act 2013 (IFSA) regulations, with simplified regulatory requirements in the Foundational Phase.

Last but not least, safeguard the integrity and stability of the financial sector through minimum capital funds of 100 million MYR ($24.08 million) in the Foundational Phase and 300 million MYR ($72.23 million) thereafter. We also believed that Bank Negara would extensively evaluate the strength and merit of the consortium partners and the adoption of technology that they engaged with, as it is crucial that those granted digital banking licenses are able to deliver the financial inclusion objectives.

How will digital banks impact the banking industry in the short term and long term?

There are differing views between incumbent banks on whether digital banks impose strategic threats to their existing operation. To that point, one has to remember that the introduction of digital banks is just the next chapter of banking evolution.

If we look back at the history of banking in the early Renaissance period, it was based on the barter system. Then it expanded to many parts of the world and continues to evolve into the current modern banking technology to meet the complex demands of various needs of customers.

With the introduction of the Internet in the late 90s, banks expanded their coverage from traditional brick-and-mortar branches to internet banking. Customers found themselves able to do basic banking services such as account inquiry, payments, and remittance via personal computer at the comfort of their own homes and no longer need to walk into a physical branch.

In the 2000s, mobile technology took a great leap with the introduction of smartphones powered by various mobile operating systems such as Android, iOS, Symbian, and Microsoft.

Between 2018 to 2020, over 383 million smartphones were sold every three months. This catapult major development of banking technology moving further towards mobile banking, e-wallet, e-remittance, eKYC, QR Pay, NFC Pay, and many more.

Now, with much more advanced technology focusing on full-fledged banking services being offered entirely over the internet. The shift from traditional to digital banking has been gradual and is constituted by differing degrees of banking service digitization.

Digital banking involves high levels of process automation and straight-thru processing (STP), web-based services and may include APIs enabling cross-institutional service composition to deliver banking products and transactional services. I think this certainly will transform Malaysia’s BFSI space in line with regional development as well.

Based on your estimation, any timeline on how long the digital bank can break even or be profitable? What are the risks and challenges of running a digital bank? How will MDS manage the risks and challenges?

Yes, most digibanks are struggling to hit breakeven. Most recent include Australian Xinja which decided to exit the business entirely after three years of operation. However, we have also seen several other digibanks especially from China, South Korea, and Japan who have managed to be in the black. In the Asia Pacific, 13 most profitable digibanks upped their earning by 49 percent in 2019.

Out of the 13, six of them with less than five years of operation took between 1.5 years to 2.5 years to be profitable, while remaining with more than six years of operation took between 2.3 years to 4.8 years to break even.

Two common factors for early profitability are that the digibanks either grew out of messaging platforms (e.g. WeChat/Mobile QQ for WeBank, KakaoTalk for Kakaobank, etc.) or are based in large consumer markets (e.g. Rakuten and PayTM). Hence, in my opinion, this is the key differentiator.

As such, for Malaysia’s digibank, in my opinion, having an existing captive population segment is crucial as it will tremendously affect how much you will end up spending on the cost of user acquisition, which in turn will affect your profitability timeline.

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