Assessment for digital banks in line with the law, no plans to issue more licences - BNM

Question 1: Why is BNM opening the doors to digital banks? Given that incumbent banks have also gone into digitalisation, what more can these banks do?

The entry of digital banks is part of a broader vision we have for the financial sector. In our recently published Financial Sector Blueprint, a key theme that we emphasised was "finance for all".

For Bank Negara, this is about making sure that customers have a wide array of choices in financial services to meet their specific circumstances and needs. In this way, the entry of digital banks is expected to spur the introduction of innovative business models and new products and services.

With a more dynamic banking sector, the needs of all segments of the economy will in turn be better served - not just today, but into the future. Importantly, the new digital banks are expected to address the unmet financial needs of underserved and unserved customer segments.

In particular, we seek to unlock the potential of innovative technologies to improve access, reduce costs, and increase the utility and quality of financial services to groups like small businesses, gig economy workers, and youth or students.

Through the wider use of technology and digital first models, the financial system will be better placed to serve our communities. With greater competition from digital banks, we also expect incumbent banks to accelerate their digital ambitions.

In turn, customers can expect better products that cater to their needs, enabled by data analytics. For example, for customers with limited credit histories, credit scoring based on alternative data might be able to help close financing gaps.

Better use of technology also has the potential to offer personalised financial management tools to encourage responsible financial behaviours and help consumers take control of their finances, such as to better keep tabs of spending or to encourage micro savings. So, it is taking a much more holistic view of financial services - to increase opportunities for all to participate in the economy and improve their well-being.

Q2: Please describe the process and criteria for licensing the digital banks.

The criteria that Bank Negara used in assessing these applications are not arbitrary. They are laid out in the Financial Services Act 2013 and Islamic Financial Services Act 2013.

In short, the primary consideration in the assessment is the ability of these digital banks to operate in a safe and sound manner and provide a strong value proposition to drive financial inclusion so as to benefit Malaysians.

As banks take deposits from the public, the protection of deposits is paramount in our consideration of applications.

As we announced five licenses to be issued, the process was a competitive one. All 29 applications that we received were assessed on their individual merits, with each application examined by several teams from multiple angles.

Each application was also then assessed against other applications to determine their relative strengths, and identify the five applicants which best met the objectives and requirements of the digital banking framework.

If we look at the profile of the five successful applicants, there are a number of things that set them apart from the rest.

They submitted strong and credible value propositions that were underpinned by a deep understanding of their target market segments among the unserved and underserved communities.

The products and services that they will offer reflect this by addressing specific market gaps within the underserved and unserved segments - many of which include Bumiputera communities - such as small businesses and gig economy workers.

They were also able to demonstrate how they will achieve this through the use of innovative applications of technology and building on their existing business track record.

Successful applicants also demonstrated how they would manage their operations effectively. This includes the ability to comply with financial, governance and risk management standards that serve to protect depositors on an ongoing basis.

In addition, they also demonstrated strong technology risk management capabilities that are critical for a digital bank's operations.

Also, I'm not sure if many are aware, but if you were to look at the experience of digital banks worldwide, you will find that many of them are rarely profitable in their early years of operation. Banking is a business for the long run, and it is not an easy business to be in.

During the assessment process, we therefore undertook rigorous analysis of the financial and operational capacity of applicants to establish whether they have the means to build and grow a digital bank, based on sound and credible business, technology and exit plans (if they still prove to be unsuccessful).

We also looked beyond the initial three to five years of a digital bank's operations - what we call the "foundational phase" - to assess whether the digital bank is likely to be able to meet the higher minimal capital requirement of RM300 million that will apply on par with other licensed banks.

As digital banks will be accepting deposits from the public, and the public trust and expect that their deposits are safe and protected, we undertook these assessments with great care and diligence.

Finally, I also want to add that it was very important for us to protect the integrity of the assessment process, ensuring that it was done objectively and free of bias. Various checks and balances were put in place.

For example, everyone involved in the assessment process had to declare if they had any interest in any of the applicants, such as whether they have any shareholding in any of the applicants, or any friends or family member working there.

Assessments were subject to multiple levels of review and challenge, involving our supervisory, technology and specialist risk teams. The assessments were then subjected to further levels of management reviews within the Bank.

All told, this was an arduous process. But awarding new banking licenses is something that we don't do very often, so it was extremely important for us to do this right.

Q3: There have been concerns raised by certain parties that Bumiputera company participation is somehow lacking in the recently announced winners of the digital bank licences. Please comment.

Two consortia, namely Boost-RHB and KAF Investment Bank, are majority-owned by Bumiputera. Meanwhile, the other successful consortia also have Bumiputera shareholding.

More generally, Bumiputera shareholding in the financial system is also significant, at 43.5 per cent, higher than that seen in other economic sectors.

The financial sector also provides employment for many Bumiputera, with many holding leadership positions in our financial institutions: 54 per cent of chief executive officers (CEOs) and 50 per cent of board members are Bumiputera.

Having said that, it is more important for us to look at this issue beyond the lens of shareholding, to the impact that we expect and want digital banks to have - and that is to effectively serve the unserved and underserved segments, many of which are from the Bumiputera community.

At the end of the day, strong and successful digital banks will benefit all Malaysians.

Q4: Why is BNM only offering five licences and will more licenses be issued in the future?

At this point, we have no plans to issue any more licenses than the five announced.

Our immediate focus is to ensure that digital banks can begin operations without delay, so that they start delivering on their promised value propositions to serve the needs of the unserved and undeserved segments.

In deciding to award five licenses, BNM considered many factors, such as the size of our banking system relative to the economy. This isn't a case of "the more the merrier!".

It is important for us to also recall back the situation in the 1990s, where we had a large number of domestic banks, but many of which didn't have the financial strength, size and scale to operate viably or compete effectively.

Clearly, Malaysians were not better served by the higher number of banks. We should also not forget about the Asian financial crisis where our economy suffered its deepest ever recession because of some of these weak banks failing - with the cost borne by taxpayers.