Digital banking is transforming the traditional financial landscape. There are now 249 digital banking players around the world, including dynamic digital start-ups and incumbent operators in transition.

Malaysia offers fertile ground for this digital transformation, with the recent wave of activity around digital banking license applications providing a positive framework for expansion. This is supported by results which reveal that over 30% of consumers and businesses in Malaysia are ready to embrace digital banking – a figure that will likely increase as exposure to these platforms increases.

The digital transformation of banking is not a new story. Internet banking has triggered a similar transition. What sets this shift apart is its remarkable acceleration, driven by the expectations of customers accustomed to the services of technological brands such as Grab, Shopee or Lazada.

Expectations of personalized and personalized service, along with the rapid expansion of digital connectivity, provide a fascinating growth landscape in which traditional banking operators face competition from new digital challengers.

This market is at the center of a new report from the Boston Consulting Group (BCG) – Emerging challengers and incumbents are fighting for the Asia-Pacific digital banking opportunity.

Competition and growth in Asia-Pacific

Asia-Pacific is home to 20% of the world’s digital challenger banks (DCBs). They are largely dominated by consortium-led players, led by tech giants and non-financial institutions like WeBank, Rakuten Bank and BigPay.

The competition for market leadership is wide open – no DCB has yet captured more than 2% market share in its operating market. Asia-Pacific is home to more than two-thirds of successful players, with just 5% of all DCBs reaching breakeven globally.

What unites these players is their ability to leverage a substantial existing ecosystem, benefiting from strong brand recognition, data-rich knowledge and an established customer base. Additionally, they leverage and utilize existing assets with strong brand recognition, an existing user ecosystem, and experience in adjacent areas such as electronic payments; build and grow a bank through a customer-centric approach with a smooth user experience supported by scalable technology and agile governance; and sustain success through an agile, data-driven approach with the right product launch strategy.

South Korea-based Kakao Bank is a great success story. Since its launch in 2017, the bank has gained more than 13 million customers. It achieved a 26% customer penetration rate with a much lower acquisition cost per customer than traditional banks, leveraging the important ecosystem of parent company Kakao Corp.

Another key example of using an “open banking” approach through an integrated digital ecosystem is WeBank, based in China. This model allows WeBank to target underbanked and unbanked segments and small and medium enterprises (SMEs), generating profits through loans. By leveraging advanced data analytics and modeling capabilities, WeBank achieved a non-performing loan (NPL) ratio of less than half of the industry average at 1.2%.

There are currently over 15 bidders for Malaysia’s digital banking licenses, either by stating their intention to bid for one or by having discussed it in the media. These players come from diverse backgrounds, including players in banking and financial technology (fintech) such as RHB and Axiata, and CIMB and Touch ‘n Go; technology companies with local partners (Sea Ltd and YTL, Razer and Berjaya, based in Singapore), as well as other industries. This diverse group of players paints a picture of the remarkable potential value that digital banking is seen as an unlockable in Malaysia.

Success in Malaysia and South East Asia

Southeast Asia offers promising ground for the growth of digital banking services, with large and underserved populations, reliable economic growth and high digital penetration.

With our digitally savvy population and the growing use of digital platforms, Malaysia is one of the most attractive markets in Southeast Asia. Although it has one of the most developed banking sectors in the region – with a high banking penetration rate of 85% – there is still significant room for growth thanks to digital banking. This potential is particularly important in underserved segments and among SMEs.

Malaysia’s payments market is liquidity resilient, but the growing shift towards e-wallets and other digital payment platforms shows high growth potential. With debit cards accounting for 81% of total cards in circulation in 2019, there is an obvious appetite for more formal bank payment methods that could be complemented by customer-centric digital banking models.

There are signs that banks are responding to this change, stepping up efforts to improve their digital and technological capabilities. Despite these measures, there does not seem to be a dominant winner in the market which nevertheless benefits from the population engaged in digital. Likewise, as rival players clash, no fintech company has yet reached true scale beyond the payments space.

A strategic path to follow

Incumbent banks should weigh the challenges of transitioning legacy IT infrastructure and organizational processes against the significant hurdles of having a winning solution in place to compete with new entrants.

In general, the report identifies three potential avenues for operators: (a) to digitize themselves; (b) launch a separate DCB entity; or (c) establish a secondary mark. Often, banks collaborate with established fintech players to support this journey.

DCBs led by non-financial institutions (such as big tech players or fintech companies) need to think about the significant complexity of the banking industry and how best to leverage their existing skills and experience to be successful in the industry. this space.

The report highlights five potential models for non-banks to become either (a) lending market platforms; (b) the players in online P2P financing; (c) self-funded online lenders; (d) ecosystem platforms that capture the value of life events; or (e) real DCBs.

Understanding the local banking landscape is also a vital consideration. The report identifies key areas of opportunity that digital banking pioneers can target in Malaysia.

Solving problems in the payments landscape with lower fees and better service quality is a possible growth path. Improving access to personal loans could also offer a sustainable path to market share, supported by more favorable conditions and smoother and shorter application processes.

Serving the key SME segment is another area of ​​opportunity to consider. Improving access to a wider range of business types, reducing tariffs and service charges, and providing customizable products that meet unique business needs could be a winning proposition.

Operators need to ask a few key questions to inform their way forward. Can we afford to become a DCB? Why would we be successful? How to accelerate success? What are my alternative strategies if not a DCB?

While the growth potential of the market remains significant, operators still face a difficult landscape in a three-part journey through the application for partnership agreements, the development of business plans and regulatory approval; build an effective digital banking structure with agile leadership and appropriate talent; and launch with defined channel strategies, marketing initiatives and brand positioning.

There is no simple path to success, but Malaysia offers an attractive potential market for digital banking players who are leading the way.


Jungkiu Choi is Managing Director and Partner of the Boston Consulting Group. Ching-Fong Ong is Managing Director and Senior Partner at Boston Consulting Group, as well as Southeast Asia Leader for DigitalBCG.