The building blocks of a profitable digital banking model

• Digital finance adoption to spur emerging economies GDP by 6% by 2025
• Digital banks next great frontier to unlock new innovations for fintech 

With around 250 digital banks across the globe, did you know that 20% of them are within the Asia Pacific region. This is a positive number as it reflects the fact that this sector is expected to forge the future of fintech and reimagine the possibilities for financial services across the board for the entire sector.

Malaysia is not excluded from this global phenomenon as the central bank, Bank Negara Malaysia (BNM), announced last April five digital bank licenses to some of the leading fintech, technology, and finance industry players, such as the Boost-RHB Consortium, led by the regional full-spectrum fintech arm of Axiata, Boost.

One key observation on the strategy taken by the Malaysian market is its focus of betting on players with a profitable digital banking model. This can be seen from BNM’s assessment criteria. It emphasised the character and integrity of applicants, nature and sufficiency of financial resources, soundness and feasibility of business and technology plans, as well as the ability to meaningfully address financial inclusion gaps.

This is not surprising as digital banks are and will be operating under the mandate of serving the financially underserved, which are regarded as risky thin-file customers with insufficient credit history. Hence, one of the primary challenges raised when it comes to serving them is the question of profitability.

Therefore, what are the building blocks of a profitable digital banking model? Using one of the prominent winners of the digital bank license in Malaysia, Boost-RHB Consortium, let’s dissect why it is regarded by most as a frontrunner in the highly anticipated digital bank sector. 

1. Proven track record and an engaged audience

For Boost over the past few years, it has been laying the foundation and building the essential blocks for a digital bank, such as through its AI-based lending business that is already operating at scale sustainably. As of end 2022, it accumulated an excellent track record of disbursing over RM2.5 billion worth of loans in Malaysia and Indonesia since inception, while also recording an increase of over 70% year-on-year in loans disbursed across the two countries in 2022.

Not only that, Boost also recorded about 90% repeat rate on short-term loans as of 2022. Despite around 40% of its customers having never received credit from other financial service providers before, Boost maintained a healthy single-digit non-performing-loan (NPL) rate. Hence, for Boost, this venture is not greenfield, but more of a brownfield venture.

2. Established ecosystem and infrastructure

Most successful digital banks will leverage their respective ecosystems. In the case of Boost, it is no different, as those that successfully execute this model will have a relatively low customer acquisition cost.

Having initially started out in 2017 as an eWallet pioneer in Malaysia, today Boost has gone beyond payments, evolving into an unstoppable regional full spectrum fintech arm of Axiata.

Now equipped with a holistic fintech ecosystem spanning its AI-based lending business that’s already operating at scale, all-in-one fintech app with over 10 million users in Malaysia, merchant solutions platform with over half a million merchant touchpoints in Malaysia and Indonesia, and cross-border payment platform in seven countries with over 100 global digital partners, Boost aims to pave the way for greater financial inclusion across Southeast Asia.

3. Shorter tenor and unit-economics-positive products

Although recent case studies showcased volatilities due to rising rates, it will likely not have material impact on the digital banks in their nascent stages.

Upcoming digital banks like Boost, which already specializes in offering simplified products with shorter tenors (length of time remaining before a financial contract expires) would not be susceptible to very large asset-liability mismatches on its balance sheet.

Digital banks like Boost should be able to ride the interest rate cycle without too much impact on its net interest margins (NIMs). However, rising interest rates and economic slowdowns may impact vulnerable sectors, such as MSMEs and the B40 community, which are the target groups that digital banks are expected to cater to.

Hence, a heightened focus on asset quality will have to be maintained.

What the future holds

As digital banks further embark on this journey, all eyes are on the sector as research indicates that widespread adoption and use of digital finance could increase the GDP of all emerging economies by 6%, or a total of US$3.7 trillion, by 2025.

With digital banks being the next great frontier that will unlock new innovations for the fintech industry and democratise access to digital financial services, the race will soon begin with the digital bank that has the most profitable model expected to lead the charge to close the gap on financial inclusion.