Digital Banks vs Traditional Banks in Malaysia: Key Differences and What You Need to Know

With Bank Negara Malaysia (BNM) granting licenses to five digital banks, advertisements have become ubiquitous, from LRT/MRT screens to cars wrapped with GXBank’s details. The rapid rise of internet connectivity has ushered in a new era of money management through digital banks that operate exclusively online.

Since the Covid-19 pandemic, more Malaysians have embraced cashless transactions. However, until recently, banking still required physical visits to local branches. Digital banks operate in a fundamentally different way from traditional banks, providing distinct advantages and challenges. A survey by Deloitte reveals that 78% of consumers prefer digital channels for banking transactions, underscoring the growing demand for seamless digital experiences.

Let’s delve into these differences and examine how digital banks are benefiting Malaysia.

Who are the entities behind Malaysia’s five new digital banks?

What Distinguishes Digital Banks from Traditional Banks?

Accessibility

Digital banks offer unparalleled accessibility, allowing customers to open accounts, transfer funds, apply for loans, and manage their finances entirely online without the need to visit a physical branch. This convenience is especially advantageous for individuals with busy schedules.

In contrast, while traditional banks provide online banking services, many essential functions still require in-person visits. For instance, a 2019 survey by the Federal Deposit Insurance Corporation (FDIC) found that 83% of banked households engaged with a teller or other bank employee in person at a branch.

Figure 1: Bank Branch Visits, Among Banked Households, by Year

Furthermore, a 2022 survey indicated that 46% of individuals conducted their banking in person at a branch, an increase from 28% in 2021.

These statistics highlight the ongoing reliance on physical branches for various banking services, even as digital banking continues to grow.

Customer Interaction

Digital banks primarily engage with customers through online channels such as chatbots, mobile applications, and email, facilitating swift and efficient communication without the need for in-person interactions. This approach caters to the growing demand for digital services, with 91% of consumers considering digital banking capabilities crucial when choosing a bank.

In contrast, traditional banks offer face-to-face customer service at their branches. This personal interaction is particularly beneficial for complex financial matters, providing customers with tailored assistance. However, it also necessitates visiting a physical branch for support, which may be less convenient for some. Notably, 82% of customers still value access to a local branch, indicating the importance of in-person services alongside digital options.

Despite the rise of digital banking, traditional banks continue to maintain a significant presence. As of 2023, large traditional banks account for approximately 42% of consumer relationships, highlighting their enduring role in the financial sector. 

Technology utilised 

The fintech industry has seen remarkable growth in recent years, with AI playing a crucial role in fueling this expansion. The global fintech market is now valued at $340.1 billion. Digital banks are a part of this trend and use the latest fintech technologies, including artificial intelligence (AI) and data analytics, to offer personalized services and improve security. They work well with mobile apps and other digital platforms, making the user experience smooth and efficient.

On the other hand, traditional banks are also using new technologies, but they often depend on older systems. These systems can be less efficient and harder to connect with modern digital platforms. Because of this, traditional banks may provide slower service and be less flexible than digital banks.

For instance, a 2023 report highlighted that JPMorgan Chase leads the banking sector in AI adoption, employing a significant portion of the industry’s AI talent pool.

Product and Service Offerings

Digital banks typically offer a streamlined range of products focused on core banking services, such as savings accounts, loans, and payment solutions. They often emphasize user-friendly features and competitive interest rates. A 2021 survey revealed that 86% of digital banks offer peer-to-peer (P2P) payment services, 75% provide budgeting tools, and 55% offer investment services.

In contrast, traditional banks provide a broader array of financial products, including savings and checking accounts, loans, credit cards, investment services, and insurance. This extensive product range allows them to cater to diverse financial needs, positioning them as a one-stop shop for many customers. According to a 2023 report, traditional banks in the United States are projected to generate a net interest income of $385 billion in 2025, with commercial banking services expected to dominate this figure.

Compliance 

Digital banks and traditional banks differ in their compliance with BNM regulations primarily due to their operational models and target markets. Digital banks, regulated under BNM’s Digital Banking Framework, are given flexibility during their foundational phase with lower capital requirements (RM100 million initially) and asset size caps (RM3 billion). This allows them to focus on financial inclusion and underserved segments, relying heavily on technology and alternative credit assessments.

In contrast, traditional banks, governed by the Financial Services Act 2013, adhere to stricter capital requirements (RM2 billion minimum) and broader prudential regulations aligned with Basel III. They focus on systemic stability and serve a wider market with comprehensive financial products. Both must comply with BNM’s risk management and cybersecurity standards, but digital banks face stricter monitoring to ensure alignment with inclusion goals.

Summery

The Bottom Line

The rise of digital banks in Malaysia marks a shift toward more accessible and convenient banking through online platforms. By leveraging advanced technologies like AI and data analytics, digital banks provide personalised services and improve security, catering to customers with busy lifestyles or limited access to traditional banking.

While traditional banks continue to offer a wider range of services and personal interactions, their reliance on legacy systems may limit their flexibility. As digital and traditional banks evolve, both will play vital roles, meeting diverse customer needs and shaping the future of banking in Malaysia.

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