Touch ’n Go-ing for banks

A RECENT viral clip showing a key executive of a local lender stating that banks should pay more attention to Touch ‘n Go (TNG) e-wallets instead of digital banks, due to the sheer size of the former’s customer base, highlights a shift that has been unfolding in the banking system for some time.

At more than 24 million users, TNG’s customer base far surpasses that of most traditional lenders, let alone digital ones, suggesting that the banking pie could get smaller over time.

Interestingly, executives at TNG Digital Sdn Bhd, the company that operates the TNG e-wallet application, have long said it does not intend to become an actual bank.

That said, the financial services that it currently provides are almost all-encompassing – spanning insurance and wealth management, not to mention managing payments – effectively making it a digital bank of sorts.

Analysts say that distinction is important.

Traditional banks tend to operate on a vertically integrated model – originating deposits, giving out loans and managing risk internally – while outfits like TNG operate a more horizontally integrated model, aggregating demand and channelling it to financial institutions.

“In doing so, it is able to capture the most valuable part of the banking value chain, which is essentially the customer, and the ability to engage with him or her.

“So it’s not about who has the balance sheet now, but who holds the customer’s heart...or money,” says a banking analyst.

Some bankers are quick to say that for now, while TNG’s customer base is enviable, banks’ net interest margins (NIMs) and profitability have not been directly impacted, at least not significantly.

“NIMs are basically about lending and deposits, and so far, in this aspect, TNG is not there yet,” says one seasoned banker.

“But with CIMB Group Holdings Bhd as its single largest shareholder, TNG definitely has a huge advantage as it continues to leverage on the traditional bank’s strengths to cross-sell and maximise opportunities that can be monetised, expanding its offerings and services to its millions of customers,” the analyst says.

On TNG eventually starting to eat up banks’ NIMs, he points out that under normal circumstances, one of the cheapest sources of funding for banks is retail deposits, such as fixed deposits and current or savings accounts.

Not the end of banks

“In that sense, it is undeniable that TNG’s business scale and retail base may impose some sort of pressure on banks’ margins, considering that it has established a very strong payment ecosystem surrounding its e-wallet.

“Customers who used to park their money in bank accounts are now loading up their wallets with that same cash instead,” the analyst says.

That said, another analyst believes this does not mean traditional banks’ deposit business is becoming obsolete.

“I am inclined to believe that most of the deposits parked in TNG e-wallets are meant to be used for daily spending, as ultimately only money placed in bank accounts are protected by Perbadanan Insurans Deposit Malaysia.

“All in all, I believe the eventual headwinds will mainly arise from a possible heightened competition for deposits and yes, this will assert weight on banks’ NIMs.

“But this doesn’t mean the end for banks, as they can still tap alternative, cheaper funding sources by issuing bonds and so on. They can also leverage their balance sheets and immense regulatory expertise as well as risk management capabilities to ensure they remain competitive.”

Former investment banker Ian Yoong, who closely tracks developments in the banking sector, notes that TNG e-wallets reduce transaction friction and back-office costs by automating manual processes, thereby lowering the cost-to-income ratio and directly boosting returns on assets.

“But it has been complacent and punching below its weight given its first-mover advantage when it evolved into a digital e-wallet and online payment platform in 2017 with the onboarding of Ant International Technologies (HK) Holding Ltd as a 34.6% shareholder.”

He reckons the advent of digital banks two years ago must have been a “lightbulb moment” for it to increase its range of products and services to its large retail customer base.

“The next logical step would be for it to seek a digital banking licence. It is, after all, the most successful de facto digital bank not only in Malaysia but also in the Asean region.

“But controlling shareholder CIMB might not be keen to unleash this formidable digital banking competitor. In addition, there are Bank Negara Malaysia’s regulations to comply with.

“With the rumoured listing of TNG later this year, this would be a pleasant problem for CIMB shareholders,” he adds.

Looking ahead, observers say competitive dynamics between TNG and traditional banks are likely to intensify in the years to come.

As TNG accumulates more data on user behaviour, it will be better positioned to expand into higher-margin products such as lending.

If it starts to offer credit directly or via deeper partnerships, it could begin to capture not just fees, but also interest income – traditionally the forte of banks.

This would bring it into more direct competition with traditional banks and potentially have a more pronounced impact on lenders’ NIMs.