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Digital Banking Malaysia: What Is It & Why Should You Care?

Updated 24 May 2022 – By Henry Choo


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Digital banking has been talked about in Malaysia since 2019 and it’s becoming a reality! Local big names and banks have already thrown in their bids for the licence, and 66% of Malaysians already want to be part of the digital banking wave. 

And recently, Bank Negara Malaysia (BNM) announced the 5 successful applicants for the digital bank licences as approved by the Minister of Finance Malaysia.

A. The following applicants are to be licensed under the Financial Services Act 2013 (FSA):

  • a consortium of Boost Holdings Sdn. Bhd. and RHB Bank Berhad;
  • a consortium led by GXS Bank Pte. Ltd. and Kuok Brothers Sdn. Bhd; and
  • a consortium led by Sea Limited and YTL Digital Capital Sdn Bhd.

B. The following applicants are to be licensed under the Islamic Financial Services Act 2013 (IFSA):

  • a consortium of AEON Financial Service Co., Ltd., AEON Credit Service (M) Berhad and MoneyLion Inc.; and
  • a consortium led by KAF Investment Bank Sdn. Bhd.

Note: 3 out of the 5 consortiums are majority-owned by Malaysians namely Boost Holdings and RHB Bank Berhad, Sea Limited and YTL Digital Capital Sdn. Bhd. and KAF Investment Bank Sdn. Bhd.

Now, you’re probably a little... hesitant in jumping in, but if it’s going to bring something different to how you bank, let’s get you up to speed, you should keep an eye on this.  


Okay, what exactly is Digital Banking, and how is it different from Traditional Banking?

Digital banks (aka neo-banks) is basically a term for all forms of financial transactions taking place with the use of technology. The objective here is to digitise all operations of a physical bank and meet customers’ needs.

Wait, doesn’t that mean that it’s the same as online banking? 


The answer is actually macam yes, tapi bukan. There’s a fine line between online banking and digital banking, which can sometimes cause confusion between the two. 

Online banking deals with your daily banking operations. It’s just an extension feature of traditional banking. For certain matters, you still have to go to the physical bank to get them sorted. 

Meanwhile, digital banking is the digitisation of every operation - from front-end to the back end.  It can do everything a bank does, except everything is in a virtual environment - the access, process and experience are simplified.


Source: www.fintalent.com

Unlike the traditional bank, digital banks don’t have to rely on old legacy systems and processes to operate. It utilises technologies like Artificial Intelligence (AI), Blockchain, Biometrics Security, and Cloud or application programming interface to run administrative tasks and data processing. 

This would mean that you could even manage your financial portfolio, check your credit score or get a preapproved loan without being at the branch.
 

So, why is Digital Banking such a big deal?

1. It simplifies the process for everyone


Source: Wikimedia Commons


The processes at the bank are usually manual and long. Regardless if you’re an individual or a business owner, the money and time spent on travelling to the bank, printing the necessary documents, and waiting hours or days for your application results is not fun. 

Digital banks can help save time and make banking convenient for you with the help of technology as we mentioned earlier. Let’s take the loan process, to give you some perspective. Before this, we have to submit documents like your payslips, EPF contributions, but with digital banking, you probably just need your bill payment or shopping receipts as a form of credit risks assessment. 

Another simple example would be opening a bank account. Usually, the process is that you have to be at the branch, fill up some documents and wait for at least an hour to get your account ready, but with digital banking, you just need to upload a picture of your IC, a fingerprint confirmation, and 8 minutes for the whole process. This removes the need for people to take time out of their busy schedules to visit a bank branch.
 

2. It gives financial access to the unserved & underserved

According to global consulting firm Bain & Company, around 55% of Malaysia’s adult population is still underbanked and unbanked. This includes self-employed individuals, first-time borrowers, retirees and those who recently joined the workforce; people with low financial literacy, in rural locations, or have disabilities.


Source: The Edge

If we don’t address the lack of access to credible, transparent and correct financial information factors now, they will become more significant issues in the future. For example, relying on informal financial solutions like ah longs.

The convenience provided by digital banks means that the underserved will be able to gain access to formal financial services. Not only that. Being able to bridge the financial gap also positively impacts the economy. Some experts have found that the financial inclusion through digital banking can increase South East Asia’s GDP by 6%.
 

3. It saves on operational costs

The manual processes of traditional financial institutions actually incur high labour costs, and should they try to access the underserved through these processes, it would mean higher maintenance costs. All of these raise the expenditure of the institutions, hindering growth.


Source: internationalbanker.com

With digital banks, the labour and maintenance costs can be significantly reduced. A study by McKinsey has shown that financial institutions in emerging countries can save up to US$400 billion annually. Back end processes can be streamlined and the reduction of manual labour also means that mistakes can be reduced.

The same study also shared that with easier processes, it gives people more confidence to invest more in the institution, and a potential of US$4.2 trillion in deposits can be brought into financial institutions, which could then be converted into loans for more people.
 

4. It could go beyond financial products

Because there’s continuous growth in the sector, digital banks can pave the way for new innovations that can go beyond current financial products provided by the banks.

Yeoh Xin Yi, head of financial risk management of KPMG Malaysia said that “The unserved and underserved categories from the B40 groups should be onboarded to financial service platforms that can help with their cash flow management, enable micro-savings or deposits, offer micro-insurance to safeguard their basic needs as well as offer basic financial products to tide them over their financial troubles.”


Source: KPMG: Digital Banking: The Inclusive Agenda

Findings from the study conducted by KPMG shows that Malaysians are looking forward to services that would improve the quality of their lifestyle, like rewards-based programs, advice on finance, track spending habits, as well as customised deals and promotions from their digital banks.
 

What will be a challenge for digital banks in Malaysia?

Pretty cool what digital banking can do, with the potential benefits that it can bring, right?

However, before Malaysia accepts digital banking with open arms, there are some things that should be addressed first, in order for it to successfully work here.
 

1. The strength of Malaysian cybersecurity

The availability of extra user data that is leveraged by digital banks can also fall into the wrong hands. This comes as cybercrimes, like online scams, have been on the rise along with the growth of technology in the country. 

Studies in 2020 have also revealed that 21% of cybersecurity attacks have been aimed at banks in South East Asia. The presence of personal data online also has created an avenue for criminal activities like the Macau scam.



Malaysians are still not well versed with cybersecurity yet, with plans only put into place to start from a grassroots level under the Malaysia Cyber Security Strategy 2020-2024

The country has not really dealt with this issue yet, with the most recent incident involving a victim who lost money to a caller who claimed to be from Bank Negara. If traditional banks are still working on curbing this, how can digital banks, which run on a fully virtual landscape, assure potential users that their accounts would be in safe hands?
 

2. The readiness of the country’s internet infrastructure

Sure, digital banking can provide accessibility to the underserved, in this context, the rural areas. But our internet infrastructure might not be ready to bring digital banking there yet. While this is being sped up, MCMC currently faces obstacles of local authorities' cooperation with installing the needed infrastructure, and loopholes within their own policies.


Source: Free Malaysia Today

Because of this, rural areas still lack access to the internet. We’re sure you’ve heard the story of Veveonah Mosibin, who had to spend her time on a treetop just so she could get the internet to do her examinations in 2021. Her village in Pitas has come up with an ingenious alternative, like tying mobile phones to bamboo poles to act as internet providers, through mobile hotspots. 

The reality is that without the internet, digital banks are unable to carry out their functions. If the infrastructure is not stable yet, the question of whether financial accessibility can be achieved here will still remain.
 

What Does This Mean for Malaysians?



 

This could change the way Malaysians carry out banking. It could bring some dynamism to the sector the country is looking for. Making it easier for everyone to access financial services means that there will be an improvement in the quality of life, productivity and a potential increase in economic growth. 

Not only that. The addition of digital banks also falls in line with the 12th Malaysia Plan, in which some elements focus on resetting the economy, strengthening security, well-being and inclusivity, and advancing sustainability.

However, there are some pain points for the country to address first, especially with safety and the current internet infrastructure to be able to fully realise the aim of digital banks for the country. 

What are your thoughts on digital banking in Malaysia? Share with us!

 

*The above article is intended for informational purposes only. Loanstreet accepts no responsibility for loss that may arise from reliance on information contained in the articles.
 

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