Cover Story: Are Malaysian banks doing enough in fintech?

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This article first appeared in Corporate, The Edge Malaysia Weekly, on June 20 - 26, 2016.

FOR many in the banking industry, the pressure is mounting after Bank Negara Malaysia governor Datuk Muhammad Ibrahim recently warned of potential revenue disruption from financial technology innovations.

At the recent Global Islamic Finance Forum 5.0, Muhammad told financial institutions that they ought to embrace fintech as an opportunity rather than “look at the fintech revolution as unwelcoming”.

“The potential impact of such technological disruptions is significant. An estimated 10% to 40% of overall banking revenue could be at risk by 2025 due to fintech innovations outside banking institutions that are able to achieve a significant pricing advantage,” Muhammad said.

Those comments got the industry talking again. Indeed, these conversations have been taking place in varying degrees in the industry. Some are sceptical about how disruptive fintech can be while others are more proactive.

In recent years, many of the larger local banks have set up digital teams to understand the new innovations coming out of the global fintech hubs.

These banks include CIMB Group Holdings Bhd, Malayan Banking Bhd (Maybank), Hong Leong Bank Bhd and RHB Bank Bhd.

CIMB Group chief executive Tengku Datuk Seri Zafrul Aziz says the regional banking group is adopting a proactive strategy and keeping an eye on innovative financial and banking solutions.

“We have also established an innovation roadmap to explore and establish collaboration with suitable fintech companies to enhance our suite of offerings and transform our business and operating models,” says Tengku Zafrul.

The plan, according to him, is to ensure a seamless integration of fintech expertise into CIMB’s business segments where it can generate the most value, be it in terms of cost savings or innovative products. “The end goal is to achieve operational efficiency and enhanced customer experience with minimal impact/disruption to our customers’ banking transactions,” he says.

Some of these banks have also started accelerator or bootcamp-type programmes to work with fintech startups in Malaysia and the region.

For example, Maybank’s fintech programme with startups last year was the first in the region to be led by a bank.

Maybank chief strategy officer Michael Foong says the programme was to identify the startups that they can collaborate with. “The shortlisted companies came to Kuala Lumpur and made their presentation at the #MaybankFintech 2016 Demo Day. We have identified several exciting companies that we are currently in talks with,” he says, without divulging the details.

Many of the banks have been trying to improve their digital offerings, especially when it comes to mobile banking solutions. It is understood that some bankers are also looking into more disruptive fintech solutions, such as the potential of block chain or distributive ledger technologies.

Still, there is scepticism as to whether local banks are doing enough on the technology front.

“Malaysia is not quite at the forefront of fintech. That’s Singapore. Our banks are still feeling their way around but there are some changes that are happening,” says a banking industry source.

Christiaan Kaptein, principal of the Singapore-based financial services-focused Dymon Asia Ventures fund, notes that while some banks are getting proactive in approaching fintech opportunities, there remains the weight of legacy systems and habits.

Indeed, banks are trying to build more digital solutions for consumers or use technology to simplify processes and acquire more customers but the core structure is little changed.

“A few banks at the top level will get it. Then, there is a whole marketing drive with the accelerator programmes and such. One does not really expect anything much from that in terms of the banks really changing at their core,” says Kaptein, who, with Jinesh Patel, leads the venture capital fund that is part of Dymon Asia Capital.

The problem is that the old structures are still in place.

“You may have some innovation but if your core never changes, what then? The heads of banks have to believe in creative destruction to lead the change. Everyone is trying, to a certain extent,” Kaptein remarks.

1337 Ventures founder and CEO Bikesh Lakhmichand is similarly unconvinced. “Banks and risks don’t go hand in hand. If banks want to get into fintech, they must realise that there’s no sure thing,” he says.

Bikesh reckons that this is what most banks will do: “Set up a digital team, fire the digital team, then rehire the digital team and ensure they’re not bankers. Then, realise that the digital team is still part of the bank and they still have their hands tied.”

So, what can they do? According to Bikesh, banks can build the tech solutions themselves or acquire a late-stage product if they want control or want to play it safe.

“If you’re fine with a little more risk, go in earlier and help open doors. Get your hands dirty. Prepare to write off investments. Rinse and repeat. Hey, worst case, it’s an acquihire [buying out a company for skills instead of products],” he reasons.

Bikesh’s 1337 Accelerator will launch its own fintech-focused Alpha Startups programme in Hanoi, Vietnam, in September.

In Malaysia, the banking and tech industries are awaiting the regulatory framework on fintech that Bank Negara is expected to unveil next month. The framework will ensure the potential risks and opportunities can be appropriately managed.

“We are looking at this from several perspectives: first, the impact of fintech strategies on the management of risks by financial institutions; second, the potential for fintech start-ups to introduce new risks to the broader financial system as a result of regulatory arbitrage; and third, the impact on consumers,” Muhammad said recently.

Industry observers expect Malaysia’s fintech framework to bear some similarity to Singapore’s. The Monetary Authority of Singapore had on June 6 proposed a “regulatory sandbox” for financial institutions and non-financial players to experiment with fintech solutions within a well-defined space and duration. 

“For the duration of the regulatory sandbox, MAS will relax specific regulatory requirements that an applicant would otherwise be subject to,” the authority said.

Apart from the fintech framework, Bank Negara, in February, introduced the Investment Account Platform for the Islamic banking industry. The IAP is akin to a peer-to-peer platform, one that is intermediated by Islamic banks to connect investors to viable economic ventures.

Last month, the Securities Commission Malaysia unveiled a regulatory framework for peer-to-peer lending and started accepting applications from interested platform operators from May 2.

This comes after the regulator last year awarded six licences for equity crowdfunding platforms to start operating in Malaysia — the first country in Southeast Asia to offer this alternative mode of fundraising for early-stage and small and medium enterprises.


Next week: The region’s fintech disruptors