This article first appeared in Digital Edge, The Edge Malaysia Weekly on July 12, 2021 - July 18, 2021

Banking has evolved at a rapid pace over the last decade. The days of queueing at a local bank to open an account, make a deposit, transfer money or cash a cheque are long gone.

In Asia, soaring demand for online and mobile alternatives is incentivising digital players to shake up the market and transform the banking experience.

The Covid-19 pandemic has had a significant impact on the pace at which new digital banking products and services are being adopted, and it is becoming more challenging for incumbents as digital technology lowers barriers to entry.

With their leading-edge solutions, digital banks are attracting millions of new customers. Tencent Holdings Ltd-backed WeBank, for example, serves some 200 million people, and Alibaba Group Holding Ltd-supported MYbank has more than 20 million small and medium enterprise (SME) customers, points out McKinsey & Company.

In just over five years, China’s digital banks now have roughly a 5% share of the country’s RMB5 trillion (RM3.21 trillion) unsecured consumer loan market and more than 7% of online SME loans. South Korea’s KakaoBank, launched in 2017, attracted more than 10 million customers in its first year and now has a roughly 5% share of the country’s unsecured consumer loan market.

In Malaysia, digital and mobile-only banks are gaining popularity due to the rise of e-commerce and e-payments services as well as the rise of the digital economy. “Businesses can potentially benefit from digital banking as it can help them save on costs and time as well as provide convenience in the future,” says Geoff Soon, managing director for South Asia at data cloud company Snowflake.

Also, seeing that digital banks can reach underserved or unserved markets better, Malaysian regulator Bank Negara Malaysia on Dec 31 last year issued its framework for the licensing of digital banks to conduct either conventional or Islamic banking business in Malaysia.

“Digital banks are seen as the next frontier in terms of innovation in the financial services sector, which is traditionally dominated by large, well-established banks. In addition, the pandemic has accelerated the openness of online banking and adjacent financial services such as insurance and wealth products as consumers are unable to visit bricks-and-mortar branches in person,” says Soon.

The excitement is almost palpable. The deadline to apply for a handful of digital banking licences passed on June 30, with over 40 big corporations and e-wallet operators expressing interest to take on the country’s traditional banks in providing financial services.

According to McKinsey, successful digital banks in Asia operate under a consortium business model that contrasts with the vertical approach seen in Europe and the US. In China, for example, both WeBank and MYbank are consortiums, led by Tencent and Alibaba’s Ant Financial respectively.

Malaysian corporations, too, have similarly formed consortiums in bidding for the digital bank licences. Some of the prominent joint bids include Axiata Group Bhd and RHB Bank Bhd; Grab and Singtel; Sunway Bhd, LinkLogis Inc — a Tencent-backed fintech firm — and Bangkok Bank; and, a five-party consortium made up of Paramount Corp Bhd, Star Media Group Bhd, RCE Capital Bhd, Prosper Palm Oil Mill and an unnamed technology partner.

“Malaysia already had a relatively high level of financial inclusion, particularly when compared with many other Asean countries. [But] the new and innovative digital or mobile-only banking products offer simplicity, ease of access and often lower fees — they put consumers in charge of their financial destiny, and remove the need for people to take time out of their busy schedules to visit a bank branch.

“These products are proving popular because they put the customer at the centre. And they’re cheaper and more conveniently accessible,” says Myles Bertrand, managing director for APAC at Mambu — a software-as-a-service (SaaS) cloud banking platform.

As the new entrants will be armed with nimbler and smarter digital capabilities to reshape a relatively stable and sleepy banking industry, it is paramount that traditional banks re-evaluate their digital offerings and technology to see how they can leverage new cloud-native technologies to keep up with innovation and the impending digital disruption, says Bertrand.

“Right now, the main advantages of traditional banks over new challenger banks are their reputation and financial security. But to hold on to those advantages, established Malaysian banks are going to have to make some big changes to the way they do business. New digital banks are likely to have an enormous advantage over the traditional banks on their digital service offerings,” he says.

Bertrand points out that with next-generation technologies and a much leaner operational team — often less than 1% of the workforce needed to operate a traditional bank — digital banks can offer compelling onboarding incentives and attractive pricing to customers, channelling their resources towards greater product development and innovation.

“Customers have different expectations now; they don’t have the same loyalty to a bank that they did just a few years ago. If they’re not getting what they need from their bank, they will quickly go elsewhere. If established banks simply digitise their existing services, without overhauling their technology, they risk getting left behind as the new challenger banks take off,” he says.

And this is already happening. In a report released on June 29, the Economist Intelligence Unit (EIU) declared that branch-based banking will be “dead” within five years, as new technologies and increased competition from fintech firms, super-app platforms and tech giants accelerate digital transformation and trigger a shift in banking priorities and business models.

In the “Branching out: Can banks move from city centres to digital ecosystems?” report published by Temenos — a global leader in banking software — the EIU says 65% of global banking executives view new technologies such as cloud, artificial intelligence (AI) and application programming interfaces (APIs) as having the biggest impact on the sector over the next four years, ahead of regulation and changing customer demands.

API is a software intermediary that allows applications to talk to each other. The report was based on a recent survey of 305 senior global banking executives.

“Moreover, 81% think unlocking value from AI will be the differentiator between winning and losing banks. Banks are focusing their technology investment on cybersecurity, AI and cloud computing as they accelerate digital transformation projects,” it pointed out.

The report also found that 81% of bankers believe banks will seek to differentiate on customer experience rather than products. “With this, many established banks are turning to strategic partnerships and investments in technology to become trusted banking partners and the purveyors of consumer-friendly banking experiences.”

This strategy could turn out to be beneficial for legacy institutions as digital banks will have to co-exist with traditional banks in the foreseeable future, says Snowflake’s Soon.

“For one, digital banks need to be able to tap market sectors that demand complementary financial services that traditional banks may not be able to provide such as unsecured micro-lending. Securing these markets will open new opportunities for digital banks and enable them to achieve penetration in traditionally underbanked segments.

“At the same time, with the wave of fintech innovations, traditional banks such as CIMB Bank and HSBC Bank Malaysia have long started their road to digitalisation and aspects such as anti-money laundering, know-your-customer (KYC) processes and digital identity management, which include facial and voice recognition. Other banks such as UnionBank are offering traditional banking services via APIs that fintech firms integrate with and adopt as part of their overall offering,” he says.

Soon adds that both established traditional banks and digital banks should invest in their digital and online platforms and services through AI and automation to master the data-driven customer experience.

That said, traditional banks have been ramping up their cloud infrastructure — for additional processing capacity, service capabilities and to outsource data storage — ever since the pandemic struck 18 months ago.

“If traditional banks are to compete successfully against the new influx of fintech-based digital banks, they need to completely change the way they operate. They need to begin thinking and operating more like a fintech firm, focusing on the customer experience and being ready and willing to make big changes, particularly in the way they think about technology,” says Mambu’s Bertrand.

The future of banking is digital and in the cloud, he stresses.

“Cloud banking technology enables banks to be nimble, operate more cost-effectively and be more responsive to their customers. A cloud banking platform that is delivered on a SaaS basis outsources the maintenance and upkeep requirements of the core banking system, [which then] frees up internal resources for greater product development and innovation.

“But traditional banks need to realise that it doesn’t have to be an ‘all or nothing’ approach; they can utilise cloud banking to launch an entirely new digital bank — what we call a ‘speedboat’ — offering all of the speed and agility of a digital bank, while also being backed by the financial security and reputation of the established bank.

“It offers the best of both worlds — the flexibility, speed and low cost of a digital bank, with the solid foundation of a traditional bank,” says Bertrand.

For example, Vietnamese digital-only bank TNEX, which was launched by established commercial bank MSB, is built on a cloud banking platform and offers virtual sign-ups and zero banking fees.

“TNEX, while operating as an agile and innovative standalone digital bank, retains the weight and security of MSB behind it,” he points out.

For traditional banks to stay ahead of the curve, Soon says using cloud services as a central repository to house various types of data is highly advantageous.

By migrating to the cloud and choosing to use a cloud-based solution, financial services organisations can unlock insights derived from all of their data and revolutionise their business while ensuring a strict approach to data governance, security and regulatory compliance, he says.

“With a 360-degree view of customer behaviours and preferences from multiple inputs, financial organisations can drastically improve personalisation strategies for their customers and ensure that they have a good experience at every touchpoint.”

“Cloud-based solutions can offer direct and secure data sharing without the complexity, cost and risk typically associated with legacy data warehouses. Cloud-based solutions can also help reduce the manual effort and copying that is necessary with traditional data sharing tools, thereby empowering companies to find new sources of revenue and opportunity.

“Financial service companies can use cloud-based solutions with certain functionalities such as advanced data analytics, detection rules and enhanced visualisations to analyse data and be prepared for possible cyber threats and risks. This, in turn, translates to higher consumer confidence and loyalty while lowering costs for fraud and cybersecurity mitigation,” says Soon.

Moreover, having a central repository system is a boon for financial service institutions such as banks and insurance companies that need to collect a large amount of sensitive financial and customer data.

“They are facing the challenge of storing this data securely in line with Bank Negara’s guidelines. Organisations with legacy data frameworks and outdated architecture need to adopt innovative and flexible technologies while safeguarding consumer privacy and maintaining regulatory compliance.

“A centralised repository of data will help financial services organisations keep their data organised. The data repository on the cloud is secure and certified by multiple national authorities, thereby reducing costs for financial organisations while ensuring that the data is regulated in the meantime.

“Cloud-based solutions can help financial service organisations improve account management, prevent fraud and unlock valuable insights while ensuring that they protect valuable consumer data,” he says.

As banks in Malaysia are required to adhere to stringent data privacy and handling guidelines, leveraging on cloud solutions provides more control and visibility, says Sheena Chin, managing director for Asean at Cohesity — a multi-cloud platform for data management services.

“[Cloud] minimises the fragmentation of data resulting from data collected, collated, and stored in disparate sources, systems and environments. It secures the data, as it has increased visibility over ‘dark data’, and minimises vulnerabilities associated with point solutions while using data encrypted to lower operational risk.

“Built-in machine learning in cloud solutions reduces the administrative burden by providing proactive actionable recommendations, ‘what-if’ analyses, anomaly detection and health checks that would otherwise go unnoticed or require additional manual effort. 

“It improves productivity by freeing up IT and provides developers and analysts with easy access to data so they can develop new apps and gain better insights,” she says.

By not having a centralised consistent view and easy data accessibility, banks will never be able to maximise the value of their data, Chin adds.

“With new government regulations being implemented post-pandemic, enterprises should think of how to leverage modern data protection and management tools that deliver insights, visibility and automation that help ensure they meet regulatory goals and the last line of defence against ransomware, regardless of where the data resides, be it on-premise or in the cloud.”

However, Soon asserts that there is more to banking and financial services than technology. 

“Digital banks have the chance to innovate by adopting different risk profiles to lending — for example, microloans, short-term business financing and much more — as well as to package various products in interesting ways, such as e-wallets with wealth products and loyalty schemes.

“Ultimately, the digitalisation of banking services from traditional banks and the innovation we see from digital banks should lead to more choice and inclusivity for customers in Malaysia,” he says.

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