Technological advancements have penetrated every facet of our daily lives, and the banking industry is not exempt from this change. While Malaysians have had access to online banking for years now, there is still a need for physical banks as not all banking services are available online.
In December 2020, Bank Negara Malaysia introduced the digital banking framework. Digital banks, unlike online banking, eliminate the need for physical banks as all services can be performed online.
As countries in Asia-Pacific such as Taiwan and Singapore inch towards the implementation of digital banks, Malaysia is not far behind. On April 29, 2022, Bank Negara announced the successful applicants of its digital banking licences, opening the door to the prospect of having digital banks in the country.
As a requirement of the licence application, digital banks would have to offer banking products and services to the underserved or unserved markets and address the financial inclusion gaps in the country.
According to Dr Siti Hawa Yusof, a lecturer at the School of Accounting & Finance at Taylor’s University, financial inclusion is defined as access to useful, affordable and quality financial products and services for all segments of society, delivered in a responsible and sustainable way.
Currently, there are communities that are financially underserved. These communities comprise individuals and businesses with limited access to mainstream financial products due to unstable or low income, credit challenges, or the absence of bank branches to facilitate financial transactions in rural areas.
This market segment is different from the unbanked community, which accounts for 5% of individuals in Malaysia without access to the mainstream financial system such as a basic savings account.
“Digital banking serves as a solution to bridge the gap in financial inclusion by catering to the underserved and unserved market segments, in an effort to boost sustainable economic growth,” Dr Siti said.
Improving financial inclusion
Dr Nafis Alam, professor and head of the School of Business at Monash University Malaysia, sees digital banks as the main solution to promoting financial inclusion.
“Digital banks that use data insights can offer personalised financial services based on customer and business needs. Digital banks are expected to fill the credit gap of Malaysians, especially those in the B40 segment.
“Moreover, digital banks that use the power of data analytics are able to create a proper risk infrastructure focused on advanced credit models, on top of leading-edge non-financial risk prevention,” he said.
“This would allow digital banks to provide responsible financing by offering access to funding with limited to no collateral, and transparent pricing with no hidden fees or penalties.”
The cutting-edge risk infrastructure would result in more Malaysians being eligible for banking services and products according to their credit performance and financial capabilities.
While a decrease in the underserved community is good for financial inclusivity, the envisioned financial inclusivity should extend beyond just having access to financial products. Dr Siti said promoting financial inclusion also entails offering services that are responsive, responsible and meet customers’ needs and capacities.
“Digital banks should strive to offer fast and seamless services with a straightforward onboarding user experience, simple customer journey and personalised recommendations for customers. Offerings should also be simplified, making them easy to understand, and micro-sized to encourage everyone to save, invest, grow and achieve their aspirations,” she added.
The role of data and digitalisation
Big data plays a vital role in digital banking as it is the main asset needed for operation. As digital banks are required to serve the underserved communities whose main challenge is obtaining credit, big data analytics (BDA) allows digital banks to make appropriate lending decisions.
According to Dr Siti, digital banks would need access to data for analytics to expand the coverage of their digital financial services offerings. “Digital banks would first have to tap into the existing outlets in the underserved communities or rural areas such as retail, convenient or grocery stores, pharmacies or even post offices,” she said.
Dr Nafis echoed the sentiment, stating that, “The BDA pertaining to Malaysians’ credit history can be used to give digital banks better insights into an individual’s spending habits and produce a credit history beyond traditional means of measurement.
“To do so, data from various sources such as spending habits on e-commerce platforms, shopping loyalty points or even power consumption can be utilised for digital banks to decide and analyse the best financial solution for individuals,” he said.
He added that digital banks can use BDA to combine data from various sources to create a holistic, all-encompassing picture of client preferences and behaviour. This can significantly enhance their strategies to personalise and create products and user experience, guaranteeing a positive interaction at every point of contact. This can provide digital banks with an edge in strategising and customising products that are more relevant, specifically for the target audience at hand.
With better insights through the data obtained, underserved Malaysians can enjoy a more accurate credit assessment while micro, small and medium enterprises (MSMEs) will see lower servicing costs.
This creates a win-win situation for the community and financial service providers for the expansion of product and service coverage.
“With digital banking solutions that promote financial inclusivity, individuals and communities would be empowered to meet their basic needs or recover from the disruptions brought about by the Covid-19 pandemic,” Dr Nafis said.
“For example, they can use data analytics supported by machine learning algorithms to assist in credit assessment and lending decisions more accurately and efficiently, creating a more customer-centric plan that is specifically tailored to the needs of the target market such as the B40 community, which needs financial assistance to recover from the pandemic.”
Strong partnerships to form digital banks
With many digital banks on the horizon, it is important for businesses to choose the right fintech partner to provide the best possible digital solutions for their customers.
Dr Nafis said those that were awarded digital banking licences, such as the partnership between Sea Ltd and YTL Power International Bhd, will be strategic in the long run. “Both companies bring specific expertise to the table,” he pointed out.
“Sea brings a deep understanding of and insights on consumer and SME behaviours through its subsidiary, Shopee Malaysia. These insights enable it to offer tailored financial solutions that meet the demands and requirements of underserved or unserved individuals and SMEs.
“Meanwhile, YTL serves a wider segment of individuals and SMEs across verticals that Sea can tap into. Together, their synergistic partnership in digital banking has the potential to provide competitive product offerings as well as a simple and streamlined user experience for their users nationwide.”
In this new age of banking, Malaysia’s financial services industry is encouraged to innovate, pushing it towards becoming more convenient, safe and accessible for not only the underserved but also all Malaysians as a whole. In doing so, digital banks are seen as the solution to reduce, if not close, the financial inclusion gap in the country.
It is hoped that through the innovative use of data and insights, coupled with strong partnerships, digital banks will bring sustainable economic growth in these trying times.