Digital Banks To Drive Positive Change In The Ecosystem

Island nation, Singapore approved four digital bank licenses to non-banking players late last year and the Monetary Authority of Singapore (MAS) expects the new digital banks to commence operations from early 2022. 

Looking beyond Singapore, digital banks in other parts of the world have also gained success by focusing on specific pain-points from the start of their journey. This could include providing cheaper foreign exchange transactions for travelling consumers, or more efficient lending for small and medium-sized enterprises (SMEs).

Closer to home, Bank Negara Malaysia issued its digital banking framework, which aims to foster a financially inclusive way forward by promoting responsible usage of suitable financial solutions to unserved and underserved segments. 

“One key lesson we can take from Singapore is the necessity of closer collaboration between traditional players and new entrants,” says Nium Malaysia’s Chief Executive Officer, Rajendar Dhorkay. 

“With this in mind, Malaysia’s upcoming digital banks should consider how they can collaborate to create an ecosystem that can drive such positive change in the financial sector,” he adds. 

The one main difference, Dhorkay says, of the landscape in Malaysia and Singapore is the target audience. Malaysia’s digital banking push is primarily to address market gaps in the underserved and unserved segments, which reflected very clearly in its digital banking framework. 

Malaysia also offers only one type of license, which is open to both conventional and Islamic banking while Singapore offers two types of licenses for digital full bank and digital wholesale bank. 

The island nation will also most likely target millennials who are digital savvy, and SMEs, which account for 99 percent of Singapore’s companies and employ 70 percent of the population. 

The similarity between both countries’ approach, however, is the goal of promoting financial inclusion. 

“This can be achieved through the reduction of costs, the improvement of convenience and providing affordable access to financial solutions for all.” 

How Can Malaysian Consumers And SMEs Benefit?

According to PwC’s commissioned study, Digital Banking: Malaysian banks at a crossroads, sentiments have been positive as the country embraces this digital banking revolution. Malaysian consumers have shown to be open to new technologies if they are better than what’s on offer. 

However, data protections remain a key concern. 

“As digital banks are branchless, it is likely that they may offer higher interest rates and lower fees for their financial products. Unserved or underserved groups in Malaysia, such as the B40, micro and SME market segments can be better reached with the lower costs of digital banks. 

“Improved convenience and more personalised services for consumers can be expected, with banking services at their fingertips at all times,” he says. 

A Crowded Market Space 

“Yes, digital banks are entering Malaysia’s already crowded and competitive banking space and this will only grow in the coming years,” Dhorkay says. 

A report by IDC and Backbase estimates that there will be at least two digital banks in every Asia Pacific market by 2025. 

63 percent of banking consumers polled were willing to switch to digital banking. 

“Financial institutions can explore a number of options. They can either create a digital-only bank with an existing license, create new mobile channels to compete with new digital banks or choose to apply for a digital license either alone or as part of a consortium,” Dhorkay says, in response to the digital banking regulations in Malaysia. 

All of these options will require them to fast-track digitalisation of their processes and infrastructure, and players can choose to do so by building stronger partnerships with existing or new players to compete in this crowded market space. 

Players will also face one key challenge, the evolution of regulations around digital banking. “This comes as no surprise as digital banking licenses are relatively new,” he says. 

“Fintechs must be sure to keep up to date with the rapid evolution of regulations and ensure they have strict compliance measures. This will ensure they can continue to operate and remain competitive,” he says. 

The Monetary Authority of Singapore, for instance, is holding new digital banks to the same high standards in cybersecurity and technology risk management as traditional banks. 

Another key challenge he says facing digital banks would be the competition they face, not only from other digital banks, but also from more established traditional banks.

“Established banks have the advantage of economies of scale and huge customer bases, whereas new digital banks face the challenge of establishing themselves in the market and gaining customer trust.

“Digital banks must be clear on their point of difference to ensure their voice is heard in the crowded market,” he highlights. 

Closing The Gaps Within The Unbanked Population 

Dhorkay is optimistic that digital banking will be able to close the gaps within the unbanked population. 

“In Malaysia and Singapore, this is the end goal that many are trying to achieve. While we have yet to see results and outcomes from Singapore’s digital banks as we wait its operations to commence only in 2022, there is still ample time for relevant authorities to put in place initiatives targeted at promoting financial inclusion,” he says. 

“The unbanked segments will no doubt be looking for quicker access to financing, which can potentially become the difference between staying afloat and shutting down.” 

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