SMEs to benefit the most from digital banks

BNM is expected to award new digital banking licences to 5 out of 29 applicants this month

by AZALEA AZUAR / pic by BLOOMBERG

SMALL and medium enterprises (SMEs) will be the biggest beneficiaries of digital banks as they contribute half of Malaysia’s GDP as well as the working population.

Bank Negara Malaysia (BNM) is expected to award digital banking licences to five out of 29 applicants this month.

The announcement is expected to take place this month and would make Malaysia the second South-East Asian country to issue such licences, next to Singapore.

Unlike in the past, it is apparent that more non-fintech companies are vying for the licences, as the pandemic accelerates digitalisation in the country.

The bidders not only have a banking or fintech background, but they are also industry conglomerates, e-commerce operators, cooperatives and state governments. These non-fintechs have joined forces with banking companies to apply for the licences.

According to Monash University Head of Business School Prof Nafis Alam, digital banks will also take a more borrower-centric approach to financing needs in contrast with traditional incumbents.

“They will offer tailored customer solutions, fast approval and disbursement of funds, simplified lending management and competitive pricing.

“Digital banks will help traditional banks transform their banking services operations by pushing them to look after Malaysia’s underbanked population,” he told The Malaysian Reserve.

Even those who have been left out from formal financial services from stringent credit ratings or documentation would also benefit from these kinds of banks.

Nafis also mentioned that even traditional banks would migrate into digital banks if they manage to up to the expectation of 24/7 branchless banking, which is cheap and convenient.

Compared to brick-and-mortar banks, digital banks are 90% cheaper to operate as they do not need to cover physical rental or high labour costs so it is ideal for low-cost financial services to lower-income groups.

However, he does not believe digital banks would fully replace traditional banks in the future although they have the capital and trust while digital banks have agility, personalisation and enhanced user experience advantages.

Traditional banks have capital and trust and they should invest heavily in technology and adopt digitalisation to remain relevant.

“Banking has been continuously going through various stages of transformation and digital banking evolution is one of them.

“Digital banking is meant to increase financial inclusion and bring forward financial services to those individuals and businesses traditionally not part of brick-and-mortar banks,” he said.

The Covid-19 pandemic which drove digitisation has changed consumer and business behaviour, demanding more digital delivery and cost-effective financial solutions.

Nafis warned that the most significant disadvantage for digital banks will be the technology risk. Since every aspect of Digital bank is digital, digital banks are more prone to hacking, data breaches and data privacy.

To overcome these issues, he advised digital banks to be resilient, adopt cloud technology and make technology an integral part of their offerings.

“The primary purpose of cyber security in digital banking is to protect the customers’ assets. Digital banks need to build confidence in their users by investing in data protection and securing their digital customer footprint.”

Nafis also believed that Malaysia is a flourishing fintech ecosystem which has come a long way since BNM’s sandbox.

Apart from digital banking licences, other positive developments in the country’s fintech landscape also include regulated digital asset exchange, fintech applications in Islamic finance.

“Moving forward, Malaysia still needs to have a good balance between the fintech start-ups and to have a ready workforce (fintech graduates) to serve the industry’s growing need.

“Talent attraction and retention within the fintech space will be the key driver of the fintech ecosystem in the country,” said Nafis.

Other licences such as crowdfunding and peer-to-peer lending platforms will boost Malaysia’s entrepreneurial ecosystem development so he hopes regulators and policymakers need to strengthen and streamline their licensing process.

“Regulation of fintech is also essential and Malaysia needs to build an exhaustive regulatory regime to support the rapidly developing fintech ecosystem.

“Awareness towards digital currencies, central bank digital currencies and robo advisory will also be an essential aspect of Malaysia’s fintech development in the next five years.”