Thursday 28 Mar 2024
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This article first appeared in Digital Edge, The Edge Malaysia Weekly on August 8, 2022 - August 14, 2022

Earlier this year, the Malaysian central bank awarded five digital bank licences after receiving applications from 29 candidates, putting the financial services trend back in the spotlight.

Successful applicants are now going full steam ahead on strategy and planning to bring their digital bank services to end-users, and most expect to be executing fully on their ambitions within one to two years at both the enterprise and consumer levels.

While digital banking in Malaysia is still in its early days, such services have already kicked off in other parts of the region such as Indonesia and the Philippines, and they are generally well-received.

For consumers, the appeal in digital banks, which has been accelerated by the Covid-19 pandemic, is in speed and convenience.

Despite traditional incumbents’ best efforts to digitalise and refresh their offerings to cater to the changing market, they are still encumbered by legacy systems.

Thanks to the integration of technology from day one, digital banks’ cost to serve customers is massively reduced, and their speed of execution and ability to scale new products and services are unmatched.

Next frontier in banking

The wide-ranging capabilities of technology in banking are immense.

From front-middle-and-back-office functions, technology and artificial intelligence (AI) can be applied across the entire value chain to optimise efficiency, while combating and preventing rising online fraud.

In fact, these office functions are slowly being outmoded by newer technologies and all-in-one solutions that allow banks to work smarter, and make quicker and more accurate risk decisions, improving efficiency.

For example, AI-powered technology used in customer onboarding and servicing enables customers to open a bank account via a smartphone in a matter of minutes — anytime, anywhere.

Innovative solutions such as liveness detection, a form of biometric authentication that verifies live users by detecting facial movements, has more than 99% accuracy, making it less likely for identity theft to occur.

Technology also automates many repetitive manual processes within banks including settlements, human resource functions and IT systems, helping to improve resource and cost efficiency.

However, where the power of technology lies is in improving banks’ risk management capabilities.

Proper risk management and regulatory compliance is critical, especially amid rising cases of cybercrime frauds, including increasingly sophisticated ones such as synthetic identities, impersonations (deep fakes) and social engineering fraud, which erode consumers’ trust and confidence in the bank.

In addition, for banks to deliver a seamless and frictionless banking experience that caters to customers’ demands for instantaneous services — for example, from making retail and corporate credit decisions to online account opening — they have to redesign their risk management strategies and digitise it at scale.

By enhancing the way current risk management processes are being conducted, banks can not only build resilience to real and perceived threats but also tap powerful data analytics to change the way they assess credit risks and underwrite loans.

For example, electronic Know Your Customer (eKYC) technology can provide banks, digital or traditional, with an alternative way to determine the creditworthiness of customers.

The implications are huge, allowing banks to expand their operational scope significantly, from compliance to loan underwriting.

Reaching new markets

It will also allow banks to expand into new markets, including the financially underserved.

Despite the high internet penetration in Malaysia, as many as 55% of the adult population in the country remains underbanked and unbanked.

They include gig economy workers or low-income families who lack the credit history to gain access to a wider variety of financial services, including a basic bank account, credit cards and long-term savings products.

They are typically overlooked by traditional banks, whose risk management capabilities and current credit scoring practices leave them out of the picture. Small and medium businesses, which are the lifeblood of the economy and account for 98.5% of all Malaysian businesses and provide livelihoods for many in the country, are also limited by traditional banking.

They often need more flexibility around their business demands than the bank can deliver and often miss the bank’s requirements to get funding as well.

Digital banking will help drive financial inclusion for these market segments.

They now only need, say, their employment record, salary slip or tax statement, to access basic financial services in a secure, precise and timely manner.

Need for good infrastructure

While it is still too early to see the full value of digital banking, financial service providers are already jumping on the digital bandwagon to cater for consumers’ demands.

However, building a successful digital bank requires a sustained, multi-year effort and competition for user growth and revenue will be fierce.

Digital banks, which are not backed by established names, have an uphill task of proving their reliability and gaining consumers’ trust. On the other hand, the challenge for traditional banks is in finding a way to rapidly digitalise to stay ahead of the curve.

For both, it is critical to develop a good infrastructure, with robust data and risk management strategies in place, to ensure sustainability, optimise resource and cost efficiency, and mitigate risks.

This is where technology will play its greatest role in the years ahead in shaping the future of banking in Malaysia.


Mohammed Fouladi is the regional head of customer value proposition at ADVANCE.AI, a big data and AI company offering enterprise clients services such as digital transformation, fraud prevention and process automation

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