Bank NXT Asia By Riddhi Dutta (April 2021)

Malaysia’s digital bank boom – What does it mean for incumbents?

Malaysia’s banking scene is transforming before our very eyes.

Bank Negara released its highly-anticipated digital banking framework in December 2020, and with over 40 parties vying for five digital banking licences, one can only guess the rippling impact this landmark piece of regulation will have.

Last month, I joined three experts from major Malaysian banks to discuss some of these implications and how incumbent banks are reacting to them.

Malaysia’s guidelines are very clear and balanced in terms of promoting innovation and financial stability.

As for banks, there are four key considerations to ensure holistic development of their digital offerings: business vision and strategy, innovation, overall risk and control framework, and cultural mindset.

Possible digital adoption strategies

There are three possible strategies that incumbent banks may adopt in response to the new framework.

First, a bank may choose to fully devote itself to digitalisation. An example is the Bank of the Philippine Islands (BPI), rated as the best bank in the Philippines, partnered with Backbase since 2016 for its digital transformation.

The bank had the exceptional foresight to invest in digitalisation, advancing its digital channels and other capabilities. Consequently, it has experienced almost 100% growth in the last two years and gained valuable access to 300 fintech partners.

This proves that a discerning bank willing to invest in the right resources to stay updated will be able to grow despite new competition.

Secondly, a bank may choose to adopt a spin-off strategy that combines the benefits of legacy and innovation. A notable example would be Vietnam’s VPBank, which launched a digital bank, Ubank, with distinct target segments and a set of offerings.

The third strategy is leveraging the opportunities in ecosystem cooperation. A traditional bank may join hands with a telco or fintech – in payments, e-wallets, and other financial services – to create an entirely new banking experience.

For TPBank, also voted as the ‘best digital bank’ in Vietnam, leveraging Backbase’s platform exposed them to different partners which is one of their goals to build win-win partnerships with neobanks and fintechs.

The chosen strategy depends on a bank’s risk appetite, confidence about its internal operations, innovativeness, and where it sees itself in the near future.

Regardless of the approach, digital-only banks should not be viewed as a threat to incumbents. Instead, they should be viewed as a boon – spurring traditional banks to move with the times, benefiting themselves and their customers.

Critical factors to succeed in the digital arena

With reference to the concept of a minimum lovable product raised by Farilla Abdullah, Chief Strategy Officer of Bank Islam, banks should focus on their unique value propositions.

The majority of successful fintechs started by solving a key pain point for their customers. For instance, Revolut, an English fintech company, focused on travel cards and cross-border payments before branching out into banking services. Similarly, in the SME space, the Coconut app set its sights on supporting the accounting needs of the self-employed.

Banks can replicate this success by identifying their minimum viable product and delivering the best possible solution before expanding their scope of operations. This will help avoid the common pitfall in business of spreading themselves too thin.

Areas of growth for digital and incumbent banks

One area that surely has room for digital innovation is increasing accessibility of credit, as Indian fintech MoneyTap is doing. Another promising sector is banking for SMEs and MSMEs, with underdeveloped services such as lending, cash flow forecasting, sweep accounts and cash management.

While these areas are critical in the short term, banks also need to look to the mid and long-term horizons and embed themselves across the entire customer journey. Equipping themselves with the right technology and platform foundations will open up opportunities for banks to better their customer experience and engage in partnerships with other industry players.

Watch the full session of the webinar here.