There has been no better time to extol the virtues of digital banking than today.
Giving customers the ability to access all their financing needs from wherever they are and whenever they want to is perhaps what Malaysia needs during a time where Covid-19 fears are at the top of their minds.
The proof is in the pudding: Banks in Malaysia are reporting an increase customers using its digital banking facilities.
Take Standard Chartered Bank for example, with its range of self-service requests through its digital banking channels. The bank’s clients in Malaysia, Singapore and India can now make most of all available service requests via Online Banking and the Standard Chartered Mobile app (SC Mobile). This capability is expected to be rolled out in the rest of the Bank’s Asean and South Asia markets later this year.
Banking service requests, which have been traditionally done through visiting a branch or calling into the contact centre, have been given a new digital lease of life.
According to Standard Chartered Malaysia head of retail banking, Lai Pei-Si, over the last two years, number of Standard Chartered clients who are digitally active has doubled and currently, 40 per cent of its customers in Malaysia are active users of SC Mobile.
“One in five of the total service requests we receive from our customers are already performed online,” she added.
“We expect this figure to rise rapidly as we expand the number of services available online and from the growing number of customers switching to digital banking due to the pandemic.”
This trend tallies with the fact that Malaysia leads other countries in Southeast Asia in the usage of mobile/digital wallets at 40 per cent, ahead of the Philippines (36 per cent), Thailand (27 per cent) and Singapore (26 per cent).
According to a Mastercard Impact Study 2020, Covid-19 that led to wide movement restrictions had driven momentum in Southeast Asia towards the digital economy by necessitating rapid adoption of e-commerce, digital payments and preference for online activities.
The report indicated that even as countries in the region start to ease the restrictions and prepare for a ‘new normal’, some of the trends and habits formed in response to the pandemic would likely remain.
Nearly half of the consumers surveyed in Malaysia reported an increase in online shopping during the period.
Other online activities also saw heightened interest, such as surfing the Internet for news and entertainment (75 per cent), online video streaming (57 per cent), social networking (55 per cent) and home delivery of food or groceries (50 per cent).
Additionally, about 64 per cent of Malaysians said they will conduct online shopping in the same frequency as currently or before the pandemic, even after restrictions are lifted.
Malaysian consumers also shifted to other payment methods other than mobile/digital wallet, such as contactless debit cards (26 per cent) and contactless credit cards (22 per cent), while cash usage declined 64 per cent since the beginning of the Covid-19 pandemic.
An ever-evolving industry
All these trends point to Malaysians’ appetite for digital services, more so encouraged by Covid-19. How do regulations catch up?
Towards last year-end, Bank Negara Malaysia (BNM) issued the Exposure Draft on Licensing Framework for Digital Banks that forms part of the series of measures adopted by the bank to enable innovative application of technology in the financial sector.
This follows its plan to issue up to five licences to qualified applicants to establish digital banks to conduct either conventional or Islamic banking business in Malaysia.
BNM said the exposure draft outlines the proposed framework for the licensing of digital banks to offer banking products and services to address market gaps in the underserved and unserved segments.
Such digital banks were expected to offer meaningful access to and promote responsible usage of suitable and affordable financial solutions to financial consumers, it said.
“The bank has adopted a balanced approach to enable admission of digital banks with strong value propositions whilst safeguarding the integrity and stability of the financial system as well as depositors’ interests, taking into account that such digital banks have not operated in a full financial and economic cycle, ” it said.
In the wake of the Covid-19 pandemic, BNM has announced that the deadline to respond to consultation papers on the digital banking licensing framework has been extended to June 30, 2020.
Meanwhile, in other initiatives, the central bank earlier this week issued a policy document on Electronic Know-Your-Customer (e-KYC), which aims to accelerate and streamline practices of industry players in their adoption of e-KYC technology, the online process of identifying and verifying individual customers.
“The adoption of e-KYC technology by the industry is in line with the bank’s efforts to facilitate greater digital offerings of financial services,” it said in an accompanying statement.
“This is expected to pave the way for greater innovation in the financial sector, including end-to-end offering of digital financial services for customers.”
The e-KYC initiative enables the digital on-boarding of customers to occur anytime and anywhere.
With implementation of e-KYC, a majority of customers no longer need to visit the physical premises of a financial service provider to open an account.
In addition to increased customer convenience, the digital on-boarding of customers enabled by e-KYC also lowers cost for both users and providers.
This can also help increase competition in the financial sector over the long term.
The policy document seeks to promote the safe and secure application of e-KYC technology in the financial sector by clarifying desirable outcomes in the use of e-KYC and sets out best practices, as well as parameters to ensure security and integrity of the on-boarding process for customers.
How ready are Malaysian consumers for digital banks?
How willing are Malaysians to accept full-on virtual banks? Perhaps more than you think.
In a PWC report last November 2019 titled “Virtual Banking: Malaysian customers take charge”, 74 per cent of Malaysians say they were ready become customers of a virtual bank. Malaysians are most open to the idea of sharing their data, as long as they are confident the data is secure.
This tallies with another research conducted by FICO, a global analytics software firm, in its its Consumer Digital Banking Survey released in May this year.
The survey found that a large percentage of Malaysians had an expectation that they should be able to complete all aspects of account opening online or on their phone.
Out of the regular identity checks needed to open an account, 78 per cent of Malaysians thought they should be able to prove their identity by scanning documents or providing a selfie, 46 per cent expected to prove where they live without moving offline and 40 per cent said they should be able to set up a biometric such as a fingerprint scan at account opening.
If all actions required to complete an account opening cannot be accomplished in-session, only 45 per cent of respondents said they would carry out the necessary offline actions as soon as possible and 23 per cent said they would abandon opening the account.
Overall findings demonstrated that financial institutions that don’t facilitate a completely digital account opening experience could lose over 40 per cent of their new business.
FICO’s Consumer Digital Banking Survey was the result of an online, quantitative survey of 5,000 adults (over 18) across 10 countries carried out on behalf of FICO by an independent research company.
The study showed that 23 per cent of Malaysians prefer to open a bank account on their phone compared to 18 per cent in the US and 16 per cent in Canada.
“It is not surprising that Malaysian consumers are digital natives,” said Subhashish Bose, Fico’s lead for fraud, security and compliance in Asia Pacific.
“It is demographically a young country, with 80 per cent of the population under the age of 50. Plus, the Malaysian government is actively encouraging development and investment in the digital economy which makes up about a fifth of the country’s GDP.
These factors have promoted a digital-first consumer base.”
The study showed that digital account opening is rapidly becoming the norm in Malaysia with 78 per cent of consumers saying they would open some kind of financial account online.
Of those that would open a financial account online, 65 per cent would consider doing so for an everyday transaction account, 45 per cent for a credit card and 28 per cent for a personal loan.
Leading the digital push were 25-34-year-olds, with 76 per cent of them saying they would open a bank account online.
This dropped to 49 per cent when it came to consumers 45-55 years-old, but interestingly climbed back up to 61 per cent for those over 55 years of age.
“Malaysian households are often multi-generational,” explained Bose.
“So, this finding might be explained by younger generations helping their grandparents with their banking, especially if they are less mobile and can’t get to a branch.”
“As consumers’ reliance on online services grows in response to Covid-19, we expect further shifts in adoption and indeed an acceleration and acceptance in opening bank accounts digitally.
“It is important that banks closely examine any points of friction in their application process to ensure consumers are not abandoning a process or switching to a competitor,” said Bose.
Keen on biometrics as Malaysians struggle with banking passwords
Fico, in the same study, found out that a notable percentage of Malaysians are not taking the necessary precautions to protect their passwords and logins when banking online.
The study found that only 46 per cent are using separate passwords to access multiple accounts; 22 per cent have between two to five passwords they reuse across accounts; and a staggering 14 per cent use a single password across all accounts.
Additionally, 23 per cent of respondents use an encrypted password manager — which many consider best practice — while 22 per cent adopted risky approaches to recall passwords, such as writing them down in a notebook.
“As consumers’ reliance on online services grows in response to Covid-19, criminals are preying on this, targeting consumers with malicious activities such as phishing and social engineering,” said Subhashish.
“With Malaysia’s movement control order, many Malaysians are only able to access their finances digitally, so it’s essential to stay vigilant and take the time to adopt security best practices.”
FICO’s study shows that consumers struggle to recall their current passwords.
Nearly half of respondents (43 per cent) reported that they have abandoned an online purchase because they forgot the login information, and 45 per cent saying they were unable to check an account balance.
Forgotten usernames and passwords also affect new account openings, with 20 per cent saying that it has stopped them doing so with an existing provider.
This is noteworthy as consumers are more willing than ever to bank online.
The study found that 78 per cent of Malaysians say they would open some kind of financial account online, such as personal loans (28 per cent), credit cards (45 per cent) and everyday transaction accounts (65 per cent).
Malaysians have at the same time become more accepting of biometrics, with the study revealing that 78 per cent are happy to provide this information to their bank.
The use of fingerprints was the most widely accepted approach (79 per cent), facial scans came second (38 per cent) and eye scans last (27 per cent).
A more popular alternative with Malaysians was analysis of how they type their password (74 per cent), a technique known as behavioural biometrics.
The survey also asked Malaysians about the current security used when logging into their mobile banking apps beyond traditional usernames and passwords.
The five most widely used security alternatives were:
- One-time passcode via SMS (63 per cent)
- Fingerprint scan (39 per cent)
- One-time passcode via email (33 per cent)
- One-time passcode generated by bank supplied device (30 per cent)
- Facial scan (23 per cent)
“Digital services are now an important part of our lives, it’s very important for consumers to protect themselves from online scams and fraud,” said Bose.
“Malaysians have the highest adoption of one-time passcodes by SMS out of all ten countries surveyed, but they are also willing to adopt additional biometrics to secure their accounts.
“Financial institutions and Malaysian consumers have shown they are ready to adopt more
secure authentication technologies in an effort to stay protected from fraudsters online.”
Q&A with Fico lead for fraud, security and compliance in Asia Pacific
Question: We refer to your survey revealing that Malaysian consumers are more comfortable opening bank accounts on their smartphones than American and Canadian consumers. As the survey was conducted prior to the escalation of the Covid-19 pandemic, how do you think the pandemic will impact this? Will more Malaysians be comfortable opening bank accounts on smartphones? Why so?
Subhashih: Malaysia is a mobile-first country with high smartphone penetration. According to Malaysian Communications and Multimedia Commission’s (MCMC) 2018 Internet Users Survey, close to half of Malaysians already use their smartphones for banking needs, such as bill payment, money transfer and checking of bank balance.
FICO’s survey showed that 78 per cent of Malaysian consumers said they would open a financial account online and that 23 per cent of Malaysians prefer to open a bank account on their phone compared to 18 per cent in the US and 16 per cent in Canada.
The Covid-19 pandemic has essentially accelerated adoption of online banking. We have seen in three months a spike in digital banking that probably would have taken years to achieve.
Older generations for example who may have always visited a branch have had to embrace digital banking due to the movement control orders that had people sheltering at home. Given the expectation that pandemic conditions and social distancing will continue for some time, we believe digital banking is a trend that will stick as people look to save time and effort.
Question: What do you think about Malaysia’s digital landscape, specifically for its financial system? Do you think enough is being done to support growth of the ecosystem to date?
Subhashish: The Malaysian government has also been actively pushing for digital transformation within the financial landscape. In 2019,the Securities Commission Malaysia announced a series of FinTech cooperation agreements with several regulators in major financial centres like Hong Kong and Singapore to help shape the regulatory approach and encourage the growth of digital finance within Malaysia.
Most recently, BNM’s release of the Exposure Draft on Licensing Framework for Digital Banks indicates the need for digital banks to focus on financial inclusion and support the underserved.
All these point to the country’s efforts to transform the financial landscape, however, these initiatives are not a silver bullet when it comes to digital transformation. Individual banks are on a journey with their customers that requires a fundamental change in approach.
Banks will need to look at how they manage risk, improve decision making and alter their front-end offerings. A lot of this will require adopting predictive data analytics with deep AI capabilities across the business in a way that delivers the best return on investment for the organisation. The process will take years, but the leaders have already started.
Question: Malaysian consumers underscored the need for financial institutions to start facilitating completely digital account opening experiences. If they don’t, these financial institutions could apparently lose over 40 percent of their new business. What is your advice to financial institutions on this front?
Subhashish: With new customers now getting more comfortable with the digital environment, financial institutions must stand ready to capture these opportunities by making sure the digital account opening process is seamless and simple for consumers.
Our survey revealed that nearly a quarter of applicants (23 per cent) will abandon opening an account digitally if the actions required to complete an account opening cannot be fully accomplished in-session.
Banking executives need to understand the difference between application completion for authenticated versus non-authenticated applications, as well as how many applicants with saved or abandoned applications return to complete the process.
Financial institutions need to look at these numbers closely. The most important metric that banking executives need to understand is the difference between application completion for authenticated versus non-authenticated applications, as well as how many applicants with saved or abandoned applications return to complete the process.
Thankfully, there are several technologies available in this space to help financial institutions onboard consumers remotely. One example is how mobile applications can use identification documents and ‘selfies’ to verify consumers during the onboarding process.
Users simply have to scan their ID card and snap a front facing photograph of themselves. In the background, such solutions perform document validity checks like hologram and edge detection, as well as apply facial recognition and liveness detection using Artificial Intelligence to confirm the customer’s identity.
Financial institutions can take advantage of such solutions to acquire more customers.
Question: Going forward, what are your thoughts on the Covid-19 pandemic and how this will change consumer’s digital consumption or digital dependence?
Subhashish: I think the pandemic has enabled, and to a certain extent, forced an accelerated adoption of digital tools among consumers. Many consumers have now tried and got used to doing daily activities online from shopping for groceries and meals to maintaining social interactions and we can expect this “new normal” to persist even after Covid-19.
However, what is also important is making sure no one slips through the cracks and ensuring that every Malaysian is equipped with the relevant digital skills necessary for them to keep up in a post-Covid reality.
Beyond adoption of smartphone or online banking, I expect that the zoom revolution of video calling will see innovation such as meetings with bank staff in areas like mortgage lending or wealth management conducted in this way.
Customers will see the benefit in avoiding travel, reduced waiting times and reaching the best qualified staff as more than balancing out the familiarity of a face-to-face meeting.
Try to see the silver lining of the pandemic. There are many good things to come out of it. People are reengaging with daily exercise, examining their consumerism, spending more time with family, placing new value on the natural environment and looking at how they can contribute to others.
Change can be hard, but mostly I have been impressed by how people have adapted. Digital banking is one small example of that but it is a change that is here to stay.
Post-Covid 19: What’s changed?
The question now lies in whether the local financial banking scene will step up to the challenge of this increasing demand for digital banking.
“In a previous life, Malaysia’s banking sector has made massive strides towards digital transformation which in fact, partly allows for a small sense of normalcy during these times.
“However, there is still more that needs to be done which may not have been fiscally viable before; partly prompting Bank Negara to announce a digital banking framework even though the permissions given in the framework could have been served by existing financial institutions,” commented Khairul Nisa Ismail, CEO of Sedania As Salam Capital.
“While the framework is still in its seeking public feedback phase, the launch of similar measures in contemporary Asian nations has allowed banks to shed its legacy systems and procedures to start a new entity from scratch – one that is able to pave a new way forward for the bank without being tied to the past.
“Members of the fintech community have joked that Covid-19 is the biggest digital disruptor today. Honestly there is a lot of truth in their jabs. More traditional players would be wise to heed the recent upheaval as a push to truly innovate.
“Mindful of tightening purse strings however, what needs to radically change in Malaysia’s digital transformation climate is our approach.
“The usual product-focused approach thus far necessitates aggressive marketing, perhaps unwelcome in a more sober social climate. So break the wheel.
“This time, ask yourself: what would Malaysians need right now? How could we answer the needs of SMEs, 69 per cent of them having lost half their income since the MCO order?
“During this MCO and inevitable social distancing period afterwards, how will the average Malaysian interact with your organisation, and how could you help them during the process?
“Be it via analytics, artificial intelligence, or tried-and-true surveys, listening to your consumers is crucial right now because a problem-focused approach will help your organisation streamline what resources you have into the correct digital transformation projects.
“Your spending can become more streamlined without sacrificing that zeal for innovation, and allows for better market adaptability.”
Focus on economic recovery
According to KPMG’s latest report entitled Digital Banking: The Inclusive Agenda, in a post-Covid-19 world, the financial services sector will be a key driver of economic recovery and growth. In particular, the stage is set for digital banking to thrive.
Adrian Lee, head of financial services at KPMG Malaysia, observed how the changing socio-economic landscape has altered customers’ money management and spending patterns as well as the way businesses are run. For both individuals and businesses, mode of payments and channels of financial management will also change.
“Recent customer behaviours in both retail and commercial sectors during the pandemic have evolved in support of digital banking services.
“As customers and businesses seek alternatives to safely run operations, the potential is great for digital banking to be the next success story for the financial services sector in Malaysia.
“Digital banking presents a value proposition poised to help companies and individuals get back into the economic saddle, and financial services providers that design its products around customer needs will stand out the most.”
Adrian continued, “It is widely anticipated that BNM will see a large number of applicants for the five digital bank licenses in Malaysia due to the lower entry requirements in minimum capital and significant market opportunities locally and in the region.
“Given the emphasis BNM has placed on financial inclusion, the successful applicants will be the ones that demonstrate how their products and services will help the underserved and unserved segments rebuild themselves financially.”
KPMG in Malaysia conducted an online survey to understand customer appetite and concerns when it comes to digital banking.
The study revealed that 77 per cent of the 1,220 respondents in Malaysia believe digital banking is the next evolution in financial services, and 82 per cent are already using internet banking functions of their banking service providers.
According to Yeoh Xin Yi, KPMG’s financial services advisory partner and head of financial risk management, 82 per cent indicated they would consider opening a bank account through online platforms only if they were regulated by Bank Negara Malaysia.
On preferred features of digital banks, respondents appear to look forward to products and services that add value to their lifestyle (see chart below).
“Malaysian consumers are clearly ready and willing to embrace digital banking. It is up to the players to make the crucial step in establishing a customer-first model for digital banking.
“Banks need to incorporate advanced analytics into understanding customer preferences and behaviour, from a historical as well as a forward-looking point of view. Information and data are key to providing customers with better products and services, thereby translating to economic value for the digital bank,” added Yeoh.
Improving financial literacy and inclusion
Despite there being more than 1,823 bank branches in Malaysia as of December 2019 and more than 37 banking institutions covering commercial banks, Islamic banks, and development financial institutions1, there is still a lack of coverage for the unserved and underserved segments of the B40 and M40 groups.
Yeoh commented, “Customers that fall into the unserved or underserved segments are more likely than others to have a profile that fall short of the conventional bank’s credit criteria when financing is sought.
“Digital banks can view this as an opportunity to expand its reach into untapped markets while also delivering on BNM’s aspirations for financial literacy and inclusion. Ideally, we would seek to have customers achieve higher financial literacy through the provider’s ability to advise, recommend and encourage positive financial behavior.”
For the unserved or underserved in retail and non-retail segments, micro-savings or deposits, micro-financing and micro-insurance are some of the basic products that is needed.
These “bite-sized” products enable consumers to access affordable financial enabling services in manageable quantum, and introduces those who are financially unaware to products that can gradually improve their financial literacy and economic livelihood.
The unserved and underserved of the B40 groups in Malaysia should be onboarded to financial service platforms that can help in cashflow management, enabling micro-savings or deposits, micro-insurance that safeguards their basic needs, and basic financing products to tide them over their financial trouble if the need arises.
The underserved M40 and T20 segment can also benefit from the convenience and value add that digital banks can offer from a lifestyle and advisory perspective, with a different set of customised targets to help achieve their financial needs.
Be an active platform Digital banks should be an active platform in the economic lifecycle of the segments it serves. It can do so by forming an eco-system or be part of an eco-system that is relevant to their users, where the user will be immediately plugged into a host of services within the digital bank platform.
Yeoh explained, “For a micro enterprise, for example, the platform would enable receiving payments digitally, purchasing materials via a marketplace, micro-savings and micro deposit auto functions, analytics for its business and personal finance, and basic micro-financing that commensurate with their financial behaviour and capacity as a micro-enterprise.”
In conclusion, by leveraging on advanced technology, digital banks can fill the void that is within our economic environment and address the pain points of the unserved and underserved in both retail and non-retail segments.