As part of their licensing requirements, digital banks in Malaysia are expected to offer banking services to unbanked and underserved segments to promote financial inclusion. Partnering with like-minded fintechs that are working on innovative solutions to complement financial inclusion could be a significant game changer in enabling these banks to meet their mandate, while staying on track to achieve long-term sustainability.
I. The emerging digital banking landscape
In 2014, the first concept of a digital bank emerged in Asia’s banking industry landscape, when the Chinese government awarded licenses to Ant Group’s MyBank and Tencent’s WeBank[1]. Within the next decade, growth and adoption of digital banks spread across both developed and developing economies in the broader Asia Pacific region, beginning with two of Asia’s highly developed financial systems, Hong Kong and Singapore, followed by other countries like South Korea, Japan, Indonesia, the Philippines.
Malaysia too has begun its own journey towards digital banking adoption in recent years. In April 2022, BNM issued digital banking licenses to five qualified recipients[2] comprising different groups of companies or consortia, of which three were awarded conventional licenses and the remaining two Islamic licenses. At the time of writing, three of these consortia have already begun commercial operations, while two more licensees are due to launch their respective banks by the end of this year, in alignment with the approved commencement date set by the ministry of finance for end 2024[3].
II. Pursuing the financial inclusion agenda
As part of its licensing requirements, BNM has given its digital bank license holders a clear mandate to meaningfully address financial inclusion gaps and provide digital banking services for underserved and unserved segments that face limited or no access to traditional banking financing[4]. In fact, commitment to financial inclusion was a key cornerstone criteria used by the Central Bank to assess the best interest of applicants in its licensing framework, besides other factors such as character and integrity, nature and sufficiency of financial resources, and the soundness and feasibility of business and technology plans[5].
The requirement for these digital banks to focus on financial inclusion and address gaps in underserved and unserved segments underscores the Central Bank’s larger aspirations to create an inclusive financial system, as well as to address financial barriers faced by the unbanked to ensure that financial services are accessible and available to all segments of society.
III. What can digital banks offer?
According to BNM’s Financial Capability and Inclusion Demand Side Survey 2021-2022, Malaysians are fast adopting digitalized financial products and services, based on mobile banking, internet banking, payment card and mobile payments usage[6]. Moreover, the 2021 Global Findex report from the World Bank showed that 79% of Malaysian adults use digital payments, and this increased use was accompanied by a rise in utilization of other financial services, including savings and lendings[7].
The high take-up rate of digitalized financial services reflects a wider pattern of transformation in the banking industry, driven by innovative business models and the widespread adoption of advanced technologies to create financial access points through digital experiences. In line with this, digital banks have great potential to
provide better accessibility to financial services for those with limited access to conventional banking facilities.
As digital banks operate through digital apps and platforms, they remove traditional barriers to obtaining services, particularly for populations in remote or rural areas that may face difficulties travelling to a physical branch to access banking services. Moreover, by offering services in-app, digital banks have the potential to transform certain face-to-face banking processes, such onboarding, transactions, financing and others, to become more streamlined and simplified.
Some digital banks have also ventured into “embedded finance” (a term for integrating banking services with nonfinancial apps and services) which serves to enable application procedures to be done in a shorter, more efficient processes. By refining the user onboarding experience and simplifying the end-to-end journey for users, digital banks can thus promote better financial inclusivity, by making banking less of a hassle and more accessible for customers that may be less financially literate.
On the same note, digital banks can also harness data analytics to identify customers’ specific pain points and tailor products that can meet their needs. Often, underserved communities do not require elaborate services early in their financial journey. For example, credit-poor groups may benefit more from “bite-sized” affordable financing products, such as micro-savings, micro-financing, and micro-insurance. Such ‘simplified’ products can help to provide greater financial inclusion to underserved communities, small businesses and consumers alike.
IV. Balancing financial inclusion commitments with ensuring profitability
In meeting BNM’s mandate of serving the financially underserved, one of the primary challenges faced by digital banks is the question of whether they will be able to meaningfully do so, while staying on track to achieve sustainable growth and profitability in the long-term.
For context, BNM has imposed an asset growth cap of RM 3 billion for digital banks to prove their viability during the foundational phase, before graduating to become a full-fledged bank[8]. However, even with this relatively modest threshold, digital banks may face significant challenges in scaling growth, especially when it comes to managing risks and balancing their assets and liabilities to provide services to underserved communities.
Compared to established financial institutions that already have mature ecosystems and established expertise across core business areas, digital banks are still in the nascent stages of evolution and finding their footing in the industry. As a start, they will need a sound business plan that includes strategies to remain sustainable, while also delivering on the agenda of financial inclusion.
V. Collaborate with like-minded Fintech partners to spur financial inclusion
One strategy that digital banks can consider adopting is to work with FinTech companies that can offer relevant support to meet the financial needs of the underserved and unserved segments, which is a key criteria established by BNM. While the current digital banking landscape in Malaysia predominantly offers deposits and payments as service offerings, the next step to widening financial inclusion would be to expand into providing loans to underserved communities, since accessibility to such credit facilities is a common pain point.
As the digital arm of Credit Guarantee Corporation Malaysia Berhad (CGC), CGC Digital aims to empower MSMEs by creating a simpler and more seamless financing experience in the digital ecosystem, and help to close the funding gap for these enterprises[9]. To date, it has over three years of accumulated experience in partnering with players in the digital finance ecosystem, combining expertise and co-creating accessible digital banking solutions for the underserved and unserved segments.
One such solution involves innovating CGC’s digital guarantee product to help bridge the gap for MSMEs in accessing credit facilities, and championing the alternative credit scoring approach to complement traditional credit assessments. This is done through harnessing digital technology such as AI and machine learning tools to gather information on spending habits and financial behaviour patterns of loan applicants that may lack formal credit history[10]. The “alternative credit scoring” approach, or ACS, integrates these alternative data points into credit assessments, and has been shown to be useful in expanding access for “thin-file” applicants, as it helps to form a more complete picture of their risk profiles.
Since its inception, CGC Digital has built up a strong track record of collaborating with like-minded partners in the FinTech ecosystem to enhance financing access for MSMEs and tackle the challenges in their growth journey. A key focus of CGC Digital is the development of innovative digital guarantee products through a digital-first approach. These digital guarantee products are designed to broaden the scope of services available, specifically targeting underserved and unserved markets, thereby fostering greater financial inclusion.
CGC Digital’s commitment to bridging the financial inclusion gap for MSMEs largely mirrors the mandate of digital banks to reach more underserved segments and provide them with access to financial services. This shared vision underscores the potential of both players aligning to become partners, and supporting each other to make a broader, wide-ranging impact in financial inclusion. By joining forces with CGC Digital through strategic partnerships and collaborations, digital banks may well unlock new opportunities to co-create value and enhance their effort to expand financing access for underserved segments, driving greater inclusion within Malaysia’s digital finance ecosystem in the long term.
Commenting on the company’s potential of collaboration with digital banks, Puan Yushida Husin, CEO of CGC Digital, said, “As a digital first tech startup, we share similar digital DNA with digital banks, and are committed to partnering with MSMEs throughout their life stages to drive their excellence through digital guarantees and other targeted forms of developmental support to scale their impact. We believe that we can bring a strong value proposition to the table for digital banks, as the digital banking business aligns with our own aspirations to promote financial inclusivity for MSMEs in support of their growth and development.”
In this regard, digital banks that leverage on CGC Digital’s expertise may stand to benefit from reducing their exposure to excessive risk while taking on “thin-file” MSMEs that are generally deemed to be riskier clients.
VI. BNM endorses stakeholder partnerships, in line with strategic policy thrust to advance financial inclusion
In its second Financial Inclusion Framework (FIF) 2023-2026, BNM emphasised the importance of strategic collaborations and partnerships between financial service industry players to drive financial inclusion.
The FIF, which serves as a four-year roadmap to advance financial inclusion, sets out wide-ranging strategies aimed at achieving broad development outcomes and elevating financial resilience and well-being for all Malaysian residents. Significantly, under Policy Objective 5 of the FIF, the Bank has underscored the importance of strengthening the role and capabilities of financial institutions in promoting financial inclusion. Among the strategies laid out to achieve this include facilitating “greater partnerships, collaborations and capacity building” among stakeholders in the financial services industry, as well as ensuring a conducive policy environment “for digital banks to evolve business models to effectively deliver on financial inclusion commitments.”[11]
Complementing this, in addressing the Malaysian SME National Conference 2024, BNM Deputy Governor Jessica Chew stressed that the path forward to deliver an effective financing strategy for SMEs would need to include, among others, a focus on developing and deepening alternative sources of financing. She further stated that the entry of digital banks and alternative fundraising platforms offering “different business models and innovative approaches to credit assessments” would contribute to the expansion and diversification of funding sources” for SMEs[12].
These sentiments indicate that the Central Bank recognizes the role of digital banks as a significant driver of financial inclusion and encourages strategic partnerships with industry stakeholders that can offer innovative solutions in expanding access for the unserved and underserved segments. In this regard, collaborating with a digital-first, forward-looking FinTech such as CGC Digital, with its innovative product offerings and strong commitment to empower financially unserved and underserved MSMEs, presents promising opportunities for digital banks.
At the end of the day, tapping into innovative partners and proven solutions can be a game changer for digital banks. Such collaborations enhance their capabilities to expand banking services to the underserved and unserved segments, while also aligning with the goal to become sustainable and thrive in the long run.
References:
- Frances Gagua, “Did Digital Banks Fail to Disrupt?,” Asian Business Review, March 28, 2023, https://asianbusinessreview.com/banking-technology/exclusive/did-digital-banks-fail-disrupt.
- The five consortiums were Boost Holdings Sdn Bhd and RHB Bank Bhd; GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd; Sea Limited and YTL Digital Capital Sdn Bhd; AEON Financial Service Co, Ltd, AEON Credit Service (M) Bhd and MoneyLion Inc; and KAF Investment Bank Sdn Bhd.
- GXBank was the first to launch in the market in the final quarter of 2023, by a consortium made up of Grab-linked GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd. Following this, two other digital banks opened its doors to the public in June: AEON Bank, a subsidiary of AEON Financial Service Co, Ltd; and Boost Bank, a joint venture between Boost Holdings Sdn Bhd and RHB Bank Bhd. The remaining two digital banking applicants that have yet to launch their digital banks are a consortium led by Sea Limited and YTL Digital Capital Sdn Bhd and a consortium led by KAF Investment Bank Sdn Bhd.
- BNM, “Financial Inclusion Framework 2023-2026 Strategy Paper,” June 23, 2023, https://www.bnm.gov.my/documents/20124/55792/SP-2nd-fin-incl-framework.pdf.
- “Five Successful Applicants for the Digital Bank Licences – Bank Negara Malaysia,” accessed June 27, 2024, https://www.bnm.gov.my/-/digital-bank-5-licences.
- “Financial Stability Review First Half 2022,” 2022.
- “The Global Findex Database 2021,” Text/HTML, World Bank, accessed November 1, 2024, https://www.worldbank.org/en/publication/globalfindex.
- BNM, “Licensing Framework for Digital Banks,” December 31, 2020, https://www.bnm.gov.my/documents/20124/938039/20201231_Licensing%20Framework%20for%20Digital%20Banks.pdf.
- “CGC Digital: Making Finance Inclusive and Accessible for MSMEs,” CGC Digital, accessed November 21, 2023, https://cgcdigital.com.my/.
- With their data driven approach, digital banks can assess financial transactions using non-traditional data sources such as payments, payroll and point of sale terminals on digital platforms. Data obtained from these digital transactions (sometimes called ‘digital footprints’) can be applied to alternative credit scoring frameworks to complement traditional credit scores, and create a more holistic picture of creditworthiness.
- Bank Negara Malaysia, “Financial Inclusion Framework 2023-2026,” June 23, 2023, https://www.bnm.gov.my/documents/20124/55792/SP-2nd-fin-incl-framework.pdf.
- “Deputy Governor’s Keynote Address at the Malaysian SME National Conference – Bank Negara Malaysia,” accessed June 27, 2024, https://www.bnm.gov.my/-/dgjc-spch-smenc24.
