Towards Sarawak’s Very Own Digital Bank

28 March 2021

IN a time where physical distance becomes a safety prerequisite, both consumers and businesses are turning to digital options out of pure necessity – opening the path wider for digital banks.

This new normal of banking is steered away from the traditional branch-driven, product-centric business model to consumer-centric organisations with more personalised solutions that can be delivered quickly, effortlessly and more effectively.

Things are heating up in Malaysia’s digital banking space. Bank Negara Malaysia issued on December 31, 2020 the much anticipated digital banking framework, which followed a six month public consultation period.

Plans for a digital banking framework was first announced in March 2019 and were initially scheduled to open for applications in mid-2020, but the development of the framework hit a snag due to disruptions caused by Covid-19.

The central bank said that the licensing framework was created to “enable innovative application of technology to uplift the financial well-being of individuals and businesses and foster sustainable growth” which includes expanding “meaningful access” and “promoting responsible usage of suitable financial solutions to unserved and underserved segments”.

“The framework adopts 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.

“To achieve these outcomes, a simplified regulatory framework will be applied to digital banks during the initial stage of operations, commensurate with an asset threshold of not more than RM 3 billion for three to five years.

“This functions as a foundational phase for the licensees to demonstrate their viability and sound operations, and for the central bank to observe the performance of the licensed digital banks and attendant risks that arises from their operations.”

In February, BNM governor Datuk Nor Shamsiah Mohd Yunus divulged that about 40 parties have registered their interest to apply for a digital banking licence.

“In our policy paper, we mentioned digital banks are expected to introduce innovative applications of technology that can contribute to the financial well-being of Malaysians in particular to address the unmet needs of the underserved and unserved customer segments.

“We expect to announce the granting of the licences in the first quarter of next year and there will be five licences issued to qualified applicants,” she said during a virtual press conference to announce the country’s gross domestic product for the fourth quarter of 2020.

Submission of applications to conduct digital banking business or Islamic digital banking business need to be made to the central bank no later than June 30, 2021.

Sarawak enters the fray

Sarawak is no stranger to taking the initiative to pioneer its own ventures, as can be seen by its formation of its very own digital wallet Sarawak Pay.

Thus, it came as no surprise when in November last year, Chief Minister Datuk Patinggi Abang Johari Tun Openg revealed that the state government was looking to apply for a digital banking licence and has submitted “its expression of curiosity”.

“We are totally conscious that an efficient digital banking have to be resilient, honest and dynamic. It is among the many stipulations for the Sarawak authorities to collaborate with respected know-how firms and native retail banks permitted by the governing our bodies.

“Accordingly, the Sarawak authorities is within the midst of placing up the required infrastructure and amenities all through Sarawak, partially to assist our digital banking and different digital initiatives,” he said during his winding up speech during a state meeting.

He mentioned a digital banking licence would assist to serve the underserved. In April 2017, Financial institution Negara permitted the institution of the Improvement Financial institution Of Sarawak.

“On this (Covid-19) pandemic disaster, hyper-connected and capital-light world, I see the long run belongs to small and medium enterprises (SMEs) utilising digital platforms,” he enthused. “The monetary impacts from these financial developments are going to be large.”

The Chief Minister further mentioned that the state authorities is dedicated to spearhead the digital economic system initiatives with a purpose to optimise the potential of digital know-how and digitalisation to allow Sarawak to leapfrog in the direction of a high-income economic system by 2030.

He revealed that RM540 million had been allotted for 2021 to proceed funding the varied digital initiatives.

“In accelerating the digitalisation of the economic system, the availability of excellent infrastructure is crucial to spice up the expansion of companies, to create higher financial alternatives and to open up the native economic system in addition to to strengthen digital reference to the world, ” he said.

Building blocks of a digital bank: By Sarawakians, for Sarawak

THE race to digital banking is very heated as the deadline for submission to BNM is now less than three months away, closing in on June 30, 2021.

Other than the Sarawak state government being part of the intense race, other strong contenders include Grab Financial, Axiata Group (Boost), Sea Ltd (Shopee), Razer Pay, as well as 35 other contenders.

All of them eye for a piece of the pie of the five digital banking licenses to be offered by BNM.

Although many are rushing into the scene, only a few can claim that they comprehend the requirements well in setting up a bank from scratch, even more so a digital bank.

“For strong contenders with deep pockets, the initial capital of RM100 million is perhaps the easiest thing to fulfil,” opined Vision Group founder Chua Zhu Lian.

Vision Group is an integrated business enabler firm.

Chua, who is Sarawakian, is also currently serving as the director of investments at Fortress Capital, managing several funds and business portfolios in multiple industries. He has previously served as a financial supervisor at Bank Negara Malaysia from 2011 to 2017.

“Under the umbrella of a banking business, there are multiple panels of business models, each with their unique playbook for successful execution. The major panels include consumer banking, SME banking and business banking (for larger businesses),” he further commented.

“Key questions to ponder are whether the models applied are going to lead to a consumer-focused bank or a business-focused bank? What types of products can help to supplement the incumbent banks as well as other potential digital bank entrants?

“How about the loan origination process from application stage to disbursement stage? What about the asset liability management to account for daily fund inflows and outflows?

“In addition, all these have also yet to account for the Malaysian Financial Reporting Standard 9 (MFRS 9) requirement on the staging criteria to provide adequate loan loss coverage, as well as regulatory requirements on money laundering and counter-terrorism financing, liquidity coverage ratios, as well as Basel capital requirements, just to name a few.”

Vision Group deputy managing director Albert Chee told BizHive that there are still many areas which have yet to be accounted for in digitalising these prudential requirements to comply with BNM’s standards of reporting.

“Digital banking is essentially a banking model that goes from offline to online with wider outreach in just a few clicks via your mobile app.

“Without having physical branch presence, digital banking model can potentially have a huge cost savings as compared to traditional banks which requires to maintain the staff costs, rentals as well as various security expenditure on a monthly basis,” he explained.

“These benefits shall be directly passed down to the rakyat, be it from depositors perspective with higher FD rates (as overall costs are lower compared to the traditional banks), as well as at borrowers level with competitive interest rates.”

While acknowledging the biggest challenge from Sarawak is on the current broadband infrastructure to facilitate a digital economy, Chee said they recognise the determination of the state goverment through the heavy budget allocation to improve the existing broadband infrastructure at RM795 million to set Sarawak back to the right track.

“With the rollout of digital banking that are expected to take place in the next one to two years, it should meet the timeline of the widening 4G network across Sarawak state,” he added.

A Sarawak-first model

TOUCHING on the business model of a digital bank, the Vision Group duo forewarned what may work in other parts of the world may not work in Sarawak.

“Sarawak differs from many parts of the world in terms of geography, so the infrastructure of a comprehensive 4G network coverage for full internet penetration will be much more costly,” Chua added.

“This is mainly due to the difficulty in providing comprehensive road infrastructure due to the challenging geographical terrains and low population density, as compared to the metropolitan cities like Kuala Lumpur.”

Meanwhile, basic infrastructure such as banking services and road access can be deemed as a luxury to the rural parts of the state.

“Hence, a digital banking model that is assessed as a good use case for Peninsular Malaysia might not yield the same assessment when put in the Sarawak context,” Chua added.

“We also recognise the determination of the state government to steer Sarawak to the next stage of development through its heavy budget allocation amounting to RM795 million to improve the existing broadband infrastructure.

“In our opinion, a successful digital banking model for Sarawak has to take into account of the state’s current infrastructure level, progress of the digital economy master plan, as well as the socio-economic status of Sarawak.

“Vision Group strongly believe that a successful venture in the digital banking model in Sarawak will bring tremendous benefits (socio-economic as well as economic multiplier effects) to Sarawak, thereby achieving the State’s vision of becoming a developed and high-income state by 2030.

“It will also elevate Sarawak as a leader to the rest of the world to become a successful role model on how a digital banking platform can empower the underserved for other countries with similar pain points,” Chee said.

“Digital bank can help to breach the economic gap for the Sarawak businesses to get funding needs be it individuals/SMEs which will translate to economy multiplier in Sarawak, it would also provide a safe heaven for Sarawakian for better interest rates to grow their income.”

Meanwhile, current challenges faced by Sarawak is the difficulty to provide extensive road infrastructure due to the challenging geographical terrains and low population density as compared to the metropolitan cities like Kuala Lumpur, Singapore or Jakarta. Hence basic infrastructure such as banking services and road access can be deemed as a luxury to the rural parts of the state.

“The accessibility towards banking services online shall translate to potential time and cost savings for people who lived far outside the urban areas, through digital bank,” added Chee.

“On top of these, the difference between digital bank and the ordinary banks on the street is digital bank is far more agile, more innovative, and designed to shake up the industry to push for innovative products and serves the existing gaps in the industry.

For example, traditional banks typically does not lend to borrowers without credit history as the existing scorecard models is only limited to groups with some credit history via CCRIS/CTOS. This results in many micro businesses to be always rejected at the front door of the bank and not able to fund the capex of their businesses, despite being viable with continuous business flow.

Preference for banks’ digital channels

THE appeal of in-person branch banking is fast fading post pandemic. Earlier in March, FICO in its Advancing New Experiences in Digital Banking survey discovered that 28 per cent of Malaysians prefer to deal with just one primary bank, with a further 43 per cent saying that they ‘somewhat agreed’ this was their preference.

The FICO survey revealed that 61 per cent of Malaysian consumers prefer to use digital channels to engage with their bank during financial hardship.

The poll, conducted in December 2020 during the height of the global Covid-19 pandemic, demonstrated the willingness of consumers to embrace digital banking and the opportunities that exist for banks to further develop their offering.

The high level of high-speed internet penetration in Malaysia meant that 27 per cent of Malaysians preferred to communicate about hardship via online banking; 18 per cent used their mobile banking app; 8 per cent preferred telebanking; 6 per cent communicated via email and 2 per cent wanted to use virtual conference technology.

“The risk of infection and social distancing requirements made branch visits less appealing last year, accelerating a shift to digital banking channels globally,” said Aashish Sharma, risk lifecycle and decision management lead for FICO in Asia Pacific on its findings.

“Being able to deliver and manage numerous channels in line with customer preference and deliver a seamless and engaging experience is a challenge that is here to stay.

“Investment in customer management and communication tools that span these channels and product silos and can deliver personalization and improved decision making is key to making digital banking a success.”

Customer attitudes to new technology from banks such as debt collection automation can yield some interesting preferences and behaviors.

“It is worth noting that during periods of hardship, some customers prefer to deal with the issue using intelligent, automated online services so as to avoid the embarrassment of talking to an agent about outstanding loans.

“If customers prefer digital channels during times of hardship, their most difficult time, it seems to me we can expect branch banking to continue its decline.” explained Sharma.

The survey was conducted in December 2020 using an online, quantitative poll of 5,000 consumers across ten countries and regions carried out on behalf of FICO by an independent research company. The countries surveyed were Australia, Hong Kong, Indonesia, Malaysia, New Zealand, Philippines, Singapore, Taiwan, Thailand and Vietnam.

Importance of maintaining banking relationships

BANKS still have a data and relationship advantage when compared to fintech challengers. The survey revealed that across Asia Pacific, one in three consumers preferred to have all their banking needs serviced by one bank.

In Malaysia, this was slightly lower at 28 per cent, with a further 43 per cent saying that they ‘somewhat agreed’ they would like to deal with just one primary bank.

“Managing multiple bank accounts or finance products with different lenders can often be a complex, time-consuming and costly process for the average banking customer,” said Sharma.

“Digital banking users today are looking for greater control and visibility of their financial position.”

When asked about their willingness to try a fintech or challenger bank, 19 per cent of Malaysians said that they were inclined to consider a competitor with a further 41 per cent relatively open to the idea.

“To consolidate and strengthen main bank engagement, lenders need to offer digital banking features that compete with the challengers to ensure the stickiness and viability of long-term customer relationships,” added Sharma.

When asked about the reasons they would make the switch to a competitor, 73 per cent of Malaysian consumers said their number one reason would be to secure improved personalization and controls in their digital banking service. The poll defined this as the ability to view transaction history, update personal details, reset passwords and other such functions.

Interestingly, personalisation and control was also the top reason for switching across Asia Pacific (31 per cent).

Other top switching drivers across Asia Pacific were; the ability to control a payment card (set transaction limits, lock/unlock); the ability to set up recurring payments; and improved security features such as biometrics and two-factor authentication.