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Digital banks: Opps and challenges

Rajendar Dhorkay, Malaysia Country Head for Instarem has a chat with Enterprise IT News about global money transfers, digital banks and getting them to be competitive.

EITN: Please briefly share what Instarem does, its activities and customers in the APAC or ASEAN region.

Rajendar: Launched in 2015, Instarem is a leading digital cross border payments platform that enables consumers and small and medium-sized enterprises (SMEs) to conveniently and securely send and collect international money transfers. With our network in over 100 markets, 65 markets in real-time, Instarem is setting a precedence in bridging currency borders by making global money transfers quick, easy, and cost-effective. Instarem is a trusted licensed service provider with licenses in Malaysia, Australia, Singapore, Hong Kong, India, UK, US, EU and Canada.  

In Malaysia, our current priority is to grow the local retail and corporate business by 20% by the end of 2021. We are also in the midst of launching key consumer initiatives this year, aimed at making it even easier for Malaysian consumers to send and receive funds.

EITN: What are the key takeaways or learnings from Singapore’s recent digital bank licenses?

Rajendar: With the COVID-19 pandemic accelerating digitalisation, the region is expected to enter a new era with digital banks. According to Google, Temasek and Bain & Company’s e-Conomy SEA 2020 report, the estimated number of Internet users in the region hit 400 million last year, and the value of online transactions is expected to reach $300 billion by 2025. The race is on between market players to figure out how best to secure a piece of this rapidly expanding pie.

Malaysia’s decision to open doors to digital banks comes close on the heels of other markets in Asia Pacific in terms of issuing new digital banking licenses. Singapore, for instance, has just approved four digital bank licenses to non-banking players late last year. As we look towards Malaysia’s new phase of digital banking, it is useful to reflect on the challenges faced by those in the payments space, and how they have overcome them.

One key lesson we can take from Singapore is the necessity of closer collaboration between traditional players and new entrants. Late last year, Bank Negara Malaysia’s issued its digital banking framework, which aims to foster a financially inclusive way forward by “promoting responsible usage of suitable financial solutions to unserved and underserved segments”. With this in mind, Malaysia’s upcoming digital banks should then consider how they can collaborate to create an ecosystem that can drive such positive change in the financial sector.

Looking beyond Singapore, digital banks in other parts of the world have also gained success by focusing on specific pain-points from the start of their journey. This could include providing cheaper foreign exchange transactions for travelling consumers, or more efficient lending for SMEs.

With this in mind, Malaysia’s upcoming digital banks should then consider how they can collaborate to create an ecosystem that can drive such positive change in the financial sector.

EITN: What are new opportunities and challenges that Malaysian consumers and SMEs can expect?

Rajendar: According to a recent PwC-commissioned study, sentiments have been very positive as the country embraces this much-anticipated digital banking revolution. Malaysian consumers encourage the switch to digital banks and are open to new technologies. As digital banks are branchless, it is likely that they may offer higher interest rates and lower fees for their financial products. Unserved or underserved groups in Malaysia, such as the B40, micro and SME market segments can be better reached with the lower costs of digital banks.

Improved convenience and more personalised services for consumers can be expected, with banking services at their fingertips 24/7.

However, the same report cited data protection as a key concern. Indeed, there are possible drawbacks that can be expected, such as security and identity theft concerns, technology and service interruptions, and lack of personal banker relationship. For instance, the Monetary Authority of Singapore is holding new digital banks to the same high standards in cybersecurity and technology risk management as traditional banks. This would be a key aspect that Malaysia will address in the next few years leading to 2022.

Indeed, there are possible drawbacks that can be expected, such as security and identity theft concerns, technology and service interruptions, and lack of personal banker relationship.

 EITN: How can Malaysia’s future digital banks succeed – and thrive – in a crowded market space?

Rajendar: With digital banks entering Malaysia’s crowded and competitive banking space, its long-term viability is only possible if they move beyond the payments space, through the creation of their own ecosystem, for instance, or the integration of lifestyle solutions. The same report found that Malaysian consumers today want access to e-commerce and lifestyle services for an integrated experience on a single platform.

We are finding that consumer needs will stay the same in 2021 and beyond, even if the financial landscape has greatly evolved. Consumers still want quick and easy access to their money. They also want some form of a relationship with their bank through trust and personalisation. In the early days, this meant face-to-face interactions with their banker, however digital banks will need to quickly bridge this gap to set them apart from their conventional competitors. One way is to leverage emerging technologies to innovate and respond to consumer demands with agility. Artificial intelligence (AI) capabilities, for instance, can enable real-time customer interaction and build deep customer understanding using sophisticated data and analytics.

Lastly, to gain market share, digital banks need to offer attractive pricing on basic financial products such as deposits, payments and credit cards.

Digital banks are typically loss-making in their early customer acquisition phase. In building a winning proposition, digital banks around the world share a common organisational DNA, including lean and low-cost operations both in customer acquisition and servicing.

EITN: What’s to come in a post-pandemic era for the digital payments landscape?

Rajendar: Of course, having more digital banking services in Malaysia will not automatically solve all of the industry’s problems and improve financial inclusion at the same time. Even with more players, there will be certain consumers and SMEs who still prefer face-to-face banking at physical branches or simply lack the digital literacy to do so.

As we look to promote financial inclusion in a post-pandemic era, there is still more that can be done collectively. Bank Negara Malaysia and relevant industry players will have to cooperate and put in resources to improve educational levels, increase awareness and promote digital literacy in the long run.

This will also have significant implications for SMEs and micro businesses, as they slowly recover from the pandemic. These unbanked segments will no doubt be looking for quicker access to financing, which can potentially become the difference between staying afloat and shutting down.

As we look to promote financial inclusion in a post-pandemic era, there is still more that can be done collectively.

 EITN: Please share Instarem’s business and technical roadmap for the next 1 to 3 years.

Rajendar: Instarem is launching new product offerings that aim to better service retail consumers and SMEs in Malaysia, which will be progressively rolled out in the next 1 to 3 years. The country’s ongoing shift to digital and online channels will help reduce operational cost and improve responsiveness of local businesses to new market opportunities post-pandemic. This is a key area of focus for us as the Malaysian economy gradually moves into the recovery phase.