Banks Will Focus on the Basics, Says KPMG

By Charles F. Moreira

ICT investments by Malaysian banks will focus on their retail and SME banking services over the next three years, said Mohd. Muazzam Mohamed, KPMG executive director, Advisory Management Consulting.

They will seek to increase their number of channels serving retail customers, especially through Internet and mobile banking, firstly to make it easier for their customers to conduct transactions and secondly to save costs. KPMG found that an Internet banking transaction cost 2% or 50 times less than an over-the-counter transaction.

Mohd. Muazzam Mohamed

This move back-to-basics began after the 2008 global financial meltdown, after which banks moved away from “sexy” investment banking products such as derivatives, structured products and so on, and also due to more stringent requirements such Basel II, III and national regulations required by industry regulators such as Bank Negara Malaysia, the central bank.

“In the early 2000s, banks measured their growth by quantity of assets but now they focus on asset quality by  offering high-margin loans to credit-worthy people and according to feedback from banks’ chief information officers (CIOs), they have a greater need for credit scoring and loan origination systems to be able to provide loans to such quality customers quickly, based upon details such as their income, other loan commitments, loan repayment track record, mortgage collateral and so on,” said Muazzam.

Analysis of big data such as payslips, photos, thumb prints, track record and so on will let banks segment customers according to spending pattern and cross-sell them other products, while also helping banks manage their risk exposure.

Standardised customer experience
Meanwhile, some of the larger Malaysian banks have expanded regionally, including through acquisitions and their current technological focus is to provide a standardised customer experience, look and feel across their customer-facing and front-office systems worldwide, right down to their forms and processes, their ATM machine, Internet and mobile banking user interfaces. 

For now, a lower priority is being given to back-office systems but that can change.

Very simply, banks’ ICT systems consist of three layers and besides the delivery layer mentioned above, some banks’ ICT investments have been in the middle-layer, for example to support hybrid products such as a current account which comes with a housing loan provided. KPMG has observed a trend towards such products among Malaysian banks. Core banking systems which calculate interest and so on are the third layer.

“We’ve also seen a trend towards virtual banking in South Korea and the U.S. where such banks have no physical presence. However, bank CIOs believe that regulations requiring banks in Malaysia to verify their customers particulars in person could pose a challenge to virtual banking here, though a solution could be like in South Korea, where a virtual bank tied up with a telco to provide banking services to its customers, since the telco has all their details,” said Muazzam.

Bridging the back-end
Meanwhile, KPMG has observed that many Malaysian banks still have disparate back-end systems which don’t communicate with each other, so require manual intervention but this is changing as more banks are building bridges between these systems.

Also, while there still are security concerns worldwide over the sharing of the same infrastructure between different banks via cloud computing, over the past two years, banks overseas have been deploying their own private cloud serving their group worldwide, though banks in Malaysia have not done so yet.

Multinational vs local
Muazzam believes that since banks compete on economies of scale, foreign multinational banks have an advantage over Malaysian banks in that they can decide on an ICT system and duplicate it worldwide at a much lower cost, while they can also share their infrastructure such as data centres and their services centres across their group worldwide. They also have a much larger talent pool which they can also deploy between countries.

“So smaller banks must focus on serving niche customers by offering them unique, innovative offerings,” said Muazzam.

Economic downturn?
While banks worldwide are in a process of consolidation and the recent World Economic Forum in Davos identified the Eurozone as sluggish, however, the IMF projects 3.5% growth in the world economy, and that will also impact Malaysia. But Muazzam believes Malaysia’s economy will remain more stable than say Singapore’s, thanks to government regulation.

“Malaysia’s economy may not grow as fast as Singapore’s if global growth is positive but will probably still grow slowly despite a global contraction. Meanwhile, ICT vendors will push their products at competitive prices to banks in the growth areas and ICT systems deployed earlier in developed countries such as the U.S. will be deployed here, since it is essential to continued competitiveness,” Muazzam added.