Shweta Jain, Head of Product (Digital, Analytics and Platform), at Finastra, shares her thoughts about the recent awarding of five digital banking licenses by Bank Negara Malaysia.
EITN: How do you see Malaysia awarding digital banking licenses, influencing the SEA/APAC landscape for digital bank licenses (if at all)?
Shweta: After Hong Kong, Singapore and the Philippines made the move to introduce digital banks, it was only natural for Malaysia to be the next country to do so given that they have the highest percentage (83%) of digital consumers among Southeast Asian countries according to a Facebook/Bain report in 2020.
When we consider that there are over 40 licensed e-wallet operators serving a country of 32 million, and e-wallet volume increased 89% to 468 million transactions in just one year as of June 2021, digital accounts and payments are clearly widely accepted and used. This creates a very fertile environment for the growth of digital banks.
With the announcement of the 5 successful applicants for Malaysia’s digital banking licenses, it would not be unreasonable to expect this development to accelerate transformation in the banking and financial sector not only in Malaysia, but also across the region as well. Additionally, this will stimulate more innovation among incumbent banks who are looking to maintain their market share against the new entrants.
EITN: Would digital bank licensees play within only one country, do you think?
Shweta: If you look at who the winners of these new licenses are and who they’re backed by, it’s reasonable to expect that they will have ambitions beyond Malaysia so I expect they will eventually be looking to expand across the region through nearby countries like Singapore, Indonesia and Thailand. For instance, Grab and Sea Group are already operating in various forms – including financial services – in multiple countries in the region, whilst Aeon is a large Japanese player that is dominant in the Southeast and North Asia regions.
It’s notable that the companies and consortiums involved span a range of industries, from ride sharing to gaming to retail, so it will be interesting to see what cross-fertilisation of ideas and solutions we see as they expand their financial services into Malaysia and across APAC.
EITN: What kind of technology trends can we expect to see from this space and how will BaaS help further the aspirations of challenger banks?
Shweta: The main goal for challenger banks after they launch is to become profitable, and to that they need to attract customers. New entrants tend to do this by offering appealing rates on savings and loans, but this is expensive and unsustainable over the long term. Another challenge is that new digital banks do not have the same level of trust – which is vital in attracting customers – that the incumbents have built over many years.
It’s notable that the companies and consortiums involved span a range of industries, from ride sharing to gaming to retail, so it will be interesting to see what cross-fertilisation of ideas and solutions we see as they expand their financial services into Malaysia and across APAC.
This is where BaaS can provide a major boost for challenger banks, as they no longer need customers to come to them. Instead, BaaS embeds financial services directly into the customer journey, whether that’s in online retail or services for SMEs, giving banks access to an entirely new market of customers.
For example, Finastra recently announced a BaaS collaboration with Microsoft which enables SMEs using Microsoft Dynamics 365 to access and unlock vital financing offers without leaving their business management platform. The introduction of new lending options by embedding a finance solution on a key cloud-based platform for business will provide a much needed, more convenient path to the capital SMEs need to thrive.
A recent global survey by Finastra found that ‘distributors’ – the brands that are embedding financial products into their customer journey – are spending US$10-$50m per year on financial products and service partnerships across APAC – a high level of spending which is expected to be sustained throughout 2022.
Over 46% of APAC distributors currently offer, or plan to offer, credit cards to their customers using BaaS, with other popular offerings including savings accounts (41%) and payment cards (38%).
EITN: Which countries in APAC are better positioned to reap the benefits of digital banking/achieve profitability and why? Is it Indonesia or Singapore or Malaysia? For the others, what more should they be doing?
A recent global survey by Finastra found that ‘distributors’ – the brands that are embedding financial products into their customer journey – are spending US$10-$50m per year on financial products and service partnerships across APAC – a high level of spending which is expected to be sustained throughout 2022.
Shweta: Indonesia, Singapore and Malaysia are equally positioned for success in digital banking but in different ways, given that they are very different markets with their own set of benefits and potential. For instance, Singapore is establishing itself as the fintech hub of Asia, with startups and fintech players that are helping digital banks to expand and develop new business models. The country is digitally savvy and local banks like DBS have successful digital banking offerings with high adoption, but with such high rates of digital banking penetration already, the potential for new entrants is limited.
In contrast, Indonesia has a very large underbanked and unbanked population that is largely untapped. Indonesia is also an archipelago nation, which means that there are islands that are not well covered by existing financial services. Digital-only banks in particular are well placed to address this significant market, which can not only be profitable but also help to improve financial inclusion.
Like other Southeast Asian nations, Malaysia has high mobile penetration and a tech savvy population. Mobile wallet adoption is particularly high and there is a wide acceptance of digital banking. This environment should help digital banks to launch quickly and get on the path to profitability, as long as they have the right business model.
EITN: Which areas are digital banks expected to make the most progress in (payments, loans, investments, etc?) in Malaysia? Does the regulatory landscape create a conducive enough environment for them to do this?
Shweta: Malaysia already has very high digital wallet adoption, so I would expect to see digital banks progress quickly when it comes to deposits, loans and payments in the short run. However, for digital banks to sustain and survive they will need to be innovative in their business models and bring differentiators in their offering.
This would push them towards the investments, insurance and wealth management segments once they have their customer base and, crucially, trust.
EITN: What kind of partnership model (digital bank backed by parent bank, FinTech backed bank, etc) will emerge winners as competition intensifies?
Shweta: The most common partnerships we tend to see are fintechs backed by incumbent banks. However, with players like Aeon entering the fray, we are seeing a shift where non-financial institution (FI) players such as retail providers as well as telcos like Singtel are expanding into the banking space.
This is a space to keep watching out for, as we can expect to see new business models tying shopping behavior of consumers with their banking habits being developed. Sea Group’s presence across the region is also interesting, as it already has an established e-commerce and gaming ecosystem where they can push out banking services to their wide user base.
The most common partnerships we tend to see are fintechs backed by incumbent banks. However, with players like Aeon entering the fray, we are seeing a shift where non-financial institution (FI) players such as retail providers as well as telcos like Singtel are expanding into the banking space.
In sum, each player will find its unique way to sell banking services, playing to their own strengths whether it is through taxi and food apps, retail stores or gaming business.
EITN: What sort of strategic considerations incumbent banks need to have if they are to remain relevant?
Shweta: The biggest shift we are seeing at the moment is the proliferation of BaaS, so incumbents must ensure they are taking steps to ride the wave or get left behind.
In a recent survey by Finastra, 88% of the senior executives we spoke to across several industries told us that they are already implementing BaaS solutions or were planning to.
These executives were from a range of industries, both banking and non-banking, highlighting the broad potential that BaaS has to offer across the retail and corporate sectors.
In a recent survey by Finastra, 88% of the senior executives we spoke to across several industries told us that they are already implementing BaaS solutions or were planning to.
For banks looking to adopt or improve their BaaS offerings, the playbook for success has three key steps:
Understand what use cases will deliver the most value in the role and segment they operate in.
Be clear on the monetization models for selected use cases and what capabilities are required.
Be clear on how they will take a BaaS solution to market. Select partners with the right capabilities to accelerate delivery of their selected use case.
