Malaysia to Hit the Next Wave of Digital Banking Innovation

Malaysia to Hit the Next Wave of Digital Banking Innovation

Ever since Bank Negara Malaysia issued its much-awaited digital banking framework, there is an air of excitement in the Malaysian market. The digital banking framework is expected to develop a new breed of non-conventional financial players that make use of innovative technologies to bring novelty to the market.

Under the digital banking framework, Bank Negara Malaysia will grant up to 5 new digital banking licenses in 2022. However, it isn't certain that we'll see all of these five new digital banks by the end of 2022. In the case of Singapore, when their government announced the digital banking licenses, ​only 4 out of 5 institutions were chosen​.

What Do Aspirants Say About Malaysia's Framework?

Despite a significant level of skepticism among industry experts, digital banking aspirants are applauding the new framework introduced by Bank Negara Malaysia.

In an interaction with FinTech News Malaysia, Khairil Abdullah, the CEO of Axiata Digital, said that he feels very encouraged with the new framework. He also stated that most requirements in the framework are either proportional or exempted in the initial phase. Axiata offers digital financial services like Boost e-wallet and

micro-lending platform Aspirasi, and they have kept no secret about their willingness for a digital bank.

The group CEO of Funding Societies, Kelvin Teo, believes that the initial phase of the digital banking framework by Bank Negara Malaysia, will bring in a more significant segment of applicants with innovative business models. This trend is more likely to promote sustainable growth.

The co-founder of BigPay, Salim Dhanani, described the framework as the "best of breed" in terms of the balance it brings in the market. BigPay models itself as a neobank, and they are keen to get their digital banking license.

In the policy document, Bank Negara Malaysia stated that the initial (foundational) phase is designed to consider that digital banks haven't gone through their complete financial and economic cycle. Hence, the foundational phase is expected to establish financial inclusion, where digital banks will safeguard financial integrity and stability.

Malaysian Financial Market Scenario in 2021 According to IMF analysis​, FinTech is rapidly getting into the core of the Malaysian financial market. With the increasing middle class, strong government support, and high smartphone penetration, Malaysia is well-settled to leverage FinTech innovation's benefits. From mobile wallets and contactless payments to peer-to-peer crowdfunding, Malaysian consumers and businesses are ready to embrace the technology in the Financial sector.

The use of internet banking has significantly increased in the last decade, with a 90 percent usage rate in 2018. With the rise in smartphone adoption, affordable data packages, and 4G infrastructure, ​mobile banking ​is also finding its space in the Malaysian FinTech space.

Unsurprisingly, in its network readiness index 2019, the World Economic Forum ranked Malaysia very high amongst the 139 countries that they surveyed. Internationally, Malaysia is ahead of Italy, China, and Chile, whereas it ranks first within emerging and developing Asia.

Where's the money?

The most popular forms of FinTech in Malaysia are mobile wallets and digital payments, followed by insurtech, peer-to-peer lending, digital remittances, blockchain, crowdfunding, e-KYC, and several others.

The increasing popularity of FinTechs in Malaysia is flourishing, which is expanding the country's financial landscape. With the new digital banking framework, Malaysia's financial market will continue to expand, as the number of digital-savvy financial institutions is expected to grow.

The conventional Malaysian banks will continue to dominate the banking industry for a period of time. However, they will have to keep adopting innovative technologies or alternatively collaborate with fellow digital banking institutions. In April 2019, there were nearly 200 FinTech startups, ranging from contactless payments to peer-to-peer lending.

What's the Road ahead Indeed, the rapid evolution of technology in the financial space doesn't come without security risks and challenges. But the Malaysian government has implemented strict regulations to make sure that their financial ecosystem remains cybercrime-proof.

Needless to mention that cyberattacks hamper customer confidence in the FinTech services, which inflict widespread damage. Hence, Malaysian regulators and banks list cybersecurity among their top concerns.

A very concerning challenge in front of financial institutions and new FinTechs in Malaysia is the shortage of required talent in ​FinTech app development within areas such as machine learning, data analytics, and compliance management.

Being an Islamic finance leader, Malaysia stands at a unique position within Islamic FinTech across the world. As per the analysis by IMF in 2018, Islamic bank loan growth in the country increased by 8.9%, compared to 2.5% for conventional banks.

Although I​ slamic ​FinTech is still in its infancy in Malaysia, the central bank is starting to give additional focus on promoting the sector.

A few weeks ago, a Malaysian multi-bank supply chain finance company and peer to peer financing platform called CapBay, announced that it has successfully secured $20 million in the Series A round from KK Fund.

Conclusively, all of the FinTech trends and the digital banking framework in Malaysia points to one thing; that the future of FinTech in Malaysia is bright. We're very likely to see more record-breaking investment rounds for the FinTech sector in Malaysia.