As technology paves the way for global markets in these new and unprecedented times, it presents new opportunities for businesses to tap into new markets – in result, disrupting older markets. In the case of the banking and financial services industry, new players are slowly emerging and unveiling themselves to potentially serving untapped markets. Where some may see them as a threat, others may see them as a potential to serve underserved markets. They are otherwise known as “Digital Banks”. So, who and what are digital banks and how will they likely serve the market differently?

In a recent webinar hosted by University Utara Malaysia (UUM) on 3rd November 2020, 400+ students from the department of banking and risk management attended a talk given by our CEO, Ms See Wai Hun, and our Presales Manager and digital transformation driver, Ms Natrah Mohamed Nor, who shared insights on digital banking. The talk was officiated by faculty dean Prof Dr. Russayani Bt Ismail and moderated by Dr Muhammad Muhaizam Musa. Now although the term may seem uncommon to many, the earliest forms of digital banking can be traced back to the 1960s when ATMs and cards were first launched. Today, “digital” is the new buzz word in the banking sector, as banks all around the world are shifting to digitisation.

Wai Hun kicked off the talk by walking the students through the different ages of industry revolutions (shown in figure 1 below) and how they’ve come to be disrupted over time. She explains how there has been a great transcendence from Industry 1.0 to Industry 3.0, otherwise known as ‘The Digital Revolution’, creating the likes of new digital jobs such as computer engineers, aerospace engineers, bioengineers, and more. However, the leap into Industry 4.0 has opted for an even greater shift, creating a new paradigm in the world of automation, otherwise known as ‘The Smart Era’.  The smart era has created the likes of everything digital, such as IoT, cloud computing, 3D printing, and virtualisation, ultimately blurring the lines between physical and digital. So how will Industry 4.0 disrupt the financial industry?

Figure 1: Industry revolutions timeline

Natrah took the stage and briefed the students on what digital banks really are. Unlike traditional banks who operate in a physical space, digital banks are bodies that operate wholly through the internet or other electronic platforms without having any physical branches. Digital banks differ from physical banks in primarily four factors: 1. Operations are completely virtual; 2. Business models seek to offer innovative digitised products embedded into the customers’ daily lives; 3. Infrastructure leverages technologies such as cloud and APIs, artificial intelligence (AI), machine learning, and a certain degree of automation; 4. Require a higher proportion of talents who are more digital-centric.

Natrah further elaborated how digital banks are essentially more customer-driven than they are product-led, as most banks are today. Digital banks focus more on customising products that are tailored to real-time customer needs, defined by their usage, behaviour, and expectations. Moreover, digital banks focus on creating omnichannel distributions, which integrates all of the customers’ touchpoints in a single and seamless journey.

“Traditional banks today should have a shift in perspective whereby they should embed ‘digital’ in all aspects of their business to maintain a competitive edge in the market and be able to deliver the maximum value to their customers.” – Natrah Mohamed Nor

Despite many digital banks existing in the west and parts of Europe, they’re fairly a new concept in Southeast Asia, particularly in Malaysia. Natrah mentioned how Bank Negara Malaysia (BNM) has recently proposed a digital banking licence framework that aims to drive financial inclusion and deliver quality and responsible usage of financial services into the Malaysian market. As of now, BNM seeks to provide 5 licences to potential applicants, however, the award of the licences is yet to be determined due to the nation’s priority in curbing the COVID-19 pandemic. An insight on “digital banking key features and what it would mean for APAC” talks more in-depth on the licencing framework as well as the potential applicants.

The customer banking journey has evolved tremendously over the years, mitigating several processes and steps a single customer would have to go through, such as travelling to a physical branch, the long waits to speak to bank personnel, and even the process time to get a service or request approved. Natrah mentioned how digital banks would replace and streamline all existing hurdles customers would have to face when dealing with banks.

The customer experience of the future would be that where customers would be able to open an account remotely in under 5 minutes, apply for a loan in just a few clicks, purchase goods through frictionless payments, receive personalised product recommendations, and even be advised on smart-spending. The integration and adoption of technologies with regards to IT infrastructure, mobility, personalised customer experience, and security, would enable banks to make such desired experience brought into reality.

Wai Hun shared some examples of existing digital banks today that have already created such an experience. Revolut and Monzo, two of many rising digital banks in the UK have popularised themselves over the years through their ability in offering consumers value propositions and unique key features in their product and service portfolios. For instance, Revolut gives full control to their users in managing their entire account all in a single tap on their phone, such as freezing their cards, enabling location-based security for fraudulent transactions, control over different payment methods, and even control over spending limits. An intriguing feature Monzo offers its consumers is the ability to split payments on the spot among friends or family members when dining out, paying bills, and even splitting travelling expenses.

Figure 2: Revolut security feature (left), Monzo payment-splitting feature (right)

The opportunities that digital banks will create for the global market is massive. Needless to say, the same would also apply to the Malaysian market. Wai Hun recapped on how BNM’s digital banking licence aims to serve and support the underserved market in Malaysia, namely startups, small and medium-sized enterprises (SMEs), low-income class groups, and early-income millennials.

The COVID-19 pandemic has put many businesses at risk, especially SMEs since they constitute 98.5% of all businesses in Malaysia. The risk of SMEs closing down could potentially put the entire economy into turmoil. Moreover, SMEs contributed 38.9% of Malaysia’s GDP in 2019, an increase from the previous years (shown in figure 3 below). Wai Hun explained how the tightening of spending by consumers has placed several impacts on SMEs during this period, in result, affecting the progression of the economy in the long run. If anything, digital banks would be able to provide them with financial aid by connecting them to their digital payment channels, customers, and distributors, plus be able to personalise their product offerings as well as promoting them directly to consumers for increased visibility.

Figure 3: Change in Malaysia’s GDP (2016 – 2019) | Source: DoSM

For the case of low-income and millennial groups, there lies a gap in financial inclusion where equal access is not available to all segments in the nation. Wai Hun mentioned how banks in general target higher income groups to profit off of them, while middle and lower-income groups aren’t given the same level of priority. Hence, digital banks would see more micro-financing available for the segments who need it, let alone, drive interaction with them through the help of technology.

At the same time, there lie some risks for digital banks in which they need to probe. It can be challenging to differentiate a good customer from a bad customer without knowing their existing credit history. Through a customer’s credit history, it would be easier to identify their behaviour patterns in order to process a specific request or service. Without understanding these patterns, it would be difficult to evaluate a customer’s creditworthiness. Hence, digital banks need to rely heavily on alternative data through third parties.

Leveraging on customer data insights shared among fintech companies and banks would drive SME growth as the data would be utilised in a way where small businesses can reach out to targeted consumers. Analytical tools would allow them to personalise as well as hyper-personalise their product to their target markets.

Another risk many digital banks face is their dependence on fintech funding. Wai Hun highlighted on how many investors have pulled back their investments in digital bank players, due to the pandemic and the declining economic condition (shown in figure 4 below). Investors today are facing the difficulty of seeing digital banks making any profit in the foreseeable future. For traditional banks, they generally make profits off bill payments, and interests from personal loans and home mortgages. For digital banks, they rely on commissions and interests made from consumer lifestyle activities such as shopping, eating out, travelling, and more, which are being suppressed at the moment due to the pandemic lockdowns on a global scale.

Figure 4: Drop in fintech funding | Source: cbinsights

Finally, it’s imperative for digital banks to keep up with the latest technological trends to maintain their competitive edge and stay ahead of other players. Wai Hun mentioned how 45% of Malaysians are looking for virtual banking service providers to offer a better mobile and digital experience. In order to achieve that, digital banks will need to look into their technology infrastructure to ensure that they are able to provide a seamless customer experience. Furthermore, Wai Hun stresses the importance of digital bank players partnering with the right vendors who can provide the right technology platforms to support the customer journey.

Having said that, JurisTech comes into action as a digital enabler to cater for many rising fintech players and create a financial marketplace for them. We provide the essential engine and backend technology that aid them in growth and succession. Our solutions such as Juris Access and Juris Origination Management have helped automate and speed many of our clients’ customer processes by sevenfold, enabling them to prioritise their focus on their customers and less on operations.

“We ensure that all business is taken care of so our clients can focus on theirs.” – See Wai Hun

To recap, industry 4.0 is seeing a paradigm shift where the average workforce will need to champion skills in automation, digitisation, and information technology to maintain their relevance in the industry. In essence, Wai Hun shared five key skills students need to practise if they are to enter into the digital banking space, namely:

1) Digital awareness – using new technologies to scale efficiently.

2) Customer value – understand the importance of delivering value and creating a seamless customer journey.

3) Agile thinking – being able to deliver more value to customers faster.

4) Risk and governance in a digital world – understanding and managing risk in a digitised world of financial services.

5) Data-driven decision-making – Understanding how to apply data analytics to decision-making insights and problem-solving.

Wai Hun wrapped up the talk by ending with a powerful quote to all students, telling them to, “Be an idea person, not just a technical talent.”

In today’s world, it’s not enough to hold technical skills, but also be able to identify new gaps in the market and grab hold of these opportunities to constantly thrive in an ever-evolving world. With that, the talk ended in a fruitful Q&A discussion.

About JurisTech

JurisTech (Juris Technologies) is a leading Malaysian-based fintech company, specialising in enterprise-class software solutions for banks, financial institutions, and telecommunications companies in Malaysia, Southeast Asia, and beyond.

To explore more on our product suite, check out our digital banking solutions that covers everything from digital engagement, to credit management, to artificial intelligence.