COVID-19: Opportunities and Challenges for Digital Banks

April 2020
By Lum Kar Hoe, Senior Manager, Financial Services, PwC Malaysia

The ongoing COVID-19 pandemic has meant that businesses are being challenged to rethink how day-to-day activities are conducted. Whilst financial services are essential services and are operating amidst the Movement Control Order (MCO) in Malaysia, there has been a significant shift in how customers are being served during this period.

We are also observing similar trends globally as consumers and retailers adapt to changing circumstances. For example, in a bid to help retailers struggling through the outbreak, and to minimise the use of cash and physical contact points among retailers and customers, the UK has increased the limit for contactless payments.

Closer to home, digital banks in South East Asia are reporting an increase in the registration of banking accounts during the enforcement of their respective movement control measures. Similarly in Malaysia, in the days leading up to the MCO enforcement, there was an increase in traditional small and medium-sized enterprises (SMEs) opening up online banking accounts to facilitate the transfer of funds in lieu of depositing traditional cheques at their local bank branches.

On 27 December 2019, Bank Negara Malaysia announced its intention to award up to 5 new digital bank licences in 2021 to drive further innovation in the market to support the unbanked, underserved, and micro-SME segments. This highly anticipated initiative follows similar announcements by regulators in South Korea, Hong Kong, and Singapore. These applicants, supported by innovations and emerging technologies, have the potential to modernise the Malaysian financial services market.

Evidently, consumers and SMEs are turning to digital channels out of necessity during these challenging times. This is proving to be an unlikely catalyst and a further business case on the opportunities for future digital banks in Malaysia. Additional examples include:

Empowering the SMEs

The SME sector, which contributed to 38.8% of the country’s GDP in 2019 and employs about 10 million workers, is negatively affected by the ongoing pandemic.

When the dust settles from the aftermath of the MCO, these micro-SMEs and SMEs, which are already underserved due to high servicing costs and low revenue potential, will require assistance from financial institutions. These segments face challenges in obtaining traditional credit facilities owing to their limited track record and low credit scores which typically result in high loan rejection rates. They also have to deal with the intricacies of lengthy processing and approval times.

Potential digital bank licence applicants can bring innovations which provide better credit assessment as well as lower servicing costs to micro-SMEs. For example, they are able to use data analytics to accelerate lending decisions and are supported by machine learning algorithms to more accurately assist in credit assessment and lending decisions.
Boosting financial literacy

As the country’s projected GDP growth may shrink in 2020, consumers are expected to further tighten their purse strings on non-essential spending.

Future digital banks will have a role to play. They are likely to form various partnerships with retailers. With their insights on consumer spending patterns, they will be able to direct consumers towards promotions on their partners’ platforms. Analytics tools and platforms may provide personalised information that allow consumers to change their spending and savings habits. The B40 segment (the bottom 40% income group in Malaysia) is likely to benefit from these product features.

While the above examples would fit into the playbook of digital banking services, they are not without their challenges.

Target operating model

Banks have been classified as essential services. Some of their staff in core functions are allowed to continue working from bank premises, while the remaining workforce are able to work from home with minimal disruptions due to usage of technologies.

However, the enforcement of MCO will now raise additional considerations on the target operating model of digital banking services, especially when there are interruptions to standard business processes during the MCO period. For example, how is consumer data safeguarded if they are accessed remotely by those working from home?

Unencumbered by traditional processes, aspiring digital banks will have the opportunity to design their process flows such that they are able to continue to operate seamlessly with minimal disruptions during a crisis situation.

Our observation is that successful digital banks place customers at the forefront when designing business processes and ensure adequate customer data protection plans are in place. They also focus on customer value proposition when designing their business plan, strategy and target operating model.
Hosting data on the cloud - Challenging current assumptions on technology enablement

As digital banks will not have a physical presence, their delivery of service will be mainly through the Internet and via mobile dial-in. The quality and bandwidth of Internet services and call centres have been put to the test during this MCO period. There have been recent market reports on the decline of mean download speed in Malaysia as well as an increase in latency speed, which points towards a deterioration in online experience during the MCO period.

Through our experience where we looked at end-to-end digital processes and services to support the customer value proposition, we learned that the right selection of technology platforms, vendors, and partners is essential to support a seamless operation upon go-live. Therefore, potential digital bank licence applicants in Malaysia will need a technology architecture that ensures that their online experience is enhanced by hosting data and applications in the cloud, while also addressing any concerns if these clouds were located outside Malaysia.

Our survey with consumers in November 2019 revealed that 45% of Malaysians are looking for virtual banking service providers to offer a better mobile and digital experience. Downtime will damage the customer experience, and erode efforts made to build trust with them, given that digital banking service providers are new to consumers in Malaysia.

In a nutshell

Bank Negara Malaysia has indicated that the award of digital bank licences is focused on financial inclusion and the underserved, such as the B40, micro-SME and SME market segments. The MCO period has unexpectedly triggered opportunities and catalysts but also identified challenges which aspiring applicants will need to consider. Players which are able to best appreciate these opportunities and respond quickly, be they incumbent banks, or new entrants to the digital banking landscape, will be primed to serve the best interest of Malaysians, as they carve out a future for themselves.