Innovating Financial Services in Malaysia - A Summary of Session E

Updated: Dec 18, 2019



PERDANA LEADERSHIP FOUNDATION CEO FORUM 2019

SESSION E: Innovating Financial Services in Malaysia


Panellists:

  • Mr. Suhaimi Bin Ali, Director of Financial Development & Innovation, Bank Negara Malaysia

  • Mr Gurdip Singh Sidhu, Group Chief Strategy & Design Officer, CIMB Group

  • Mr. Mohammad Ridzuan Abdul Aziz, President, FinTech Association Malaysia

  • Mr Anshuman Singh, Partner, Ernst &Young Advisory Ltd and EY Asia Pacific Financial Pte Ltd and Asia Pacific

  • Moderator: Tan Sri Dato’ Dr Lin See Yan, Former Deputy Governor of Bank Negara, Trustee, Jeffery Cheah Foundation

Summary


This session focused on FinTech, a new phenomenon and a dominant force behind the advances in finance today, attracting US$71b in investments between 2015 and 2016. While financial technology has existed for decades, its development has accelerated in recent years. However, it’s not only about technology but also the business model that has resulted in the breakthrough.

Big Tech are threatening to disrupt global finance. Amazon, Facebook, Alibaba, and Tencent now offer payment and money services on their platforms. AliPay and WeChat are cooperating with PayTime of India, TrueMoney of Thailand and BCash of Bangladesh. China is at the forefront of the global FinTech innovation.


Big Tech platforms that have pivoted to financial platforms are becoming the more prevalent threat to traditional financial institutions and they will cause the biggest disruption in global financial services. We have seen it in China, we are starting to see this in the West and we will definitely see it in this part of the world. Banks are at a disadvantage in the face of intensifying competition and uneven regulation between them. The growing sector of Islamic Finance is also strongly lacking in innovation and fintech solutions.


While Banks continue digitalising their core businesses, they will need to hedge against the strong possibility of disruption by non-banks.


There is a perception that banks and financial institutions in Malaysia are lagging in the fintech race. There is a certain balance to be struck still in terms of the macro objectives financial innovations. While traditional financial institutions have not been the fastest to respond to these changes, they are catching up and the regulatory environment has been supportive of their efforts.


Innovation is a lifeline for the financial system. It is constant, and it is disruptive. The underlying forces plying the growth trend of fintech are digitalisation, the proliferation of payment options, the emergence of new customer segments that were previously too costly to serve; and new technology such as blockchain that enables the expansion of services. Bank Negara recognises the potential that these bring but is also mindful of the risk that they pose to Bank Negara’s mandate of maintaining infrastructure stability.


Note: Tan Sri Dr Lin See Yan wrote an article, originally published in The Star, on financial technology, based on this session at the CEO Forum. You can read his article here.



SUMMARISED POINTS BY PANELLIST

TAN SRI DATO’ DR LIN SEE-YAN


Tan Sri Dr Lin See Yan
  1. The industry faces many challenges despite growing into a global force that attracted USD71 billion in investments between 2015 and 2016. Fintech has become a dominant force behind the advances in finance, which is made possible through cheap biometric systems, cloud computing, and AI analytics.

  2. Big Techs’ move into finance is threatening to disrupt global finance. Europe’s 2018 open banking regulation has left bankers worried that tech groups would cherry-pick the best part of their business. Banks are at a disadvantage as they face intensifying competition in the face of uneven regulation.

  3. China is at the forefront of the global fintech innovation. The cashless society has already arrived in China. China’s activities are market-driven, with global cooperation for mutual learning, often offering regulators their experience in balancing innovation and risk.

  4. The impression is that banks in Malaysia have lagged behind. The digital world requires the government to be at its best by being there for start-ups. We should help fintech firms regulate their own business models, and in turn, improve the regulatory framework.

  5. Fintech start-ups are racing to become the top global app providers for international money transfers. Their global e-wallets greatly facilitate payments by individuals and small businesses.

  6. In the US, fintech companies can now apply to be special-purpose banks, do bank transfers and compete directly with the banks in lending.

China is at the forefront of the global fintech innovation. The cashless society has already arrived in China. China’s activities are market-driven, with global cooperation for mutual learning, often offering regulators their experience in balancing innovation and risk.

MR SUHAIMI BIN ALI


Mr Suhaimi bin Ali
  1. Innovation is the lifeline of the financial system. It is constant, destructive, and a fundamental brutal force within the financial system.

  2. Leveraging on technology is not a new phenomenon in the financial system. In the 70s, we embraced some of the latest innovation in the country using technology. The credit card was introduced in the 70s and 80s, and the debit card in the 80s. In 2000, we started our internet banking system. So technology has always been there within the financial system.

  3. Banks in Malaysia have been innovating. We have seen the provision of e-wallets, operative banking technologies using artificial intelligence, AI-powered chatbox, digital education solution, original P2P, financing platform, and others.

  4. The industry is working together on the GRID Finance platform using the speaker method technology. Similarly, quite a number of innovations are taking place within the insurance industry.

  5. In Malaysia, we have about 240 fintech players. Bank Negara has registered 80 of them. Seven of them are operating in our sandbox, and 15 are considered for our sandbox with the new innovations that they are growing.

  6. The innovation factor of this space is quite broad, covering areas such e-remittance, insurance aggregation services, secured tech banking, day-to-day insurance, digital banks, and blockchain-based solutions and learning platforms. So we are seeing quite robust innovation taking place within the ecosystem.

  7. The underlying value forces plying the growth of fintech today can be categorised into four:

  • · Digitalisation, which has changed how financial services players interact with their customers. It is supported by the technological advancement at the user end devices as well as technology that was formerly known as the ABCD of fintech: A - artificial intelligence, B - blockchain and distributed leader technology, C - cloud computing, and D - data and data analytics;

  • · Proliferation of payment options, which necessitates these players to partner with other players in the ecosystem so that they can offer seamless payment options to users with the integrity of data protection. In Malaysia, 40% of the 240 fintech players are in the payment space, so, that naturally seems to be the beginning for many fintech players in the ecosystem;

  • · Emergence of new customer segments that previously were too costly to be served by the incumbent financial players. The fintech firms are generally highly scalable and the cost of onboarding new customers is near zero, as a lot of the investment cost has already been incurred upfront;

  • · New technology allows for the expansion of services. A case in point are blockchain and crypto assets. Now, they have new offerings in the market that we did not see before.

8. Bank Negara recognises the potential that fintech brings, but we also need to recognise the risks to our mandate in terms of infrastructure stability. Our approach is not to shy away from those risks but to embrace them, understand what they are, and allow and provide the right space for fintech players to experiment together with us so that we can understand the risks that they bring.


9. We have adopted four broad approaches to facilitate innovation:

  • · Coordinating with the regulators. We work closely with other regulators, such as the SC and MDEC, so that the regulation we introduce facilitates good innovation in the market;

  • · Conduct outreach programmes for fintech companies on a quarterly basis. We have workshops for all fintech companies on legal and regulatory boundaries so that we can help them manage their business plans;

  • · Operate a regulatory sandbox to allow good innovations to experiment, graduate from the sandbox, and become intimate players; and

  • · “Allocate plantation” to cater to genuine innovations that are good for the system.

10. Bank Negara has no plans for a CBDC (Central Bank Data Currency). Our view is that the e-payment solutions that we have now are likely to be the catalyst to help us gain efficiency in our economy and reduce certain activities that were done in the past. Debit card usage increased by 51.5% last year, indicating wide acceptance of the card. Mobile payments increased 20 times last year, which shows that all the e-wallets are becoming quite popular.


11. In the past, blockchain technology was deemed to be solid technology that could not be hacked, but it has already been hacked. So my advice is experiment, and understand the technology well before using it.


Innovation is the lifeline of the financial system. It is constant, destructive, and a fundamental brutal force within the financial system.

MR GURDIP SINGH SIDHU


Mr Gurdip Singh Sidhu
  1. Fintech is not a new phenomenon. It has obviously accelerated in different shapes and forms in recent years, and Suhaimi put it very well with the ABCD.

  2. It is not about technology only but also about the business model. If you look at some of the examples that Tan Sri Lin See Yan mentioned in his opening, it’s not technology that was the breakthrough but the business model.

  3. In ASEAN, we are not at the front of the curve globally in terms of adoption. At the same time, not everything always has a first-mover advantage. You can see disruptions happening even in very advanced markets. For example, in China, the exposure to money market funds has had to be backpedalled a little bit.

  4. One of the core roles of financial intermediation is safekeeping. That is what I think is at the back of policymakers’ minds; it is about balancing that with various instructions and ideations that are happening. But I am not saying that we can be complacent or oblivious to much of this disruption.

  5. At CIMB, we look at it as two core components:

  • Digitalising the core; and

  • Moving and disrupting ourselves ahead of others disrupting us.

6. Digitalising the core is essentially a continuation of what banks have started in the last 10–15 years but at a much faster pace with a much more comprehensive way of leveraging the ABCD, and also potentially at a much lower cost point than it used to be 5–10 years ago.


7. I observe many business models where fintech has gone from a B2C strategy to a B2B2C strategy, meaning they are now cooperating a lot more with established brands which have the infrastructure, trust, and the financial muscle to be there.


8. The biggest threat banks face is not the up and coming small fintech, but the Big Tech platforms which have pivoted to financial platforms and which are still in the midst of pivoting to financial services. They will cause the biggest disruption in global financial services.


9. Non-banks have a certain edge in playing the game differently and hence, potentially disrupting the banks. We have got to hedge ourselves. In Malaysia, CIMB is fortunate that indirectly we are in partnership with Ant Financial, which has a 50% share in Touch ‘n Go Digital.


10. In terms of the macro objectives concerning financial disruptions and financial integrity, banks have not been the fastest, but I think that many banks, including ourselves, are responding very quickly now.


11. The regulatory environment has been supportive, and there have been various shapes and forms of government support.


12. The ecosystem requires funding, and we need a facilitative environment. The funding element still has a lot of room to grow in Malaysia.


13. In the whole context of the financial industry, we see 2 things happening:

  • · For pure-play fintech, we will see a lot more B2B business models, meaning, large institutions with a customer base; and

  • · Big Tech companies that will disrupt.

The biggest threat banks face is not the up and coming small fintech, but the Big Tech platforms which have pivoted to financial platforms and which are still in the midst of pivoting to financial services. They will cause the biggest disruption in global financial services.


Mr Mohammad Ridzuan Abdul Aziz

MR MOHAMMAD RIDZUAN ABDUL AZIZ


  1. Consumers are looking for alternatives because the issue statement of creating value for humanity has never been served by the traditional financial institutions.

  2. Consumers will always be looking at gaps that have not been filled. The thirst for better services propelled some of the fintech companies to think about how to fill the void.

  3. Some of the fintech companies that got it right do not think only about the money. They think about creating the value desired by consumers. Even though money is not their ultimate goal, the money will just come because they are solving issues that humanity desires.

  4. Those who only chase the money will be around for a while. For example, the craze about ICO has fizzled out now. This is why you need to determine the value you want to create.

  5. Malaysians do not have a high level of financial literacy. Even though we have advanced significantly on the distribution side, there is a mismatch because consumers do not understand what it is all about. Value has been created, but it does not fulfil a need.

  6. Malaysia has been at the forefront of Islamic finance for a long time. Certain Islamic finance scholars are trying to look at the values that are relevant to Malaysian consumers to come up with a fintech solution. But even the best of solutions will be meaningless if it is not properly understood.

  7. We need to look at 2 aspects:

  • · To find a fintech solution that is relevant; and

  • · To look at how we could improve our financial literacy first before even considering the technology that will be relevant to us.

8. To have a digital currency, we need to have the right infrastructure. It is not just about the idea but also readiness in terms of infrastructure and the knowledge about how to use it. A lot of mindset and product shifts need to happen.


To have a digital currency, we need to have the right infrastructure. It is not just about the idea but also readiness in terms of infrastructure and the knowledge about how to use it.

MR ANSHUMAN SINGH


Mr Anshuman Singh
  1. Digitalisation brings a certain degree of threat and a high degree of opportunities to small businesses.

  2. Additional channels provide SMEs with the opportunity to reach segments that they couldn’t otherwise get through. Now, we can expand into markets much faster than we used to previously. As with all opportunities for small businesses, the real crunch comes to taking action to leverage on opportunities.

  3. The first thing you need to do is focus. It is important for the SMEs to understand what they want to do, the customer needs they want to serve, their value proposition, and what’s in it for them.

  4. The second thing is leveraging on partnerships. One of the biggest changes that has happened is that businesses need to consider partnerships, whether it is through pick and learn partnerships or business partnerships. The ecosystem that you create around you, be it the supply chain or distribution network, allows you to avail yourself to opportunities.

  5. The third thing is to keep your business hierarchy as flat as possible.

  6. I say “No” to a digital currency. I believe that introducing a crypto-currency right now will exclude a significant part of the economy from transacting, due to limited reach and infrastructure. It goes against what we plan to drive in South East Asia, and that is financial inclusion.

  7. Access to capital is incredibly important, and government and regulators have roles to play to improve this.

  8. We need to have a vibrant financial centre to attract the right talent.

The first thing you need to do is focus. It is important for the SMEs to understand what they want to do, the customer needs they want to serve, their value proposition, and what’s in it for them.

©2019 by Perdana Leadership Foundation.