Digital Banking: The Next Generation of Banks

Banking has evolved at a rapid pace over the last decade. The days of queueing at a local bank to open an account, make a deposit, transfer money or cash a cheque are long gone.

In Asia, soaring demand for online and mobile alternatives is incentivising digital players to shake up the market and transform the banking experience.

The Covid-19 pandemic has had a significant impact on the pace at which new digital banking products and services are being adopted, and it is becoming more challenging for incumbents as digital technology lowers barriers to entry.

With their leading-edge solutions, digital banks are attracting millions of new customers. Tencent Holdings Ltd-backed WeBank, for example, serves some 200 million people, and Alibaba Group Holding Ltd-supported MYbank has more than 20 million small and medium enterprise (SME) customers, points out McKinsey & Company.

In just over five years, China’s digital banks now have roughly a 5% share of the country’s RMB5 trillion (RM3.21trillion) unsecured consumer loan market and more than 7% of online SME loans. South Korea’s KakaoBank, launched in 2017, attracted more than 10 million customers in its first year and now has a roughly 5% share of the country’s unsecured consumer loan market.

In Malaysia, digital and mobile-only banks are gaining popularity due to the rise of e- commerce and e-payments services as well as the rise of the digital economy. “Businesses can potentially benefit from digital banking as it can help them save on costs and time as well as provide convenience in the future,” says Geoff Soon, managing director for South Asia at data cloud company Snowflake.

Digital banks vs Traditional banks – what’s the difference?

A significant difference between the traditional banks and digital banks is the enhanced customer experience, according to sources we spoke to. (Image source: Capgemini via The Financial Brand)

Also known as virtual banks, digital banks are often misunderstood as online or mobile banking platforms – a misconception because both involve basic banking transactions like account management, funds transfer and payment of bills on the bank’s website or via mobile.

But digital banks are more sophisticated and elaborate: they involve leveraging technology in every banking activity, process and stage when it comes to delivering banking products and services, with the goal of making the customer’s experience more seamless, effective and efficient – and within this process, eliminate the need to be at a physical location.

“Their business model targets very specific segments of the market and customers, unlike traditional banks who serve A-Z when it comes to customer needs. Digital banks tend to pick a very specific micro segment. For example, you might have new digital banks that target gig workers or SMEs,” said Shankar Kanabiran, a partner in the Financial Services Consulting practice of Ernst & Young Advisory Services Sdn Bhd (“EY”) to

Digital banks rely heavily on technology and leading practices like big data, machine learning, and a high degree of automation, leveraging cloud, analytics, and artificial intelligence (AI) to enhance the customer’s experience beyond just the typical banking transactions of credit and debt. “They are highly dependent on technology and work with the ecosystem,” Kanabiran said.

But the most significant difference between digital banks and traditional banks is the customers’ journey – a digital bank journey starts online and stays strictly online (or via a smartphone app), discarding any need to visit a physical location. “They don’t try to compete head on with the traditional banks by serving end-to-end. They do not have branches to support their operations and most customarily use mobile apps to reach out to their segments. What differentiates them are world-class customer and user experiences,” Kanabiran added.

And while traditional banks have a larger number of employees and often operate through a network of branches, digital banks are the antithesis of this concept – operating via straight through processing – an automated electronic payment process used to speed up financial transactions from initiation to final settlement, and free of human and manual intervention. “By doing this, they can keep their cost-to-income ratio quite low compared to the traditional banks and these savings are passed on to their customers via higher interest rates or lower lending rates,” Kanabiran said.

When it comes to dealing with queries or concerns, Kanabiran said digital banks are able to serve customers through the app or via robo servicing compared to traditional banks that will usually require customers to get in touch with the call centre or visit their branches.

Finally, from a talent or workforce perspective, Kanabiran said digital banks consist of tech-savvy individuals, or people from different, multidisciplinary backgrounds who work as a team to drive the value proposition.

Digital banks deepen financial inclusion in Malaysia

A report by the World Bank reveals that Malaysia has one of the highest financial inclusion rates in the world, as 92% of Malaysian adults have a deposit account, meaning they can save, withdraw money, access automated teller machines (ATMs), and carry out payments through electronic means nationwide.

Despite this massive achievement, Malaysia still faces challenges when it comes to financial inclusion such as reaching out to the remaining unserved population – a large part of which comprises foreign workers and their families, some of whom are undocumented workers, according to the World Bank report.

Other reported challenges are to ensure that the people with access to financial services actually make active use of their accounts and that employers make use of direct deposits instead of cash when paying salaries.

One way to promote financial inclusion, as identified by BNM, is through the establishment of digital banks. In its framework, BNM has outlined that serving the underserved and unserved in retail and SME are among the key requirements for organizations interested in establishing digital banks.

One way digital banks obtain credit information on SMEs is via transaction data and business volume information available on e-commerce platforms. (Image source: Deloitte)

Micro-SMEs and SMEs, who typically experience high servicing costs and low revenue potential, face extreme challenges in obtaining traditional credit facilities due to their limited track record and low credit scores which typically result in high loan rejection rates. It also doesn’t help that the processing and approval process of credit facilities is lengthy and intricate.

A digital bank, through its data analytics and machine learning algorithms, according to a PwC Malaysia report, could potentially provide a solution for this issue via innovative solutions to accurately assist in credit assessment and lending decisions, and lower servicing costs to micro-SMEs.

Digital banks could also offer better accessibility to rural areas. “Though the population in the urban areas has increased significantly in Malaysia compared to rural areas, the accessibility of the rural population to banking products is still not sufficient,” Kanabiran said.

Gig workers are another segment of the economy that may benefit from digital banking because of the unique operating model that it offers. “The gig economy is another segment (that is underserved) – this is where a lot of people are taking up gig work like driving for Grab, freelancing etc., and they do not have access to financial products such as lending because they don’t have salary slips and banks usually require salary slips as part of credit assessment. Digital banks are able to serve this group because their operating models are different,” he added.

Digital banks provide an additional platform for consumers and SMEs who want to transform digitally

During these challenging times, SMEs and consumers are turning to digital alternatives out of necessity, and digital banks offer a substitute that is safer, more effective and convenient.

The new normal of banking is steering away from branch-driven, product-centric organizations with legacy technologies and cultures to consumer-centric organizations with more personalized solutions that can be delivered seamlessly and effectively.

Firms that can deliver fully digital, platform- based banking will help ramp up significantly lower acquisition costs, improve efficiency ratio and result in much lower costs of distribution, according to the World Banking Report 2020  from Capgemini and Efma.

On top of that, unlike traditional banks, digital banks may continue to operate seamlessly with minimal disruptions during a crisis situation, because of their ability to design their own, unique process flows and are not necessarily dependent on being on- site to serve their customers, according to a PwC Malaysia report.

Digital banks leverage on rich data insights to deliver more personalized digital experiences for consumers – particularly relevant in today’s COVID-19 era, where all consumers want customized solutions for their own individual crisis-related needs.

For example, a PwC Malaysia report states, by understanding a consumer’s spending patterns, digital banks – through the use of analytics tools and platforms – will be able to direct consumers towards promotions on their partners’ platforms.

The changing socio-economic landscape in today’s COVID-19 world is further supported by a statement from KPMG in Malaysia’s Head of Financial Services, Adrian Lee, who said the COVID-19 had altered customers’ money management and spending patterns as well as the way businesses are run, with mode of payments and channels of financial management also changing – many of which becoming digital.

“Digital banking presents a value proposition poised to help companies and individuals get back into the economic saddle, and financial services providers that design [their] products around customer needs will stand out the most,” he said.

Digital banks offer different customer experience

From the consumer end, Paul Francis, Financial Services Strategy Director of PwC Malaysia told that digital banks would utilize data in new, unexplored ways compared to incumbent banks when serving the unfulfilled segments of society.

“From a consumer’s perspective, there’s a lot of unmet demand today, and it is partly because, as banks, it is hard to give you the information to be able to qualify for credit, for example,” he said. “Or it is hard to find products that are priced appropriately. So if you were going to go down the digital banks pathway, they use data in a very different way than virtual banks when assessing risk.”

Through the use of data analytics and enhanced processing of data, digital banks can potentially understand customer needs better. “For example, one firm I know of in the United States of America that is talking to people here in Malaysia about being a virtual bank, offers payday advances. So if you have an account with them, they have insights such as knowing that you are running out of money for the last five days of the week,” he said.

Using data and analytics, digital banks, he said can generate small amounts of money, with very low risk, all while helping save people from money lenders that take very high margins. “A good reason they can do this is that they have a very good understanding of every individual customer’s transaction history,” Francis added.

Legacy banks, unlike digital banks, Francis said have only historically collected data to run their products transaction systems and for regulatory reporting purposes – but have underutilized a lot of information about consumers that can be used to predict behaviors. Virtual banks on the other hand, he said, will take advantage of such data to drive decisions and position it as a key competitor advantage.

It only takes 22 seconds before payment can be made on Monzo, a challenger bank (another name for digital bank), according to a comprehensive study by app experts Built for Mars. (Image source: Sifted)

Some of the potential promises of digital banks include slicker app interfaces and speedier features, both offerings targeted at the retail market. A comprehensive study by app experts Built for Mars, as reported by Sifted, validates the view that digital banks will outdo incumbent banks when it comes to optimizing banking performance.

Built for Mars’s research, which looks at how long it takes to send money domestically on each account, shows that the UK digital banks are all faster than average when compared to other incumbent banks – Monzo, Starling and Revolut all top the charts, according to a news report by Sifted.

Customer experience will be at the forefront of digital banks so it is imperative that digital banks ensure that when designing business processes, sufficient customer data protection plans are in place. Digital banks, Francis said, should also focus on customer value proposition (CVP) when designing their business plan, strategy and target operating model.


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