This article first appeared in Digital Edge, The Edge Malaysia Weekly on September 23, 2024 - September 29, 2024
In April 2022, Bank Negara Malaysia issued five digital banking licences, signalling a step towards financial inclusion in the country. Three of the digital banks — AEON Bank (M) Bhd, GX Bank Bhd and Boost Bank Bhd — have since launched their platforms, saying they aim to cater to the underserved communities. Two more digital banks, one by the consortium of Sea Ltd and YTL Digital Capital Sdn Bhd and the other led by KAF Investment Bank, are expected to follow soon. But as these platforms roll out with promise of accessibility and innovation, the question arises: Will this push for financial inclusion be delivered, or is it just a well-crafted marketing strategy?
“Financial services are more like a necessity now than anything because people need to be able to pay for stuff and other things. All communities that live in Malaysia should have access to these and people who don’t are underserved, which includes refugees and the elderly who are having issues accessing financial services,” says Dr Melati Nungsari, associate professor of economics at the Asia School of Business.
“From the personal conversations I have had about digital banks, it appears that the people who have already signed up and taken advantage of all these great returns and stuff for now have been mainly the richer people, to be honest.”
According to the 2023 RinggitPlus Malaysian Financial Literacy Survey, 71% of the respondents said they could only save RM500 or less each month, while 67% stated their emergency savings could only last them three months or less.
Despite being cash-strapped, Malaysian households continued to allocate 60.7% of their income to consumption expenses in 2022, the Khazanah Research Institute points out in its report The Financialization of Our Lives: Values and Trade-offs, highlighting a shift towards spending rather than saving.
The report also said that more than half (55%) of Malaysians spend exactly or more than what they earn each month, effectively living paycheque to paycheque. This combination of low saving rate and insufficient emergency funds underscores the urgent need for improved financial literacy and education across the country.
With the recent launch of digital banks, which promise greater accessibility and financial inclusion, there is hope to foster better saving habits among the public, particularly the underserved.
Beyond the bottom 40% income earners (B40) and micro, small and medium enterprises (MSMEs), the digital banks should also consider other underserved communities such as the immigrants, refugees and unbanked. While these groups represent a smaller percentage of the population, they should not be overlooked.
The first step toward financial inclusion for digital banks should be reducing the requirements for proof of identification for access to their services. It should be noted that providing education and reaching out to underserved communities are key to achieving true financial inclusion in the country.
“I can see the value of not having to go to a physical bank for communities who live far away or are hard to serve outside of urban areas. But if the digital banks really want to be different from traditional banks, they need to actually do things that make sense for these communities. Fewer identification requirements and less paperwork would be an example of these,” says Melati.
In addition to promoting financial inclusion, digital banks face the challenge of balancing their social mission with the need to remain profitable. In their applications to the central bank, they are required to maintain minimum capital funds of RM100 million and be unimpaired by losses for the first three to five years, also known as the foundational phase. After this period, the required capital is increased to RM300 million.
Applicants for the digital bank licence had to provide comprehensive details on their deployment of technology as well as address cybersecurity issues and IT governance. During the foundational phase, a cap of RM3 billion is placed on the asset size of digital banks.
Ultimately, digital banks will need to generate sufficient revenue streams, such as through lending products or transaction fees, without compromising on their commitment to inclusivity, say industry players.
Boost Bank chief technology officer Steven Gan is cognisant of the challenge. He stresses that the bank is working to break down barriers to allow users who don’t even have a traditional bank account to open a digital bank savings account.
Gan says that on a recent work trip to Kuala Terengganu, he came across many potential users who were unfamiliar with digital banking and had limited financial resources.
“When we did on-the-ground interviews at Mydin Bukit Mertajam, of the 500 users who came in, 97% said they did not have RM2,000 on hand to begin with. We want to stitch together the ecosystem and get the right momentum of saving and spending behaviour for these underserved customers,” he adds.
Gan wants to offer guidance to the underserved segment and eventually encourage saving and investing literacy. “Through BoostMyMoney, we hold monthly campaigns to bring awareness to them on how their funds are being managed and to give them financial literacy because cash is still power in some parts of Malaysia.”
Digital banks will need to join forces with the central bank and government to educate users who are not familiar with digital payment services.
“We are working to allow foreigners to come in as well after we have all the robust anti-money laundering (AML) security tools in place, together with the National Fraud Portal (NFP) built by Paynet,” says Gan.
While the NFP and MyDigital ID system by the government are underway, there is still a gap in onboarding immigrants or foreigners due to their limited financial resources and lack of digital literacy. Traditional banks might consider them high risk, making it difficult for them to access financial services.
However, Gan sees this as an opportunity. “We have adopted a very stringent AML ruling to detect not just your transaction monitoring and behavioural pattern, but also your digital activity.”
By leveraging data from transactions, digital activity and even geolocation tagging with user consent, the digital bank can develop a more sophisticated risk assessment system. This will allow it to onboard high-risk customers while implementing a robust fraud detection framework.
Gan envisions a future where Boost Bank becomes an essential financial platform, particularly for the underserved population in Malaysia. It aims to achieve this by partnering with a vast network of businesses, from major corporations to local merchants. Extending beyond mere convenience, by creating a unified financial ecosystem, he hopes to empower the underserved to save and invest their money.
Meanwhile, AEON Bank focuses on supporting suppliers and entrepreneurs by leveraging the strong retail presence of its parent company as a means of promoting financial inclusion.
While larger, established enterprises are well supported by conventional banks, smaller suppliers — such as those providing fresh produce or locally made goods to supermarkets — often struggle to secure seed capital or funding.
“Some might think the underserved only means B40 individuals. But for us, it is crucial to be more inclusive, and that means extending the much-needed financial funding to enhance someone’s economic situation,” says AEON Bank CEO Raja Teh Maimunah Raja Abdul Aziz.
“Therefore, it is key that we offer a solution to support these smaller suppliers and vendors that have been a very important part of our ecosystem. If their cash flow improves, they can thrive and grow their business at a sustainable scale.”
Instead of just providing financial assistance, AEON Bank wants to help MSMEs develop sustainable business practices and skills so they can thrive independently in the long run. The large funding gap of RM90 billion for MSMEs indicates that there is a significant unmet demand for financial services that are tailored to their specific needs.
Hildah Hamzah, chief of staff at GXBank, says the bank has made significant progress in promoting financial prudence, with 750,000 users setting up more than 800,000 Savings Pockets. This feature allows customers to grow their savings without the limitations of a fixed deposit lock-in period, ensuring they retain the accrued interest without penalty.
“We are still a young bank, but our mission is clear. We are constantly exploring and fine-tuning our efforts to serve the underserved. An example is the more than 750,000 users who have set up more than 800,000 Savings Pockets, which goes to show how we are making headway in addressing pain points of Malaysians when it comes to financial resilience,” she adds.
“Malaysia is ready and wants equitable access to banking services anytime, anywhere. With the proliferation of smartphones improving connectivity across the country, and coupled with our Impian GIGih efforts, we are confident that we can be the bridge for the underserved to help them achieve greater financial resilience and realise their financial goals.”
Impian GIGih is the digital bank’s financial inclusion and literacy programme through which it offers bursaries and financial assistance to empower the underserved demographic.
Hildah says the bank will roll out its first lending product, GX FlexiCredit, designed to help its customers have access to funds with affordable interest rates. The product aims to address pain points such as access to credit, especially for individuals who have challenges due to limited financial history.
“We define the underserved as the group of individuals and businesses that have limited or no access to useful and affordable financial products and services that meet their financial needs — transactions, payments, savings, credit, insurance and more,” she adds.
In the long run, GXBank hopes to address the longstanding needs of MSME customers. It hopes to provide an end-to-end digital engagement to enhance convenience and accessibility for all Malaysians.
The rapid rise of digitalisation is transforming financial services, with digital banks standing as a prime example of its impact. As the economy continues to evolve, it is becoming clear that digital financial services will play a central role in the future of payment solutions.
“We will definitely see an increased trajectory in terms of the usage of digital payment solutions and also cashless solutions,” says Johnson Yu, founder and CEO of e-wallet operator Evolet.
Evolet is one of the players striving to help migrant workers and the underserved with their financing needs. The e-wallet operator started out by catering to migrant workers after a conversation Yu had with his grass trimmer, which made him realise the importance of having a secure place to save money, especially for the underserved and unbanked.
While e-wallets differ from digital banks in the sense that they do not have any extended banking features in their system, they are still drivers of digital payments and access to finance.
Receiving their salaries in cash creates a lot of downtime for migrant workers as it necessitates a visit to the bank or money changer, while putting their cash at risk of being stolen.
“Before this, [people] received their salary via either bank or cash. But in terms of the underserved and unbanked, they do not use a bank account or do not know how to use a bank account,” Yu points out.
“In terms of migrant workers, a lot of them do not have bank accounts. So, getting their salary electronically in an e-wallet makes a difference for them.”
Financial literacy varies from one person to another among the migrant community, but their needs are comparatively simple. Yu says remittance is the most common transaction among Evolet’s users and that migrant workers, as well as those in the B40 and M40 groups, spend more than half of their salary on necessities.
“One is to provide for their family, two is for food, three is for necessities, which is connectivity, like their prepaid reloads. So, it basically depends on what they need,” he elaborates.
This is why Yu believes that digital banks can offer the accessibility needed to help underserved communities manage their finances more easily on a monthly basis.
Having been developed primarily for the unbanked and underserved, Evolet has features that have been designed to help those with lower digital literacy. For instance, it uses simple and straightforward icons to inform users what actions to take.
Going the extra mile, the e-wallet operator uses WhatsApp as its main mode of customer support as the app is familiar to many. Yu points out that WhatsApp also has accessibility features such as voice notes and camera calls for users to show the situation at hand.
Evolet, a white-label app under ManagePay Systems Bhd, has received approval from Bank Negara Malaysia, authorising it to operate its e-wallet services. The platform ensures that all users complete the electronic Know Your Customer (eKYC) process, and safeguards users' funds by holding them in a trust account.
“That itself is really secure [because] e-wallet players aren’t able to actually touch the money. Even if the company is no longer there, the money will still be there,” he assures.
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