Digital banking, disruption or evolution?

While digital banking, thrown into sharp relief by the onset of the Covid-19 pandemic, is considered by some a disruptive trend in the industry due to its effect on traditional brick-and-mortar branches, experts say the trend will help democratise banking products and services for customers as well as benefit the banks themselves.

As digital banking moves to the fore, driven by the demand for efficiency in aspects such as banking records and transactions, some features of conventional banks are likely to begin fading away.

There will be fewer customer offices, for example, less back-office infrastructure, and fewer automatic teller machines (ATMs).

Such changes may come sooner rather than later, with Bank Negara Malaysia expected to announce a list of applicants given the green light for the receipt of digital bank licences. Those who applied included Aeon Credit Service, Sunway, Grab Holdings and AirAsia’s BigPay.

In Asia, Hong Kong paved the way with its digital banking service up and running in 2020. This was followed by Taiwan and Singapore – the other two “Asian Tigers” – which had theirs operational last year.

Speaking to MalaysiaNow, economist Geoffrey Williams said the technology-driven interactive features online would mean lower infrastructure and staff costs for digital banking players.

“Customer interaction is all online, but they offer instant transactions through phone apps which are very popular with Gen Z customers, for example,” he said.

Williams, who is attached to the Malaysia University of Science and Technology, said this in turn would help make them more viable in asset-light formats.

“Digital banks tend to offer fewer but easier products, mainly for money transfers, payment transactions, and personal loans and savings,” he said.

“But they can also be more innovative, and some offer peer-to-peer lending or cryptocurrencies, for example.”

Bank Islam chief economist Mohd Afzanizam Abdul Rashid said the absence of physical branches would give digital banks an advantage in terms of product offering, and allow them to be more nimble in managing their operational costs.

“They will also be able to get returns on investments in a much shorter time,” he said.

He believes that the award of digital banking licences suggests that the banking institution is still evolving, with entry barriers for new players coming down.

But this will also affect those with a more established presence in the field, he said.

“The incumbent players will really need to up their game by ensuring that customer experience is at the forefront, considering that financial products can be quite generic.

“In the end, the customers will benefit the most as the services and products have been democratised,” he added.

Williams meanwhile expects traditional banks to respond with more online banking services themselves, adding that they might even buy up digital banks subject to regulatory requirements.

“I think many digital banks have in mind the possibility of acquisition in the medium term,” he said.

One example of how customers might benefit from digital banking is the RM1 ATM interbank transaction fee which was reinstated this month. With digital banking, such fees would be unlikely.

Williams said digital banks are also more likely to offer zero-fee products as their income would come from assets held as well as investments from deposits rather than day-to-day transaction flows.

“Over time, digital banks will have some impact because they are attractive to many, especially the younger people, foreigners who can’t open traditional accounts, non-banked communities in rural areas and so on,” he said.

Nevertheless, he said traditional banks would not disappear immediately as they are still needed to cater to customers who prefer face-to-face service, in addition to handling company payroll and commercial banking matters.

Despite the expected acceptance of digital banking, he said, investment banking and other financial offers across the overall portfolio of traditional banks would take some time to disrupt.

“The adoption of digital solutions in e-hailing, for example, shows that Malaysians can adapt and become familiar with apps very quickly.

“But the regulatory environment here is strict, for good reasons, and market size and low-income groups restrict growth possibilities.”

He pointed to Indonesia, which has nine times as many people and a large non-banked population. More growth in digital banking is expected there, he said, as well as in India and China.

Azfanizam meanwhile said that traditional banks would have to reinvent themselves in order to navigate the competition from digital banks.

As the younger generation is more accustomed to technology, he said, digital banks would have the upper hand when it comes to making headway in this market.

Williams said that in the future, money itself would likely be digital. He noted that central banks in Malaysia, Singapore, Australia and South Africa are already coming up with cross-border payment systems using central bank digital currencies.

“Digital banks are more likely to be interested in digital currencies, but the overall use of digital money is about acceptance as a form of payment for day-to-day transactions, as well as security and regulations – not just the establishment of a digital bank infrastructure, although of course this is important.”