2010 > 2019: Decade of Disruption - Digital disruption a major wake-up call for banks

THE rise of new digital technologies and fintech over the last decade has been a big wake-up call for the banking industry.

The disruption these brought, particularly in recent years as consumers became more comfortable using alternatives like GrabPay and Boost to do payments and transfers, was a stark reminder that while banking will remain necessary in the future, banks will not.

It forced lenders, especially the bigger ones such as Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd, to each develop a digital strategy and new capabilities to remain relevant.

“You have the banks really on their toes now, in defensive mode,” a banking expert from PwC Malaysia remarks.

Malaysia has been a particularly hot market for e-wallets, with many sprouting up over the last two or three years. A few banks — Maybank, CIMB, AmBank (M) Bhd and RHB Bank Bhd — got in on the action too in order to retain customers.

According to Bank Negara Malaysia data, there are currently 47 e-money issuers, of which 42 are non-bank issuers. In 2016, there were just 25 non-bank players.

The most dominant players are TNG Digital Sdn Bhd (which owns the Touch ’n Go e-wallet), GPay Network (M) Sdn Bhd (GrabPay) and Axiata Digital eCode Sdn Bhd (Boost).

The e-wallet market is projected to grow to about US$20 billion (RM82.7 billion) by 2024, according to PwC.

The rise of e-wallets is good news for consumers — they now have multiple channels to perform basic financial services and are rewarded with cashbacks and attractive promotions as the players try to outdo one another in their bid to acquire customers. In fact, many e-wallet players are not making a profit.

For banks, however, it is a matter of concern as they stand to lose valuable customer data.

“One of the fundamental points [of concern] is the loss of customer data. From a bank’s perspective, when you top up an e-wallet using your bank account and then make purchases…they have no idea where your money is flowing to. They can’t track or analyse your spending patterns, which is valuable data for banks,” says Ong Ching Chuan, PwC’s financial services leader and assurance partner.

“E-wallets, on the other hand, know exactly how the consumer spends. They are actually mining the data, so that they can then push products to you … that will be the future trend,” he adds.

For that reason, a few banks have gotten into the game. For example, in March, Maybank launched its MAE e-wallet, which also enables users to open an account via their mobile phone. Earlier in December 2017, it was the first bank to offer a cashless mobile payment option using QR (Quick Response) codes, called Maybank QRPay.

Meanwhile, TNG Digital is a joint venture between the CIMB-controlled Touch ‘n Go Sdn Bhd and Ant Financial Services Group.

Experts say the mobile banking space is where competition will heat up going forward.

At the MAE launch in March, Maybank group CEO Datuk Abdul Farid Alias shared that the number of transactions taking place via mobile had been growing “at a rate not seen before”. The bank saw 5.85 billion transactions done on its Maybank2u platform in 2018 — 3.77 billion over its website and 2.08 billion over the mobile platform.

“The number of Maybank’s web transactions grew 53% last year. However, the volume of mobile transactions jumped 173%. We hope that it will grow by triple digits again this year,” he said, adding however that it was hard to predict how the market would behave.

Bank Negara data shows that the number of financial transactions conducted over the mobile banking channel last year more than doubled to 257.4 million, and these were valued at RM100.1 billion (2017: 107.7 million, RM50.7 billion).

But 47 e-wallets is too many for a market of 30-odd million people, and a consolidation is inevitable. For perspective, China, with its 1.4 billion population, is served by only two main e-wallets, namely TenCent’s WeChat Pay and Ant Financial’s Alipay.

It is a highly competitive segment and, already, a few have fallen by the wayside. Last month, vcash, owned by telco Digi.Com Bhd, was shut down after only two years in operation. Digi cited a change in business strategy as the reason.

Two weeks ago, in a move that acknowledged the growing usage of e-wallets in the country, the government picked Touch ’n Go, Boost and GrabPay e-wallets to participate in its RM450 million e-Tunai Rakyat initiative, which starts next month. Under it, Malaysians who earn less than RM100,000 a year are eligible to receive RM30 each, through any of the e-wallets, to purchase goods and services.

Be that as it may, e-wallets have not really hurt banks’ profitability. Commercial banks in Malaysia, including Islamic ones, continue to grow profits, making an estimated gross operating profit of RM26.88 billion last year, up 14% from RM23.57 billion in 2014, according to Bank Negara data.

Five digital bank licences

But another digital threat is soon to emerge. Digital or virtual banks — those with no physical branches — are coming. Last Friday, Bank Negara released its digital banking licensing framework for industry consultation. It plans to issue up to five digital bank licences to qualified applicants to conduct either conventional or Islamic banking business in Malaysia.

The central bank expects to finalise its policy documents by the first half of 2020, after which it will open applications for the licences.

Experts say digital banks may prove to be the single biggest disruption that the banking industry has seen in decades.

In Hong Kong, not long after eight virtual banking licences were issued this year, HSBC — which did not pursue a licence — reacted by doing away with minimum deposit-balance requirements and fees for personal accounts.

Nevertheless, Bank Negara has said it expects digital banks to addresss market gaps in the underserved and unserved segments, which suggests they will not be a major threat to incumbent banks. Most banks in Malaysia have a wait-and-see stance on whether to pursue a digital banking licence.

Those that have indicated interest include CIMB, Affin Bank Bhd, Hong Leong Bank Bhd and AMMB Holdings Bhd, but it remains to be seen if they will go it on their own or with non-bank partners. Non-banks that are keen on the licence include regional tech giant Grab and Axiata.

To be sure, going into the next decade, all eyes will be on developments on the digital banking front.