KUALA LUMPUR, March 29 — Financial technology (fintech) industry players are optimistic that Malaysia will be able to kick off its virtual banking revolution and set up its first neo or virtual bank in the third quarter of 2020 at the soonest.

This followed Bank Negara Malaysia’s (BNM) recent announcement on the release of virtual banking licence requirements by year-end.

Fintech Association of Malaysia (FAOM) said the optimism was based on the experiences from other jurisdictions, lessons gathered from more than 50 existing virtual banks, as well as the interest from various parties that the industry players had come across.

“We believe that BNM is emphasising for a banking industry that is modern, innovative and technology-driven, yet mature and managed by experienced resources, as one of the key components for Malaysia digital economy and ingredients for a high-income nation,” it told Bernama in an email today.

Asked whether it is timely for BNM to roll out the requirements by year-end, the association agreed with the move as Malaysia needed to step up the pace to catch up with Europe, the United States (US), Australia, and even Hong Kong, which allowed neo banks to be established in their respective jurisdictions.

“Given BNM’s maturity and understanding of banking technology, as well as Malaysia’s fintech talent capabilities which serve as the much needed catalyst for our nation’s digital economy agenda, yes, it is timely for the central bank to initiate the move.

“In addition, with Malaysia’s leading role in the Islamic finance industry, particularly the regulatory maturity in the sector, the country is primed to have the first virtual Islamic bank by next year, as it has the best talents, experiences and resources,” it said.

Touching on the future of traditional banks in the face to rapid technology innovation and change, FAOM believed that in order to survive, traditional banks must firstly, shift their corporate mindset towards being more open for collaboration to facilitate mutual and viable partnership with fintech firms.

“Secondly, traditional banks need to re-calibrate their existing technology in order to manage the legacy issues, as this is one of the biggest stumbling block for better technology adoption.

“And thirdly, they need to change their business model to be agile, mobile-centric and modular to accommodate the fast-changing technology advancement and innovation,” it said, adding that the two virtual banks recently approved in Hong Kong were strong evidence that collaboration between traditional banks and fintech players could occur.

FAOM said the fintech firms had proven that they could establish virtual banks without the involvement of traditional banks, as seen with the UK’s Atom Bank and Moven in the US.

Meanwhile, Frost and Sullivan Malaysia managing director and Asia-Pacific senior vice-president Hazmi Yusof believed that virtual banking would not disrupt the traditional banking sector as it would be the first to adopt the digital-only banking technology due to the market confidence backed by support from the authorities.

“There is still a portion of traditional Malaysians that would want every transaction to be conducted face-to-face and at the counter,” he said.

With that, Hazmi believed that traditional banks that adopted the virtual banking technology would have an advantage compared to 100 per-cent virtual banks.

“It won’t be easy for the virtual newcomers, as they have to come in and provide better customer experience and offer more value added services, but their main target would be the tech-savvy millennials who will use their banking services on top of social and lifestyle platforms,” he said.

Other than that, Hazmi said multinational corporations (MNCs), and small and medium enterprises would also be the target of neo banks due to the cost efficiency, flexibility and speed offered.

“MNCs would look at this favourably, especially if virtual banking will drive down costs, such as on foreign exchange dealings, and subsequently, will have a spill over effect on the global supply chain,” he said.

Hence, Hazmi is certain that virtual banks would inevitably add competition to the traditional retail banking space, as the banking players would opt to spend less on their physical infrastructure, such as branches and manpower.

Echoing Hazmi’s view, FAOM said banks in Malaysia have been reducing their office space and the number of branches over the last five years, as banking services had improved significantly with rise of Internet and mobile banking resulting in a reduced need for face-to-face services.

“For example, CIMB Bank and Maybank have been closing and reducing the size of their branches since 2016, as they channel resources to focus on digital services.

“Other banks, such as Public Bank, RHB Bank and Bank Islam, are not adding new branches as they too are focusing on optimising their current branches with the view of reducing either the existing space or number of branches,” it said.

Looking at concerns over cyber security, data privacy and the readiness of the banking industry for all-digital banks, FAOM said BNM’s announcement on allowing virtual banking would spur industry players to greater efforts to meet the requirements of this new segment.

“This will be the catalyst for better Internet speed and improving capabilities on managing risks related to cyber-security and data-privacy for key stakeholders such as customers, regulators, service providers and investors to embrace digital banking.

“It will not be an overnight paradigm shift for Malaysia to launch digital banking, but more of a structured transition from what we have today to a hybrid service and eventually, a fully-digital offering which will happen within three to five years,” it added.

However, Hazmi opined that security concerns, including data breaches, identity fraud and confidentiality of personal information, would remain the top priority for users of virtual banks.

“There will still be cases but I believe with a proper framework and enforcement, security concerns will be manageable,” he said.

According to the recently released BNM Financial Stability and Payment Systems Report 2018, the monetary value of mobile banking financial transactions doubled to RM100.1 billion last year from RM50.7 billion in 2017, as the number of transactions jumped to 257.4 million from 107.7 million.

The report said the growth in transactions was supported by a 2.2 million increase in mobile banking service subscribers to 6.6 million in 2018, from 4.4 million in the preceding year. — Bernama