It’s the 5 digital banks that the regulator gave permission to operate that actually drove the transformation of the banking industry in Malaysia:
The transformation of the banking sector in Malaysia is more marked by the sudden and quick emergence of digital banks than any other factor, including high-level of technology induction. The country has seen the emergence of digital banks like Aeon Bank, GX Bank and Boost Bank, which have challenged the traditional banks. What has indeed spurred their growth is the role played by the central bank.
Bank Negara Malaysia, which has liberally licensed their operations, enabling them to function as financial institutions without physical locations. The people in the country too accepted these banks – for example, GX Bank is known to have got some 100,000 customers in about 2 weeks of its launch of operations.
However, the emergence of digital banks has not led to any loss of ground for the traditional banks, for they have taken up technology induction and adoption of the digital on a large scale. And in Malaysia, both the digital banks and the traditional banks are pioneers in the use of AI and data analytics, especially for better understanding of the customer behaviour and then for tweaking their operations.
Malaysia also has a high internet penetration – as much as 98% in 2024 – which has been one of the key factors that promoted the adoption of the digital on a large scale. An estimated 92% of the bank customers in the country have opted for digital banking.
RELEVANCE OF SANDBOX
Bank Negara Malaysia has initiated a regulatory sandbox in 2016 with a view to promote fintechs and startups to experiment with new technologies in a controlled setting. The sandbox seeks to encourage innovation and the delivery of financial services by granting regulatory flexibilities for fintech solutions with genuine value proposition to be experimented in a production or live environment. The sandbox comprises 2 tracks – a Standard Sandbox, which refers to the standard procedures introduced in October 2016 to allow fintech companies to test innovative solutions; and a Green Lane, which is an accelerated track introduced in February 2024 that provides a simpler and quicker way for financial institutions with strong track record in risk management capabilities to test innovative solutions that face regulatory impediments.
ISLAMIC FINTECH
One key aspect of the banking domain in Malaysia is the growth of Islamic fintech, which has fulfilled the needs of the population for ethical, Shariah-compliant financial services. The supportive regulatory framework in the country and a majority tech-savvy population necessitated the need for transparent Islamic financial products and there have been no dearth of innovative products like Islamic digital banks and Robo-advisors as well as specialized services for underserved markets.
Malaysian banks are today examining the benefits of adopting open banking and providing personalized financial advice, seamless payment processing, improved loan processing and better security. Likewise, there are major projects now under way using blockchain technology, especially for facilitating cross-border payments in a better way and reducing reliance on intermediaries. The banks are also experimenting with data analytics and AI to understand customer behavior and requirements, and then deliver more customized and relevant services.
Malaysian banks in their digitization process are adopting a low-code no-code approach that can bring in benefits like shorter time to market products and services, and also offer scalable banking solutions.
INTEGRATION TOOL
One other area where Malaysian banks are showing their prowess is in adopting Integration Platform as a Service (iPaaS) to speed up their digital transformation. iPaaS provides a platform for seamless application integration, enabling banks to modernize their systems and offer new digital services. iPaaS solutions help them to streamline processes, connect various systems and build new digital services.
Another area where the banks in the country have made a significant stride is in the adoption of cloud. Most of the banks in their transformation process have opted for cloud mainly to have cost savings, and in order to be able to reap the benefits of scalability, agility, better security and improved collaboration.
The country’s Bank Muamalat had recently deployed a cloud-based operating model to develop new financing products and achieve operational efficiency besides saving costs and enhancing security measures. It is now in the process of adopting GenAI capabilities to analyze data and deliver personalized digital banking services. The bank has migrated its applications and databases to Google Cloud.
In this background, the 5 new digital banks are expected to be disruptors for the country’s banking sector, leading to both increased competition and possible consolidation. These banks are: GXBank, which is the country’s first digital bank, and set up by Grab Holdings and Kuok Group, AEON Bank, which is the first Islamic digital bank owned by AEON Financial Service, Boost Bank, which is a joint venture between Axiata Group subsidiary and RHB Bank, KAF Digital Bank, which is the second Shariah-compliant digital bank led by KAF Investment Bank and Ryt Bank, which is an AI-powered digital bank by the YTL-Sea consortium.