Malaysia’s Budget 2023 plans towards digitising our industries, particularly digital finance
Based on Budget 2023 tabled on 28 October 2022, there are a few touchpoints that will help expand digital financial services in Malaysia, powering inclusive growth in the digital economy. Firstly, a service tax exemption was proposed for online banking or financial services and digital payment services effective until 2025 (Ministry of Finance Malaysia, 2022). This will incentivise recipients of digital payment services and local non-bank digital payment services providers, such as payment instrument issuers, merchant acquirers, and payment system operators to expand their business during the tax exemption period until 2025.
Following this, there are initiatives to help increase the usage of digital finances such as e-Pemula, where e-wallet credit worth RM400 million will be distributed to 2 million youths and another RM800 million credited to individuals from M40 households through e-wallet as well (Ministry of Finance Malaysia, 2022). This form of financial assistance is effective in reaching broader communities due to increased accessibility and convenience through technological advancement and the prevalence of e-wallets.
Another initiative to increase usage and confidence in digital financial services in Malaysia is taking measures to curb online scams. For example, forming the National Scam Response Centre (NSRC), tightening internet banking security by discontinuing OTP for high-risk transactions, and organising the Financial and Digital Literacy Programme to raise awareness on online scams(Ministry of Finance Malaysia, 2022).
Additionally, there are initiatives to increase digital network connectivity, including the Jalinan Digital Negara project (JENDELA) Phase 2, which aims to provide 100% internet coverage in populated areas (Ministry of Finance Malaysia, 2022). An RM700 million allocation was budgeted to be spent on JENDELA in 2023, and it’s expected to improve digital connectivity in 47 industrial areas and nearly 3,700 schools. Also, Digital Nasional Bhd is to expand the 5G network nationwide to cover 70% of highly populated areas in 2023, with infrastructure expenditure allocation worth RM1.3 billion. This will increase the reach of digital financing and allow it to be utilised by the masses, especially those in rural areas. These initiatives are estimated to benefit more than 1 million people in rural areas and reduce the unbanked population from 11% to 8% by 2025. According to World Bank, 88% of Malaysians were considered the banked population in 2021, which indicates their accessibility to financial services regardless of conventional or digital. The net 12% of the unbanked population mostly came from rural areas and was equivalent to 7 million people who could not access any financial services.
The Budget 2023 is a great step forward in line with the digital finance movement. This is a dire need in Malaysia due to the country’s fast growth rate in mobile banking and e-money transactions, which quadrupled to RM800 billion in 2021. Moreover, the existence of financial inclusion gaps among underserved communities such as women, gig workers, and lower-income earners require significant attention (Hani, 2022). With the rise of digital banking, the credit gap between Malaysians is expected to be filled through the implementation of a personalised financing structure that benefits underserved communities (The Edge Markets, 2022). This will also lead to more convenient and accessible financial services, looking beyond traditional credit scores and home ownership to ensure individuals’ and SMEs’ competitiveness in this rapidly-growing global digital economy.
However, Malaysia still has a long way to go when it comes to the implementation of digital finance. To promote digital inclusion, Malaysia must first be able to provide 100% internet coverage in the country to make progression into the digital economy a reality (NST Business, 2022).
“The government may propose that telco providers offer free data or whitelist certain registered apps necessary for online banking and e-wallets,” says Saify Akhtar, the director of the strategy at Pertama Digital Bhd (NST Business, 2022). He also hopes the government considers allowing third parties to authorise access to specific data via Application Programming Interfaces (APIs) because the regulatory framework for open APIs is currently limited to card and insurance data accessed by data aggregators (NST Business, 2022). It is also important to highlight that there is still low public confidence in digital banking due to the rise in online fraud and scams. Thus, it is crucial that the government prioritises educating its people, particularly senior citizens, about fintech and mobile banking (NST Business, 2022).
How is digital finance different from traditional finance?
Traditional finance refers to the traditional financial system, which is centred around brick-and-mortar financial institutions such as banks and credit unions and involves the use of physical financial instruments such as cash, checks, and credit cards.
On the other hand, digital finance refers to the use of digital technologies to deliver financial services such as mobile banking, electronic payment systems, and online lending platforms. Digital finance is a renowned way of financing and usually provides a lower entry threshold and aims to deliver a better customer experience.
Key differences between traditional finance and digital finance
| Difference | Traditional Finance | Digital Finance |
| Presence | Traditional finance exists in the form of physical bank branches and serve walk-in customers. | Digital finance usually does not exist physically as all services are provided through digital means |
| Convenience | Traditional finance is less accessible, especially in rural areas where there may not be a physical financial institution nearby. | Digital finance is generally more convenient than traditional finance, as it allows people to access financial services from anywhere and at any time. |
| Accessibility | Traditional finance is limited. People have to visit physical banks, and it is only available during working hours. | Digital finance is more accessible, especially to underserved populations. It enables people to access financial services through their smartphones or digital gadgets. |
| Security | Traditional finance might face risks of data leaks from the bank’s centralised server. | Digital finance is vulnerable to cyberattacks and malware apps which could leak the users’ data and give malicious parties access to info without the users’ knowledge. |
| Speed | Traditional finance transactions can take longer to process, especially if they involve physical documents that need to be mailed or delivered. | Digital finance transactions can be completed relatively faster as they can be processed electronically in real time. |
| Efficiency | Traditional finance is less efficient as its services are carried out by bank officers, and these officers only can serve one customer at a time. | Digital finance is more efficient in serving customers. It can serve a bulk amount of customers at the same time without the need for human capital. |
| Cost | Traditional finance incurs a lot of operating and fixed costs. | Digital finance has relatively low operating costs as it does not have a physical presence and requires only software maintenance to keep it running. |
| Customer Service | Traditional banks can provide tailored one-to-one services to customers and yield a higher customer satisfaction rate. | Digital finance is still lacking in providing a satisfactory customer experience as no human interaction is involved and the system may sometimes be down for maintenance. |
| Contact | Customers can have face-to-face contact in traditional finance. | Customers can only access electronic contacts in digital finance. |
Which industries in Malaysia are pioneering the digital finance movement?
In general, the three branches in the finance industry that experienced the biggest digitalization are the payment, lending and e-wallet industries, which combined occupy more than half of the market of fintech companies in Malaysia. Specifically, the payment industry leads the market, with 60 Fintech companies launching products and apps that hold about 20% of the market size. This is due to the surfacing prevalence of digital payment usage, which boomed during the Covid-19 Pandemic as consumers’ paying behaviour largely switched from physical to digital or cashless to reduce unnecessary interactions such as the exchanging of money notes.
Next, the lending industry also experienced tremendous growth, represented by a total of 55 companies equivalent to 18% of the market size among Malaysia’s Fintech companies. Notable companies and apps such as Boost Credit, Bigpay, Capbay, and more are platforms that provide lending services outside of conventional banking coverage. They tend to be laxer on the minimum amount of borrowing allowed and their repayment terms. However, these fintech companies might charge higher interest rates than conventional banks as they bear higher risk by dealing with customers of a lower credit score threshold.
The third largest digital finance industry is the e-wallet industry, with a total of 43 companies that hold 14% of the market among Malaysia’s Fintech companies. Apps like Touch N’ Go e-Wallet, Boost, Alipay, and ShopeePay have high market penetration among current consumers, especially youths due to its usage convenience and instantaneous transaction speed
The three industries mentioned above represent the biggest branches of the digital finance industry in Malaysia and have been growing rapidly in previous years. This rapid growth is also driven by changes brought about by the Pandemic and changing consumer behaviours, such as increased adaptation to technological changes. Many digital finance industries are still expanding quickly. The following section lays out an overview of the trends in the digital finance industry over the past several years.
Market breakdown of Malaysia’s digital finance industry
The digital finance industry can be granularly broken down into 10 branches. These niches are relatively new industries that have just started their expansion into Malaysia’s market. The biggest player in Malaysia’s digital finance market is the digital payment industry. It consists of companies that marketize various methods and technologies used to facilitate electronic transactions. This can include online banking, mobile payments, digital wallets, and payment gateways among other things. The digital payment industry is a key component of the broader financial technology ecosystem in Malaysia and carries several unique attributes such as vast accessibility, especially to the unbanked population, usage convenience, and speedy transactions.
The lending industry in the digital finance market is made up by finance companies that are dedicated to lending money to consumers, typically serving the group of people that are unable to borrow from conventional banks. Digital lending apps cover various purchases regardless of their amounts, ranging from car purchases to home appliances and phones. However, digital lending companies might charge a higher interest rate than conventional banks as they impose less stringent standards on their applicants and thus bear a higher risk of default.
The e-wallet industry refers to the companies that marketize financial applications that allow users to store money, make transactions, and track payment histories on devices like phones and tablets. Digital wallets usually do not require a bank account; instead, consumers can place funds online, which provides underbanked communities the chance to access financial services, thus enabling broader financial inclusion. E-wallets like Touch N’ Go function as more than just a platform to send and receive funds; they usually also have in-built functions for transport services and insurance purchase.
The digital remittance industry refers to the companies that provide digital technologies and platforms to facilitate the transfer of money across borders. This can include online platforms, mobile apps, and other digital channels that allow individuals and businesses to send and receive money internationally. The digital remittance industry has grown rapidly in recent years and is transforming the way people send and receive money across borders, making it faster, cheaper, and more convenient.
The Insurtech industry refers to the companies that have adopted technological innovations to design and find the balance between cost savings and efficiency in the current insurance industry model. Insurtech explores avenues that large insurance firms have less incentive to exploit, such as offering ultra-customized policies and social insurance and enabling dynamic price premiums according to users’ behaviour. Overall, Insurtech is aimed at making the insurance industry more efficient, cost-effective, and customer-centric by using technology to streamline processes, increase transparency, and customise offerings for different customers.
The Wealthtech industry refers to the finance companies that provide wealth management services to customers through the use of big data and analytics to improve investment decision-making. Wealthtech aims to develop digital platforms to pool and invest clients’ funds by automated investing algorithms. Take Robo-advisory services as an example—it is an automated online investing platform that uses algorithms to provide personalised investment advice, portfolio management functions, and other financial services. Also, the rise of social trading platforms like eToro allows individuals to follow and copy the investment strategies of successful traders, which enables them to achieve the same return as the trader they follow. Overall, Wealthtech makes wealth management more efficient, cost-effective, and customer-centric by using technology to streamline processes, increase transparency, and customise offerings for different customers.
The blockchain and cryptocurrency industry in Malaysia refers to companies that provide platforms for cryptocurrencies trading and digital asset management. The cryptocurrency industry in Malaysia currently offers platforms for customers to trade and hold cryptocurrencies like Bitcoin, Ethereum, etc. Although blockchain technology has the potential to disrupt the finance industry, the risk of investing in cryptocurrency is high and uncertain, given the technology is still developing and just having less than a decade of history. Not only that, unlike the equity market, cryptocurrency has less regulatory governance, so investors should look out for the systematic risks of cryptocurrencies such as regulatory risk, programming risk, and market manipulation.
The Islamic finance industry refers to companies that are backed by Islamic law and provide Shariah-compliance financial services to the Muslim population in Malaysia. The Islamic finance industry has its uniqueness in abiding by the Islamic principles. One of the principles, namely Riba (interest), prohibits the charging or paying of interest, while Maisir (speculation) prohibits investment in certain types of businesses, particularly those that are considered harmful to society or are in conflict with Islamic values; for example, sports betting businesses and alcoholic companies. The Islamic finance industry includes various financial institutions and products, such as Islamic banks, sukuk (Islamic bonds), Islamic insurance, and Islamic funds. The Islamic finance market in Malaysia is considered well-established and diverse, and it continues to grow, making it one of the leading Islamic finance markets in the world, hence attracting foreign investors who look to invest in the country via Islamic finance investment opportunities.
Regtech (regulatory technology) is the application of technology to the compliance and regulatory requirements of financial institutions. The Regtech industry helps companies to be more efficient and to effectively comply with the growing number of regulations they are subject to while also reducing the costs and risks associated with compliance. Regtech aims to help financial institutions comply with regulations in more automated and cost-effective ways while also reducing the risk of non-compliance and increasing transparency and security. However, Regtech is still growing at a slow pace. It is considered a niche market in Malaysia as local regulators are still currently relatively conservative about Regtech.
Lastly, the crowdfunding industry provides a structural platform for connecting potential donors with entrepreneurs or organisations seeking funding. The business model of the crowdfunding industry operates as a middleman for connecting entrepreneurs to donors for funding their business or project. The platform charges a certain percentage of the management fees as operating income. Generally, crowdfunding platform fees vary from 5% to 12%. The crowdfunding business is an alternative way for businesses, projects, and entrepreneurs to access funding aside from conventional banks’ debt or equity financing. Crowdfunding tends to seek capital from individuals and hence has a relatively lower threshold of donation amount.
How can we Malaysians benefit from digital finance? What are the potential cons to look for?
A report from the World Bank stated that countries with deeper, more developed financial systems can actually achieve higher economic growth and faster reductions in poverty and income equality, especially among developing countries.
Digital technologies are making it possible to bring financial services to those who previously have lacked access (almost two-thirds of adults in the developing world). Adopting technology could lower costs by maximising economies of scale, increasing the speed, security, and transparency of transactions, and allowing for the development of sustainable financial products tailored to the needs of people with very low, erratic incomes. Digital finance is removing the barriers to financial services, including those arising from issues such as lack of identification, absence of formal income, and geographical distance.
A high mobile phone usage rate was the key to achieving digital financial inclusion in many developing countries. Today, there are over 850 million registered mobile money accounts across 90 countries, with $1.3 billion transactions occurring through these accounts every day. Sub-Saharan Africa has become a leader in mobile money, with over a fifth of the adult population having a mobile money account. This region has also shown that these accounts can provide a basis for more sophisticated financial services, such as digital lending and insurance. Large e-commerce platforms and telecom operators have leveraged the ability of digital finance to facilitate payments to offer services such as insurance and lending.
One of the most significant benefits of developing digital finance is increased financial inclusion. Digital finance makes financial services more accessible to people who were previously unbanked or underbanked, such as those living in remote areas or those with low incomes. This results in greater economic opportunities and improved financial stability for these individuals. By providing access to basic financial services, digital finance can help people build a better future for themselves and their families.
Other than that, the development of digital finance can improve the accessibility and convenience of the financial services industry. Digital finance eliminates the need for physical bank branches and ATMs, allowing people to access financial services from anywhere with an internet connection. With solid digital finance development as the backbone of the economy, transactions can be completed faster and with more ease, making it easier for people to manage their finances. Digital finance also enables financial institutions to lower transaction costs and serve massive customers at once, enabling better and quality services to deliver the best customer experience.
Another benefit of digital finance is enhanced security and fraud prevention. Digital finance is often more secure than traditional financial services, with multiple layers of security, including encryption and authentication processes. This can help prevent fraud and protect consumers’ financial information. In particular, digital finance platforms often use biometric authentication and multi-factor authentication, making it difficult for fraudsters to access people’s financial information. However, incautious user behaviours may bring about vulnerabilities through security breaches such as the installation of malware apps and viruses that leak users’ data.
The COVID-19 pandemic has heightened the urgency of using digital financial services to keep financial systems functioning and people safe during time of social distancing, falling demand, reduced input supply, and tightening credit conditions. The development of digital finance can help governments quickly and securely reach people with cash transfers and other forms of financial assistance and reach businesses with emergency liquidity. It is allowing people to transfer funds, enable cross-border remittances, and pay bills from their homes with no physical contact.
Overall, the development of digital finance has the potential to transform the financial industry and bring numerous benefits to consumers and businesses. This is also aligned with World Bank’s findings of digital financial services, which states that the development of digital finance can benefit people in accessing basic financial services such as transaction accounts, credit, savings products, and insurance. It is crucial as it can help the poor increase their incomes and become more resilient. Lastly, as technological advancement continues to evolve and expand, it is clear that digital finance will play a critical role in shaping the future of finance.
Reference List:
Top 10 differences between Internet Banking and Traditional Banking (no date) AccountLearning.com. Available at: https://accountlearning.com/top-10-differences-between-internet-banking-and-traditional-banking/
Fintech News Malaysia (2022) Fintech Report 2022: Malaysia charts a new path for Fintech growth, Fintech News Malaysia. Available at: https://fintechnews.my/31945/malaysia/fintech-report-malaysia-2022/
World Bank Group (2020) How countries can expand access to digital financial services, World Bank. World Bank Group. Available at: https://www.worldbank.org/en/topic/financialsector/publication/digital-financial-services (Accessed: March 4, 2023).
Written by: Sylvia Chen Weng Yan, Alex Chong, Yeoh Jia Xin, Muhammad Hafizuddin Hakim Bin Ruzlisham and Sherilynn Ngerng Siew Fong
Edited By: Abigail Phang
