The theme for 2022 is not just recovering from the pandemic, but to also set the tone for economic transformation that will drive and support business growth in the years to come. Hence, Bank Negara Malaysia’s (BNM) announcement of the Financial Sector Blueprint 2022-2026 is extremely well-timed in our opinion.

We expect the blueprint to have a profound impact on the Malaysian economy at large. This is especially true for the eKYC and ID assurance industry, which serves as the compliance bedrock of the financial sector. As such, we have prepared a commentary to share our thoughts on the 120-paged document, which you can find through this link here.

First impressions

The earlier portion of the report goes in depth into the financial development progress of the country. Greater e-payment adoption, transitions into e-remittance, greater access to financial services, and so on. No doubt these are key trends we can observe within daily news reports and our everyday lives, but it is assuring to see them in concrete numbers.

More critically, the key focus of the blueprint is to:

  • Resolve the uneven local economic recovery.
  • Combat the regulatory challenges of new digital technology.
  • Address financial exclusions of certain demographics, especially the B40 and ageing population groups.
  • Build a greener and climate resilient economy.

These targets are certainly admirable and relevant in this day and age. Many of these trends are not entirely new, with problems long identified and present over the years. Although issues remained largely the same, the intensity of such problems have ramped up substantially — Take, for instance, the recent spikes in EPF withdrawals affecting the older generation.

Despite these pressing issues, BNM can only respond in a limited capacity as a regulatory body. Action can be more damaging than inaction, and preserving any form of financial stability is of our national interest. After all, the blueprint itself states that the Malaysian financial system today is the outcome of decades of continued efforts and reforms.

Although the blueprint positions itself quite conservatively, there are pockets of optimism that we look forward to, such as greater regulation towards digital currencies, the push towards the national digital identity (NDI) system, and the emphasis on a greener economy.

All in all, this is a balancing act of actively participating in areas warranting attention and passively monitoring areas that require degrees of stability. This is not necessarily a bad thing for a central bank. Move too quickly and we risk undermining the underlying structure of the financial sector, but moving too slowly will put us far behind our regional and international peers.

The unending push towards digitalisation

At Innov8tif, our key focus would be on Strategic Thrust 3, which is BNM’s efforts to advance digitalisation in the financial sector. Their steps include:

  • 3A. Future proofing key digital infrastructures
  • 3B. Supporting the digital financial service landscape
  • 3C. Strengthening cybersecurity and responsiveness
  • 3D. Supporting greater use of technology for regulation and supervision

On the ground, we have observed that demand for digital services is at an all-time high but supply does not seem to keep up with the demand. The digitalisation of the financial sector is slow, cautious but steady, especially when compared to the other industries.

From a service provider’s point of view, there are periods of inactivity, waiting for the dominos to fall into place before anything major can happen. For instance, Strategy 3C involves improving cybersecurity, but relies on having a solid underlying infrastructure and availability of the relevant services in both 3A and 3B. The same is true vice versa.

It is difficult to push a digitalisation agenda synchronously when each heavily relies on one another. Thus, we recommend public authorities to focus on two key areas that will have compounding benefits later on.

National Data Sharing Policy (NDSP)

TheEdge reported late last year that Malaysia holds one of the lowest ranks in the Global Open Data Index, placing 87th out of a total 94 countries, even behind nations such as Zimbabwe and Afghanistan. The availability of open government data is lacking, let alone open data on the financial sector.

It is notoriously difficult for the local fintech sector to create value-added services that hinge heavily on low-risk data. For instance, companies that help users compare exact loan rates between banks have to jump through many hoops to achieve the same results that an open API would within seconds.

Because there are no clear guidelines on what data is deemed sensitive and what should be publicly available, each market player within the industry tends to hold onto their data with an iron fist. After all, financial data is a sensitive, tightly guarded asset.

By having an open financial data platform built on top of clear mandates and guidelines, it opens up new innovative services that cater to both direct consumers and businesses alike. Incumbent players are compelled to offer more competitive service in this new playing field, while we can expect to see the birth of a new wave of fintech startups.

National Digital Identity (NDI)

We are no strangers to the NDI program, as evident in our past commentaries here and here. Although plans for NDI have been in the works for years and are referenced several times within the document, there have been no major updates to the subject yet.

We acknowledge the tremendous effort it requires getting the project off the ground, especially the need to coordinate amongst various ministries and government bodies. However, we would like to take the opportunity to highlight why NDI is the bedrock of the future of our local financial sector.

  • Know Your Customer (KYC) is the foundation to any official account creation, and by extension, foundational to the financial sector.
  • It plays a functional role in combating identity fraud and money laundering efforts, which feed into our national cybersecurity and national security agenda.
  • In an online world where anonymous, duplicate accounts are not an outlier but the social norm, NDIs reintroduce trust within the system for high-value activities.
  • It is a straightforward way to improve bureaucratic processes that are currently still heavily reliant on paper documents, improving customer experiences and reducing our carbon footprint.
  • There are already plenty of existing case studies on how NDI can be implemented, from the US, UK, Australia, to even our neighbour, Singapore.
  • If a sovereign nation does not actively take part in conversations surrounding digital identities, we are effectively giving away control to corporate entities such as Meta and Google.

Another point to highlight is the risks of implementing the NDI system through a single commercial channel, effectively turning it into a dangerous monopoly. A government-operated NDI should serve as a moment-of-truth for identification while embracing innovations within both the public and private sector, promoting healthy market competition.

A 2019 report by McKinsey provides a good insight into this subject matter, highlighting the elements of what makes a “good” NDI ecosystem. Even before the pandemic, the report states that NDIs tend to benefit emerging economies more than mature ones, unlocking up to 13% of a nation’s GDP. We expect the figure to further increase since then.

Final thoughts

Our wishlist merely comprises rolling out NDI through stages, perhaps on a localised or state level. We also hope to see any improvements on the NDSP front, where data is the gold rush of the 21st century. We believe that focusing on these two key areas in the short term will yield compounding benefits in the long run.

Overall, we believe in our central bank’s efforts to improve the status of our financial sector, and the blueprint provides the necessary framework and flexibility to do so. We look forward to actively contributing thoughts and opinions on the subject matter where user identity is of a key concern.

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