ASEAN’s fintech scene is currently on steroids as nations compete in a highly tech-encouraged landscape. The pandemic has spurred structural changes to the regional economy, amongst which is the rise of digital banking — causing the issuance of digital banking licences to be placed under the microscope.
This trend has been particularly concentrated in Southeast Asia because of its tech-savvy working population, the increased accessibility of smartphones, the rollout of 5G, and a firm push to speed up financial inclusion, specifically for the unbanked and under-banked.
Will homegrown tech-firms help support this newly founded banking landscape?
Current state in ASEAN
Singapore led the way in late 2020, with The Monetary Authority of Singapore (MAS) awarding two full banks and two wholesale banks with licences. For the rest of the region, regulatory approval for standalone digital banking has been slow in coming, with regional players eyeing Singapore’s approach to digital banking to follow in their footsteps.
Malaysia and the Philippines have approved licensing frameworks for digital banks, but Malaysia has yet to announce any successful licensees. Bank Negara Malaysia (BNM) governor Tan Sri Nor Shamsiah Mohd Yunus said in late March that the central bank will make the announcement of the five successful applicants upon completion of the legal process. The timing of which has yet to be finalised as at the time of writing.
Meanwhile, the Philippines said it will cap its digital banking licence at six recipients, which have already been awarded. Indonesia already has seven digital banks, with seven more awaiting licences.
In Vietnam, the nation’s central bank approved electronic know-your-customer (eKYC) processes in 2020 to allow users to open of bank accounts online, making it easier for citizens to set up bank accounts and reap the benefits of digital banking. However, the country faces roadblocks to implementing digital banks for other various regulatory reasons. But no doubt there is significant market potential here, because Vietnam ranks second among the top 10 unbanked nations globally.
Out with the old, in with the new
Despite the push towards digital platforms, traditional banks still have a stronghold in the region. ASEAN is still at its infancy when it comes to digital banks as compared to the West, due to the existing strong presence of incumbent banks and the financial systems built around them.
However, we have seen a lot of fintech startups entering joint venture agreements with traditional banks to modernise the latter. This allows existing banks to offer legacy services, while fintechs can focus on accelerating into growth areas — from regulation to technology — to make a successful digital bank. This symbiotic relationship also favours fintechs by resolving common issues faced by startups, such as funding and scalability.
Digital banks created from the ground up have to fend off unsustainable and ambitious ideals, as most try to compete with traditional banks by offering lower-priced products than traditional banks. Many have spent too much resources on building the underlying technology without channelling enough capital to make the business commercially viable.
Competition remains rife in this space with a focus on superior user experience (UX). While it is essential for a digital bank to attract and retain customers, superior UX does not serve as a significant competitive moat because traditional and other digital banks can easily replicate it.
Cybersecurity remains an enormous risk as well. As the technology sophistication grows, so do security vulnerabilities and a hacker’s expertise. A report by global cybersecurity leader Palo Alto Networks revealed that financial services and fintech companies regard themselves to be at most risk of cyberattacks, as highlighted respectively by 45% and 42% of the respondents.
The report also highlighted that cybersecurity budgets have increased the most for financial services (81% of respondents) and fintech (75%) organisations, and banks in particular have a higher concentration of attacks as attackers tend to follow the trail of money.
According to a report by Interpol: ASEAN Cyberthreat Assessment 2021, phishing attacks in the ASEAN region show no signs of slowing down or decreasing. From January to June 2020, Kaspersky alone blocked over 1.6 million attempts to transfer users to phishing pages via links.
In the first half of 2020, Kaspersky foiled the most phishing attempts in the region against small and medium businesses in Indonesia, Malaysia, and Vietnam. Singapore experienced the lowest toll of phishing email, but still witnessed an increase of 60.5% compared with the same period in 2019.
With the rate of digitalisation in the region, the industry requires more stringent user authentication processes. A Kearney report says at the most basic level, cybersecurity should focus on basic authentication, perimeter-based security and standard threat protection mechanisms. But the industry is far more mature than that and a more secure eKYC authentication method, such as multi-factor authentication, should be put in place.
The role of eKYC in digital banking
eKYC is the term used to describe the electronic and digital way of verifying and authenticating a person, which is paperless, can be done remotely and is fast due to the minimised bureaucracy necessary in the KYC processes.
Typically, the eKYC process will involve an individual taking a photo of themselves as well as proof of identification, be it a MyKad (for Malaysia), driver’s licence or passport. For financial services, it could take up to 48 hours for the eKYC verification process to be completed. For Innov8tif, the process takes mere minutes.
A typical onboarding involves a number of legal standards specific to the banking sector, including anti-money laundering, requiring banks and financial institutions to verify their customer’s identity against the existing database of blacklisted records and watch lists, before accounts can be opened and approved to conduct transactions in the systems. The data collected during the eKYC process will also serve as an authentication method, such as a person’s biometric information (thumbprint or facial recognition).
Multi-factor authentication (MFA), which is an authentication method that requires the user to provide two or more verification factors to gain access to a resource, is an example of how digital banks can strengthen the eKYC process to reduce fraud. Rather than just asking for a username and password, MFA requires one or more additional verification factors, which decreases the likelihood of a successful cyberattack.
For established banks and up-and-coming digital banks, it’s become a business imperative to streamline the digital onboarding experience and dramatically cut abandonment rates. This is where a good and secure eKYC process will be beneficial, as it will be simple, intuitive and quick.
As the region moves towards becoming a fully digital and economically strong region, a secure and robust eKYC process is imperative for digital banks, especially to remain competitive in the market and secure a market share of potential clients. Ultimately, eKYC is the gateway democratising access to banking services, regardless of financial background, culture, and ethnicity.
What does it mean for banking consumers moving forward?
Digital banking is part of the broader transition towards online banking as a whole—where banking services are delivered over the internet. As the ASEAN region saw increased adoption of digital payment methods such as e-wallets, banks have since jumped on the bandwagon to offer similar services.
Digital banks extend the customers payment options, be it through QR codes, NFC Tags, debit or credit cards, or instant transfers. Digital banking fulfils the demands of the new generation of consumers – Millennials and Gen Zs who appreciate a variety of choices, speed and convenience – having banking services available at their fingertips.
Hence, eKYC will play a key role in enabling digital banks to operate entirely digitally in the first place.
Through eKYC, digital banks can finally conduct “always online” operations. The pandemic, while accelerating digital adoption, also saw institutions utilising tech for physical distancing and contactless solutions. This inevitably pushed the industry to offer more banking services 24/7. Consumers no longer need to line up at banks anymore, even to apply for a loan or credit card.
Compared to human input, innovative technologies such as artificial intelligence and machine learning can automate many aspects of eKYC, allowing multi eKYC checks to be performed simultaneously. This eKYC process can also be operated 24/7, 365 days, automatically flag any negative, false media and immediately report to compliance departments when such activity occurs.
As digital banks do not have many physical branches to maintain, the lowered operating cost translates to better services at cheaper prices for consumers. With ASEAN becoming a mobile-first region, digital banks allow even those who live in remote areas access to banks and its services from the comfort of their homes.
With technologies becoming more sophisticated, eKYC will become more agile and can provide customers with an instantaneous and seamless onboarding experience, helping financial institutions resolve the aforementioned issues while still adhering to financial regulations.
Keen to learn more about Innov8tif’s eKYC solutions? Drop us a quick message at [email protected]. Looking forward to hearing from you!