When we think of 2020, the first thing which comes to our mind is Covid-19, but 2020 will be also remembered for the emergence of a digital economy as digital finance and cashless payments took over and eliminated the customary modes of financial services.
Traditional financial activities such as lending were overshadowed by crowdfunding and digital lending; universal payment mode such as cash, debit and credit cards were taken out of the equation by digital payments as a more convenient and safe payment model.
Digital finance, which encompasses all segments of financial technology (fintech) includes a wide range of financial services which include but not restricted to savings, investment, financing, payments, credit, remittance, and insurance accessed and delivered through digital channels.
Digital experience is becoming a new normal for the users of financial services thanks to the pandemic and the tech-savvy consumers.
One of the global reports on this theme, The Global Covid-19 FinTech Market Rapid Assessment Study, a joint initiative of the Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge Judge Business School, the World Bank Group and the World Economic Forum found that Digital Asset Exchanges, Digital Payments, Digital Savings and WealthTech all reported year-on-year growth in transaction volume in excess of 20 per cent, whereas Digital Banking, Digital Identity and RegTech sectors reported more modest year-on-year increases of around 10 per cent.
This was primarily due to the timely actions taken by digital finance providers, FinTech platforms. Globally, almost 70 per cent of FinTech providers made changes to their existing product and services to expand their customer bases such as fee or commission reduction and waivers; changes to onboarding criteria or implementing digital onboarding and payment easements.
Due to the pandemic, suppressed economic activity compounded job losses which in turn making it difficult for the individuals and micro, small and medium enterprises (MSMEs) to obtain financing from the traditional lenders.
Banks on the other side also struggled to offer new credit facilities due to defaults and moratorium on bank loans (one we saw in Malaysia). Digital finance providers like fintech platforms or digital banks appeared as a messiah for the public and struggling businesses.
Digital bank accounts (having no physical presence) can be 90 per cent cheaper than the traditional bank accounts making it favourable for the lower-income group.
Digital finance channels did not only help individuals or small businesses, but it also facilitated government and policymaker economic stimulus activity during the pandemic.
For instance, a digital bank in Hong Kong launched an initiative to get the government stimulus check to people earlier in form of fee-free and interest-free loans. For digital capital raising, several UK equity crowdfunding sites delivered government matching fund via their sites as part of the "UK Future Fund", which made it possible for start-ups with earlier equity-based Crowdfunding to obtain a convertible loan at reduced interest rates.
In the case of digital lending initiatives, With the federal Covid-19 relief measures not being available to SMEs, a US-based digital lending firm entered in a partnership with a statewide Covid-19 relief recovery fund to disburse loans to this segment.
In case of insurance technology, UK-based InsurTech worked with the UK government on a Trade Credit Reinsurance Scheme where the UK government created the £10 billion (US$12.5 billion) reinsurance scheme to help businesses during the Covid-19 pandemic by guaranteeing transactions insured by trade credit insurers.
Malaysia also did not fare badly in this area as the government allocated RM750 million for e-Penjana Credits in the e-wallet to encourage e-wallet usage for safe, contact-free payment experience and to boost consumer spending.
To further boost the usage of digital channels, the Malaysian government also allocated RM80 million for Technology Innovation Sandbox to encourage innovation and creativity that can propel the digitalisation of service delivery including financial services.
To speed up the digital banking initiative in the country, Malaysia is on course to be in the league of Australia, Canada, Hong Kong, South Korea, the UK, and the US who have established their digital banks. Even our closest neighbour Singapore awarded four digital banking licenses last month, with Grab-Singtel consortium and tech giant Sea being the first beneficiaries.
The Finance Ministry (MoF), in its Economic Outlook 2021 report also emphasized that a digital bank would revolutionize the financial landscape by offering financial services through digital and automated platforms. Bank Negara Malaysia (BNM) issued the Policy Document on Licensing Framework for Digital Banks on the last day of 2020.
This licensing framework aims to enable the innovative application of technology to uplift the financial well-being of individuals and businesses and foster sustainable growth including access to and promoting responsible usage of suitable financial solutions to unserved and underserved segments such as low-income individuals, early-income millennials, start-ups, and micro-enterprises.
Malaysia plans to offer five digital banking licenses in 2021 which will be in addition to the Asia Digital Bank (AsiaDB), officially approved digital bank by The Labuan Financial Services Authority (Labuan FSA).
It might be too early to assess the full-blown impact of the digital finance push both in Malaysia and globally, one thing is clear that digital financial services have arrived to disrupt the traditional financial services industry and have the best opportunity to expand financial access to the underserved community (which has become prominent during the pandemic).
The movement restriction due to pandemic has impeded the use of physical financial activities and resulting in a surge in the use of digital and cashless transactions can be considered as a blessing in disguise for the growth of digital finance.
Fintech and platform-based financial services is like 24/7/365 activity meeting all the customer needs as well as providing flexibility and cost reductions for the businesses. It might be very soon that digital finance will be the face of the financial services.
* The writer is a Professor of Finance and Head of School (Accounting and Finance) at the Asia Pacific University Malaysia and a research affiliate of Cambridge Centre for Alternative Finance (CCAF) at Judge Business School, University of Cambridge. He is one of the contributors of The Global Covid-19 FinTech Market Rapid Assessment Study a joint initiative of the CCAF, the World Bank Group and the World Economic Forum. Nafis has been ranked among top 100 global social media influencers in Fintech and top-ranked Regtech influencer. He holds a PhD in Banking and Finance from Monash University.
He can be reached at nafis.alam@apu.edu.my
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times