Jessica Chew Cheng Lian: Digital developments in Malaysia's
financial sector and the broader economy
Opening address by Ms Jessica Chew Cheng Lian, Assistant Governor of the Central Bank of
Malaysia, at the Asian Banker Digital Finance Convention 2018, Kuala Lumpur, 22 March 2018.
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It is my great pleasure to be here today at the 2018 Asian Banker Digital Finance Convention.
Many of us here would remember what a "Kodak moment" is. I believe the term for that these
days is "Insta-worthy".
Kodak's story is a familiar one, now infamous as a classic case of digital disruption. At the turn of
the century, film was still very much the technology of choice. But within years, the digital camera
quickly took over the mass market, eventually putting Kodak out of business. And the story does
not end there, as we all know. Very soon, most people were taking pictures with their phones
instead.
This may be an old cautionary tale, but its message continues to be relevant. The digital
revolution is real. It is inevitable. And it is pervasive in ways that change the way we live today,
and in ways we cannot yet imagine.
At its most fundamental level, perhaps the most significant change brought about by the digital
revolution has been the change in paradigm. By this, I mean the basic assumptions that shape
our thinking - whether in a business, social or political context.
In the world of finance, some of the questions being asked today are: What makes a bank a
bank? Will digital currency ever replace central-bank issued money? Or more likely, will central
banks issue their own versions of digital currency and in the process, disintermediate banks? Are
banks selling financial products, or are they offering a lifestyle, opportunity and the freedom to
pursue a new and different path in life? What business are banks really in?
When everyone stopped using film in cameras, one wonders if Kodak realised that it was
actually in the business of capturing memories. Or when smartphones burst into the mobile
handset market, did Nokia realise that their business was not selling mobile handsets, but
connecting people with the world around them?
Three years ago, McKinsey predicted that technological advancements will redefine the
landscape of finance, and then went on to argue that incumbents had - at most - a brief window
of five years to adapt or risk becoming obsolete. You may or may not agree with this, but I think it
would be hard to deny that a shake-up of the industry is already present.
To some extent, the finance industry has been responding. Total IT spending is estimated at over
$200 billion every year across the regions of North America, Europe, Asia Pacific and Latin
America. In 2016, a single global bank spent $9.5 billion, or 16% of its expenses on technology.
The impact of these investments are becoming increasingly visible - banking without branches,
investing without brokers, paying without paper.
Technological advancements are also redefining the landscape of finance in ways that we are
only beginning to understand. Distributed ledger technology offers the potential to transform
longstanding practices in areas such as correspondent banking, trade finance and remittances.
Big data analytics continues to uncover new ways to understand and access untapped markets.
Innovations in mobile technology are also challenging the status quo, particularly in the area of
payments. Alipay and Tenpay quickly come to mind as examples of companies that took a single
mobile app and went on to build an international ecosystem from scratch.
These trends are now increasingly commonplace across the globe, driven by a multitude of
factors - from the drive to improve efficiencies, deliver a superior customer experience, break
into new markets, or combat fraud.
In the face of these tectonic shifts, most of us are finding ourselves in unchartered waters. Within
the central bank, we are doing work across a range of issues that we believe will be important to
inform our thinking on digital developments, both in the financial sector and the broader economy.
Within your own institutions, I trust this is also the case. In that sense, we share a common
interest - to keep our sights fixed on the future so that we can step forward confidently.
With that in mind, today I would like to touch on four areas of particular relevance as we navigate
this digital world:
First, the role of digital leadership;
Second, ensuring the quality of growth in the financial sector;
Third, future-proofing the workforce; and
Fourth, preparing our society for digital finance
Digital leadership in the face of changing market dynamics
Let me turn first to digital leadership. Strong digital leadership starts with an acceptance of a new
normal. Historically, finance has been a close-knit community. But the barriers to entry are being
lifted by technology. As I alluded to earlier, this has blurred the boundaries of what it means to be
a bank, or a financial services provider.
As a result, banks are no longer just competing with other banks. Non-traditional players - such
as fintech firms and platform-based companies - are increasingly well-positioned to offer
financial services. Digital disruptors want to not only gain market share, but to transform the
market itself. This is reflected in the willingness to take loss-leading positions when entering a
market.
The changing market dynamics raise some important strategic questions for banks - including
how banks will choose to fundamentally approach competition, what this means for existing
business models, and what outcomes this will entail both in the short and longer term.
One strategy has been to leverage opportunities for collaboration - whether among existing
players or new entrants. We see this emerging as an increasingly important, if not inevitable,
response globally on several fronts.
In the blockchain space, the industry in a number of jurisdictions has pooled resources to defray
the cost of experimentation involved in developing scaleable use cases for the technology's
application. In Malaysia, nine banks have done this by coming together to develop blockchain
applications for trade finance.
Establishing shared networks, or opening up previously closed ones, is also gaining traction.
This can be seen in the growing use of Open Application Programme Interfaces (or Open APIs).
Over the last five years, publications of APIs in the financial sector have increased exponentially,
with an estimated 200 new APIs published every year. In a survey that we conducted earlier this
year, more than half of banks and insurers in Malaysia indicated plans to roll out open APIs in the
near to medium term.
At the industry level, the Bank has established an open API implementation group with members
drawn from the industry, fintech community and key stakeholders to develop open API standards
for the financial sector as part of efforts to broaden access and promote innovation and
competition.
On the risk management front, the World Economic Forum announced less than three weeks
ago the creation of a consortium to facilitate more coordinated efforts in addressing
cybersecurity risks. This entails developing common principles for risk assessments, guidance
for implementation, and a scoring framework.
In the area of payments, the Bank has just last week issued the Interoperable Credit Transfer
Framework (ICTF), which promotes collaborative competition or 'co-opetition' for mobile
payments. Under this framework, banks and non-banks alike collaborate at the infrastructure
level through a shared payment infrastructure, while individual players compete at the product
level by developing innovative value-added features. This approach is envisioned to expand the
network reach at a lower cost, while promoting competition in areas that advance financial
inclusion, higher service levels and the delivery of a superior customer experience.
There are clear synergies to be gained from such collaborative efforts. They enable technological
infrastructure to be shared across the industry. This shifts the competitive focus towards
improving the value created for customers and the economy at large, rather than a race towards
building proprietary networks that ultimately leads to market fragmentation.
However, the effect of this is also a sharp laser focus on bottlenecks within individual firms. By
levelling the playing field, firms will face a greater urgency to address internal constraints that
prevent them from capitalizing on opportunities for higher growth and productivity. This may well
be the most important challenge for digital leaders.
Elevating the quality of financial sector growth
This brings me to the quality of financial sector growth.
There are two perspectives to this. First, digitisation offers enormous potential for the financial
sector to achieve what was not possible before, at least not without prohibitive costs. And
second, the transition to a digital economy itself calls for a re-orientation of the financial sector to
meet the new business demands for financial services. On both counts, the financial industry
can, and in fact ought to be, powerful agents of change.
With a little ingenuity, digital finance can unlock new growth opportunities that were previously
deemed to be not commercially viable. Indeed, disruptive innovations - whether in banking or
beyond - often begin at the fringes of the market, such as the underserved and unserved
segments.
The much-lauded success of M-Pesa in Kenya is a shining example of this, where the humble
mobile phone was transformed into a bank account for millions of people who were otherwise
excluded by the financial system. We have our own success story in Malaysia with agent banks
that were made possible with technology. Through the vastly expanded network of access
points at a fraction of the cost involved to set up a branch, over 30,000 individuals who did not
have bank accounts before now have access to banking services through agent banks.
This is just the tip of the iceberg, with considerable potential that remains untapped -
to achieve full financial inclusion with access to bank accounts for all Malaysians;
to make it easier, through psychometric and big data analysis, for businesses that have no
track record or collateral to qualify for financing as Malaysia embraces an innovation-led
growth model; and
to practice and influence sustainable business practices that protect our future.
With digital finance, these are commercially viable possibilities. From Africa to London,
technology and finance are being combined in unprecedented ways to deliver solar power to
communities, drive investment decisions based on sustainability metrics and break down
barriers to access.
With growing inequality, environmental degradation and more uncertain global developments, the
stakes are high. If banks do not take up the mantle of leadership within the community, at risk is
their legitimacy in the longer term as vehicles for the efficient allocation of economic resources.
Future-proofing the workforce for digital finance
One can hardly talk about the quality of growth without addressing the workforce. This brings me
to the third area that I would like to touch on.
In a sense, the financial sector is arguably better positioned than most to transition its workforce
as job profiles change in response to technological disruptions. For one thing, the financial sector
has already been moving for a while in the direction of higher skilled jobs. Over the past three
years, 91% of total jobs created in the financial sector were in high-skilled positions. As at the
end of last year, high-skilled workers continued to comprise the majority of the workforce -
representing 74% of the banking sector employees and 83% of the insurance/takaful sector
employees.
That said, more substantive considerations of the implications of technological disruptions for the
financial sector workforce have generally been lacking. Beyond talk of hiring more data scientists
and cyber-security experts, or automating counter and customer services, most institutions have
not fully examined how changes to workflows or business strategies under different digital
scenarios will impact existing jobs. It is also not uncommon for institutions to chiefly focus on
ITrelated technical skills as a core competence for future workers. Yet we all recognise the speed
at which technical knowledge becomes quickly obsolete. In reality, learning agility, creative
thinking and behavioural insights may be far more important in future workers.
In responding to technological disruptions, the implications for the workforce therefore demand
much more rigorous attention than the cursory acknowledgement that it is getting today.
We intend to work with financial institutions over the coming months to take this forward,
beginning with a holistic assessment to better understand the dynamics of the financial sector
workforce as a basis to forecast skill demand and supply under different scenarios. This in turn
aims to support the formulation of strategies - both an the institution and industry level - to
effectively transition the workforce.
For Malaysia, with a significant majority of jobs in the high-skilled category, technology is more
likely to augment and redefine job roles in the financial sector, rather than eliminate occupations
altogether over the next decade. Nevertheless, some segments will inevitably face the risk of
displacement. We aim to work with the industry to establish appropriate mechanisms to re-skill
workers and enhance their prospects for gainful employment in different roles. I should add that
we will also expect individual financial institutions to design and implement appropriate programs
for transitioning employees affected by digital disruptions, beyond compensation arrangements.
Preparing society for digital finance
My final point has to do with preparing society for digital finance. The consumer experience of
financial services is changing dramatically. This is happening on several levels. Customer
interfaces are shifting online. The basic commodity of finance - money - is being replaced by
electronic forms. Financial products are offered as part of a seamless solution for customers
buying property, subscribing to a mobile phone or data package, going on a holiday or enrolling in
university. This in turn alters the relationships that a consumer develops, which can be several
layers removed from the entity that is ultimately providing a financial product or service.
Frameworks and business practices designed to protect consumers have not fully kept up with
these changes. This can increase risks to consumers - from a lack of transparency,
misrepresentations, the inappropriate use of data to unfairly discriminate against consumer
segments, legal loopholes, and financial fraud. Greater access to financial services itself
through the entry of new and unconventional players can also contribute to
overindebtedness.
More needs to be done to better prepare society for digital finance. This must address the
information needs of consumers in the context of digital financial services, clear parameters
adopted by financial institutions for offering financial products through a new interface, and
expanded arrangements for handling complaints which also cover the role of intermediaries
through which financial services are offered. Most importantly, we need to increase efforts to
educate consumers on how to protect themselves against fraud, and the implications of giving
consent for their data to be collected and used.
Drawing on lessons from our engagements with financial service providers and fintech
companies in the regulatory sandbox, the Bank intends to clarify and enhance existing standards
expected of financial institutions in these areas to maintain confidence in the use of digital
financial services.
Ultimately, what really matters is how effective your customer engagements are in addressing
potential consumer risks. We look to financial institutions to preserve, if not further improve on, a
positive consumer experience for your customers. At the industry level, financial institutions
should also collaborate on public communication strategies to educate and raise awareness on
digital financial services.
Conclusion
It has been said that not since the digital revolution in the 1990s has technology placed such a
comprehensive burden on business, employees and individuals to reinvent themselves. In the
process, a vast range of possibilities and challenges will open up for the world of finance to
deliver stronger, higher quality and more inclusive growth. Individually and collectively, we will
face stark choices that will shape the future of financial services in Malaysia. It is critical that we
move forward thoughtfully to ensure a financial system for the ages and for all segments of
society.