Digital Banking in Malaysia – Sticking to your core but not to your core banking system

by Daniel B Ruppert

Banking is becoming less about money and more about data, in particular user data. Not many fully comprehend what this means but more and more youngsters are taking a shot at it. The startup scene has smelled blood and is out for more.

And that’s not (only) because our banks are managed by old, vinyl-records-sound-better believers, but because their core technology, aka core banking, was designed 40 years ago and since then patched, silo-upgraded and silo-bridged – similar to the LDP-Penchala Link crossing.

Most FSIs have a hate-hate relationship with their core banking system provider. Malaysian mid-tier banks have to set a budget of at least RM200 million for “digital banking” efforts but actually this budget is 90% for their core banking provider who is then trying to analyse his own legacy, multi-patched spaghetti-code into which it will implement yet another silo module patchwork. 

Legacy Core Banking software architecture was based on patch processing, lower transaction volume and for internal users, i.e. tellers and loan officers, not to include customers or third-party products. Legacy systems are designed around product-silos and account numbers – not around customer data analytics and user experience. 

What are the first symptoms? 

Banks basically make money through interest and non-interest revenue streams. Non-interest revenue streams include transaction fees, management fees, currency exchange rate spread, etc. – all the lovely little fees which customer always saw as an unfair exploit of having no alternatives. 

And exactly those non-interest revenue streams are now taken over by the Fintech startup scene ranging from inexpensive, instant worldwide remittance services, free eWallets and performance-based robot advisory for fund management.  Banks are being stripped away of their non-interest revenue services.

But that’s only the tip of the iceberg. The real disruptors, ironically, are the B2B software platforms that collaborate with the FSIs making them more efficient and customer-centric by providing effective workarounds to their legacy core banking system. For example, the As-Sidq™ platform by Sedania Innovator Bhd which handles personal finance loans for Islamic banking from application to the Sharia-required commodity trade. As-Sidq™ clients managed to eliminate their loan application backlog, reduce staff from 40 to 4 and processing time from 7 hours to 7 minutes – all without changing the core banking system. 

Another example, is ringgitplus.com which appeared as a B2C comparison site for credit card offers but ultimately morphed into a collaborative means to FSIs to attract, qualify and approve new credit card customers.

What should Malaysian banks do? 

Invest in another silo-patch of their core banking system for a specific new banking product? 

The answer is no if you are a forward-thinking banking brand. The answer is also no if you are a stiff legacy bank BUT you accept that your new job is to orchestrate banking products rather than owning them. 

Banking 2.0 is less about the new Fintech products itself but more about how the products work together around the customer - how they are seamlessly interlink beyond the bank’s borders to third-party Fintech providers, and how customers have a choice of the best services and products available on the market without having to leave their “core” bank.

This time the bank’s business model is evolving, not just the technology. Hence, a technology upgrade alone won’t do the job this time.

Componentisation, APIs –along with emerging frameworks such as ICTF– and the cloud environments allow banking systems to communicate more effectively with each other and thus, enable banks to create their own service-orientated architecture (SOA). 

SOA adds a layer to the technology environment which allows banks to “mix and match” technology solutions they need to adjust and drive their business model, as well as the ability to quickly adjust and implement new solutions – almost at no cost.

Combining a mobile-centric presentation platform with a security layer, an integration layer with business and workflow engines, data analytics and stripped-down core banking legacy systems in a cloud environment will give banks the flexibility, agility, and risk profile necessary to offer customers the solutions they demand, to compete in the rapidly-changing retail financial services market.

So how will the banking future look like? 

Some banks will get “unbundled”, that means Fintech startups will take over some of the banks’ services and customers; and other banks will learn to orchestrate proprietary and third-party banking products. 

Those banks who prefer to orchestrate (and keep their customers) will firstly, need to make a plan on management level, select a digital product to tackle first, and execute a proof of concept project to validate their expectations. This can be done in 3-6 months, involves real customers and products, and costs less than half a million ringgits. 

After that, however, you probably need to push for a formal commitment from the Board to approve a banking digitalisation strategy involving marketing, business operations and IT. 

Which technology vendor to choose?

Simple. Rule #1, don’t repeat the mistake which all banks have unwittingly done last time, e.g. don’t lock yourself into a technology that later holds you hostage by your antiquated system and becomes an obstacles of innovation.

Rule #2, don’t ask typical IT consultants either. They are not innovators but listen to the developments from the second row – and charge a lot for executing nothing, nor taken responsibility for their preaching.

Either you look for a new digital-centric core banking system which runs in parallel to your legacy core bank and handles all the new digital products, until over the next 10 years it has taken over most of the legacy core bank tasks and at one point you can retire the legacy system.

Or, you keep your current core banking system and install banking middleware which is like a wrapper around the old system and uses APIs to handle all the communication between the new systems, digital products and the old systems.

The first option is technically the most efficient way, however, it also comes with a high CAPEX tag and holds more risks. If you are a new bank, this is the way to go. Your firm’s vision, your staff’s work culture and your new technology are bound to tackle the financial industry.

The latter option, a banking middleware solution, is quick and inexpensive, and gives you a playground of over 150 third-party digital products which you can try, combine and collaborate as your heart desires. It also gives your more time as your board, management and staff gets used to the new open, customer-centric mindset. Because there is no point having the newest technology environment but not the staff to adopt it. If you are an existing Malaysian bank, no matter with which background, this option is the wiser choice.

Malaysia has a few independent system integrators for such banking middleware, including the big international players like Accenture, DXC, Cognizant, … but there are also local players with knowledge on conventional and Islamic banking, and hands-on experience for a lower price tag, such as SoftSpace and Sedania Innovator Bhd.

More on digital banking execution strategies for Malaysian banks next time.

Daniel B. Ruppert is the Group CEO of Sedania Innovator

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