The Need for Digital Islamic Banking

IN OCTOBER 2001, education consultant Marc Prensky coined the terms Digital Native and Digital Immigrant. Digital Native refers to a person born or brought up during the age of digital technology, hence familiar with computers and the Internet from an early age.

Digital Natives spend “their entire lives surrounded by and using computers, video games, digital music players, video cams, cell-phones and all other toys and tools of the digital age”. Growing up with digital gadgets and the sheer volume of their interactions with these gadgets have changed the way they think and process information.

On the other hand, Digital Immigrant refers to a person not born into the digital world but at some point later on in his/her life picks up digital technology. Just like other types of immigrants, while some may blend well with the new environment, most would retain their “accent” or their foot in the past.

In a paper entitled “Digital Natives, Digital Immigrants”, Prensky discussed the conf lict facing education in which Digital Immigrant instructors, who speak an outdated language (that of the pre-digital age), are struggling to teach a population that speaks an entirely new language.

Now this population of Digital Natives have entered the workforce and some have become successful entrepreneurs. In more advanced countries, Digital Natives are slightly older than in some less developed ones. They are commonly Millennials (born 1982-2002) or Generation Z (born 1996-2009). It has been estimated that Millennials will form 75% of the workforce by 2030.

Accenture estimated their spending power in the US alone was US$600 billion (RM2.4 trillion) in 2013 and forecast that it would go up to US$1.4 trillion by 2020.

It is apparent that the population size and the spending power are significant enough not to be ignored by the financial services players. In my view, the conflict of Digital Immigrants and Digital Natives is also happening within the banking and Islamic banking industry today.

Most of the current banking products and services as well as the distribution channels were developed or designed by Digital Immigrants under the constraints of policy and regulatory compliance requirements prepared by yet another group of Digital Immigrants.

As a result, Digital Natives find these products and services less appealing and the distribution channels not sufficiently customer friendly. Digital Natives tend to fancy the alternatives provided by fintech companies.

Indeed, fintech companies offering more convenient and more cost effective alternative digital financial services are mushrooming.

This phenomenon is great for consumer empowerment but a threat to traditional financial services providers. To compete with fintech companies in addressing Digital Native consumers’ needs and behaviours, traditional banks have to embark on a digital banking journey.

Digital banking is not just about having digital distribut ion channels such as online and mobile (app and web) banking. Digital banking is customer oriented and offers the customer the service of his/her choice through the access of his/her choice.

It focuses on being relevant to the customer in his/her daily life through digital outreach but still recognises the importance of customer engagement via human contact.

A digital bank also has an innate knowledge of the customer.

A particular customer may visit a branch, call the contact centre, make a comment through social media such as Twitter or Facebook, and a digital bank would be aware of all these accesses and interactions and would respond promptly and consistently.

It would leverage on the customer’s single view data as a competitive differentiation and will proactively offer services required by the customer. This “personalised” service of digital banking appeals to Digital Natives.

Islamic finance players must have a digital Islamic banking strategy in order to survive.

Digital Islamic banking is a Shariah-compliant version of digital banking. At the very basic, digital Islamic banking capabilities need to match the capabilities offered by conventional counterparts.

This is necessary to cater for the needs of Muslim Digital Natives.

To further compete with conventional providers and the fast-growing fintech companies, digital Islamic banking has to be more innovative. With superior customer experience innovations, digital Islamic banking could also capture the non-Muslim Digital Natives market.

In summary, digital technology has changed customer behaviours.

Digital Natives now represent a sizeable portion of our workforce population and they have significant spending power.

Their demand for digital services drives the needs for digital banking.

For Shariah compliance, Muslim Digital Natives need digital Islamic banking. It is also possible for digital Islamic banking to attract the overall Digital Native market segment with digital services offering superior customer experience.

My column as appeared in THE MALAYSIAN RESERVE 11 July 2016

Of Fintech and Disruption in Banking

On April 11, 2016, The Malaysian Reserve ran my column in which I wrote about fintech. One month later, I’m seated at Sasana Kijang Auditorium in Kuala Lumpur. Datuk Muhammad Ibrahim, the new governor of Bank Negara Malaysia (BNM), is delivering the keynote address at the Global Islamic Finance Forum (GIFF) 5.0. 

One of his key messages was for Islamic financial institutions (IFIs) to adopt fintech innovations because “the potential impact of such technological disruptions is significant”. 

The governor said an estimated 10% to 40% of overall banking revenues could be at risk by 2025 due to fintech innovations outside banking institutions that are able to achieve a significant pricing advantage. 

It was also pleasing to hear from the governor that the central bank has been actively engaging with fintech firms to better understand their activities and provide guidance on the regulations that may apply to them. BNM has also commenced a review on the regulatory framework to remain appropriate while encouraging productive innovation.

Subsequent to the keynote address, a few speakers also talked about fintech and disruptions. In fact, the word disruption was frequently mentioned throughout the three-day forum. Someone actually counted. It seems the word “disruption” was mentioned 593 times.

Naturally, it will surface every time we engage in fintech conversation. 

Allow me to share some observations on the disruptions that have taken place in the financial industry. According to Brett King in his book Bank 3.0 published in 2013, there are four phases of disruption within financial services. Each phase is disruptive enough that it becomes a game changer.

The first phase of disruption occurred with the arrival of the internet. With the internet came internet banking. It has changed the way customers perform banking transactions. As internet banking facilities become better and more reliable, customers’ visits to branches become fewer. Social media has amplified the disruption by Internet banking. In this social media age, financial institutions may be subjected to public pressure from the social network influence.

The second phase of disruption is the emergence of smart device or phone applications. With this comes portable or mobile banking, which allows customers to perform banking transactions on the move. Except for cash deposit and withdrawal, everything that previously could only be done via the ATM machines can now be done through mobile-phones.

The third phase is when we move to mobile payments on a broad scale. In this phase, we see the convergence of debit/credit cards with our mobile-phones. 

With this, we do not need as much cash or a plastic card anymore. In fact, with our need for physical cash reduced rapidly, the disruption will be far-reaching. As we do not need to go to the ATM machines and physical branches as much anymore, a large part of the reason for their existence disappears. 

In addition, as the usage of debit cards and mobile payment becomes more widespread, the legacy payment method such as the cheque becomes less relevant. This phase is not just about the accelerating demise of cash and cheques, but also the loss of physicality, where we need much fewer physical interactions with a bank for basic day-to-day banking.

The fourth phase is about banking no longer being somewhere we go, but something we just do. There will be a fundamental split between banking as a distribution business and banking as a product manufacturing or credit provisioning capability. 

Banks are losing the basic day-to-day bank account to the mobile-phone or commodity value store. Now, you do not need to be a bank to provide banking services. Customers will go about their daily lives with banking embedded into processes that require financial products or transactional support. Home-buying will integrate with mortgage sale, travel websites will integrate with travel insurance and financing options, a retailer will give line of credit for furniture purchases, etc. 

In summary, the disruptions in the financial industry is real. Once upon a time, we all had to visit bank branches for any kind of banking activity. As time goes by and with the help of technology sophistication, we can do banking anytime anywhere. 

Now, another technology revolution is taking place. Fintech companies are offering alternative banking products that are cheaper and more convenient. As advised by the governor, IFIs have to adopt fintech innovations to remain relevant.

My column as appeared in THE MALAYSIAN RESERVE 23 May 2016