The COVID pandemic has forever changed how businesses operate, from digitising operations, and remote working, to loan financings and banking digitally. While the impact of the pandemic has been felt across sectors of various sizes, Malaysian Small and Medium Enterprises (SMEs) have been hit the hardest, with sales, revenues, and profits taking a nose dive from the pre-COVID market situation.
Arguably the most significant shortfall for many SMEs is their inability to obtain loans from traditional banks to stay afloat and balance the books. Before the COVID pandemic, poor documentation and financial credibility have already denied most SMEs from getting loans.
Multiple lockdowns in the years 2020 and 2021 have, at certain times, brought economies to a complete halt, affecting SMEs and making their profiles less favourable, even resulting in some shutting down permanently.
Malaysian SMEs frustrated with traditional banks
SMEs have voiced their frustrations with traditional banks’ reluctance or inability to support them throughout these difficult times. Their feedback includes slow responses, limited access to credits, and minimal transparency regarding decisions and processes.
According to Fair, Isaac, and Company (FICO), there are signs that traditional banks in Malaysia are facing the possibility of losing SMEs to non-traditional competitors.
The California-based data analytics firm added nearly 60 percent of Malaysian SMEs are expected to take up alternative lending solutions rather than traditional ones, as they are pessimistic about getting support from the latter.
FICO Senior Director of Decision Management Solutions in the Asia Pacific Aashish Sharma stated that 1.15 million SMEs contribute 48 percent of the total workforce in Malaysia and produce over 38 percent of the gross domestic product.
This represents a massive opportunity for any financial entity, traditional or new innovations, to serve this segment.
Lending alternatives to Malaysian SMEs
In recent times, non-banking avenues such as venture capital (VC), equity crowdfunding (ECF), and peer-to-peer (P2P) lending have surfaced into the limelight, providing lending alternatives to SMEs and stiff competition to traditional lending institutions.
According to Financing SMEs and Entrepreneurs 2022: An OECD Scoreboard, venture capital, and private equity have amassed a committed fund of RM11.70 billion at the end of the year 2020; contributors from government agencies, sovereign wealth funds, corporate investors, and other asset managers.
In the same year, 117 deals involved venture capital and private equity. The growth for equity crowdfunding in 2020 was a staggering 457 percent from 2019, from RM 22.92 million to RM 127.73 million. Peer-to-peer grew by 20 percent in 2020, from RM 418.64 million in 2019 to RM 503.31 million.
The strong presence of alternate funds lending and increasing risk of further losing more SMEs have forced traditional banks to turn to digital innovations to help improve consumer sentiment.
While most of the attention went to the five digital banking licenses awarded back in April 2022, what those partnerships and joint ventures would bring to the digital banking sector remains to be seen. So, what about those serving existing client databases?
Their subsequent adoptions and innovations to their products must be planned carefully and executed precisely to maintain their relevancy in the market.
According to an article by Andrew Gilder and Matt Cox, one recommended way traditional banks can adopt is to develop client-centric products with digital innovations that add value.
Malaysian banks offering SMEs solutions
Malayan Banking Berhad, which serves 20 million customers, offers solutions to help SMEs save costs in human resources and finance departments.
Maybank2u Biz allows SMEs to make bill payments, employee payroll, and payments to suppliers or business partners besides checking account balances and transferring funds locally and overseas.
Meanwhile, Hong Leong Bank (HLB) was recently awarded Best SME Bank in Malaysia for the fourth consecutive year, with their approach to “provide SME clients with simple and frictionless experiences by digitalising processes into automated journeys,” as quoted by Kevin Ng, HLB’s Head of SME Banking.
One solution HLB has provided clients is a fully digital onboarding experience that eliminates the need to visit a physical branch for simple tasks such as opening business accounts. Clients can do so just by visiting HLB’s web application.
HLB also launched Malaysia’s first biometric-based mobile eToken, offering convenience and added security for its online banking platform.
UOB Malaysia officially launched its own UOB SME app recently, allowing companies to conduct transactions, apply for loans, track cash flow, and track foreign currency alerts, amongst other features on the app.
“The app provides SMEs with a real-time view and the convenience of managing their finances on the go. SMEs can now stay on top of their businesses and have better financial control while driving their growth strategies”, said Ng Wei Wei, CEO of UOB Malaysia,
The foreign currency alert is vital, especially for SMEs with regional offices. “The personalised currency watch list and alerts are useful tools to help SMEs manage their foreign currency risks, especially given the volatile currency environment,” said Managing Director and Country Head of Wholesale Banking Andy Cheah.
Shaping the digital banking industry
How traditional banks redefine themselves will shape the digital banking industry moving forward. For the five ventures awarded digital banking licenses to set motion their plans and specific solutions to SMEs, it will take significant time and adjustments.
Traditional banks with data and behavioural analytics about their existing clients can use this to their advantage, capturing the market that once was theirs.
Demand for digital banking assistance and solutions will remain high as the world walks into a new norm, as long as it is client-focused, offers flexibility, and has a clear value proposition.