What is Digital Banking? Is This The Way Forward?

The term digital banking, essentially, combines online and mobile banking services under one umbrella. Online banking means accessing banking features and services via your bank’s website from your computer. You may log into your account to check your balance or pay your electricity bill. You can access additional banking features, such as applying for a loan or credit card, via your online banking portal.

Mobile banking means using an app to access many of those same banking features via mobile devices such as smartphones or tablets. These apps are proprietary, issued by the bank where you hold your account, and usually use the same login information as your online banking portal.

Source: Focus Malaysia

Designed for people on the go, mobile banking apps tend to include the most used banking features, such as mobile check deposit, funds transfers and bill payment. They also often have convenient features like peer-to-peer payments through systems like Zelle. Banks also may use their mobile apps to send customers banking alerts such as fraud detection and low balance notifications.

Online Banking + Mobile Banking = Digital Banking

Online banking in the U.S. has its roots back in the 1990s. In October 1994, Stanford Federal Credit Union was the first institution to let its customers access banking functions via the new World Wide Web. Now estimated 80% of U.S. banks offer their customers the ability to bank online.

As mobile devices gained popularity and adoption, banks were encouraged to put their services at their own mobile banking apps. The FDIC has reported that 34% of Americans use mobile banking as their primary way of accessing their accounts.

Together, online and mobile banking create the digital banking umbrella, giving people access to banking wherever they may be.

For customers who appreciate the ability to stop by a branch to perform some of their banking functions, brick-and-mortar banks is the natural choice for their bank accounts. These traditional banking institutions also usually offer online access and a proprietary mobile app to make everyday banking functions as accessible as possible for their customers.

Digital banking offers a number of benefits for both consumers and business owners.

• Access. With both desktop and mobile access to your bank accounts available, digital banking means you’re not beholden to bank hours to manage your finances.

• Better rates and lower fees. With online banks driving fees down, consumers have choices beyond their local brick-and-mortar financial institutions. It’s easy to compare rates and fee structures to find the best bank for your needs.

• Equity. Upstart online banks level the banking access playing field by reaching unbanked and underbanked communities that rely heavily on mobile phones but may not have access to physical bank branches.

Digital banking, while highly convenient and easy to access, isn’t without its challenges.

• Downtime. If you rely solely on an online bank, you could be challenged to access your accounts should your bank experience an online or mobile app outage and there’s no branch for you to visit instead.

• Learning curve. For those who aren’t tech-savvy, online banking and mobile banking apps might be a bit much to digest.

• Security. There’s always the chance that your username and password could be hacked; however, online banks pursue the same degree of risk-reducing security protections, such as multi-factor authentication, as brick-and-mortar banks do.

Into this scenario, we have BNM approving five digital banking licenses (for Malaysia) out of 29 applicants. And these include:

1. A consortium of Boost Holdings Sdn Bhd and RHB Bank Berhad.

2. A consortium led by GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd.

3. A consortium led by Sea Limited and YTL Digital Capital Sdn Bhd.

4. A consortium of AEON Financial Service Co, Ltd, AEON Credit Service (M) Berhad and MoneyLion Inc.

5. A consortium led by KAF Investment Bank Sdn Bhd.

P. Gunasegaram (of Malaysiakini, 3 May 2022) expressed caution on the changes taking shape, including the possibility of “a lot of damage” if these developments “fizzle out”.

This is a niche market and very much at an early stage globally. The digital banks are expected to commence operations in 12 months hence at the earliest. And many are anchored by strong shareholders. Also, give some credit to BNM in their evaluation. It is not some Muthu, Ali and Ah Chong consortium but real serious players. Let the music begin.

References:

What is digital banking, E. Napoletano,Daphne Foreman, Forbes, 24 Feb 2021 (

(https://www.forbes.com)

Comment| The dangers of digital banking, P. Gunasegaram, Malaysiakini, 3 May 202

The Ringgit, Inflation and Private Investment

The Minister of Finance (“MoF”) in The Edge Malaysia (2 May 2022) made a case in his article (somewhat similarly entitled) on the fine balancing act he has to perform during this Covid pandemic. Most MoFs are trapeze artistes or clowns. The new Sri Lankan MoF will attest to that!

There are several good points by the MoF. Supply chain, subsidies, inflation, interest rate, sovereign debt and exchange rate were all discussed. On the latter, he holds the view that for every 10 sen depreciation of the ringgit, GDP improves by 0.05%, exports are up by RM30.5 billion and current account surplus grows by RM800m. And GLCs with overseas investments have translation gain of up to RM7 billion. Does he not realise that this argument taken to its full measure must mean our ringgit should depreciate to say RM8 to the U.S. dollar then we will have everything in “hunky-dory” surplus and excellent outcomes? What crap! Just look at Turkey and where inflation is, 70%! Or, does he prefer Zimbabwe? Without going to the extreme, competitive depreciation will nullify any initial gains.

Source: https://dollarsandsense.my

The Hon. MoF goes on to say that “rather than focusing on a specific ringgit policy, the priority should be to implement structural reforms that will strengthen our economic potential and prospects to make Malaysia a more appealing investment destination”. Pray tell me how and what will you do? Are you going to do the following?

• NEP is discarded, including 30% (or 51%) Bumiputera equity requirement;
• Allocate fair budgetary sums for Bumi and Nons, or better still discard the division and just focus on all Malaysians according to their needs;
• Develop meritocracy  from education to employment;
• Re-calibrate  GLCs, universities, civil service to have Nons at all levels;
• Dialogue with private sector on their concerns. Malaysia’s private investment growth slowed markedly to 1.5% per annum in 2016-2021 from 12.1% per annum in 2011-2015. Private investment to gross domestic product (GDP) ratio also has fallen in recent years, from 17% in 2018 to 15% in 2021. In 2020, Covid-19 pandemic had caused a sharp decline of 11.9% in private investment before it turned around to increase moderately by 2.6% in 2021.

A host of obstacles are holding back private investment growth: weak global and domestic economic prospects; high operating, regulatory and compliance costs; distorted incentives and policies; the shortage of manpower; lack of financing for small and medium enterprises (SMEs); low profitability and return on investment as well as slowing foreign investment inflows. (All the above were cited by Lee Heng Guie, Starbiz, 5 May 2022);

• Improve FDI inflows? Net FDI inflows into Malaysia averaged US$8.3bil (RM36.13bil) in 2015-2020, which were significantly lower compared to US$82.5bil (RM359bil) in Singapore, US$17.4bil (RM75.75bil) in Indonesia, US$14.3bil (RM62.26bil) in Vietnam, while it is moderately higher than US$7bil (RM30.47bil) in the Philippines;
• Bureaucratic red-tape including APs for favoured people;
• Reduce corruption with Special Court and Public Prosecutors for corrupt practices;
• Place Malaysians with high integrity in institutions and banks; and
• Review the One-Stop Centre

Otherwise, we will be behind Singapore, Indonesia, Vietnam and the Philippines. But for now ahead of Laos and Myanmar. So, what do you say, MoF? Are you ready and “gung-ho” to start the structural reforms?

References

My say: Ringgit, inflation and the economy: A fine balancing act, Tengku Zafrul, The Edge Malaysia, 2 May 2022

Insight-voices of business: crying out for change, Lee Heng Guie, The Star, 5 May 2022

What Is Currency Depreciation? And Where is the Ringgit Headed?

Currency depreciation is a fall in the value of a currency in terms of its exchange rate versus other currencies. Currency depreciation can occur due to factors such as economic fundamentals (e.g. GDP decline/negative), interest rate differentials, political instability, rise in inflationary risk, risk aversion among investors, negative perceptions, speculative activity (by banks and others), export decline, current account deficit, low forex reserves, a deficit fiscal position and major outflow of “political” or “hot” money.

Countries with weak economic fundamentals, such as chronic current account (and fiscal) deficits and high rates of inflation, generally have depreciating currencies. Currency depreciation, if orderly and gradual, improves a nation’s export competitiveness and may improve its trade deficit over time. But abrupt and sizable currency depreciation may scare foreign investors who fear the currency may fall further. This may lead many to pull portfolio investments out of the country. These actions will put further downward pressure on the currency. Some economists and Government sources suggest that depreciation is good, it improves export competitiveness. But this is a short-term phenomenon. The “J” curve will result in situation returning to its pre-depreciation state.

In many situations, easy monetary policy and high inflation are two of the leading causes of currency depreciation. When interest rates are low, hundreds of billions of dollars chase the highest yield. Expected interest rate differentials can trigger a bout of currency depreciation. Central banks can increase interest rates to combat inflation, especially if it is of the demand-pull kind. 

Additionally, inflation can lead to higher input costs for exports, which then makes a nation's exports less competitive in the global markets. This will widen the trade deficit and cause the currency to depreciate. While economic fundamentals for the most part determine the value of a currency, political rhetoric can cause a currency to fall as well.

Between 2015 and 2016, the U.S. and China were repeatedly in a battle of words with regards to each other’s currency value. In August 2015, the People’s Bank of China (PBOC) devalued the country’s currency, the yuan, by roughly 2% against the U.S. dollar. Chinese officials said the move was required to prevent a further slide in exports.

In 2019, the Trump administration labeled China a currency manipulator, saying Chinese officials were purposely devaluing its currency, leading to unfair advantages on trade. In 2018, U.S.-China political rhetoric turned toward protectionism that resulted in a long-term trade dispute between the world’s two largest economies.

Sudden bouts of currency depreciation, especially in emerging markets, inevitably increase the fear of "contagion," whereby many of these currencies get afflicted by similar investor concerns. Among the most notable was the Asian crisis of 1997 that triggered the collapse of the Thai baht and caused a sharp devaluation in most Southeast Asian currencies.

Today, an example of that would be the Turkish lira. The currency has lost more than 40% of its value against the USD since early 2021. A combination of factors led to the depreciation. First, investors grew fearful that Turkish companies wouldn't be able to pay back loans denominated in dollars and euros as the lira continued to fall in value. Secondly, President Trump approved the doubling of steel and aluminum tariffs imposed on Turkey.

Then Turkey’s president, Recep Tayyip Erdogan, did not allow Turkey's central bank to raise interest rates.  And the country didn't have enough U.S. dollars to defend its currency. Turkey's central bank lifted interest rates in September 2018 from 17.75% to 24% to stabilize its currency and curb inflation. But Erdogan believes high interest rates are against the teachings of Islam!

For Malaysia, it is the decline against the Singapore dollar that “drops” our face.

We were on par up to 1980. Beyond that we have gone “south”. Why? The rot from a so-called “nationalist” PM set in! Currency weakness is a symptom of a larger disease. If the disease is not treated, the rot cannot be stopped.

The ringgit is also vulnerable to a slowdown in global growth prospects, especially in the world's largest economies — the US, China and the Eurozone.

Then there are hawkish statements by the U.S. Federal Reserve and others on interest rates. The Fed is set to raise its Fed Funds rate to 2.25% by end 2022. So, expectations of interest rate differentials could play a part in exchange rate movements. In turn, a declining rate will raise imported inflation, especially if food imports alone exceed RM60 billion a year. Some say a 1% variance of the ringgit to the USD will result in a 0.337% variance in CPI.

So, what can we do? BNM must raise OPR now not act after the event. That will stem outflow. Then look at supply bottlenecks. A whole set of structured reforms are also required – from removal of APs to integrity and good governance to political changes that could put Malaysia on the right path (i.e. a pre-1980 scenario)!

AmBank group chief economist recently said that strong commodity prices have kept the ringgit from sliding too much. Being sensitive to the oil price movement, the strong upside to Brent oil price has provided some buffer to the ringgit from slipping too much. Stability to ringgit is more likely to be seen once we start to factor BNM normalisation of its policy rate, health of the economic fundamentals, besides the economic and inflation outlook. 

But it is time to act and to act now, growth is already muted. So why not raise OPR?  The issue is really one of stabilisation/improvement in exchange rate or the pursuit of an “illusive” growth projection.

References:

Currency Depreciation, Tim Smith, Investopedia

“Water face drop” as ringgit depreciates to record low against Sing dollar, Cheah Chor Sooi, Focus Malaysia, 26 April 2022

Singapore dollar hits record high against ringgit at 3.1665, Syafiqah Salim TheEdgeMarkets.com, 25 April 2022

Why is the Turkish lira crashing and what impact is the currency crisis having in Turkey? Associated Press, 4 December 2022

SGD MYR historical exchange rate, Currency converter (https://www.currency-converter.org.uk)

Is Economics All About Mathematical Modelling or Mathematical Masturbation?

There is nothing wrong with mathematics per se. There is nothing wrong with applying mathematics to economics. What is, however, totally wrong, are the simplistic beliefs that:

• “math is the only valid tool”

• “math is always and everywhere self-evidently applicable”

• “math is all that really counts”

• “if it’s not in math, it’s not really economics”

• “almost everything can be adequately understood and analyzed with math”

Source: http://www.alexsarchives.org

Neo-classical economic theory today is in the story-telling business whereby economic theorists create mathematical make-believe analogue models of the target system – usually conceived as the real economic system. This mathematical modelling activity is considered useful and essential. Since fully-fledged experiments on a societal scale as a rule are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build mathematical models and make things happen, rather than engineering things happening in real economies.

Without strong evidence, all kinds of absurd claims and nonsense may pretend to be science.  There is need to demand more of a justification when it comes to the main postulates on which mainstream economics is founded. If one proposes ‘efficient markets’ or ‘rational expectations’ one also has to support their underlying assumptions. As a rule none is given, which makes it rather puzzling how things like ‘efficient markets’ and ‘rational expectations’ have become the standard modelling assumption made in much of modern macroeconomics. The reason for this sad state of ‘modern’ economics is that economists often mistake mathematical beauty for truth.

If you were to attend an undergraduate course in economics, top universities will demand A level in mathematics as an entry requirement. From years 1 to 3 (or 4) in university, mathematical modelling and equations have become the central core, as if economics is a “science” like physics. Economics has been and will also be an explanation of behavioural patterns of human beings in a geographical area. It can seldom be generalised to reflect some global fundamental truths like gravity or particle physics. The sooner economists realise their limitations, the better the modelling outcomes. Otherwise it is pure mathematical masturbation.

Reference:

Economics — confusing mathematical masturbation with intercourse between research and reality, Lars P. Syll, 7 Mar, 2017 (https://larspsyll.wordpress.com)

Happy Labor Day again!

 

Selamat Hari Raya

 

Selamat Hari Raya