The Malaysian Financial Services Industry (FSI) is rapidly embracing digital transformation, driven by changing customer expectations and the growing opportunities digitalization offers. This shift promises a future of enhanced resilience and growth for banks, positioning them to better meet evolving market demands.

Introduction | Charting the Path Forward: The Evolution of Malaysia’s FSI Industry

The Malaysian Financial Services and Insurance (FSI) sector is a vital pillar of the national economy, accounting for approximately 10% of the country’s GDP. However, this once-stable industry now faces significant challenges, driven by evolving consumer behaviors and a rising demand for digital services. These shifts are pushing the sector to undergo substantial adaptation and transformation. This analysis delves into the current state of the sector, examining key trends and challenges, while uncovering potential opportunities for telecom companies to play a pivotal role in fostering a more inclusive and prosperous financial ecosystem.

Current Market Landscape (2025) | Steady growth with digital transformation

• The embedded finance industry, a significant component of the FSI sector, is expected to grow by 36.6% annually, reaching US$1.29 billion in 2025. Additionally, the Malaysian fintech market is estimated to be valued at US$45.50 billion in 2024, with expectations to grow to US$53.89 billion by 2025, reflecting a compound annual growth rate (CAGR) of 15.56%.

• According to S&PGlobal the banking sector maintained robust asset quality, with non-performing loans (NPLs) remaining below 2%, and credit costs stayed between 15–20 basis points.
• According to KPMG the fintech sector experienced significant growth, with digital wealth management surpassing one million accounts and total assets under management reaching RM 1.6 billion.
• The introduction of the Digital Insurance and Takaful Operators (DITO) framework by Bank Negara Malaysia in July 2024 marked a pivotal step towards greater inclusion and efficiency in the insurance industry.
• The local policy rate remained stable, supporting banks’ loan yields while also limiting impairment risks on their loan portfolios that remain largely retail-focused. Household leverage is high in Malaysia at around 84% of GDP at end-2024, but risks are likely to remain contained in the near term on the back of healthy job market conditions and a stable real estate market.
• ICT Spending: AI and machine learning are projected to contribute around RM 2.1 billion to the Malaysian BFSI economy by 2025. The positive outlook for enterprise ICT spending in Malaysia is supported by survey data indicating that a majority of respondents, about 91%, reported an increase in their ICT budgets for 2024 compared to 2023. ICT spending in the FSI sector typically accounts for 7-9% of Gross Value Added (GVA), underscoring the industry’s strategic focus on leveraging technology-driven solutions to address shifting consumer expectations and evolving regulatory demands.

Key Trends & Influences | Reshaping the Malaysian FSI landscape

• Growth of Islamic Banking
• Digital Transformation and Fintech Integration
• Emergence of Digital Banks
• Integration of Generative AI and Machine Learning
• Emphasis on Financial Inclusion

Growth of Islamic Banking

• According to Fitch Ratings Malaysia’s Islamic banking market is the third largest globally, with assets surpassing USD 260 billion by the end of 2024
• Islamic banking in Malaysia accounts for 43% of the total banking sector assets. The Islamic financial services industry in Malaysia is valued at approximately RM 1.7 trillion.
• Fitch Ratings has projected that Malaysia’s Islamic banking sector will experience sustained growth in the coming years. By 2026, it is expected that the total assets of Islamic banking will reach RM 1.9 trillion, marking a significant increase from current levels. This continued expansion reflects the growing demand for Shariah-compliant financial products and services in the country, supported by both domestic and international investors seeking ethical financial solutions. As the sector strengthens, it is poised to play an even more prominent role in Malaysia’s overall banking landscape.
• According to Bank Negara, in Malaysia, the Islamic banking sector accounts for nearly half the total financing, while takaful accounts for about 25% of total net premiums or contributions . The Islamic interbank money market volume – covers around a third of the entire market, and Shariah-compliant stocks account for 81% of listed stocks.
• As Islamic banking expands, telcos can work with Islamic financial institutions to develop Shariah-compliant fintech solutions, such as mobile apps for halal investments, peer-to-peer (P2P) lending platforms, and crowdfunding services. This will align with the increasing demand for financial products that adhere to Islamic principles. Additionally telcos can collaborate with Islamic banks to offer mobile solutions that cater specifically to the Islamic banking market. This includes offering mobile-based Islamic payment solutions, mobile wallets for Zakat (charitable giving), Sadaqah (voluntary charity), and Takaful (Islamic insurance), allowing customers to make transactions directly from their phones.

Digital Transformation and Fintech Integration

• GII Research predicted that Malaysia’s fintech market is projected to grow from USD 46.63 billion in 2024 to USD 96.09 billion by 2029, at a CAGR of 15.56%
• Malaysia hosts at least 549 fintech companies, ranking third in the ASEAN region.
• A 2023 survey conducted by Statista revealed that 71% of Malaysians are now aware of fintech, which indicates a significant shift towards digital financial services in the country. This growing awareness reflects the increasing acceptance of technology-driven financial solutions among the population. As more Malaysians recognise the convenience and accessibility of fintech services, there is a clear indication of a rapidly expanding market for digital financial offerings, such as mobile payments, digital wallets, and online lending platforms. The trend highlights a growing demand for innovative financial products and services powered by fintech companies.
• TNG Digital, Malaysia’s largest fintech platform, is planning an IPO within the next 2-3 years, potentially raising over $300 million, signaling strong fintech market growth.
• Telcos can offer essential infrastructure, cloud services, and data analytics solutions to support fintech platforms. They can also enable mobile payments, digital wallets, and cross-border remittance services, helping to drive financial inclusion. Additionally, telcos can collaborate on blockchain integration, enhance cybersecurity, and provide AI-driven insights for personalised financial services. As fintech continues to expand, telcos are well-positioned to support secure, efficient, and scalable financial solutions in Malaysia.

Emergence of Digital Banks

• In 2024, the Malaysian government granted digital banking licenses to two new players, spurring innovation and competition in the banking sector. This move encourages the adoption of digital-only banking solutions, catering to a tech-savvy population. The new entrants are set to challenge traditional banks, fostering a more competitive and customer-centric market while improving financial inclusion across the country.
• Report by Hubbis concluded that by 2025, digital banks are expected to capture up to 15% of Malaysia’s total banking market.
• With the Malaysian government awarding digital banking licenses, telcos can partner with these new players to provide essential infrastructure, connectivity, and cloud solutions. Additionally, telcos can offer data analytics, cybersecurity, and mobile-based banking services, enabling digital banks to deliver seamless, innovative, and secure financial solutions to a tech-savvy customer base.

Integration of Generative AI and Machine Learning

• By 2025, around 40% of Malaysian banks and financial institutions are expected to fully integrate generative AI and machine learning technologies into their operations. These technologies will help in streamlining customer service, optimising operational efficiency, fraud detection, and personalisation of services.
• AI and machine learning are projected to contribute around RM 2.1 billion to the Malaysian BFSI economy by 2025. This includes revenue from AI-driven customer service, fraud detection systems, and AI-enhanced loan approval processes.
• Machine learning will enhance fraud detection by analysing vast amounts of transaction data in real-time, identifying suspicious patterns that could indicate fraudulent activities, and reducing financial crime.
• Telcos can provide the infrastructure, cloud services, and data analytics solutions required to support AI-driven innovations. Telcos can also enable real-time fraud detection, enhance customer service with AI-powered chatbots, and support personalised banking experiences. As AI and machine learning are projected to contribute RM 2.1 billion to the sector, telcos are well-positioned to capitalise on this growth by offering scalable, secure, and efficient solutions.

Emphasis on Financial Inclusion

• Despite high banking penetration, around 15% of Malaysians remain unbanked or underbanked as of 2024. Digital banking services are becoming a key enabler for reaching these underserved populations. Digital wallets and mobile banking apps are expected to increase access to financial services in remote areas.
• By 2025, 45% of the unbanked population is expected to open digital wallets, significantly boosting financial inclusion. This includes access to basic banking services like money transfers, bill payments, and savings products, which are crucial for financial empowerment.
• The Malaysian government has been actively promoting financial inclusion through initiatives such as the “e-wallet” scheme and “MyDebit.” This is expected to reduce the unbanked rate to below 10% by 2025, allowing more Malaysians to access digital financial services.
• Malaysia has licensed digital-only banks, such as those provided by fintech companies. These banks are creating opportunities for the underserved population to access banking services without physical branches, making banking more convenient and accessible.
• Telcos can facilitate access to digital wallets, mobile banking, and e-wallet services, particularly in remote areas. As 45% of the unbanked are expected to adopt digital wallets by 2025, telcos can play a vital role in expanding financial access through secure, reliable connectivity and mobile platforms. Additionally, collaboration with digital-only banks and government initiatives like “MyDebit” positions telcos as crucial partners in achieving greater financial inclusion across Malaysia.

Challenges and Opportunities | Pivot & progress navigating transformation

• Increasing Cyberattacks
• Demand for Digital-First Experiences
• Fintech Disruption and Competition
• Slow Adoption of Blockchain and AI
• Risk Management and Credit Exposure

Increasing Cyberattacks

• Challenge: The Malaysian BFSI sector continues to face an escalating number of cyberattacks. According to the Malaysian Communications and Multimedia Commission (MCMC), there was a 15% increase in cybersecurity incidents in 2024, with over 1,500 attacks reported, including phishing, data breaches, and hacking attempts.
• Impact: As digital banking and fintech adoption grows, institutions must contend with increasingly sophisticated cyber threats. Protecting sensitive financial and personal data has become a top priority for banks and insurers.
• Telco Opportunity: Telcos have a significant opportunity in addressing the rising threat of cyberattacks by offering enhanced cybersecurity services to businesses and consumers. As cyber threats grow more sophisticated, telcos can leverage their infrastructure, expertise, and data analytics to provide managed security solutions, threat detection, and incident response.

Demand for Digital-First Experiences

• Challenge: Consumers are increasingly expecting seamless, digital-first experiences when it comes to banking and financial services. The demand for seamless, mobile-first banking experiences continues to grow. According to a 2024 report by Bank Negara Malaysia (BNM), 78% of Malaysian banking customers prefer using mobile apps for their daily transactions, including fund transfers, bill payments, and account management.
• Impact: Banks and insurers must enhance their digital offerings to meet consumer expectations. This includes ensuring that mobile banking apps, online insurance platforms, and digital payment services are user-friendly, secure, and capable of providing a wide range of services.
• Telco Opportunity: As businesses and consumers increasingly prioritise online interactions, telcos can deliver next-generation 5G networks, cloud services, and IoT solutions that support remote work, e-commerce, and digital entertainment. By enabling fast, reliable, and secure digital experiences, telcos can become essential partners in digital transformation, opening new revenue streams through enterprise solutions, apps, and enhanced consumer services.

Fintech Disruption and Competition

• Challenge: The rise of fintech companies and digital-only banks is increasing competition in the BFSI sector. A 2024 report by the Malaysian Fintech Association (MFA) revealed that the number of licensed digital-only banks in Malaysia has grown by 40% in the past two years.
• Impact: Traditional financial institutions need to innovate quickly to keep up with fintechs that are leveraging technology to offer faster, cheaper, and more convenient services. Banks and insurers are increasingly partnering with fintechs to improve their digital capabilities, but this still remains a challenge for many incumbents.
• Telco Opportunity: With a 40% increase in licensed digital-only banks, telcos can help banks enhance their digital capabilities by providing essential infrastructure, cloud services, and mobile solutions. By partnering with fintechs, telcos can enable financial institutions to offer faster, more convenient services, improving customer experiences and allowing them to stay competitive in an increasingly tech-driven BFSI sector.

Slow Adoption of Blockchain and AI

• Challenge: While blockchain and AI hold immense potential for the BFSI sector, many institutions are still struggling with the slow adoption of these technologies. As of 2024, only 30% of Malaysian banks have fully implemented AI-driven solutions, while blockchain adoption remains limited.
• Impact: Institutions are missing out on opportunities to improve customer service, reduce fraud, streamline operations, and increase transparency. Delaying the adoption of these technologies may result in falling behind global competitors who have embraced innovation.
• Telco Opportunity: Telcos can leverage blockchain for secure, transparent transactions and data management, while AI can enhance network optimisation, predictive maintenance, and customer service. By positioning themselves as trusted enablers, telcos can help businesses adopt these technologies more efficiently, providing tailored solutions that drive innovation.

Risk Management and Credit Exposure

• Challenge: The increasing volatility in financial markets has led to higher risk exposure. As of 2024, the non-performing loan (NPL) ratio in Malaysia has increased by 2%, signaling rising credit risk within the banking sector.
• Impact: Banks and insurers must strengthen their risk management strategies and continuously assess credit risk to avoid significant losses in volatile markets.
• Telco Opportunity: Telcos have a growing opportunity in risk management and credit exposure by offering specialised solutions that help businesses manage financial and operational risks. With their access to large amounts of customer data, telcos can leverage advanced analytics and AI to provide insights into creditworthiness, fraud prevention, and customer behavior. By partnering with financial institutions or offering in-house risk management services, telecoms can help reduce exposure to bad debt, optimise payment solutions, and create more secure and profitable customer relationships, all while opening new revenue streams in the financial services sector.

Key Takeaways | Malaysia’s Evolving FSI Landscape

• The Malaysian financial services and insurance (FSI) sector is experiencing significant digital transformation. The fintech market is expected to grow from USD 46.63 billion in 2024 to USD 96.09 billion by 2029. At the same time, Islamic banking, which holds USD 260 billion in assets, continues its growth trajectory, creating opportunities for telcos to develop Shariah-compliant fintech solutions and mobile platforms that cater to Islamic banking customers.
• The rise of digital-only banks, alongside the integration of AI and machine learning technologies in financial services, presents a strategic opportunity for telcos. With Malaysia’s digital banking market expected to capture 15% of total banking by 2025 and AI contributing RM 2.1 billion to the BFSI economy, telcos can provide vital infrastructure, cloud services, and cybersecurity to support the digital banking ecosystem.
• The push for financial inclusion in Malaysia is crucial, with 45% of the unbanked population expected to adopt digital wallets by 2025. Telcos are well-positioned to support this by enabling digital wallet services, mobile banking, and e-wallet access, particularly in underserved areas. This will help address the financial access gap, aligning with the government’s initiatives to reduce the unbanked rate to below 10%.
• With an increasing number of cyberattacks targeting the BFSI sector, there is a growing opportunity for telcos to provide enhanced cybersecurity services. As cyber threats evolve, telcos can leverage their infrastructure and expertise to offer managed security solutions, threat detection, and data protection, helping banks and financial institutions safeguard sensitive information.