Malaysia’s Banks Slept Through the Digital Shift—Now AI’s Kicking Down the Door

Veteran banker Andrew Sheng warns the industry’s inertia since 2018 has left it playing catch-up as tech firms and AI reshape finance from the outside in.

It wasn’t fintech that blindsided Malaysia’s banks. It was fear. That’s how Andrew Sheng sees it, anyway.

The 79-year-old economist, ex-central banker, and outspoken observer of Asian finance says Malaysia’s biggest lenders missed their digital moment years ago — and now artificial intelligence is forcing them into a reckoning they may not be ready for.

The Missed Window Between 2018 and the Pandemic

“Between 2018 and Covid, that was the moment,” Sheng said in an interview with The Business Times. “Everything shifted online — shopping, working, payments, finance. But the banks here hesitated.”

It was a global inflection point. Some countries sprinted ahead. Banks in Singapore, South Korea, and India went deep into mobile-first banking and platform innovation. Malaysia, Sheng says, stayed cautious.

He believes the post-1MDB regulatory climate may have played a role in fostering excessive risk aversion. That, coupled with corporate conservatism, meant most Malaysian banks stuck to legacy systems. Even those that tried to build digital platforms didn’t go all the way.

One short sentence here — let it land.

TechFin, Not Fintech, Is the Real Threat

According to Sheng, the true disruptors aren’t nimble fintech startups nibbling at the edges. It’s what he calls “TechFin” — the big tech platforms entering financial services from outside the banking world.

That means companies like Grab, Shopee, and Apple. They already hold customer data. They already manage payments. In some cases, they already issue loans. Banks, meanwhile, are still figuring out chatbot upgrades and clunky apps.

In Sheng’s words: “It’s not fintech that will eat the banks. It’s the big tech platforms who see finance as just one more layer.”

He’s not alone in thinking this. Global regulators from the ECB to MAS have raised flags over the growing influence of tech giants in payments and lending — often without the capital reserve requirements banks face.

Here’s where things are tilting:

• GrabPay and ShopeePay now dominate mobile wallet usage in Malaysia.

• Buy-now-pay-later (BNPL) services are increasingly offered by non-bank players.

• Traditional banks’ apps rank lower in UX ratings compared to fintech rivals.

And all of that is before you even factor in generative AI.

AI’s Rise Catches Banks Flat-Footed

The real wake-up call, Sheng suggests, isn’t digital banking. It’s artificial intelligence — particularly large language models and predictive risk engines that can analyze consumer data and credit behavior in real time.

Most Malaysian banks, still reliant on rule-based engines and batch processing systems, are miles behind.

“One sentence paragraph for emphasis.”

A recent 2025 survey by Accenture found that just 23% of Southeast Asian banks have implemented enterprise-level AI solutions — and Malaysia lags even within that group.

AI-driven underwriting, fraud detection, and personalized product recommendations are fast becoming table stakes in finance. But many local lenders are still stuck tuning their legacy core banking systems, much of which dates back to the early 2000s.

What Went Wrong? An Industry-Wide Freeze

There wasn’t one moment, Sheng says. It was death by a thousand hesitations.

Malaysian banks after 2018 got more inward-looking. They were spooked by compliance risks, especially following high-profile scandals. And as digital transformation started to require real capital outlay, many opted to wait — or do the bare minimum.

Several mid-tier banks launched new apps or partnered with tech vendors, but without the back-end overhaul to make it truly digital-first.

Take this snippet from an insider at a major Kuala Lumpur-based bank (who asked not to be named):
“Our digital app looks slick, but our customer onboarding still relies on in-branch verification. That’s not transformation. That’s window dressing.”

Ouch.

Pressure Builds From New Entrants and Central Bank Nudges

Malaysia’s central bank, Bank Negara Malaysia (BNM), isn’t ignoring the shift. It has already issued five digital banking licenses, and some of those new players — like GX Bank, backed by Grab — are now onboarding customers.

BNM is also pushing for open banking frameworks by 2026, forcing traditional banks to share customer data (with consent) and connect with third-party financial apps.

So what’s the consequence?

Traditional banks will no longer control the full stack. Their customers might access lending, investing, and insurance from apps that aren’t even owned by the bank — eroding margins and loyalty.

And that’s happening as costs go up, talent in AI gets more expensive, and capital markets stay cautious.

Where Do Malaysian Banks Go From Here?

There’s no easy fix. But Sheng insists it’s not too late — yet.

“Digital transformation is not just about hiring a Chief Innovation Officer or rebranding your app. It’s a cultural shift,” he said. “Banks have to be agile, yes, but they also need to learn how to lose control — to open up their ecosystems.”

The urgency, he notes, isn’t about surviving. It’s about staying relevant.

Here’s what some experts believe banks must focus on by 2026:

And perhaps most critically — banks must accept that they may no longer be the center of the financial universe.