Malaysia’s position in the fintech race

Fintech players say the country is leading in certain areas but lagging in others

by NG MIN SHEN / pic by TMR FILE

THE financial technology (fintech) space in Malaysia had 166 fintech companies operating in the country as at July last year, according to the Fintech Malaysia Report 2018.

Payments and e-wallets made up the majority at 19% and 17% of the fintech players respectively, followed by cryptocurrency players (12%) and crowdfunding companies (6%).

With a population of 31.9 million and Internet penetration at 85.7%, debit card ownership has now reached 74%, while online banking penetration is at 85.1% and smartphone penetration at 75.9%.

Yet, as the report states, mobile banking penetration is only at 40%, while just 28.4% of Malaysians have made purchases online using a smartphone and 14% have made purchases using an app.

Ernst & Young’s (EY) Asean FinTech Census 2018 dubbed Malaysia an “emerging fintech hub in Asia”, with US$75 million (RM308 million) worth of investments made in 2017 — a 15 times increase year-on-year.

Its key subsectors are payments and consumer finance, with the most active investors being 500 start-ups, Cradle Fund Sdn Bhd and Malaysia Venture Capital Management Bhd.

While Malaysia appears to be well ahead of Vietnam and the Philippines in the fintech race, it’s still nowhere near Indonesia, which EY’s census called a “booming digital payments market”, or Singapore, hailed as “Asia’s fintech hotspot” with over 490 fintech players and US$141 million worth of investments in 2017.

Where is Malaysia currently in the global fintech race?
According to Jason Lee, interim VP at Foundation Ltd — a Singapore-based organisation that promotes NEM, an enterprise-grade blockchain technology platform — Malaysia is leading in certain areas but lagging in others.

“Malaysia has demonstrated leadership by providing licences to cryptocurrency exchanges, peer-to-peer financing, equity crowdfunding and fintech sandboxes. This provides clarity and allows for ecosystem players to operate within a defined area, as long as regulation does not suffocate innovation.

“Specific areas for improvement include the acceptance of emerging technologies like blockchain, which is gaining prominence thanks to Facebook’s Libra project, and more organisations developing blockchain solutions,” he told The Malaysian Reserve (TMR).

Adlin Yusman, co-founder and COO of PNMB Payfo Sdn Bhd — the fintech arm of Percetakan Nasional Malaysia Bhd (PNMB) — shares similar sentiments, as he views Malaysia to be at an “interesting intersection” whereby the country currently has over 40 licensed e-money operators, most of whom — if not all — are attempting to create their own e-wallets, while over 90% of the population is receiving banking solutions in one form or another.

“If you look at it as a microcosm, financial services in Malaysia seem to be doing well. However, we still have gaps in how we (banks and financial institutions) offer services and financial education to the public,” Adlin told TMR.

He pointed out that opening a bank account, for example, still requires “stacks of paper and ridiculous waiting times”, while consumers are charged “ridiculous” interest rates when taking up housing loans.

“Our financial solutions may cover those that are employed — with their requisite tax and Employees Provident Fund deductions taken into account — pretty well, but for the micro business owners (such as nasi lemak stalls and e-commerce sellers) who live outside the norm, they have either no access to formal financial instruments or have no interest to find them,” he added.

Mohammad Ridzuan Abdul Aziz (picture), president of the Fintech Association of Malaysia (FAOM), believes that instead of viewing fintech as a race against other countries, the focus should be on ensuring the key internal stakeholders — namely policymakers, regulators, fintech firms, incumbents, consumers and educators — are able to collaborate closely to strengthen financial inclusion in Malaysia.

The successful adoption of fintech requires a radical rethink and approach to the business model, involving talent, funding, effective communication, relevant technology adoption and conducive environment for fintech firms to start, grow and scale up, he told TMR.

Apart from fintech companies, consumers also play an instrumental role in developing the ecosystem, as the companies can only be successful if they have enough users.

Within the Klang Valley, the payments space appears to be thriving, with nearly every major merchant now accepting at least one e-wallet by way of displaying said e-wallet sticker on their facade. In fact, plenty of shops now sport multiple e-wallet stickers.

How open are Malaysians to using fintech?
Despite the proliferation of e-wallets locally, several industry observers comment that not quite everyone uses e-wallets just yet.

“Malaysians in particular are attracted by freebies, so they’ll sign up for an e-wallet if there’s a discount or promotion offered. But the moment the discount expires, they’ll move on to the next e-wallet. Stickiness and brand loyalty are hard to come by,” said an observer.

Adlin concurred, noting that while incumbent wallet companies said they have received millions of sign-ups and have onboarded thousands, if not hundreds of thousands, of merchants, the adoption curve remains the same as with any technology platform.

“The real question is, how sticky are these users once all the rebates get pulled back? The fintech companies need to find sustainable solutions that address real problems, and when this happens, I would expect quite a fair bit of consumer hesitation would be mitigated,” he said.

Mohammad Ridzuan, who also previously served as CEO of Sedania Innovator Bhd’s fintech subsidiary, Sedania As-Salam Capital Sdn Bhd, said urbanites are generally ready to use fintech, while those who live away from major cities are less likely to do so.

“This is because urbanites have a better understanding of fintech, have been exposed to fintech use-cases and are likely to have experienced fintech one way or another,” he said.

The non-urban population, despite having access to news online and offline, are unlikely to have similar experiences with fintech and, therefore, tend to be sceptical about developments that are new, fast-changing and hard to fathom.

“We believe with collaboration between the key stakeholders — policymakers, regulators, incumbents, fintech firms, consumers and educators — fintech will be accepted by the majority of the society and contribute significantly towards Malaysia’s digital economy progress,” Mohammad Ridzuan said.

What is the government doing to encourage the growth and adoption of fintech?
Lee, who is also a founding member of FAOM, said the government is doing a lot to boost the fintech space, as seen most recently with the Malaysian Digital Economy Corp’s inaugural Malaysia Tech Week 2019 last month, which was held in conjunction with Bank Negara Malaysia’s (BNM) MyFintechWeek (MyFW) 2019.

“Government agencies have led the way by introducing many fintech initiatives, and regulators are pro-innovation. The key is to find the right balance to allow talent to thrive in Malaysia by promoting cross-border talent movement,” Lee said.

Mohammad Ridzuan said the government also provides a variety of monetary incentives and support programmes for start-ups, and is now recalibrating various agencies to improve awareness and efficiency in facilitating efforts for digital economy development.

Putrajaya is also embarking on reskilling public servants, facilitating more public-private partnership programmes, consulting industry experts and professionals to be part of various joint working groups, and facilitating the creation of regulatory sandboxes to develop newer business models.

According to EY’s Asean FinTech Census 2018, 45% of respondents said it’s “difficult” to conform to local financial sector regulations in Malaysia, while a further 45% rated the difficulty level as “moderate”.

The study, which received 170 responses from across Asean and 81 responses from non-Asean countries, found that Thailand and Indonesia had the toughest regulations with regard to fintech, while Singapore-based firms had a relatively easier time conforming to regulatory requirements.

So, are regulations on fintech players in Malaysia too tight?
Mohammad Ridzuan believes it’s not about whether financial regulations are too tight, as they could be amended, suspended and/or exempted, where necessary.

“It is more effective to aim for mutual understanding among key stakeholders, especially between the industry and regulators — for the regulators to take a positive view of the new and innovative business models, and for the fintech firms to be able to approach regulators for discussion and necessary support,” he said.

He also supports BNM governor Datuk Nor Shamsiah Mohd Yunus’ call for a national cyber-security agenda at MyFW 2019, where the central bank chief spoke of the need to be cognisant of potential technologyassociated risks as fintech and big tech firms could pose “system-wide vulnerabilities that can shock the financial system”.

“The governor is right about being cognisant on risks associated with innovation, new business models and generally with fintech. These new developments bring with them a new spectrum of risks owing to the volume of data, extreme speed and a borderless online ecosystem. These elements are indeed the key enablers for new business models that enable real-time data management, fast transactions and seamless connectivity. On the flip side, they could also heighten cyber-security threats including ransomware, phishing and, eventually, compromise customers’ data,” Mohammad Ridzuan said.

Meanwhile, Adlin said BNM’s move to obtain industry feedback ahead of setting up a virtual banking framework shows that a more collaborative atmosphere is in place, which can only spell positive things for the ecosystem.

“When the Australian regulators awarded the licence to Xinja Holdings Ltd and Volt Bank Ltd, it was after an exhaustive year-long period of going back and forth with the two players to craft a framework that would allow new disruptive companies to apply innovative solutions to a space that hasn’t been disrupted (at least in Australia) for over 30 years.

“I’m sure Malaysia would have to go through a similar trajectory, but the aim as we’ve been made to understand is to ensure that the system remains robust and secure, and that any innovative solution should work within that framework,” he said.