What’s to come for fintech in the future

In recent years, with the development of Industry Revolution 4.0, there has been a rise in talks about the financial technology (fintech) industry and its future that is set to completely change the financial industry’s system.

“Financial technology – fintech – is creating new opportunities and challenges for the financial sector – from consumers, to financial institutions, to regulators.

“Fintech offers many opportunities for governments, from making their financial system more efficient and competitive, to broadening access to financial services for the under-served populations,” the World Bank said on the prospects of the fintech industry.

According to Ernst and Young (E&Y) in its latest Global FinTech Adoption Index 2019 report, based on its survey, the adoption rate of fintech services have grown faster than anticipated – from 16 per cent in 2015 to 64 per cent in 2019.

“Awareness of fintech, even among non-adopters, is now very high. Worldwide, for example, 96 per cent of consumers know of at least one alternative Fintech service available to help them transfer money and make payments,” it said.

For Malaysia, the fintech scene is still in the its early stages as the government continues to boost internet connectivity in the country.

However, with the country’s continuous effort to boost its digital economy, the awareness of the fintech industry is growing rapidly in Malaysia as more consumers adopt the usage of fintech services for their daily financial transactions.

According to Fintech Malaysia Report 2018, payments, e-wallets, and cryptocurrency dominate the Fintech market, making up close to half of the market share.

“Given the growing influence from global and regional fintech hubs, we see strong growth development of the fintech ecosystem in Malaysia, supported by active market participation and progressive regulations and policies.

“Among the 196 fintech players established in Malaysia in 2018, payments, e-wallets, peer-to-peer (P2P) lending and micro-insurance are some of the areas being highly disrupted in the fintech space.

“We also see increasing support from Bank Negara Malaysia (BNM) and the Securities Commission (SC) in releasing appropriate and supportive policies and guidelines to encourage the fintech and start-up communities,” said E&Y Advisory Services Sdn Bhd Partner and Malaysia Financial Services Advisory leader Shankar Kanabiran.

“There are more P2P licenses being issued by the SC (a total of nine so far), there have been three digital currency exchanges approved, and BNM has issued the Electronic Know Your Customer (e-KYC) and Anti-Money Laundering (AML) guidelines as well,” he shared.

Diversity in the market has also broadened with the entry of global fintech companies in Malaysia, he pointed out.

He noted that AliPay (China), WeChat Pay (China), TransferWise (UK), WorldRemit (UK) and MoneyLion (US); and the latest announcement about virtual bank licences is expected to further open doors to international players.

“In the last year also, there were new SME digital solutions launched by domestic banks to support the SME fraternity, which is a good move,” he added.

Nevertheless, although these are promising signs, a lot still needs to be achieved to make Malaysia a unique fintech hub moving forward.

BizHive Weekly takes a look at Malaysia’s fintech scene:

 

Fintech changing Malaysian banks

Fintech services are rapidly disrupting banks’ services worldwide. The same can be said for Malaysia’s banking sector as more fintech companies are stepping up to offer consumers fintech services that are usually more convenient than traditional bank services.

“Fintech organisations are no longer fringe disruptors and have grown into sophisticated competitors,” Ernst & Young LLP partner and the EY Americas Fintech leader Matt Hatch pointed out.

“Now, financial incumbents are taking note and offering fintech solutions, forming ecosystems that are replacing traditional partnerships. We fully expect this trend to accelerate as non-financial companies enter the space and leverage technology and innovation to provide frictionless, transparent and highly-personalised services,” he added.

Standard & Poor’s Financial Services LLC (S&P) had also highlighted that Malaysia’s bank sector, while stable, could face disruptions from the fintech sector if it does not step up its pace.

“In this climate of cost-cutting and strained profit arrives digital banking. Malaysian regulators are expected to hand out the country’s first digital banking licenses in the next 12 to 24 months.

“This will allow local tech and telecom groups such as Grab Holdings Inc and Axiata Group Bhd, to compete directly with banks in lending and deposits-taking, without the encumbrance of an expensive branch network,” it pointed out in a recent research report.

It further stressed that tech groups have the potential to compete with traditional lenders on almost all fronts in retail banking. International leading technology giants such as Alibaba Group and Tencent Holdings, which already have a meaningful share of Malaysia’s digital payments market, could challenge the Malaysian lenders, it said.

“Both have proved highly competitive in digitalised financial services in China. International experiences in China and Singapore show that a fintech-powered lending business is generally able to keep their cost-to-income ratio low, at slightly above 30 per cent, compared with the current 47 per cent cost-to-income ratio for the Malaysian banking sector.

“We expect the arrival of digital banking will result in service fee cuts and yet more compression to the net interest margin on deposit competition,” it said.

“To manage this threat, incumbent banks will need to invest heavily in technology,” it suggested.

However, S&P noted that there is a risk for banks as they might not have the money to support this spending given their earning constraints.

“This will be especially challenging for small Malaysian lenders, and fintech competition may trigger overdue sector consolidation,” it said.

Nevertheless, it said, the fintech industry is more long term threat as it does not expect the competitive landscape to change dramatically for the next three to five years.

“Banks still have advantages, such as their market dominance, and regulatory and compliance knowledge. They also have consumers’ trust, which the fintech newcomers have yet to earn. In addition, this three-to-five year window will give banks time to re-invent themselves, and design coping strategies.

“In our view, some banks may cooperate with fintech firms on product design and risk underwriting, some may invest in digital startups, and some may even partner with the fintech arrivistes to run digital banks. It’s a plan for next-stage incumbency, but it’s certainly not a guarantee of it,” it opined.

 

Malaysia’s fintech scene

The local financial technology (fintech) scene is growing at a rapid pace, serving the micro, small and medium enterprises (MSMEs) as well as the new generation of investors.

During the the sixth edition of SCxSC Fintech conference, Securities Commission (SC) chairman Datuk Syed Zaid Albar pointed out that there are currently 21 equity crowdfunding (ECF) and Peer-to-Peer financing (P2P) platforms registered with SC which has collectively raised RM587 million for more than 1,600 MSMEs.

“These platforms will continue to serve a number of MSME sector including high tech, education, retail, food and beverages, and young investors below 35,” he told a media conference after launching the conference.

From the digital forefront, Syed Zaid said it is important to harness the full potential of technology in promoting the capital market, as it could act as a key enabler for economic growth and transformation.

He said, “Looking ahead to 2020, we will continue to advance our digital agenda by building our foundations laid over the last few years.”

To date, the SC has newly approved two digital investment management which is known as robo-advisors named Raiz Invest Ltd and RoboWealth, which are expected to be fully operational in early 2020.

“Today, Malaysia has three licensed and fully operational robo-advisors namely StashAway, MyTHEO and Wahed. We continue to see strong interest in this space and will continue to facilitate its growth,” he said.

The SC had previously undertaken several effort to boost the fintech securities space here by initiating the aFINity innovation lab for Alternative Trading System. The type of financial products considered under this sandbox include cryptocurrencies, capital market products, primary market issuances, and cross trading of existing listed shares.

 

Financial institutions taking up the challenge

Malaysia’s long established financial institutions are also taking initiatives in the fintech segment, with most major banks engaging or investing in fintech solutions and technology.

Malayan Banking Bhd (Maybank), Malaysia’s leading bank, had launched Maybank Anytime, Everyone (MAE) e-wallet and digital banking platform earlier this year in its effort to up its fintech play.

Its latest e-wallet is also complementing its well-established Maybank2u, which is currently leading the digital banking platform segment here.

“Maybank2u is the leading digital banking platform in Malaysia in terms of market share, with over 60 per cent of mobile banking transactions and more than 50 per cent of internet banking transactions in Malaysia being undertaken through it in 2018,” Maybank’s Group chief executive officer, Community Financial Services (CFS), Datuk John Chong, said.

“We expect the number of MAE e-wallet users to triple to three million by the end of next year, boosted by the one-time RM30 e-wallet payment incentive in Budget 2020.”

In terms of transaction volume, the most popular feature in MAE is QRPay, which is accepted at over 300,000 merchants nationwide, amounting to nearly 40 per cent of total transactions as of October 2019.

Not one to miss out on the fintech race, CIMB Group (CIMB) recently entered into a partnership with Axiata Digital Capital (ADC), a fintech services provider under Axiata Digital that provides financing solutions to potentially 700,000 small and medium enterprise (SME) customers in Malaysia and Indonesia through ADC’s Micro lending platform, Aspirasi.

The partnership marks a significant milestone for both entities as it represents the first regional collaboration between a bank and a digital services provider that is focused on fueling the growth of micro and small SMEs.

Since 2014, Axiata Digital has been focused on accelerating digital adoption by offering innovative financial solutions such as e-wallets, micro financing and remittance to narrow the digital divide for Axiata Group Bhd’s (Axiata) over 300 million customers across South and Southeast Asia.

By leveraging its deep expertise in digital technology, Axiata Digital aims to ensure a future-ready and financially inclusive society for the underserved, whilst showcasing the business benefits of ICT for success and growth for micro and SMEs.

 

An alternative financial system

Virtual banking, a bank that is truly mobile, with its services and processes done exclusively on digital platforms or online.

Across the world, fintech companies are racing to establish these virtual banks.

Malaysia is already taking steps to provide a platform for these banks while at the same time, ensure healthy competition with established banks.

According to Bank Negara Malaysia (BNM), virtual banking is already happening in Malaysia, although the digital bank licensing framework will be issued for industry consultation by year-end.

In an interview with Bernama, BNM Governor Datuk Nor Shamsiah Mohd Yunus shared that there won’t be a number (for licences issued).

“But, when you talk about a digital bank, it is about not having a physical presence (at all). Not the brick and mortar type. All banking services and transactions will be delivered through the Internet or other forms of electronic channels, instead of physical branches.

“That is the difference. The framework, which is now being finalised, will be on BNM’s regulatory requirements for interested parties to be given a licence.

“Banks in Malaysia can also participate. These banks in a way are already participating in virtual banking through its offerings of mobile banking and e-wallets,” she added.

To date, more than 10 parties have expressed an interest in setting up virtual banks in Malaysia.

Of note, in 2018, financial transactions conducted via the mobile banking channel more than doubled to 257.4 million transactions valued at RM100.1 billion (2017: 107.7 million, RM50.7 billion).

This was supported by a continued increase in subscribers for mobile banking services to 6.6 million in 2018 versus 4.4 million previously.

According to BNM’s annual report, non-banks are also making headway in this segment. Payment space has always been a common starting point for non-banks to embark on financial services, some with aspirations to evolve into digital banks.

Bernama reported that of the 49 non-bank e-money issuers in Malaysia, three in four offer mobile payment solutions. Non-banks have played a key role in driving this trend, accounting for 88.4 per cent of these transactions.

According to reports, Boost, GrabPay and Touch ‘n Go(TnG) are among the dominant e-wallets in Malaysia. Others are Lazada Wallet, Samsung Pay and PayPal.

 

Prepping Malaysia for the fintech wave

With every new industry, new risks poses a threat to consumers, investors and on a wider perspective, financial stability and integrity, if it is not governed appropriately.

Aware of this, the International Monetary Fund and the World Bank Group last year launched the Bali Fintech Agenda, a set of 12 policy elements aimed at helping member countries to harness the benefits and opportunities of rapid advances in financial technology that are transforming the provision of banking services, while at the same time managing the inherent risks.

The agenda proposes a framework of high-level issues that countries should consider in their own domestic policy discussions and aims to guide staff from the two institutions in their own work and dialogue with national authorities.

“There are an estimated 1.7 billion adults in the world without access to financial services,” former IMF managing director Christine Lagarde said in a statement for the launch of the Bali Fintech Agenda.

“Fintech can have a major social and economic impact for them and across the membership in general. All countries are trying to reap these benefits, while also mitigating the risks.

“We need greater international cooperation to achieve that, and to make sure the fintech revolution benefits the many and not just the few. This agenda provides a useful framework for countries to assess their policy options and adapt them to their own circumstances and priorities,” she added.

For Malaysia, BNM had assured that regulatory requirements are being put in place to safeguard the digital economy in Malaysia.

At the 11th International Conference on Financial Crime and Terrorism Financing 2019, BNM Governor Datuk Nor Shamsiah Mohd Yunus said: “BNM is also committed to ensuring that regulatory requirements support the country’s digital economy agenda.

“We are in the midst of developing e-KYC policy guidance to streamline practices of industry players in leveraging new technology.

“The guidance will clarify desirable outcomes of e-KYC adoption, and set out best practice as well as standardised parameters to measure effectiveness of e-KYC solutions.

“Our hope is that with its promise of seamless digital onboarding of customers and lower costs, increased prevalence of e-KYC will help increase competition while also advancing the financial inclusion agenda – and this must be done without compromising on financial integrity outcomes.”

She noted that BNM is consulting with industry and other relevant parties through the publication of an exposure draft by early next month.

Budget 2020 a stimulus for digital finance

There has been growing acceptance in fintech services amongst Malaysians. To support this growth, the government had recently proposed the distribution of a one-off RM30 credit for e-wallets.

Malaysia Digital Economy Corporation (MDEC) lauded this move as a more inclusive effort to boost the adoption of fintech by consumers as well as businesses.

“Beyond providing avenues for businesses to make that digital leap, the general public needs more encouragement for digital adoption. The announcement of a one-off RM30 credit for e-wallets, will spur the development of a cashless society,” MDEC CEO Surina Shukri commented.

“This initiative, which will start on January 1 and end on February 29, 2020, is a key incentive for Malaysians who have yet to try an e-wallet. We expect this to spark a significant jump in interest to get involved with the digital economy,” she added.

e-wallet company Boost, also pointed out that the e-wallet stimulus initiative would also greatly drive the adoption of e-wallets as an exceedingly convenient method of payment for consumers.

“Importantly, it can also be viewed as a form of endorsement of technology used which is safe and very secure for financial transactions,” said Boost CEO Mohd Khairil Abdullah.

“The benefits of using an e-wallet goes beyond simplicity and convenience – used consistently, it offers a great way for users to track their spending and ultimately, inculcate stronger financial planning.

“Businesses, on the other hand, will find an easy way to track transactions and glean data-driven insights into consumer trends. This lets entrepreneurs make smarter business decisions in growing their enterprises,” he added.

He highlighted that for many Malaysians, the government’s e-wallet stimulus could encourage them to use this service as well as spur domestic spending for local merchants. This is also expected to catalyse higher adoption of digital payments amongst businesses.