Malaysian Fintech Ecosystem

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Fintech is the buzzword in today’s financial services industry and is supposed to be a game changer—the revolution that is giving the financial services industry a run for its money. All these discussions on how fintech is impacting the delicate silver line between the financial services and technology sectors triggers a sense of adventurism and change, with the outlook and final outcome uncharted and uncertain

But how will the term fintech be defined? It is a marriage of sorts between the financial services and technology sectors—a dynamic segment where technology-centric startups innovate the products and services traditionally offered by financial institutions (FIs). Following initial hiccups in the evolution of Malaysia’s fintech ecosystem, global fintech investment roared ahead at a record pace in the first half of 2018 with $57.9 billion invested across 875 deals. According to the KPMG Pulse of Fintech 2018 report, this was a significant increase from the $38.1 billion invested in all of 2017.1 The report also acknowledges the increasing interest by a mix of fintech subsectors in the area of data, artificial intelligence (AI) and regtech. The report further quotes Anton Ruddenklau, global co-leader of fintech at KPMG, saying: “Not only is more investment flowing into emerging technologies like AI and subsectors like regtech, we are also seeing efforts to combine Fintech capabilities and embed them within broader digital transformation programs.” The statistics available on the number and value of deals since 2014 supports this statement. As per Fintech Global,2 the number of deals between 2014 and H1 2018 have decreased from 1901 deals to 788 deals; however, the value of global fintech investments increased from $19.9 billion to $41.7 billion.

On comparing the numbers for 2017 and 2018, global fintech investment figures recorded a massive surge in 2018 and more than doubled to $55.3 billion, with most of the investments coming from Asia-Pacific (APAC) countries. According to an Accenture report, 3 APAC countries including Australia, Japan and Singapore contributed to a larger share in growth.

The fintech landscape in Malaysia

In Malaysia, the presence of fintech is at a very nascent and developing stage which has attracted both positive and negative attention from major industry players and regulators. Even Bank Negara Malaysia (BNM) is following a cautious approach and continues to remind banks of the threats posed by fintech. Local banks in Malaysia acknowledge the disruptive capability of the fintech firms—hence why they are following the fintech trend in their own way. They are embracing the trend either by promoting the culture of their own fintech innovations or by working with other existing fintech startups. Malaysia witnessed a mere 1% share of the global fintech investments, which is slated to increase as more and more startups enter the Malaysian fintech market. 2017 was an interesting year for fintech in Malaysia. While there has been progress in this scene in the past few years, fintech became increasingly mainstream in the Malaysian mind share.4

Some of the latest developments in the fintech sector include the following:

  • Foreign fintech players are joining hands with local players in Malaysia for creating cross-border payment and remittance platforms.
  • Banks in Malaysia are embracing the concept of fintech in their businesses to deepen their market share and reach to the common Malaysian man.
  • Malaysia launched the Digital Free Trade Zone, leveraging the fintech power to facilitate cross-border trading for smalland medium-sized enterprises.5
  • Malaysia is a big and emerging market for fintech startups. Due to the rapid adoption of technology, high internet penetration and increased levels of mobile usage are a few of the unique features attracting fintech players to this market. In addition to these unique selling points, the large population and the acceptance and popularity of the business-to-consumer model having trigged plenty of interest from offshore fintech solution companies for Malaysia. Thus Malaysia has been in the spotlight as one of the preferred destination for fintech startups.6

    Fintech in Malaysia—Sectoral view

    “Central bankers are taking away your lunch, regulations are squeezing your lunch, fintech is eating your lunch and some of you may still be out at lunch.” Tan Sri Andrew Sheng, former Hong Kong central banker.

    2018 marked a new dawn in Malaysia, following a historic democratic change in government for the first time in over 60 years. Hopefully a new dawn will follow for Malaysia’s fintech landscape as well. In 2017, the transaction value of Malaysia’s fintech market totaled $6.4 million. By 2020, this value is expected to translate to $12,966 million.7 Healthy economic fundamentals with high penetration for both internet and smartphones and a swelling number in fintech startups are the elements needed for developing Malaysia’s fintech sector.

    There are four broad divisions of fintech in Malaysia: digital payments, digital finance, digital insurance and digital investments. Digital payments and digital wallets constitute a larger pie of fintech in Malaysia. As per the statistics, the available market share of digital payments and digital wallet has increased from 18% and 12% in 2017 to 19% and 17% in 2018.9 Considering the increasing players in the fintech ecosystem in Malaysia, the space is becoming increasingly crowded. As of today there are close to 15 areas where fintech firms are marking their presence.

    Fintech in Malaysia— Regulatory activism

    Recently, there has been a greater push from the Malaysian government to promote and grow the usage of fintech for the FIs covered in their regulatory ambit. This overall approach has become a mission and there is lot of expectation tied to it in terms of fintech activism in Malaysia.11 BNM’s effort and aim to promote a cashless society is one of the classic example to support the push. Due to the focused approach by the government and by the regulator, the payment services sector has undergone several changes; there are several new entrants including new non-bank foreign and locally owned businesses. The development of new insurance technology, known as insurtech, in the insurance sector also evidences the efforts by the government and indicates that more new fintech solutions will dominate the market in the future.

    The efforts are further supported by the creation of Financial Technology Enabler Group, which is comprised of policy experts who work on policy formulation. The launch of the Financial Technology Regulatory Sandbox Framework by BNM (see previous page) will also go hand in hand in promoting fintech innovations by assisting in experimenting of products in a live environment irrespective of their viability.

    Fintech in Malaysia—Threats, challenges and opportunities

    Threats12

    The top threats arising from the fintech disruption are regulatory uncertainty, pressure on margins and information security.

    PRESSURE ON MARGINS

    Most fintech companies have an edge over traditional FIs in terms of cost and scalability as they operate on assetlight, digital-centric business models. This presents one of the biggest threats: not having their own proprietary information technology (IT) systems. As an alternative, they could employ the cloud for such operational infrastructures. These agile new competitors threaten margins when they end up seizing business opportunities from incumbents, or empowering competitors by offering their services to them.

    INFORMATION SECURITY AND PRIVACY RISKS

    The second biggest threat is information security and privacy risks. The growing number of cybersecurity events in recent years has thrown into question the adequacy of existing security standards and protocols. This includes assessing security standards of third-party vendors, which is the most significant cybersecurity challenge. Since customer and proprietary information—key commodities in the relationship between FIs and fintech—will become prime targets for cyber-attacks, this will lead to the elevated concern toward the threat of privacy and information security.

    LOSS OF MARKET SHARE AND INCREASED CUSTOMER CHURN RATE

    In the current context, fintech players are aggressively offering solutions that allow a high degree of customization. For example, there are robo-advisors and online-only solutions such as peer-to-peer lending platforms that are cheap, easy to use and available at anytime and anywhere. These offerings are likely to eat into and result in a loss of the incumbents’ market shares.

    Challenges13

    As per the ASEAN Fintech Census 2018, the following are some of the key challenges faced by fintechs.

    TAX INCENTIVES

    Tax incentives are one of the biggest challenges in the success of fintech ecosystem. In Malaysia, fintechs believe the government should increase tax incentives for angel investors in the early stage of setting up a fintech venture.

    TALENT

    Talent shortage is a key challenge facing fintechs in the Association of Southeast Asian Nations. Seventythree percent of Malaysians believe there is a shortage of fintech talent in the country. In addition, the majority of fintechs in Malaysia find technology talent insufficient to meet their needs along with insufficient talent in sales and compliance.

    REGULATION

    One of the key challenges in the fintech space is the level of support given by regulators to assist fintech startups in getting started and the level of difficulty in conforming to the local regulations. Seventy-five percent of fintechs in Malaysia expect more regulatory support and 45% of fintechs in Malaysia find local regulators too onerous.

    GOVERNMENT FUNDING

    Another challenge in Malaysia is the government funding. Over two-thirds of fintechs said that increasing the budget for “government funding initiatives, such as accelerating commercialization for early stage companies” is a key potential growth initiative

    Opportunities14

    Despite all of the threats and challenges, it must be said that the fintech space comes with a lot of opportunities for the industry and the economy, especially for a country like Malaysia. It has the necessary collaborative capability to partner with established FIs, technology or telecommunication companies to leverage on their brand and shorten the process of building trust. The three key opportunities related to the rise of fintechs will be differentiation, cost reduction and improved customer retention.

    Despite all of the threats and challenges, it must be said that the fintech space comes with a lot of opportunities for the industry and the economy, especially for a country like Malaysia. It has the necessary collaborative capability to partner with established FIs, technology or telecommunication companies to leverage on their brand and shorten the process of building trust. The three key opportunities related to the rise of fintechs will be differentiation, cost reduction and improved customer retention.

    In the context of Malaysia, there is a big room in terms of growth in loans. As fintech is relatively new in Malaysia, there is a first-mover advantage where financial services and fintech companies can strongly differentiate themselves from the competition. Players may stand a chance to be the first in the Malaysian market to provide new innovative product offerings, as was the case for mobile wallets. Another opportunity is the cost reduction, which will accrue by the introduction of new modes of delivery, i.e., digital and mobile. This approach of moving away from the traditional physical channels, along with partnerships with fintech companies, can help rationalize, improve and simplify FIs’ operations. The final point to be noted in terms of opportunities is improved customer retention. Fintech solutions can offer better customer engagement with multiple touchpoints and interactions to increase repeat patronage and inspire customer loyalty.

    Conclusion

    Regulatory uncertainty—if not addressed—can lead to missed opportunities for investing in fintech. FIs and fintech players could be looking to regulators for direction on fintech before investing. There is unlikely to be a one-size-fitsall winning strategy when it comes to embracing fintech; however, there are three key takeaways to the various financial services players:

  • Act now. There is no time left to wait-and-see.
  • Challenge existing assumptions, embrace the customer’s perspective.
  • Drive the creation of a holistic fintech ecosystem and become the dynamic center of it

In Malaysia, the future of fintech will continue to grow considering the Malaysian government support and all the endeavors toward a fintech future. The following quote15 by Datuk Muhammad Ibrahim, former BNM governor, will be apt to conclude on the Malaysian fintech ecosystem, “Fintech is challenging the status quo of the financial industry. New business models will emerge. Delivery channels will challenge existing norms. Transaction costs will be reduced. Rather than looking at the fintech revolution as unwelcoming, financial institutions ought to embrace it as an opportunity.”

Sachin Shah, CAMS, financial crimes compliance professional and subjectmatter enthusiast, shahmsachin@gmail.com

The views expressed is solely of the author in his personal capacity and does not, in any way, represent the views of his employer or any other entity related directly or indirectly with the author.

  1. Kent Miller, “Global Fintech investment soars to record US$57B in first half of 2018: KPMG Pulse of Fintech report,” KPMG, July 31, 2018, https://home.kpmg/xx/en/ home/media/press-releases/2018/07/global-fintechinvestment-soars-to-record-us57b.html
  2. “2018 is already a record year for global Fintech investment,” Fintech Global, July 11, 2018, https://fintech. global/2018-is-already-a-record-year-for-global-fintechinvestment/
  3. Komal Nathani, “APAC Led Global Fintech Investments Last Year,” Entrepreneur Asia Pacific, February 26, 2019, https://www.entrepreneur.com/article/329001
  4. Vincent Fong, “Fintech Malaysia 2017 in Review,” FintechNews Malaysia, January 9, 2018, https:// fintechnews.my/15690/malaysia/fintech-malaysia2017-in-review/
  5. “Malaysia and Fintech,” DinarDirham, June 7, 2018, https://www.dinardirham.com/malaysia-and-fintech/
  6. Ibid.
  7. Ibid.
  8. 8 Vincent Fong, “Fintech Malaysia Report 2018 – The State of Play for Fintech Malaysia,” FintechNews Malaysia, July 18, 2018, https://fintechnews.my/17922/ editors-pick/fintech-malaysia-report-2018/
  9. Ibid.
  10. Ibid.
  11. “Malysia and Fintech,” DinarDirham, June 7, 2018, https://www.dinardirham.com/malaysia-and-fintech/
  12. “Catching the Fintech Wave,” PwC, November 2016, https://www.pwc.com/my/en/assets/publications/2016- pwc-aicb-catching-the-fintech-wave.pdf
  13. “ASEAN Fintech Census 2018,” EY, 2018, https://www. ey.com/Publication/vwLUAssets/EY-asean-fintechcensus-2018/$FILE/EY-asean-fintech-census-2018.pdf
  14. “Catching the Fintech Wave,” PwC, November 2016,https://www.pwc.com/my/en/assets/publications/2016- pwc-aicb-catching-the-fintech-wave.pdf
  15. Ibid.