The State of FinTech In Malaysia

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Two similarly sized geographical regions separated by the South China Sea constitute one country known as Malaysia. One part, which is bordered by Thailand on the north and Singapore in the south, forms the Peninsular Malaysia (West Malaysia) while the other part sharing boundaries with Indonesia and Sultanate of Brunei is known as Malaysian Borneo (East Malaysia).

Malaysia is located in the Southeast Asian region, and Kuala Lumpur is its largest city and capital. With a wide variety of food, scenic tea plantations, spectacular islands and several wild animals and tribal population, Malaysia attracts tourists from all over the world. The last census, conducted in 2010, shows a total population as 28.3 million While East Malaysia has 5.72 million people, rest 22.5 million live in Peninsular Malaysia (West Malaysia). The country has a multi-ethnic character with 60.3% population are Malays and Bumiputeras. Chinese and the Indians are 24.6% and 7.1% respectively.

The overall literacy rate is 88.7%. In comparison to females, males are more literate. While the literacy rate among women is 85.4%, 92% male are literate. In the QS World University Ranking 2015/2016, Universiti Malaya holds 146th ranking while Universiti Sains Malaysia stands at 289th positions. As far as the pace of growth of the digital technologies is concerned, there is a lack of specialized talent and technical expertise in the country.

Startup Scene In Malaysia:

Malaysian startups focus on tech areas in mobile, e-commerce, cloud and big data segments. Today, 4 out of 5 top listed tech companies in South-Asia are based in Malaysia, and it confirms a booming startup eco-system in the country. A proactive government to support startup business and sufficient infrastructure with good internet access, visa, and tax norms, all help lay a very strong foundation for a healthy startup ecosystem in the country.

Malaysia has an advantage of being a close neighbor to Singapore, which is a hub of the startup business. With common boundaries, easy mobility between the two countries helps Malaysia get talent and adequate funding from Singapore.

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Reports say that Malaysian Business Angel Network (MBAN), an organization of angel investors and angel clubs in Malaysia, has 134 registered angel investors till date, and their combined income stands at RM 123 million. There are many angel investors who are also helping startups even without being a part of MBAN. Malaysian startups try to solve the local issues, and they prefer to be named in local vernacular rather than having any westernized name.

Besides private funding, the Malaysian government is taking all necessary steps to create an ecosystem that encourages healthy and innovative business-building environment. For instance, Ministry of Finance, Malaysia (MOF) has established a not-for-profit organization in 2003 called Cradle to manage the RM100 million Cradle Investment Programme. The government recently added RM175 million to this allocation under the 10th Malaysia Plan for 2011 – 2015. Some of the global funding firms which have funded Malaysian startups are 500 Startups, Gobi Partners, KK Fund, Venturra Capital, Fenox Venture Capital, IMJ Investment Partners, Axiata Digital Innovation Fund, Jungle Ventures, Emtek Group, GREE Ventures, NSI Ventures, Sequoia Capital, SPH Media Fund, Asia Venture Group, Crystal Horse Investments, Incubate Fund and Rebright Partners.

How Big Is The FinTech Pie In Malaysia:

According to statista, the transaction value of the financial technology market in Malaysia in 2016 is USD 6265.2 million This transaction value, statista says, will grow at the rate of 23.21% annually and in 2020 the total amount would become USD 14,439.6 million. Out of all the FinTech segments, digital payment has emerged as the largest segment with a total transaction value of USD 6251.4 million in 2016.

When compared with Singapore and Hong Kong, the transaction value is lower than these two countries as Singapore has USD 10,656.2 million in transaction value while in Hong Kong it amounts to USD 12,616 million.

According to Techinasia data, Malaysia bagged 1.88% of the total deals regarding finance for FinTech firms in Asia Pacific region in 2015. It’s much less than China (50.01% and India (25.58%), equal to Hong Kong (1.88%) but better than Thailand (0.79%) and Philippines (0.89%).

Segments of FinTechs in Malaysia:

The four principal segments in which Malaysian FinTechs are innovating are

(a) Digital payment (P2P payments, Online payment enablement, Mobile wallet, Crypto-payment)

(b) Digital finance (P2P lending, Crowdfunding, Alternative credit decisions;

(c) Digital insurance (Internet of things) and

(d) Digital Investment (Robo-advisors, Low-cost trading platforms)

Digital finance service is the largest FinTech segment in Malaysia. In 2014, the transaction value of digital payments was USD 3294 million only but in two years, in 2016 it has grown to USD 6251 million.

Peer to Peer lending, also known, as P2P which creates a digital platform to match borrowers and lenders without involving any traditional financial intermediary like a bank – is another area, which has attracted innovators. Some of the FinTechs which are doing well are in Malaysian digital space are Crowdo, AturDuit, Skolafund, Currenseek, iMoney.my to name a few.

While Crowdo deals in crowdfunding solutions including equity crowdfunding and peer-to-business lending, AturDuit gives the financial comparison of various financial products such as credit card offers, mortgages, the different type of loans, deposits and savings. According to reports, AturDuit connects over 2 million unique visitors every month to more than 50 financial institutions it has partnered with.

Skolafund, which was conceptualized in 2015, provides a digital platform for school pass-outs to crowdfund their scholarships for higher education. It circulates students’ details to various funding partners and agencies and gathers support for them. Many students who don’t fulfill the criteria for bank loan get benefitted for this initiative.

Currenseek is a mobile app to help foreign tourists find the best exchange rates in the closest vicinity. iMoney.my is an online finance company to help people compare loans rates, credit card features, and other banking services.

Another fastest growing segment is FinTech Islamic Finance Platform where capital is raised according to Islamic law. Six Malaysian Islamic banks Bank – Kerjasama Rakyat Malaysia, Affin Holdings, Bank Muamalat Malaysia, Bank Islam Malaysia, Maybank Islamic and Bank Simpanan Nasional – launched Investment Account Platform (IAP) which uses financial technology to direct funds from investors to entrepreneurs. The involvement of top banks and their digital approach is expected to bring a high degree of reach, accessibility, and transparency for investors as well as new ventures.

Status of Policy Regulation For FinTech In Malaysia:

Malaysia is in the process of formulating regulations to oversee the functioning of financial technologies, and recently Bank Negara Malaysia has issued a discussion paper on FinTech regulatory sandbox. The discussion paper aims at promoting innovation and delivery of financial services by providing some amount of freedom to experiment the viability of any financial product in a live atmosphere. The purpose is to have in place eligibility criteria, minimum standards and requirement to functionalize the Sandbox. The Negara Bank has also established Financial Technology Enabler Group (FTEG), a team of policy experts, who will work for policy formation. Experts believe that until regulatory authorities create the conducive atmosphere to nurture innovation, the quality, efficiency and accessibility of financial services will not improve.

Another significant recent development is the formulation of regulatory framework by the Securities Commission (SC) for debt funding, also called P2P lending. The SC has allowed small and medium-sized companies to raise money through debt funding. The rules don’t permit individuals to collect money under P2P funding.

According to the laid down process, the Commission will put a company wanting to start P2P platform through ‘fit and proper’ test. Once it passes the test, it has to adhere to certain norms such as it can’t charge more than 18% rate of interest and it has to reveal risk assessment, etc. It’s the first country in ASEAN, which has introduced crowdfunding laws in mid-2015. To boost innovation in Malaysia, the government has taken several other steps in the past. For instance, in 2013, the government had announced Angel Tax Incentive to promote funding to startup firms.

Incubation Scene In Malaysia:

Different players have set up incubators and accelerators to provide conducive breeding ground for FinTech startups. Private companies, Financial institutions, government-backed initiatives have created tremendous opportunities to provide a FinTech eco-system to encourage youngsters to innovate.

One of the government’s efforts is MSC Malaysia, which is known as the gateway to the information and communication technology (ICT) industry in the country. It has formed with a purpose to attract world-class ICT companies to groom local talent. MSC Malaysia is overseen by the Malaysian Digital Economy Cooperation, which also advises government on setting standards and making policies.

MSC Malaysia runs 18 active incubators and three accelerators – the Founder Institute, BootstrapAccelerator Asia, and 1337 Accelerator. Private companies such as Digi Telecommunications has started incubators programmes, Digi Incub8, in East Malaysia for tech startups. There are instances of private companies and financial institutions collaborating with government-owned agencies for incubation programmes. For example, Malayan Banking Bhd (Maybank) has collaborated with Malaysian Global Innovation and Creativity Centre (MaGIC) to encourage startups in the financial sectors.

Current Status of Financial Institutions in Malaysis:

Like other countries, FinTechs are reshaping the financial landscape in Malaysia as well, and financial institutions have realized that if they don’t keep pace with the digital innovation, they will be pushed to the extinctions. Expert’s view that banks will lose 40% of their overall revenues to FinTechs by 2025 in Malaysia. So banks started actively working with FinTechs in 2015 for their survival and expanding their customer base.

For instance, CIMB Bank, the second largest bank in Malaysia with around 8 million customers, launched its incubation programme Innochallenge last year for finding digital solutions to new banking challenges. It also plans to focus on digital wallets, P2P, mobile payments, remittance and blockchain technology shortly.

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RHB Bank, which is the 4th largest bank in Malaysia, has partnered exclusively with Startupbootcamp, a global network of industry-focused startup accelerators, in Malaysia. This will help the bank mentor digital innovation and implement it for its expansion.

Another financial institution, Maybank, which is the largest bank in Malaysia, held Maybank Fintech 2015, an initiative to provide a platform for aspiring innovators to showcase their ideas. The purpose was to harness the FinTech eco-system regionally and identify the best innovation technology for the purpose of acquisition.

The majority of banks are trying to acquire FinTechs with a focus on mobile banking, payments, lending, distributed database (Blockchain), asset management, financial inclusion, security to name a few.

Opportunities Due to FinTech Wave:

The gradually booming Malaysian FinTech scene has opened a lot of possibilities for everyone – youngsters, job seekers, and service providing companies and financial institutions as well. While at one hand, faced with a new challenge, financial institutions are looking for talented digital experts to either collaborate or groom their employees, rising demand for innovators have encouraged digital training companies to expand.The biggest beneficiaries are the customers of financial services who are getting the better product at a reasonable cost.

Conclusion:

The FinTech revolution is having the overall positive impact on the job market and financial sector of the country, and experts predict that innovations in another five to ten years will bring a sea-change in people’ lifestyle. However, it’s important that government and its regulatory agencies should be ready to tackle the increased financial risk for stability due to continuously innovating technology.

Alex Kong

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