This article is sponsored by Securities Commission Malaysia, under its InvestSmart initiative
Scan the headlines of any newspaper today and chances are you might stumble across the word “fintech” or “financial technology”.
Fintech is a phenomenon fuelled by the World Wide Web and mobile Internet revolution. Global professional services company Accenture found that investments in fintech across Asia-Pacific alone skyrocketed in 2015, from about US$880 million in all of 2014 to nearly US$3.5 billion in just the first nine months.
Globally, it is estimated that the value of fintech investments will amount to about US$40 billion by 2020.
In Malaysia, the presence of fintech is still nascent but growing rapidly, sometimes drawing nervous reactions from major players and regulators.
Bank Negara Malaysia Governor Datuk Muhammad Ibrahim has also reminded banks of the threats posed by fintech, citing a report by McKinsey that 10% to 40% of banking revenue is possibly at risk by 2025 due to innovations outside banking institutions.
But to be fair, while Malaysian banks are quick to point out that fintech disrupts businesses, they are embracing the movement either by coming up with their own fintech innovations or working with fintech start-ups.
What is fintech?
“Fintech” is a line of business based on using technology to provide financial services. Financial technology companies are generally start-ups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on technology.
Equity crowdfunding (ECF) is one example of fintech. In 2015, the Securities Commission Malaysia (SC) approved six ECF operators to provide alternative funding platforms for small businesses and entrepreneurs.
Another growing area in fintech is peer-to-peer or P2P lending, where online platforms help to match borrowers with lenders, and bypassing the banks.
It has attracted the involvement of big names such as Goldman Sachs, and US-based Lending Club has made a name for itself in the P2P space as the world’s largest online credit marketplace, facilitating personal and business loans.
After launching its service in 2007, it became the largest technology IPO in 2014, raising around US$1 billion. In Malaysia, the SC introduced the regulatory framework for P2P, setting out requirements for the registration and obligations of a P2P operator as provided in the revised Guidelines on Recognised Markets (the Guidelines) in May 2016.
 | • Enables users to exchange currencies at midrate, saving them up to 3% per transaction. |
 | • The local chapter of the world’s fastest growing fintech collaboration platform built by a global network of innovators, communities, events and programmes. |
 | • Helps users locate outlets that offer the best exchange rates, avoiding any extra and hidden costs from using credit cards and ATM services abroad. |
 | • A crowdfunding platform for students seeking funds for higher education scholarships. |
 | • Cloud-based iPad point-of-sale system that features full-fledged inventory and customer relations management. |
 | • Financial comparison site for users to compare and easily obtain loans, credit cards and other financial products. |
 | • A rewards-based crowdfunding platform. |
How is fintech regulated?
In Malaysia, the Securities Commission’s amended its Guidelines on Recognised Markets and launched a regulatory framework for P2P lending, allowing small and medium-sized companies access to this avenue for debt funding.
Some key points under Chapter 13 of the Guidelines on Recognised Markets[1]
- Owners are not allowed to raise money on local P2P platforms, but only fund projects and businesses.
- P2P operators must pass the “fit and proper” test. [2]
- The rate of financing cannot be more than 18% (as that would be deemed predatory lending).
- The P2P operator has to disclose information related to the issuer and the risk assessment and credit scoring parameters adopted by the operator.
Source: Securities Commission Malaysia.
The SC also introduced a regulatory framework for equity crowdfunding, making Malaysia the first country in Southeast Asia to do so. It also launched aFINITY@SC, a fintech community that serves as a hub for networking and education.
What’s in store for Malaysia’s fintech future?
Given the positive developments so far in the Malaysian start-up scene, consumers will probably continue to enjoy and explore what fintech has to offer.
According to Statistica, fintech transactions in the country this year totalled a mere US$6.37 million compared with the global figure of US$769.3 billion. However, this figure is expected to rise as more start-ups produce various innovations and enter the Malaysian capital market.
On a related note, the SC has revealed that a framework for robo-advisers – online wealth management service provides that offer automated, algorithm-based portfolio management advice without relying on human financial planners is in the pipeline.
Notes:
[1] A recognized market recognized market essentially covers an alternative trading venue, marketplace or facility that brings together purchasers and sellers of capital market products. The level of regulation in comparison to approved markets is not as stringent. Terms and conditions may be imposed on the Recognised Market Operator to commensurate with the risk profile, nature and scope of the proposed recognized market operations.
[2] An applicant will only be given “fit and proper” status if none of the grounds specified under section 65(1) of the Capital Markets and Services Act 2007 apply to them.
Image from Pan-American World.
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