The mobile phone has changed everything – from the way a person commutes to what food they consume or even how they place bets with their bookies.
In the next few years, it is likely to change the way loans are disbursed to the small guy.
In the last week of December 2019, Bank Negara released the licensing requirements for digital banks with a view of awarding up to five licences. A week later Singapore announced that it had received 21 applications for digital bank licences to operate on the island state.
Among the names are gaming company Razer, a joint venture of ride-hailing company Grab and SingTel, mobile phone manufacturer Xiaomi, and Beyond Consortium whose backers include smart card manufacturer EZ-Link and V3 Group, a manufacturer and distributor of massage chairs.
Many may wonder why a massage chair manufacturer would be interested in a digital banking licence.
Well, in Indonesia where mobile payment is fast growing, the companies fighting for a share of the pie offer their customers discounts on massage depending on the frequency of them using the payment platform. The discounts go beyond just massage – it extends to rides and even on food that they purchase through the apps.
In this region, Indonesia is leading the charge for fintech because it has a large underserved banking population. The two dominant players are Grab and Go Jek. Grab’s digital payment platform is GrabPay while the equivalent for Go Jek is Go Pay.
Both companies started as technology companies offering ride hailing services with Grab having a valuation of some US$14bil and Go Jek at US$10bil. From purely offering ride hailing services, these companies offer almost everything, especially food delivery that connects the small stalls to consumers living in the high-end condomoniums.
For small stall holders, their businesses have grown by joining the list of clientele of Grab Food or Go Food. Previously, they use to prepare food for only people around where their stall or small shop is located. Today, they have access to thousands of Grab and Go Jek users living in the vicinity.
The same applies to other countries in the region, including Malaysia.
Today, most people have a Grab app installed in their mobile phone. It is mainly used to hail a transport. Increasingly the app is also used to purchase food and other items.
The spin-off from the change in the eco-system has evolved into these companies offering services that are at the core of fintech.
The technology companies in Indonesia are offering loans to the small stalls. This is because the likes of Grab and Go Jek have an automatic digital log system to know exactly how much business is being generated by the small businesses such as the food stall operator.
With such data at hand, the fintech company adds other analyses such as spending pattern using algorithms and come up with a real time credit analysis. Within hours, the system processes a small loan for the stall owner.
In Indonesia, Grab’s partner banking partner is Ovo. And the partnership has started offering small business loans to those who are unable to get financing from traditional banks.
The trend is prevalent across the region in countries where there is a large underserved banking population. It is replicated in every segment from the hawker to the fish monger. In some places it is called nano-finance.
Go Jek’s payment arm is Go Pay and it has the backing of a financially strong shareholder in Tencent. Go Pay, which operates in more than 350 cities in Indonesia, has a service called PayLater that provides credit to customers for a short term. The customers normally are to settle it within a month.
In the Philippines, a fintech company, Oriente disburses loan as fast as 30 minutes. It has disbursed more than US$1.5bil worth of loans and charge interest rates that are much lower than the traditional lenders. The repayments can be made though over-the-counter at stores such as 7-Eleven, remittance centre or online banking.
In India, Paytm is the leading payment system provider offering everything from gold to food and foreign exchange to its users. However BharatPE is taking the largely underserved banking population by-storm offering loans to small merchants that usually depend on the loan sharks for their money.
Digital banking is set to overhaul the financial system. It is not that the traditional banks are not in digital banking. They are way ahead when it comes to banking online. In fact, nowadays, people only go to the automated teller machine or the counter in the bank when they need hard cash.
Most of the transactions are done online because banks have the technology prowess to provide their existing customers the ease of doing transactions.
However, traditional banks have restrictions that do not make it easy for them to gain market share on the under-served. In countries such as Indonesia and the Philippines and India, there is a large population that do not have banking lines. Yet, these group of people form the backbone of the economy.
In Malaysia, the small businesses do not have a loan because they do not qualify. Most of the time, traditional banks base the credit worthiness of small businesses based on how much income tax they pay.
In Malaysia’s case, most of the small businesses evade paying tax, which does not qualify them to large loans or line of credit.
This is where the technology companies will play a role as more embrace the digital payment systems. The draw back for now is these technology companies cannot afford to give out large loans.
This is because apart from capital constraints, the default rate is also high at the moment.
However, as volume picks up and over time as the risk management improves, the numbers will pick up for the digital banks.
Between 2010 and 2020, the FAANG stocks took the world by storm. The likes of Amazon, Apple and Facebook commanded sky-high valuations, far surpassing the value of brick and mortar companies such as General Motors and Shell.
Malaysia did not have any impact because there are no highly valued technology companies.
However we have a large banking system where some will feel the heat when the digital banking licenses are issued.
Most traditional banks know that the threat is coming but do not know how to jump on the bandwagon and get a share of the underserved small businesses.
The views expressed here are the writer’s own.
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