Building strategic alliances in fintech development between China and Malaysia

FINANCIAL technology (fintech) refers to the adoption of technology to improve and support the delivery of services in the finance sector. Although fintech encompasses multiple finance horizontals, mobile payment (m-payment) is undeniably the largest segment in terms of transaction value and volume in most markets.

China is among the leading countries globally when it comes to the investment, development and adoption of new technologies, including fintech.

In China, m-payment is the most popular payment method for conducting day-to-day transactions. M-payment is dominated by two major players, namely Ant Group (formerly known as Ant Financial Services Group) for Alipay and Tencent for WeChat Pay.

Launched in 2004, Alipay serves as a third-party payment platform in China and is operated by Ant Group, an affiliate company of China’s e-commerce giant Alibaba Group.

Ant Group specialises in providing consumer finance services such as mobile wallets, real-time payments, peer-to-peer payments and digital currency solutions. Meanwhile, WeChat Pay was released in 2013 by Tencent, a well-diversified company in several business segments including fintech and business services, online advertising, online games and social networks.

According to iResearch Consulting Group, both companies captured about 94% of China’s third-party mobile payment ecosystem in the first quarter of 2020.

These Chinese fintech giants entered Malaysia’s m-payment space, pioneered by Ant Group, in early 2017. One of the primary motivations for Alipay’s entry into Malaysian soil is to enable inbound tourists from China to spend while visiting the country.

Besides, this internationalisation strategy is a vital element of the Digital Silk Road, which supports China’s Belt and Road Initiative via fintech and digital technologies. Prior to this, Alibaba Group announced its plan to establish an e-commerce hub in Malaysia to stimulate the growth of e-commerce and trade in this region as part of the collaboration between Alibaba Group and the Malaysian government to develop a Digital Free Trade Zone (DFTZ) in the country.

The DFTZ is the company’s first electronic world trade platform to be established outside China, as an important step towards developing the Digital Silk Road.

At the same time, Bank Negara Malaysia (BNM), being the regulator of payment services of Malaysia, has been very supportive of the growth of fintech services throughout the country. For instance, BNM has clearly established its target of migrating cash transactions towards electronic payment systems in its Financial Sector Blueprint 2011-2020.

In addition, BNM launched the Financial Technology Enabler Group (FTEG) in June 2016 to formulate and enhance regulatory policies to facilitate the adoption of technological innovations in the Malaysian financial services industry.

The FTEG maintains a regulatory sandbox, which allows both financial institutions and fintech companies to experiment their fintech solutions in a production or live environment, subject to certain safeguards and regulatory requirements.

In order to be recognised as a lawful issuer of electronic money (e-money) in Malaysia, an issuer has to fulfil two main legal requirements. Firstly, it is required to set up a company incorporated in Malaysia under the Malaysian Companies Act. Secondly, it has to obtain approval from BNM.

In compliance with the legal requirements, Ant Group established its subsidiary, Alipay Malaysia Sdn Bhd in 2017 and subsequently received its regulatee status. Ant Group’s footsteps to secure an e-money licence from BNM were later followed by its major competitor, Tencent.

Besides, these Chinese fintech companies have also established strategic alliances with Malaysian banks. For instance, Alipay Malaysia has developed strategic alliances with the three largest domestic banks, namely Maybank, CIMB and Public Bank. This collaboration focuses on several key areas such as ensuring the real-time retail payment platform is implemented effectively, strengthening risk management and security controls of m-payment providers against cybersecurity risks and instilling customer confidence in using m-payment. Meanwhile, Tencent has partnered with Hong Leong Bank to provide WeChat Pay payment solutions in Malaysia.

Such collaboration is deemed as a win-win solution since it brings the two industries together to integrate their operations by leveraging on each other’s resources, expertise and technologies.

On the one hand, it enables the Chinese fintech companies to acquire local knowledge and access to the extensive merchant network of the domestic banks. This allows the Chinese fintech companies to implement their m-payment services with greater ease, which are widely accepted by local merchants nationwide.

As of 2018, more than 18,000 merchants nationwide have accepted Alipay, while over 3,500 merchants had accepted WeChat Pay by early 2019.

On the other hand, this venture enables the domestic banks to speed up the execution and adoption of m-payment technology while mitigating the risks associated with the development of internal m-payment technology. Additionally, the Chinese fintech companies have also entered into a series of strategic partnerships with other entities.

For example, Alipay Malaysia has collaborated with 7-Eleven Malaysia, Starbucks, GHL Systems, Malaysia Airports Holdings Bhd and Touch ’n Go, while the major outlets that support WeChat Pay Malaysia include KK Super Mart, Starbucks, Tealive and Petron.

In a nutshell, the entry of Chinese fintech companies into Malaysia has generated more awareness and acceptance of m-payment. Given the rising connectivity and proliferation of smart devices in the country, m-commerce is set to grow rapidly. The growth in digital adoption is further accelerated by the Covid-19 pandemic, which has encouraged greater reliance on fintech solutions. Nonetheless, issues related to the security and privacy of m-payment which act as major impediments to its adoption have to be addressed accordingly to alleviate fears and concerns among the consumers.

Moreover, the m-payment space is becoming increasingly crowded and fragmented as more fintech players are jumping on the bandwagon, making it imperative for each player to rethink its business model in order to remain competitive and profitable in the long-run.

Taken together, the promising developments in m-payment or fintech in Malaysia, including the participation of Chinese fintech companies, are drawing BNM’s vision of building a cashless society one step closer to fruition.

Dr Chow Yee Peng is Senior Lecturer at Tunku Abdul Rahman University College. The views expressed here are entirely the writer’s own.

The SEARCH Scholar Series is a social responsibility programme jointly organised by the Southeast Asia Research Centre for Humanities (Search) and the Centre of Business and Policy Research, Tunku Abdul Rahman University College (TAR UC), and co-organised by the Association of Belt and Road Malaysia

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