This article first appeared in The Edge Malaysia Weekly on April 11, 2022 - April 17, 2022

THE Touch ’n Go Group (TNG Group) may not have put in an application for a digital banking licence, but it is beginning to look more and more like a digital bank these days. Having started out as an e-wallet service provider, the group now offers facilities such as insurance, investment products and digital personal loans.

Its credit facility, which was launched just two weeks ago, aims to disburse up to RM300 million this year and charge interest of between 8% and 36%. GO+, an investment product that was launched in March last year, had already garnered deposits of nearly half a billion ringgit at end-February.

Interestingly, while TNG Group may already be functioning as a digital bank on the surface, its executive director and group CEO Effendy Shahul Hamid says the group “does not need to transform into a bank” and emphasised that it is comfortable with its position in the e-wallet industry, functioning as an “intermediary” between users and financial institutions.

“We feel there are huge opportunities in intermediating financial services without being a bank,” Effendy, who is also CEO of CIMB Digital Assets, tells The Edge in an exclusive interview.

“For example, we are intermediating asset management today without being an asset manager. We are also intermediating insurance today without being an insurer. And as you recently saw, we are now intermediating credit without being a bank.”

The CEO of CIMB Group Holdings Bhd’s digital asset arm points out that the margins for the e-wallet and e-payment business are entirely different from those of a bank in terms of construct and quantum.

“[Functioning as an intermediary,] that is a business model and strategy choice. Our e-wallet business is much more than just financial services. It includes payments and platforms to encourage commerce in general. So, we feel that we are casting a much wider net and financial services is a key monetisation element,” he adds.

Besides being comfortable as an intermediary between consumers and financial institutions, TNG Group did not apply for a digital banking licence because it was not able to put together a compelling consortium at the time, says Effendy. However, this does not mean the group will not consider dipping its toe in the digital banking space.

“If an opportunity comes up post the licensing process to participate, we would consider doing so out of TNG. Why is this the case? I feel there is a huge level of collaboration between banks (especially digital banks) and e-wallet companies. Hopefully, digital banks will be able to create products for us faster than traditional banks can because of the superior technology stack and execution efficiency,” he says.

The TNG Group comprises Touch ’n Go Sdn Bhd (TNG), which operates its electronic card payment solution, and TNG Digital Sdn Bhd (TNGD), which provides e-wallet services. TNG is wholly-owned by CIMB Group while TNGD’s shareholders are TNG, AIA Malaysia, China-based Ant Group and New York-based investment firm Bow Wave Capital Management (via ASP Malaysia LP).

Both TNG and TNGD come under CIMB Digital Assets, which is CIMB Group’s portfolio of digital businesses and ventures (see “Going beyond banking with CIMB Digital Assets”).

Digital bank or not, TNG Group has rolled out products that go beyond the e-wallet space and into lending as well as deposit-taking. GO+ — an investment product available on the Touch ’n Go eWallet — had reached 2.2 million users at end-February, with total assets under management (AUM) of “just shy of half a billion ringgit”, says Effendy.

“This is a prime example of a financially inclusive micro-investment product option that mimics the current account profile and immediately pays users more. We will continue to grow this base, mainly because it makes sense to users,” he adds.

“We envisage that one day, all TNG eWallet users will default their balances to GO+. We will also remain committed to educating users on these features, supporting the country’s financial inclusion agenda.”

With hundreds of millions deposited with TNG Group, which is not a bank, what is the assurance that the money is safe?

As a group and as individual companies, TNG and TNGD are regulated by Bank Negara Malaysia, and it is an approved E-Money issuer, says Effendy.

“We also have a Money Services Business (MSB) licence issued by Bank Negara and have obtained Recognised Market Operator (RMO) status from the Securities Commission Malaysia. These licences require us to comply with the regulations and have the right internal controls to run a financial services-related business,” he adds.

“Given our parentage, we have emphasised the need for solid controls of our businesses from day one and it is an area we continue to enhance and improve on.”

TNG Group, through TNGD, recently launched a credit facility called GOpinjam. Only a week since its launch, the loan facility has already drawn flak from the public for imposing interest as high as 36% per annum, depending on the loan amount and duration (see “GOpinjam 8% to 36% interest rate draws flak”).

It is worth noting that TNGD’s e-wallet business model shares some resemblance with that of its partner Ant Group’s Alipay, which has evolved from being an e-payment service provider to include insurance and investment products and, eventually, microloans.

Ant Group’s success with its loan facility is widely known. The segment was its largest by revenue in 1H2020, making up 39% of the group’s total revenue of RMB28.28 billion (RM18.75 billion).

A research house estimates that as at 1H2020, Ant Group had outstanding consumer credit of RMB1.7 trillion, larger than the non-mortgage retail loan book of any Chinese bank and almost one-fifth of the country’s outstanding short-term consumer debt.

The bulk of Ant Group’s loans are underwritten by its partner banks, a small portion is securitised and sold, and an even smaller portion is held on its own balance sheet.

The group’s subsequent troubles have been well documented. It began with Chinese officials pulling the brakes on its parent company’s initial public offering at the eleventh hour. Subsequently, the officials curbed its consumer lending activities by imposing a flurry of new rules to limit consumer credit amid soaring household debt.

Today, the TNG eWallet has more than 16 million registered users and over five million monthly transacting customers. TNG Group has definitely been one of the beneficiaries of the Covid-19 pandemic.

According to Effendy, its total transaction value (TTV) grew 19 times from 2019 to 2021, with online generated TTV being the biggest component.

“This represented an online TTV growth of about 20 times. Our merchant base, both online and offline, grew five times as businesses pivoted to the internet in view of the Covid-19-related closures,” he says.

“Less than 5% of our TTV in 2021 came from tolls and other mobility use cases. One sign of an e-wallet’s success is the ability to expand beyond stronghold positions, and I feel we have been able to do that quite successfully.”

While the TTV of the TNG eWallet has grown significantly, TNGD has yet to turn a profit.

According to the company’s latest available financial results, TNGD had a net loss of RM190.2 million for the financial year ended Dec 31, 2020 (FY2020), on revenue of RM26.62 million. As for FY2019 and FY2018, it reported a net loss of RM270.26 million and RM57.82 million respectively.

Effendy does not believe the profitability outlook is murky, instead he believes that the path to profitability is much clearer now.

“There will come a point where we will need to decide if turning a profit early is more important than continuing to invest in order to monetise better in the future. The latter will see us turn profitable later. But when it does, we will essentially have a very strong leading position to generate sustainably high returns,” he says.

While Effendy declined to comment on the timeline to profitability, he emphasises that the group must ensure it has the right structures to make such decisions on profitability and be accountable to its stakeholders.

As the e-wallet space heats up and becomes more intense each year, the game plan for TNGD will be to grow organically as quickly as possible to ensure that it is one of the winners in the industry, says Effendy.

“The thesis for this e-wallet joint venture with Ant Group was to ensure that our platform catered to mass needs and allowed interactive commerce in our ecosystem of individual and business users, both online and offline. So far, that has gone as planned,” he adds.

The company’s gross payment margins have been improving and its fee-based proposition in financial services is gaining traction. It is now looking to onboard one or two more strategic investors, in addition to AIA and Bow Wave Capital, says Effendy.

The most recent partnership that TNGD entered into was with AIA, which took up a minority stake of 3.76% in the e-wallet service provider, according to a search on the company.

Effendy confirmed the much debated valuation of TNGD, which was speculated to be about RM3 billion last year. “It is an endorsement of how we are doing in terms of growth, revenue and execution ability. We have been fortunate to have had tailwinds in all three of those areas thus far,” he says.

“However, the old-school executive in me sometimes forces me to look past these proxies and focus on the actual performance of the business. The rest, I believe, will take care of itself.”

TNG Group is cognisant of the fact that data security is of prime importance in the business it operates in and any mishaps could see it suffering reputation risk. Effendy says the group invests heavily in data security and is constantly benchmarking itself against industry peers both domestically and internationally.

“At this time, if we take investments [in data security] as a percentage of revenue, we feel we are in the right ballpark. In fact, maybe a tad on the high side as revenue is just beginning to ramp up. More importantly though, it is about investing in the right areas and the right technology to ensure our systems remain secure,” he adds.

The spotlight was recently on TNG Group’s implementation of radio-frequency identification (RFID) that had come under fire. The government also said the group would not be the only service provider when RFID becomes mainstream and it would allow other e-wallets to be used for toll payments.

It may seem odd to many that Effendy is advocating a payment system that will end TNG Group’s single service provider status. But he has a good reason for it.

“I’m all for open payments,” he says when asked for his comments on the government’s plan to introduce other e-payment providers at expressways nationwide.

The CEO doesn’t appear threatened by the plan. Instead, he is excited about the prospects of other e-payment providers entering the ring, where TnG Group has been the single provider for a long time.

“As an executive of the new world, sole providership can sometimes curtail innovation. As a result, I am very much looking forward to open payments,” he says.

“In fact, we ourselves are already working with some expressways to drive open payments forward, within the context of economics, and also how we connect these to our back-end settlement and clearing systems, so that consumers ultimately have a choice.”

Effendy adds that he wants consumers to choose TNG Group because the company has built a great proposition, and not because they have no other choice. He is confident that the group is ready to compete.

“We must also be ready to evolve, be commercially competitive, launch good products and, ultimately, have the best proposition in the market so that consumers choose us. I also believe this will enable us to price our services in the right range, instead of having our hands tied, within the context of being the only provider,” he says.

It is interesting to note that Effendy says the group is unable to price its services in a range that it deems appropriate even though it is the only payment provider in town for highways.

“We are cognisant that we have a responsibility to help highways run smoothly and at the right cost points. We want to do that and make sure that we do it well. For that to happen, we will need to invest in order to innovate. And to invest, we will need to have an optimum commercial engagement,” he adds.

“At the same time, in terms of our rates to customers, instead of increasing as costs increase, we have been traditionally expected to lower charges. So, margins continue to be thin and amounts available for investing in the future reduce. That sometimes impedes innovation.”

Effendy acknowledges that the TNG card, which has a single value proposition, has not undergone much modernisation.

But changes are coming. In the months ahead, the group will make available a new variant of the card, which users can top up using one’s smartphone and e-wallet, he says.

“Having an e-wallet company that is stable will allow TNG to trade up the value chain, with some excellent products coming onstream in the next few months. But over a period of time, we just have to create new propositions,” he adds.

What many people may not be aware of is that TNG’s main revenue contributors are the corporates and highways that pay the company a certain percentage of what is collected. The same goes for parking and transit payments.

“We have talked quite a lot about data, and more and more so, we are starting to make sure we understand the data [we have] and from there, look into how we can create better services,” says Effendy. “The possibilities for TNG’s modernisation are aplenty.”

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