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This article first appeared in The Edge Malaysia Weekly on July 1, 2019 - July 7, 2019

TELECOMMUNICATIONS giant Axiata Group Bhd is planning a bigger push into the financial services space and is interested in applying for a digital banking licence here, say industry sources.

“Tracking the group’s strategy thus far, it looks like it is putting the building blocks in place for a potentially larger move into the financial segment, and not just focus on the e-payments sector through its e-wallet Boost.

“From a structural point of view, you can see the company has been creating separate entities in its digital business — Axiata Digital — to undertake or potentially undertake different businesses in the financial services ecosystem in the future. This is to ensure it adheres to regulatory conditions,” says an industry source.

When contacted, Axiata Digital Services Sdn Bhd CEO Mohd Khairil Abdullah says the group has “definitely expressed interest” in a digital banking licence here.

“If the conditions are right and they continue to allow us to do what we want to do, then definitely we want to apply for a licence. Between now and November, Bank Negara Malaysia is expected to engage with industry players who have expressed interest in it (digital banking) to get some input from them,” he tells The Edge.

Bank Negara aims to come out with virtual bank licensing requirements by the end of the year but it is uncertain when the regulator will issue the licence.

The Edge sighted documents that map out plans for Axiata Digital — the digital subsidiary of the telecoms group — to go beyond e-payments into other financial services segments that include micro-lending, micro-savings and micro-remittance.

It is unclear at what stage these plans are, whether they are preliminary, exploratory or confirmed.

When asked about the plans, Khairul says the telecommunications company has been lending money through its entity, Axiata Digital Capital Sdn Bhd, which is separate from Boost.

“The lending platform is called QRedit. The average ticket size in Malaysia is about RM3,500 per person. The lending we have done so far is mostly to merchants and micro-merchants. Frankly, this business is still small but we are going to scale it up aggressively. So far, we have given out about 5,000 loans in Malaysia and Indonesia.

“The money we have lent out is a very tiny portion of what the Axiata board has approved for us to experiment with. The interest rate is very competitive, peaking at 18%. It’s almost as high as that for credit cards, which is about 20%,” he says, adding that Axiata Digital Capital also handles the micro-insurance business, which has sold 60,000 policies so far.

“As for micro-savings, we have not launched it yet but that’s in our roadmap and it’s coming very soon. The one thing we cannot do right now is to take the deposits in Boost accounts and use the money for financial products like loans. What banks do is to use one portion of the deposits to lend out to their customers. We cannot do that because we are not a bank. There is a certain infrastructure access that we don’t have because we don’t have a full banking licence.”

To date, Boost has gained substantial ground in the e-payments sector, garnering 3.8 million registered users and 70,000 merchants as at end-February. It is targeting five million users by the end of the year.

Meanwhile in Singapore, Tharman Shanmugaratnam, senior minister and chairman of the Monetary Authority of Singapore, announced last Friday that up to five new digital banking licences will be issued in the city state, paving the way for non-bank players to break into a financial services scene dominated by a handful of traditional providers.

“We welcome firms with innovative value propositions to apply for the digital banking licences, even if they have not yet established a track record in banking,” he was reported as saying. 

Going beyond payments

Bankers, fintech players and analysts contacted by The Edge agree that the move by telco Axiata into full-fledged banking makes sense and that it is a global trend.

In Europe, French telecoms giant Orange launched its own bank in November 2017. By the end of last year, Orange Bank had 248,000 customers in France, of which only 40,000 were the company’s employees. The telco now plans to launch a digital bank in Spain in the second half of the year.

It has been reported that Orange aims to expand its bank into Poland, Belgium and Slovakia between 2020 and 2023, targeting a total of four million clients and €500 million in net banking income in the continent within five years.

Analysts note that Orange Bank is the first full bank to be launched by a communications service provider that has gone further than payment or wallet functionalities.

Telcos are also big players in the African banking system. Vodafone, for instance, operates its text-message-transfer service M-Pesa in the continent and in 10 years since its launch in 2007, it had attracted 29.5 million active customers.

Closer to home, Telekomunikasi Indonesia — the republic’s largest telco — teamed up with public financial institutions Bank Mandiri, Bank Rakyat Indonesia, Bank Negara Indonesia and Bank Tabungan Negara in March to launch the LinkAja mobile payment services platform.

The platform uses QR-code technology to allow customers to make cashless payments on their mobile phones. This enables them to pay utility bills without a bank account. Customers are also able to top up their accounts at convenience stores and ATMs.

“The synergy between telcos and banks is very apparent,” says the CEO of a fintech company. “There is potential in the convergence of a telecoms business with a banking business.”

The CEO also points out that e-wallet players have visibility of the cash flow of users. “Think about it, this makes it easy to credit-score the users and merchants. The e-wallet issuers are able to identify the credit scoring of individual merchants and will be able to pinpoint which would be good borrowers.”

However, it should be noted that e-wallet issuers are not allowed to lend the funds collected on their platform.

“Should an e-wallet entity want to undertake lending, it has to be taken from its own balance sheet or underwritten by a bank as it cannot undertake lending out of the e-wallet customers’ funds. In other words, it is not able to lend out the money it has collected on its e-wallet platforms,” says an executive familiar with e-money regulations.

“When we look at e-money issuers, they are governed by e-wallet guidelines on what they can and cannot do. One of the things they have to do is to place customer funds back in the banking system.”

An e-money issuer is a legal entity and is allowed to have electronic store value. In other words, its customers can top up money in the digital form but no interest is paid on the value stored with it.

“Given this, should an entity be looking to take money from customers and pay interest on it, it would need regulatory approval as that is a form of savings deposit,” says the executive.

A banker points out that e-wallet players merely “distribute financial services” and that the business model seems to have gained interest in the current fast-moving technology world.

In fact, in May, one of Japan’s largest trading houses — Mitsui & Co — made a strategic minority investment in Axiata Digital, giving the latter’s core digital business a pre-money enterprise value of US$500 million.

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