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Sreekanth Nadella, CEO, KFin Technologies talks to us about the markets in Bahrain and Malaysia for the Indian MSMEs.
How do you find the Fin-tech markets in Bahrain and Malaysia in terms of profitability and customer behaviour?
Sreekanth - Following aspects may be details about these markets -
Malaysia – Digital revolution has indeed made its entry into Malaysian market in recent years. This demand has scale to new heights in 2020 given the pandemic sweep across the world where traditional financial transacting was greatly disrupted. With this, comes the marriage between FI’s, Asset Management Companies and Fintech companies.
From a regulatory perspective, the Central Bank of Malaysia is supportive of this revolution and on 18th October 2016, the regulator has introduced a Financial Regulatory Sandbox Framework in allowing Fintech companies to introduce and innovate their pilot solutions in a live and secured environment, and approval will be given to those Fintech companies that successfully meet the requirements.
Customer Behaviour – The opportunity for lower cost is one of the key areas for Malaysians. And the door swings both side for both customer as well as FI / AMC. Heralding increased efficiency and cost reductions are a new service offering such as Software as a Solution (SaaS) that foster the move away from physical channels towards digital and mobile delivery. Mobile penetration rate in Malaysia is high at 86%. In one of the recent surveys from International Monetary Fund (IMF) on Feb 2020, Internet transacting across industries has quadrupled in the last decade, topping a 90% usage rate in 2018. The most used forms of fintech in Malaysia are digital payments and mobile wallets which is also now being introduce as a platform for Unit Trust investment, followed by InsurTech, KYC and other digital banking activities, specifics as below -
Profitability – Partnership with Fintech companies like KFIN Technologies, can help rationalise, improve, and simplify FI and asset management companies’ operations, opening new stream of revenue generating channel – from both solution as well as system support. These entities also look to harness the potential for improved customer retention and additional revenues from Fintech. Fintech solutions can offer better customer engagement, with multiple touchpoints and interactions to increase repeat patronage and inspire customer loyalty. Now more than ever, there is a pressing need for FI / AMC to move their services into the digital and app space and rethink the traditional linear product push approach. All these market sentiments in tandem, opens new revenue opportunity for Fintech segment.
Basis the recent survey conducted by PwC Malaysia, 55% of FI / AMC and 59% of banking industry participants, plan to invest in FinTech in the short to medium term. And 35% of these entities prefer a partnership with Fintech companies. Partnership allows easy, flexible, and relatively low-risk arrangements for both groups to play off each other strengths.
As for KFIN Technologies, where most of our client (AMC) investors are predominantly retail participants, in past 2 years, we have seen a paradigm shift from physical transacting to digital transacting. And yes, we have helped clients in achieving this initiative and it has become a Top-of-Mind requirements across our valued customer, and us, today.
Bahrain - Bahrain has more than 40 years’ experience as a leading regional financial services center and the Middle East’s most highly regarded single regulator. The Central Bank of Bahrain (CBB) continuously enhances the regulatory environment, with an emphasis on driving the development of FinTech. Bahrain is also a global leader in Islamic finance and set the benchmark early for Islamic banking regulations.
From our understanding, Bahrain had been supportive and had been fostering tech start-ups especially fintech’s. Bahrain’s economic freedom and long-term stability enable the new FinTechs to benefit from the region’s lowest operating costs. It is around 30% cheaper overall to do business in Bahrain than in neighbouring hubs, while office real estate and employee costs are among the lowest in the GCC. Moreover, government agencies like Tamkeen facilitate business set-up with technical back-up, fully funded training, and valuable salary subsidies. Not only the new outfits gain from 100% foreign ownership in most sectors, and unrestricted repatriation of capital, profits, and dividends; there are no corporate or personal income taxes.
Bahrain is in the top ten countries in the world for individual mobile and internet use and has among the GCC’s highest mobile and broadband penetration rates. This combined with a fledgling ecosystem and a pro tech government policies form an ideal recipe for growth.
From our experience, whilst the profitability may not flagrantly different from that of India/Malaysia, top line growth is subdued owing to market size and existing pricing structures.
Is there a difference between the Indian markets and those of Bahrain and Malaysia?
Sreekanth - Whilst there are several similarities, such as – high tech penetration, rising levels of investible surplus, plethora of investment opportunities, there are also few fundamental differences between Indian and markets such as Malaysian. Indian fintech ecosystem is dominated by lending, payments & wealth tech space closely followed by services and automation layers dedicated to fintech’s (KYC, regtech, etc.,). BNPL is the latest in the stable of offerings from fintech standpoint. Malaysia has made rapid strides in wealth tech and is progressing well on areas of fintech. Ticket sizes for transactions across industries tend to be smaller in India in comparison to Malaysia thus rendering the opportunities for monetisation more on hyper scale volumes as against the value of ticket sizes in Malaysia.
As for Bahrain, the difference is due to geographic & population sizes between India and Bahrain. Bahrain is a small country located in Persian Gulf having an area of 786 sq.km with a population of around 17.20 lakhs. In terms of market size compared to India, Bahrain’s market is relatively small for customer & investor base. There are around 1.5 lakh investors from all the listed, unlisted & MF companies. Having said this, Bahrain is highly progressive in adopting new age tech and rapidly bridges gap with other fintech economies.
How have these markets fared during lockdown?
Sreekanth - Lockdown impacted all 3 countries quite substantially. From the standpoint of Fintechs, India had seized the opportunity of going digital far faster than most other companies. Fintech industry gained both depth and breadth due to lockdown induced restricted movements. India has created record number of unicorns during the past 15 months and fintechs played their role in the same. First gen fintech’s such as Paytm, Zerodha grew from strength to strength, global trends in BNPL have caught India’s fintechpreneurs. Wealthtech & Aggregator platforms too saw extensive growth fuelled by the market velocity and just as importantly by making the process of investing an exceedingly simple affair even for the uninitiated.
Malaysia too had seen a rising interest in driving fintech adoption. Fuelled by launch of eKYC in 2020, there had been a sharp rise across the sectors of – lending, remittances, wallets, payments amongst others. All the sectors have seen attracting sizeable capital from alternative sources even as the primary markets were subdued due to the pandemic. Malaysia size near 100% rise in digital transactions across the platforms and the trend is expected to be sustained over the foreseeable future given the convenience the fintech platforms have provided, which is comparable to those in India.
Bahrain did not remain immune to the changes across the region and had seen quicker adoption of fintech across all services. Several international firms have opened fintech operations in Bahrain and adoption of the services too had been at par with other geographies
What are the challenges in operating in these markets?
Sreekanth - Following challenges may be detailed -
Malaysia – KFIN Technologies operate and service predominantly all Financial Services entities, encompassing Mutual Funds, Insurance and to a certain extend - Banks. All these target entities are being regulated by 2 regulators, namely the Securities Commission of Malaysia (the SC) and the Central Bank of Malaysia (i.e., Bank Negara Malaysia (BNM).
The SC regulations towards Fintech services and innovation is encouraging, progressive and encouraging innovation. Malaysia’s eco system of AMCs, exchanges, IUTAs, wealth platforms, EPFO, RTAs etc., all work rather harmoniously paving way for benchmarked customer service levels against best in the world.
Extensive product customization leading to complex products and legacy technology are areas that pose some challenges for faster expansion and improving go to market speed. However, embracing new technologies had been a common and progressive trait amongst most entities.
Likewise, the BNM regulations is stringent towards Insurance and Banks (which are the entities they regulate) and investors information is not allowed to be residing outside of Malaysia. This pose as a challenge for international firms whose Centre of Excellence or Data Centre out of Malaysia. Obtaining an exceptional approval from BNM, where in general it is possible, can be challenging.
Bahrain - The fintech tools such as digital payments, mobile wallets, mobile banking transactions, mobile remittances from Money Changer Apps are already existing in the country which most of the customers use them. Due to COVID-19 in the last 16 months, the usage has increased by 3.6% between Jan 2020 – Jan 2021. There are totally 17.10 lakh internet users in the country and the internet penetration rate stood 99% as of January 2021.
Further to support FinTech initiative, the Central Bank of Bahrain (CBB) during April 2021 announced the launch of a series of nation-wide fintech innovation challenges, the Bahrain Supernova. The Bahrain Supernova is aimed at resolving real market challenges such as Account Blocking & Unblocking Automation Process, connecting customer accounting system with banks and extending payment services for proximity/wearable devices aimed at finding customer-centric solutions. Innovators and fintech startups will have access to an API sandbox from local and regional banks to enable rapid and seamless proof of concepts (PoCs). Addressing these issues in the post COVID-19 recovery phase will be critical as this will enable the financial services industry in Bahrain to transform legacy banking systems, and enable the development of new solutions across fintech, regtech and insuretech.