Thursday 28 Mar 2024
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This article first appeared in Digital Edge, The Edge Malaysia Weekly on August 8, 2022 - August 14, 2022

In the early days of 2017, Malaysians were still learning how to pay with e-wallets and enjoy the rewards that come with it. One of the popular e-wallets then was the Boost e-Wallet App launched by Boost, the regional full spectrum fintech arm of Axiata Group Bhd.

Since then, Boost has grown to provide financial services beyond e-wallets. Boost Credit, for instance, is its micro-financing and micro-insurance business. The company took a step further into the financial sector in April, when it was awarded the digital banking licence together with RHB Banking Group.

For Group CEO of Boost Sheyantha Abeykoon, this was a rather natural progression for the company. When Boost started to build its financial technology (fintech) business five years ago, the goal was to get into the micro payments, microlending, microinsurance, micro savings, micro investments and remittance space.

“Even at that time, our ambition was not just to be an e-wallet provider and stick to payments. Our ambition was always to offer the full [set of] digital financial services. When Bank Negara Malaysia introduced the digital bank licence, we saw it as an avenue to fulfil our full ambition,” says Sheyantha.

There was slight concern, at first, as to whether the company could still operate as a fintech company in a banking environment. But Sheyantha felt assured after Bank Negara obtained feedback from the industry. “I felt that it’s a model where we can still run [our operations] digitally in a fairly agile way,” he says.

Bank Negara has stated that the digital banks must be able to address financial inclusion gaps. This is a mission that is right up Boost’s alley, Sheyantha believes.

Boost targeted merchants who mainly transact in cash because it knew that the transition to a cashless environment would be difficult. These merchants are also typically thin-file customers who do not have enough credit history to take loans.

“Boost Credit, which started as Aspirasi, has dispersed RM1.6 billion worth of loans to small and micro businesses in Malaysia and Indonesia (as of 2021). Over 40% of those are new-to-credit customers or people who’ve never taken a loan before. From that perspective, we’ve been enabling financial inclusion,” says Sheyantha.

“The good thing for us is that we don’t have to do anything differently from what we’ve already been doing. Our vision is linked to the same story from day one, which is to solve a pain point in the market.”

Axiata Group operates in many Asian countries, he adds, and understands the market. The company will continue to cater to this segment that it knows well through the digital bank.

“Across the market, each licensed [digital bank] provider has its own ecosystem that it will tap on. There may be some overlap, but each of us has our own unique proposition and set of customers that we are already catering to today,” says Sheyantha.

The market is big enough for all the players, he adds, especially when considering the informal sector. This refers to enterprises that are not registered with the government or other professional bodies.

“We are quite focused on what we are doing and we’ve been providing core services like lending to the segment for a while already. So, we are just going to double down and focus on that.”

Applying lessons learnt

It would be ironic if the market that digital banks are meant to serve — the underserved and underbanked — are not digitally literate or equipped with the right technology. This is something that Sheyantha acknowledges as well.

With this market, it’s important to bring the technology to them instead of trying to change their behaviour. “When we think about offering them digital or financial services, we like to embed our services in the transaction journey or purchasing cycle that the business already has,” he says.

For instance, many small merchants order from their distributors via WhatsApp. Some may have a small inventory management system. Boost serves them by integrating its lending solutions via its application programming interface (API) into the existing purchasing module.

“So, when they order next week’s purchase, they can order in cash or credit. Earlier, they only did it with cash. Now, the credit is provided by us. The merchant doesn’t need to do anything differently. They can just order using the same module,” he says. Getting them to download a new app or go through a rigorous registration process creates too much friction in the process.

Another lesson the company learnt from working with the underserved segment is the importance of trust. Boost has built a strong reputation among merchants who transact mainly in cash, says Sheyantha. RHB Bank, meanwhile, is a household name.

“This segment is particularly wary of scams. We’ve done a lot to build our brand with them and obviously, we have RHB. These are two well-known brands. That relationship of trust is very important for them to adopt your service,” says Sheyantha.

“Hand-holding” the merchants in the use of the services for the first time is also very important. “We find that the churn rate or their use of your platforms tend to be quite sticky [when you do that],” he says.

The repeat rate on Boost’s loans, according to Sheyantha, is over 90% (as of 2021). “People generally don’t roll off the services but it’s important that you invest a lot of time in getting that first experience right. If the first experience is bad, you will probably lose the customer forever. There will be a lot of apprehension about coming back. These are some things we observe particularly in the underserved sector.”

Looking at the bigger picture, Malaysian digital banks can also learn from the successes and failures of peers in other countries. The sector is still in its early days, Sheyantha observes.

A June 2022 analysis by consultant Simon-Kucher found that of the 25 largest digital banks in the world, only two are profitable. Many digital bank clients are inactive after opening accounts despite high acquisition costs, it says.

A Moody’s Investors Service report in February stated that around half of the 20 largest digital challenger banks are profitable. WeBank and XW Bank in China outperformed the country’s banking sector in 2020. Rakuten Bank in Japan and OakNorth in the UK achieved similar feats.

Regardless, many of the successful digital banks have a strong ecosystem, says Sheyantha.

“What I found is that generally, it doesn’t work when you go into a complete greenfield without a captive base of customers and a strong value proposition in the market. [It also doesn’t work] when there’s a heavy emphasis on cash burn to acquire customers,” he says.

“I think it’s really about getting the strategy right. If you do, there is a strong path to making profits.”

Working with tech

Boost has a modular API technology that can be integrated seamlessly into different platforms. The company also builds its own technology and data science capabilities, says Sheyantha. To run Boost Credit, the company has been using alternative credit scoring, which relies on non-typical data sources, powered by artificial intelligence, to build credit profiles for customers.

“We use data science and algorithms to give customers a credit score because they are typically thin-file, which means they do not have documentary evidence to support their credit standing,” says Sheyantha.

“But we also use a lot of traditional credit enhancements to make it work. Data science and algorithms are just part of the equation. At the same time, by using it, we’re able to serve and attract customers that we couldn’t otherwise.”

The data points that it uses include transaction, location and behavioural data. It also uses parameters based on the lending experience that Boost has already done. Some customers may not have taken a loan, but they have paid utility bills or vehicle leases, for instance. These could demonstrate a pattern of repayment.

Other than that, Boost works with ecosystem players to provide funding. For instance, it can work with the supply chain of a fast-moving consumer goods (FMCG) company.

“If a retailer takes a loan, they typically won’t default on it because it will affect their follow-on purchases. So, it’s about having the right incentives. And whenever we start [our journey] with any new ecosystem borrower, we start small and grow from experience. We’ve been doing this for four to five years already,” says Sheyantha.

Digital banks will be powered by technology like e-KYC (know your customer) modules, which are already very common in the financial sector in Malaysia. Cybersecurity, of course, will have to be stepped up as well.

“Cybersecurity is a risk that is out there. In the last two to three years, it’s been more prominent. We take cybersecurity very seriously across all our businesses. It’s something we’ve invested in a lot and today, we leverage on a lot of the infrastructure available to the Axiata Group as well,” he says.

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