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

Since its establishment in 1996, AEON Credit Service (M) Bhd has focused on providing lower- and middle-income Malaysians access to credit. With the digital banking licence it clinched recently, the consumer finance company is now gearing up to expand its retail financing scope to offer deposits, wealth management and investment products.

Listed on Bursa Malaysia’s Main Market, AEON Credit has been looking into the digital banking model to complement their current services for about three years, says chief transformation officer Ajith Jayaram.

“We have been providing financial services in Malaysia for the last 25 years; the retail brand, AEON Co (M) Bhd, has already been here for close to 40 years. This presence was [testament] enough that we need to provide more financial products and services.

“Currently, AEON Credit is just in the lending business, but with the digital banking licence, we can provide more than just lending. We want to provide complementary services to our existing 4.4 million customers. The monthly average footfall is close to five million, that’s another factor,” says Ajith.

AEON Credit won an Islamic digital banking licence as part of a consortium with its parent company AEON Financial Service Co Ltd (AFS) and fintech firm MoneyLion Inc. AEON Credit and AFS will have a 45% stake each in their digital bank, with MoneyLion holding the remaining 10%.

Founded in 2013, the New York Stock Exchange-listed MoneyLion is one of the 17 digital banks — which are also referred to as neobanks or challenger banks — in the US.

As a consumer finance company, AEON Credit provides personal, motorcycle and used-car financing to customers who are predominantly from the bottom 40% (B40) income group and other underserved segments.

With MoneyLion as its technology partner, AEON Credit hopes to further its financial inclusion objective and optimise its consumers’ money management, a goal that the former is also working towards in the US, says Ajith.

“Banks’ overheads are so high that they don’t want to concentrate on small loans or small personal loans. They want to concentrate on bigger dollar amounts because it is expensive for them to serve the population that needs small loans. Everything from collection to creditworthiness is [performed] manually at these big banks, which is why it becomes too expensive,” says Foong Chee Mun, co-founder of MoneyLion.

With financial technology — powered by tools such as artificial intelligence and machine learning — MoneyLion has been able to serve lower-and-middle income Americans in an affordable way, says Foong.

“It’s extreme automation in such a way that we can pass the savings back to the users. We were able to discover segmentations that generally were neglected by not just the big banks but a lot of the smaller financial institutions in the US as well.

“To date, we have [dispersed] about US$1.5 billion in loans that were automatically underwritten. This kind of advantage is even more pronounced when it comes to Malaysia because there is the same middle-income population and their financial [situation] is similar. And by utilising what we have learnt the last 10 years in the US, we are able to jumpstart our digital banking offering in Malaysia as soon as possible,” he adds.

A striking similarity between the two populations is how a large portion of Malaysians live from pay cheque to pay cheque.

“Most middle-income Americans, like most middle-income Malaysians, don’t have credit cards. They might be doing well about nine months out of a year, but then they face a credit crunch in the remaining three months,” says Foong.

In Malaysia, the credit crunch often happens during Hari Raya or other cultural festival seasons, and quite often to those employed in the gig economy, causing many to fall behind on bill payments, observes Ajith.

“The problem is that to get personal financing for just three months, almost a random three months out of the year, can be extremely challenging for big banks to support,” says Foong.

“We are in the age of the gig economy, where your car is not just a mode of transport, but it is how you make money as well. If your car breaks down and you don’t have enough money to fix it, it also means you cannot make money.

“That is when people like us [MoneyLion] come into play because we provide just-in-time underwriting where we are able to do personal loan assessments immediately and are able to underwrite the loans almost immediately and disperse them fast because everything is done using machines,” he says.

Ajith adds that AEON can go outside its existing ecosystem and provide its customers with additional products and services.

“Cumulatively as a group, we have close to 17,000 businesses under AEON Credit and AEON retail, and we can have their entire cash flow managed on one platform. We will be able to make predictions based on a supplier’s purchasing activity and sales. Once we can see their cash flow, we can provide them with invoice financing to free up their cash flow to expand their purchases.

“Beyond a lending product, we will be able to give current, savings, investment account or wealth management accounts, instead of just a salary account, and educate users to build up an emergency fund.

“The common thing about AEON and MoneyLion is financial literacy, where we guide customers from the very beginning. Some of MoneyLion’s products in the US, such as the personal finance management facility, guide customers on how to build a good credit score.

“We know that is needed in Malaysia, looking at the high household debts,” says Ajith.

Bank Negara Malaysia in its 2021 annual report found that Malaysian households have nearly RM1.34 trillion worth of debt, exceeding what the federal government owes to its creditors.

The report noted that between 2018 and 2021, the household debt in the country jumped by almost 17% raising concerns about the country’s debt-servicing ability, especially in times of crisis.

This is made worse by the fact that most households have low savings buffers, given that 76% of households have savings that can only cover less than three months of living expenses, said Bank Negara.

Households in the B40 bracket are the worst affected, as they had a net income of RM230 per month in 2019 after accounting for expenditures and financial obligations, added Bank Negara.

“Unlike conventional banks, which are still using conventional ways of credit scoring such as using salary slips and payment history to assign a score, digital banks consume data beyond the typical credit models by using, for example, machine learning and AI to come out with very high levels of prediction.

“For example, with these capabilities, we can have a lot of data predicting the earning and spending patterns of gig economy workers or those without a proper job.

“For example, bank statements record all transactions, which the tools can study to determine a user’s cash flow. We have a 360° view of a person’s financial situation,” says Ajith.

With open banking — the practice of sharing customers’ banking data with third parties electronically, under conditions that the customers approve of — it will be even easier to serve consumers, he adds.

“One of the things that we have observed for the last 10 years is that technology continues to disrupt the way that we live and work significantly, and these disruptions are only going to accelerate.

“Five years ago, most people didn’t know who gig economy workers were. Today, there are nearly 100,000 gig economy workers in Kuala Lumpur alone.

“Within the gig economy itself presents a huge spectrum of workers, from people who deliver food and carry out e-hailing, to those who do graphic design for companies in Sweden and people who work on systems development for companies in Denmark.

“Digital banks are not only able to cater for them faster, but also launch products for them to try quicker,” says Ajith.

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