Things you need to know about fintech in Malaysia

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Things you need to know about fintech in Malaysia

Malaysia’s fintech sector appears to be picking up considerable momentum in recent years. With a population of 32.6 million and Internet penetration at a whopping 86%1, the country is ranked 1st in Southeast Asia when it comes to mobile penetration2, proving that its people are showing increasing preference for technology when using financial services.

This is not surprising. The potential for innovation within fintech enhances financial services like cross-border remittance, fund management, insurance or captive insurance as well as forex and online payment processing, making it easier and faster to perform many financial tasks and even venture into the unknown.

Fintech companies could also reinforce traditional banking, increasing competitiveness and efficiency of the country’s financial sector. This in turn increases the robustness of the country’s economy to withstand shocks from within and without.

Overview of the fintech sector in Malaysia

As of 2019, there are 196 key fintech players in Malaysia. According to the Fintech Malaysia Report 2019, 38% of them are in e-wallet and payment, which shows that while there is still room for the two markets to grow, it would be wise to consider venturing into other less-explored areas of fintech, such as regtech (6%) and AI/Big data (4%).

We have previously talked about the importance of big data, so you can read more about its potential in fintech there. Note this: most businesses are beginning to make sense of data trends to improve operations, lower costs and increase growth, so watch that space closely.

That aside, here are 4 more points to consider if you are interested in operating a fintech startup in Malaysia.

Shariah-compliant fintech is moving to the forefront

If you are looking to enter the fintech market, then shariah-compliant finance in Malaysia could be a great choice, seeing that the government is encouraging contributions to Islamic finance through digital solutions. It has even allocated funding for start-ups through the Working Capital Guarantee Scheme (WCGS).

Many experts in Islamic finance seem open to the idea of fintech. An online Shariah-compliant Investment Account Platform has recently been launched (set up by 6 Malaysian banks and backed by the government).

It’s been primarily designed as a central marketplace for financing SMEs and small businesses. When it comes to Islamic Finance, Malaysia’s infrastructure is pretty solid. The governor of Bank Negara Malaysia (BNM), the country’s central bank, has spoken about the many possible benefits that fintech could bring through future integration.

However, regulators may have to move cautiously, as there are certain risks present in the fintech sector that might compromise current systems if implemented poorly.

Labuan, a hidden gem for fintech players

In terms of its location, Labuan, a federal territory off the coast of Sabah, may often be overlooked. However, what many people probably don’t know is that it is one of the best areas to set up an international business.

Labuan is an incredibly convenient part of the country if you want to establish an international trade, investment holding or online service business because you can create a tax resident entity in a low tax environment.

Furthermore, some of the best Asian banks are accessible from Labuan, particularly since it is a renowned financial centre and free-trade area. If your goal is to enter the fintech market, then consider making it your business destination.

Take note though.

Some recent developments related to fintech regulation in Malaysia might affect Labuan’s appeal for cryptocurrency-driven businesses. On 15 January 2019, Malaysia’s Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 came into effect. This rule is aimed at regulating cryptocurrencies as securities, working to ensure that crypto-assets are only used as securities if used in specific ways (e.g. for raising capital or trading).

Labuan authorities have stated that crypto businesses and exchanges based in Labuan can still operate through a Money Broking Licence. However, digital asset businesses will be prohibited from promoting within Malaysia due to new regulations.

The Crypto Regulatory Landscape is a fluid one and players within the crypto space have to roll with the punches in instances like this.

Virtual banks should stay on top of regulations

BNM has also addressed the forming of regulations related to virtual banking.

Virtual bank licensing requirements are relevant to players in this space. Financial technology can put pressure on traditional banks by providing alternatives. However, established banks are likely to remain key players in most countries (Malaysia included).

It is more a question of how these banks might be able to harness the innovative power of fintech. Both digital banks and traditional banks require more information regarding licensing criteria.

The EY Global Fintech Adoption Index 2019 reported that nearly two-thirds of consumers within Asia Pacific are active users of fintech services and products. Areas within the fintech space include e-wallet, cross-border payment, peer-to-peer lending and micro-insurance solutions.

Take advantage of the fintech regulatory sandbox

BNM has responded to these innovations in fintech with the introduction of the fintech regulatory sandbox. This is a key development: Malaysia joins its neighbours Singapore, Indonesia and Thailand in having a framework that supports financial services, enhances the economic landscape and positions fintech initiatives for the future. As of now, many fintech startups have been added to the sandbox.

BNM has interacted with about 80 startups through workshops, networking sessions and other outreach efforts. So far, about 15 of them have been considered for the Financial Technology Regulatory Sandbox. If you’re starting a fintech operation in Malaysia, you should check out this sandbox, along with other government-backed initiatives that exist.

The evolution of financial services in Malaysia is being met with regulation, demographic changes and other factors. Be sure to keep an eye on these developments.

Future of fintech in Malaysia

Fintech is poised to be a major growth driver in Malaysia. While fintech players need to overcome regulatory challenges and think of ways to get the older generation to buy into the fintech ecosystem and new-age technologies, the future, as it is often said, is in the hands of the growing group of millennials and those who are born after.

With more and more support from a government that knows the importance of fintech and a more globalised mindset, all signs point to a bright future for the sector in Malaysia.

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