This article first appeared in The Edge Malaysia Weekly on June 19, 2017 - June 25, 2017

CASH is king, or at least Malaysians seem to think so.

Despite the explosion in smartphone usage and popularity of debit cards, Bank Negara Malaysia statistics show the preference for cash payments has not waned.

Cash in circulation, an indicator of the public’s utilisation of cash in transactions, continues to outpace GDP growth. In 2016, cash in circulation per capita rose 9.8% year on year to RM2,699.20. In contrast, GDP only expanded 4.2%.

But this trend might soon change with the growing popularity of cashless payments. Excluding the high-value Real Time Electronic Transfer of Funds and Securities  System or RENTAS transactions, overall e-payments rose 14.4% last year — the quickest pace in the past five years.

That said, this growth is coming off a relatively low base, primarily led by debit card uptake as well as internet and mobile banking.

For fintech startups however, this same payment ecosystem is a potential goldmine as digital currency and digital wallets take off.

Perhaps a sign of things to come was the announcement by Alipay last week that 100 merchants in Malaysia were now accepting its digital payments.

For now, this will have little impact on Malaysian consumers. Alipay is still focused on expanding its merchant network outside of China to cater to Chinese tourists.

With over 450 million users, Alipay’s entry into Malaysia is nothing to sneeze at.

“It is a great value proposition for merchants. With the Alipay app [with GPS on a smartphone], users can see all the nearby shops that accept Alipay. In fact, they can go one step further to attract customers — merchants can promote themselves from July 2017 by offering discounts and freebies to draw Alipay users,” explains Danny Leong, group CEO of GHL Systems Bhd.

In April this year, GHL announced a tie-up with Alipay — which is owned by Ant Financial Services Group — granting the latter access to its entire merchant network. Ant Financial is part of the Alibaba group.

“We already have the infrastructure in place — the credit card terminals and barcode readers that we provide to merchants are also able to read QR codes for Alipay. It also accepts many forms of contactless payments like Samsung Pay,” says Leong.

In fact, GHL has been working around the clock to add Alipay to the existing suite of payment services that it offers its merchants.

“We have added 100 merchants across over 500 in-store locations across Malaysia to date, and hope to grow this to 1,000 locations by the third quarter this year. The process itself is relatively straightforward, but our team needs to approach the merchants one by one to sort out the paperwork,” he adds.

Alipay is not the only one eyeing the Malaysian market. Channel checks reveal that Alipay’s chief rival in China, Tencent Holdings Ltd, is closely monitoring the development of e-payments in Malaysia, presumably, to gain a foothold.

Tencent is estimated to have over 830 million mobile payment users, eclipsing Alipay. Payments and money transfers can be undertaken with ease via the group’s popular messaging app, WeChat.

Whatsapp, which was acquired by Facebook in 2014, remains by far the most popular messaging app in Malaysia. That said, WeChat is also gaining popularity among Malaysians.

Unlike Alipay, WeChat would have immediate access to a relatively large user base in Malaysia should it choose to jump into the e-payment space.

Still early days for local players

Against this backdrop, there is a stark absence of a local digital wallet player in Malaysia with substantial scale. Most either lack large numbers of users or the technology for mobile payments.

Touch ’n Go, for example, may have a large base of users, but without mobile payments, its use is severely limited, primarily for transit-related services.

On the other hand, other more innovative attempts have left a bad taste in the mouth for early adopters.

Take MBI Group International, for example, which was raided by the police and Bank Negara last month. The group’s M-coin virtual currency is now under close scrutiny by consumers despite claims from the group that it is business as usual at the mall it runs in Penang Times Square.

That said, there are many other players eyeing a slice of the cashless payment pie. After all, there is big money to be made by becoming the Alipay or Tencent of Malaysia.

But who will eventually come out on top is anybody’s guess.

Telcos like DiGi.com Bhd, Axiata Group Bhd and Maxis Bhd are already piloting their own version of digital wallets.

For example, DiGi’s 49% parent company, Telenor Group, has a Money Services Business licence from Bank Negara that it uses to operate Valyou — a remittances app.

Valyou is primarily used by DiGi’s dealers to facilitate remittances for foreign workers. However, there is talk that Telenor is looking to leverage Valyou’s licence for a local digital wallet and mobile payment solution.

At the same time, there is nothing stopping a company like Whatsapp from transforming its messaging service into a payment service.

In fact, Bank Negara is already laying the groundwork for the coming revolution in e-payments.

“Today, the payments industry is no longer the exclusive domain of banks. The advent of fintech driven by increasingly inexpensive and pervasive internet and mobile technology has encouraged the entry of more agile non-bank players as potential disruptors or collaborators of the incumbent players,” Bank Negara governor Datuk Muhammad Ibrahim said in his keynote speech at the Malaysian e-payments excellence awards last month.

But becoming the dominant player could be a messy affair.

Fintech startups are likely to be funded by venture capital and be more focused on gaining market share than profitability. Similar to how tech startups like Uber and Grab are willing to lose huge sums of money to gain market share, new digital wallet players might be willing to do the same.

Consumers will clearly benefit while banks may lose out. So how can investors tap into the coming fintech gold rush?

For one, it might make more sense to focus on companies like GHL that remain exclusively in the domain of merchant acquisition.

“The payment market is broadly divided into two sides — the issuers and the acquirers. The issuer’s job is to get more users to use their payment method. Our job as the acquirer is to get as many merchants as possible and enable them to accept all prevalent payment methods,” says Leong.

However, there is a key difference — merchant acquirers are willing to accept all payment systems.

GHL’s merchants, for example, are able to accept credit cards, debit cards, contactless payments like Samsung Pay and Touch 'n Go, as well as newer entrants like Alipay.

“Unlike the issuers, there is substantially less competition in the acquirers’ side of the business,” Leong notes.

In fact, the more competition there is among issuers, the better it is for acquirers, he argues.

One of GHL’s competitors is Managepay Systems Bhd (MPay), but the latter only has a market cap of RM145.6 million. GHL is currently worth RM946.5 million based on last Thursday’s closing price of RM1.44.

Bear in mind that every issuer that hopes to go to scale will need the widest merchant network possible and will have to work with all acquirers. In other words, the more competition there is in the issuance space, the more business there will be for acquirers like GHL and MPay.

However, it is important to note that acquirers are not completely future-proofed.

“While there will be lots of upside for merchant acquirers (like GHL and MPay) in the near future, they are still reliant on physical infrastructure — their payment terminals. If a mobile payment solution comes along that does not rely on payment terminals, it could be a problem for them,” notes one industry executive.

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