This article first appeared in Unlisted & Unlimited, The Edge Malaysia Weekly, on July 11 - 17, 2016.
IMAGINE using your mobile phone to pay for your teh tarik at a mamak stall. You will soon be able to do this because of a technology pioneered by Malaysian digital payments company Soft Space Sdn Bhd. It is the first financial technology (fintech) company in Asia to receive Europay, MasterCard and Visa (EMV) certification from EMVCo, which facilitates worldwide interoperability and acceptance of secure payment transactions.
Soft Space offers affordable credit card or mobile card readers to business owners, many of whom were previously unable to collect payments digitally because their business was too small. These card readers give them the opportunity to grow their business and reach out to a wider market.
The company also provides
EMVCo-approved mobile point-of-sales (MPOS) solutions to 14 banks across nine countries — Australia, Cambodia, Indonesia, Malaysia, New Zealand, the Philippines, Singapore, Taiwan and Vietnam. It is the first in the region to do so.
It all seems so obvious now that it is up and running, but it took a lot of work to get the project off the ground. For starters, the banks were not that keen on taking it up.
Founder and CEO Chang Chew Soon was only 32 when he came up with this idea. He quit his job as technical director for a multinational advertising agency to set up Soft Space in March 2012.
The idea came about because his father ran a small motorcycle spare parts distribution business that only accepted cash payments and one day, an employee embezzled RM100,000. The business nearly had to be shut down.
“My father had always wanted to use a wireless credit card machine to collect payments as it is secure and reduces the risk of such things happening. Instead, he was forced to rely on sales personnel to collect cash payments from his clients because small businesses like his were not on any bank’s priority list. The rental and processing fees charged by the banks were too high for small businesses to adopt digital payments,” he says.
Chang, who has a background in software engineering, started tinkering with the problem. His idea was to build a mobile card reader that could be plugged into the audio jack of a mobile phone, which would then function in the same way as a bank’s expensive credit card machine. This product could cater for the needs of both big corporations and small businesses.
He must have known what he was doing because his company has won several awards over the years. It was the gold winner and best Asean start-up at the Asean ICT Awards in 2013, the merit winner at the World Information Technology and Services Alliance awards in 2014, and third prize winner at the Asian Entrepreneurship Award last year.
It also secured RM2 million in angel funding from Foetus International group executive chairman Tan Sri Vincent Lee. “The cheque was the first and only investment Soft Space ever received,” says Chang.
“We have been financially self-sustaining since. Upon receiving the cheque, the company kicked off officially with a team of four software engineers, including myself, and we built the solution from scratch.”
Time, however, was not on its side. As the company was preparing for EMVCo certification, which requires companies to send their solutions to a private lab in the US for a series of tests, the angel investment started to run out. The testing process is onerous. There are thousands of different tests and the product is required to pass all of them. Otherwise, it has to start all over again.
Three months of sleepless nights later, the hard work of the Soft Space team finally paid off and the company received the certification in August 2012. It was kind of a big deal.
“We were the first fintech company in Asia to be certified and approved by EMVCo. Had we not had the certification, which vouches for the security and integrity of the system, no bank would have looked at our solution, let alone adopt it,” says Chang.
The company had overcome its biggest hurdle and things seemed like they were coming together. But little did Chang know the real hard work was just beginning.
“We are a Malaysian company so naturally, we hoped that Malaysian banks would be the first in Asia to use our solution and spearhead a huge emerging trend. While we were trying to get the word out, we were summoned by the central bank for a briefing. They wanted to know what we were up to,” he says.
The meeting with Bank Negara Malaysia was not scary. In fact, it provided the company with a much-needed boost of confidence.
“Our initiative to provide an electronic acceptance device so that people would not have to carry cash around was in line with its agenda of moving towards a cashless society. The central bank was supportive of our new solution and with its blessing, we went out and pitched the solution to the banks,” says Chang.
This was where Soft Space faced its first roadblock. The banks had never heard of the company. Some did not even agree to a meeting. As for those who did, the first question was: Who else was using the solution?
“When we said no one, because the technology was new, we were turned down immediately. None of the banks wanted to take the risk, even if it meant they could lead the market,” Chang recalls.
The team was disappointed. Had they made a mistake? Was it all for nothing? They had all taken a pay cut to start this company.
And then, there was a glimmer of hope. Unlike the local banks, Visa and MasterCard recognised the brilliance of the solution and understood the significance of having the EMVCo certification. If the banks in the country — both local and foreign — couldn’t see this, fine; they would introduce Soft Space’s solution to the rest of the region.
Chang and his team excitedly agreed. First stop: Thailand.
“During the tour, Kasikornbank agreed to sign up after our presentation. The bank felt like it was a good deal. The contract was signed in December 2012 and the solution was officially launched the following month. We have shipped more than 60,000 devices to Thailand since,” he says, adding that the Thai bank is the leader in the market as it was one of the early adopters.
That was a crucial turning point for Soft Space as CIMB Bank in Malaysia contacted the company to express its interest in the solution just before the signing ceremony with Kasikornbank was held.
In 2013, the company managed to close deals with seven banks. CIMB was the first local bank to get on board, followed by Hong Leong Bank and Maybank. And the rest, as they say, is history.
Today, Soft Space sits on the board of EMVCo. It holds business associate and technical associate seats. As the only Malaysian company on the board, it gets to rub shoulders with the likes of JP Morgan Chase, McDonald’s Corp, Microsoft, Target and Walmart to help govern the EMV payment framework.
When Soft Space started in 2012, its solution was a first and there were no competitors. Naturally, when others saw how lucrative this was, the “me-too” companies started springing up. But having done all the initial groundwork, it was not easy for these companies to cut in.
“There are two barriers to entry for them. First, they have to get EMVCo certification before they can start selling. Second, they need client references and a track record to get the banks on board,” says Chang.
But Soft Space is not standing still. Its solution has evolved as more banks use it and the company irons out the bugs. “We have credibility and a proven track record. Why would the risk-averse banks choose a newcomer instead of an established player, unless we were not performing well?” he asks.
Chang is determined not to allow this to happen.
Today, the company has evolved from a payment technology provider into a payment service provider. In 2014, it acquired Fasspay to expand its business.
“Fasspay has been appointed by Hong Leong Bank to provide payment services to its clients. Fasspay’s staff meets with the merchants who want to adopt mobile payments, collects the paperwork, does the risk assessments, delivers the devices and teaches the merchants how to use them,” Chang explains.
The 36-year-old proudly declares that AirAsia is using Soft Space technology and Fasspay services on its flights. This has transformed how payments are made on flights. Previously, if you used a credit card to buy something, the transaction could only be confirmed when the plane landed.
“This raised the risk of card fraud, such as counterfeit cards or identity theft, which will lead to losses for the airline if it does not realise this before the passenger disembarks. That is why most airlines have a cap on how much one can swipe on a flight,” says Chang.
“With AirAsia’s on-board WiFi and our solution, in-flight transactions become online transactions — the transactions will be approved or denied immediately, eliminating the risk of fraud in such situations. Also, this allows the airline to accept debit transactions as it allows immediate online deductions from one’s bank account.”
Soft Space went on another long journey to get the in-flight online transaction solution approved by multiple parties including Hong Leong Bank and the Department of Civil Aviation. Currently, the DCA has only recognised the Soft Space device and solution for inflight online transactions.
In November 2014, Bank Negara deputy governor Datuk Muhammad Ibrahim announced that the banking industry would adopt the chip-and-PIN card, which is a more secure cardholder verification method for purchases, by Jan 1, 2017.
While Malaysia is still using the chip-and-signature card, Soft Space — which has worked in other countries with different regulatory environments — is already providing devices that cater for both types of cards.
“We are a few steps ahead of our competitors, but we are not going to stop here. The technology game requires constant improvements,” Chang says, adding that the company has developed its own contactless payment method.
“With this payment method, you only need to touch your phone to a machine, or another phone, to make a payment. We are now experimenting with a new solution where you can make payment while your phone remains in your pocket or bag.”
The theory is that the customer’s phone will be programmed in such a way that when he is in his favourite store, and the store initiates a transaction through the Soft Space payment system, the phone will automatically authorise the transaction. The phone will then beep to signal that the transaction has been completed, allowing the customer to make purchases with no fuss.
Soft Space will need a sustainable business model to survive and thrive. And Chang is working on it. Each time its device is used, the bank charges the merchant a fee of 1.5%, and the company gets a small percentage of that. Most of its revenue comes from these transactions, he says, joking that it is a business model that earns money even when they are sleeping.
“Almost 90% of our clients are on a profit-sharing model, and only a few banks refuse to split fees with us as this is something new for them. We charge the banks an annual licensing and maintenance fee instead. Fasspay also charges the bank for each merchant it brings on board and for the deployment of devices,” says Chang.
The company broke even in 2014. At that time, many companies and investors were looking for an opportunity to invest in or acquire Soft Space as its solution had generated great interest in the market. It would have been an easy and comfortable retirement for Chang and his team, but it would also have meant “game over” as the new owners might have taken the company in a different direction than the one envisioned by Chang and his team. So, they said no.
Despite this, Soft Space is on the lookout for strategic investors who can add value to the company, for instance, by introducing it to new markets. Chang believes the team should set its sights on bigger things such as disrupting the payments industry and enhancing the payment experience.
“We have come a long way. The banks are a lot more receptive and willing to cooperate with fintech firms like us. They should continue to focus on what they do best — lending, deposits — and work with fintech companies that are able to move nimbly to keep up with market demand,” he says.