Fintech: The best of both worlds

This article first appeared in Wealth, The Edge Malaysia Weekly, on October 26, 2020 - November 01, 2020.

We want to democratise money market funds and make them relevant to the man in the street … Versa will onboard investors through our app and they can invest in and withdraw their money from a money market fund online at any time. - Teoh

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Investors may soon enjoy the benefits of parking their emergency funds in a fund that allows flexible withdrawals yet gives returns comparable to that of fixed deposits.

Versa Asia Sdn Bhd, a financial technology (fintech) start-up, will launch a mobile application at end-November that will allow investors to put their money in a money market fund through their smartphone without any sales charge imposed. Versa wants to tackle distribution issues faced by money market funds through the app, enabling more retail investors to access such funds.

The start-up has obtained conditional approval from the Securities Commission Malaysia (SC) to be a recognised market operator. The approval allows Versa to distribute capital market products, including money market unit trust funds, through e-services platforms.

“Versa will onboard investors through our app and they can invest in and withdraw their money from a money market fund online at any time,” says Teoh Wei-Xiang, CEO of Versa.

A money market fund, an investment instrument that invests in short-term debt securities, is a useful tool for investors to park their idle cash in the short term. Such a fund is often compared with a fixed deposit as it is a low-risk investment instrument that generates a similar rate of return, which is about 2% — in line with the current interest rate environment.

Liquidity is the key differentiator between money market funds and fixed deposits in the market. The former allow investors to withdraw their money at any time with accrued interest, while most fixed deposits have a lock-in period. Investors who withdraw their money from fixed deposits before maturity would have to forfeit their earned interest.

Thus, some investors prefer to park their cash in money market funds for liquidity purposes and cash out when other opportunities arise. For instance, they can use the money to buy shares when there is a correction in the stock market or properties when prices start to look attractive.

There are many money market funds in the market. As at Sept 11, there were 93 such funds, according to The Edge-Lipper Fund Table. The average annual return of the 46 non-Islamic and 47 Islamic money market funds was 2.41% and 2.36% respectively.

However, the participation of individual investors, especially retail investors, is extremely low, says Teoh. “Money market funds are dominated by corporate investors and high-net-worth individuals (HNWIs). I do not have the exact number, but it is safe to say that the retail participation in these funds is extremely low due to various reasons.”

Why? Firstly, fund houses are not active in pushing money market funds to investors. These funds are low-risk, low-return products that are sold without imposing sales charges on investors because any amount of additional charges imposed would immediately deem the returns unattractive. Such a situation means that fund houses cannot rely on unit trust agents — the main distribution channel of unit trust funds — to sell money market funds.

“Money market funds are unlike equity funds, which unit trust agents can sell with a sales charge of up to 5%, or even 6%, as equities can provide investors with a potentially much higher return. So, they cannot be sold by agents,” says Teoh.

Also, the profit margin earned from money market funds is low, as reflected by the annual management fee of these funds, which is only up to 0.5%. Fund houses need a much larger amount of investment to justify the cost of managing money market funds. As such, corporate investors, instead of individual investors, are the target customers for these funds, he adds.

However, these pain-points that have stopped money market funds from being accessible to individual investors can be solved by using technology. The funds can also be further enhanced to make them more useful to the masses. “We want to democratise money market funds and make them relevant to the man in the street. This is where Versa comes in,” says Teoh.

Versa does not have the licence and capability to manage unit trust funds. As such, it is tying up with Affin Hwang Asset Management (AHAM) to let investors invest their money in AHAM’s Enhanced Deposit Fund through the Versa app.

The minimum investment amount through Versa is RM100, which is much lower than the minimum in existing money market funds of at least RM1,000. It is also significantly lower than the minimum investment amount of AHAM’s Enhanced Deposit Fund of RM10,000 if investors were to invest in the fund without going through Versa, Teoh points out.

The annual management fee of 0.32% will be split in half between Versa and AHAM, he says, adding that “Versa will be in charge of customer acquisition and the continuous development of its mobile app while AHAM will focus on managing the money of the investors”.

The benefits of doing so are apparent: Fund houses can distribute their money market funds to the mass market without relying on agents while investors, who are now the target market, can access these funds online with a low minimum investment amount without a sales charge.

However, distributing money market funds online is only one part of the solution for Versa. Teoh wants investors to be able to cash out and spend the money they invested in a money market fund at any given time.

For instance, when a Versa user wants to buy an item on an e-commerce platform, the user can withdraw part of the money he or she has invested in AHAM’s Enhanced Deposit Fund to make the purchase instantly.

The key challenge in doing so is that fund houses usually need one to four days for investors to withdraw and access their money. Such a delay is due to the various layers of transactions that need to be performed between fund houses, intermediaries (such as a unit trust agency) and investors. These transactions take some time to be processed by banks before reaching investors’ bank accounts.

To address this issue, Teoh says Versa integrated its back-end information technology (IT) system with that of AHAM, allowing money transactions to be performed more seamlessly between both parties.

The Versa app will allow investors to withdraw their money within a day, similar to what is already being offered by some of the existing fund houses.

However, Teoh plans to allow Versa’s users to spend the money they have invested in AHAM’s Enhanced Deposit Fund instantly, starting the second quarter of next year.

Besides the further integration of the IT systems that allows money transactions to be made even faster, there are two important factors that will enable Teoh to realise such a plan. The first is the partnership with AHAM that allows Versa’s investors to invest in the Enhanced Deposit Fund, which has a sizeable assets under management of about RM2.6 billion (as at Oct 8, according to Morningstar Inc).

“The fund invested about 99% of its money in fixed deposits and the remaining 0.6% is in cash. This leaves the fund with about RM156 million in cash, which is more than enough to cater to the liquidity needs of our users to cash out and make payments,” says Teoh.

Also, Versa has signed a memorandum of understanding (MoU) with a global payments technology company, an international financial services company that facilitates electronic fund transfers globally, which will allow Versa’s users to make payments starting next year.

“If the plan is successful, subject partly to regulatory approval, our users will receive a debit or prepaid card that will allow them to spend the money invested in AHAM’s fund instantly. You may walk up to a merchant and make payments with your card. The money will be deducted from the pool of money you have invested in AHAM’s fund. You can also make online payments to purchase stuff by keying in the card details.

“If the plan pans out, it will be the first of its kind in Malaysia,” says Teoh, adding that Grab Holdings Inc launched a similar initiative called Grab Invest in Singapore recently.

Replicating Ant Group’s Yu’e Bao

Teoh, who is also one of the founding partners of private equity firm TH Capital Sdn Bhd, has wanted to democratise money market funds ever since an experience he had in 2015.

While he was working full-time at TH Capital, one of his investee companies experienced a cash flow crunch and was unable to pay the salaries of its employees. Teoh was left with no choice but to withdraw about RM90,000 from his six-month fixed deposit, which was two days away from maturity.

“I lost all my earned interest. I was very unhappy despite knowing the consequences of early withdrawal. However, it was the event that gave me the idea of starting Versa, which is to provide investors with an alternative to fixed deposits with better flexibility,” he says.

Teoh shared his unhappiness with close friends and the initial idea of democratising the money market fund industry was born.

Subsequently, when he was doing his research to concretise the idea, he stumbled across Yu’e Bao (which means “leftover treasure” in Chinese) — a money market fund jointly launched by Alipay (now known as Ant Group) and Tianhong Asset Management in 2013 that helps Alipay users invest their idle cash. It also allows online shoppers to make payments directly by cashing out from the fund.

It was said that Alipay had unearthed a gold mine after Yu’e Bao was launched. The fund experienced a meteoric rise in its assets under management and rose to become the world’s largest money market fund in just four years.

According to a 2017 Wall Street Journal news report, Yu’e Bao accrued 370 million account holders and US$211 billion in assets under management in those four years.

While a September 2019 Fitch Rating report pointed out that Yu’e Bao had ceded its position as the world’s largest money market fund, it remains one of the largest of its kind globally today.

Thus, Teoh made the decision to replicate the Yu’e Bao business model in Malaysia. “Ant Group partnered with an asset management firm to launch Yu’e Bao, which is what we have done with AHAM. The company also helps people to invest their idle cash and allows online shoppers to make payments. And this is why we signed an MoU with Visa.

“We want to focus on customer acquisitions for now. But in the future, we might explore other partnerships to enable our users to make payments via smartphones using QR codes,” he says.

It remains to be seen if such a business model will work in Malaysia. However, Teoh is excited about the progress of Versa thus far and its potential moving forward. “The board members of Versa and I are all very happy that we are working with reputable players in the asset management and card payment network industry to deliver such a solution to Malaysians.

“There is about RM600 billion sitting in fixed deposits. We aim to attract RM4 billion from investors in five years,” he says.

Who are the investors of Versa?

Versa Asia Sdn Bhd, a financial technology (fintech) start-up that aims to replicate Ant Group’s Yu’e Bao business model in Malaysia, has received investments from a few interesting figures in the corporate and asset management industry.

According to the Companies Commission of Malaysia’s report, one of them is Kuan Kam Hon, founder and executive chairman of Hartalega Holdings Bhd, the world’s largest producer of synthetic rubber gloves.

Then there is Areca Capital Sdn Bhd, a private wealth management company that focuses on providing fund management and wealth advisory services. Danny Wong, the firm’s CEO, is a familiar face in the asset management industry.

There is also Teoh Cheng Chuan, former CEO of Asia Poly Holdings Bhd, an investment holding company that engages in the provision of cast acrylic products. He is the father of Teoh Wei-Xiang, CEO of Versa.

Money market funds are not protected by PIDM

While money market funds provide more flexibility than fixed deposits, investors should be aware that money invested in these funds is not protected by the Malaysia Deposit Insurance Corp (PIDM).

Marshall Wong, a licensed financial planner at FA Advisory Sdn Bhd, says PIDM protects up to RM250,000 per depositor per member bank. “PIDM claims that 97% of the money of depositors is fully protected. The protection does not extend to money market funds.”

Kevin Neoh, a licensed financial planner at VKA Wealth Planners Sdn Bhd, says, “Investors invest their money in various instruments for different purposes. And they park their money in fixed deposits for the protection provided by PIDM. It gives assurance to many conservative savers.”

Investors should also note that the investment returns of money market funds are generally not higher than the returns of fixed deposits, adds Neoh. “The returns generated by money market funds may be similar to fixed deposits. But considering the annual management fee these funds impose on investors, their returns are unlikely to outperform those of fixed deposits.”

However, Neoh says the Enhanced Deposit Fund of Affin Hwang Asset Management probably invests in other short-term debts, besides the regular fixed deposits offered by banks.

“With the word ‘Enhanced’ in the name of the fund, the fund may invest in other short-term bonds that could generate higher returns by taking on more risk. This information can be found in the prospectus of the fund,” he continues, adding that investors should understand money market funds before investing in them.

Wong: I wouldn’t encourage my clients to put their entire emergency fund in money market funds due to the lack of protection by PIDM(Photo by Haris Hassan/The Edge)
Neoh: We are sometimes hesitant to park our excess cash in fixed deposits as there is a lock-in period. Money market funds will help investors overcome such an issue.(Photo by Abdul Ghani Ismail/The Edge)

Wong and Neoh agree that money market funds are useful tools for investors to park part of their emergency funds, which may need to be deployed at any time.

“Recently, I increased my emergency savings from three months of my salary to six months. Half of it sits in a current account and the other half is in a money market fund,” says Wong.

“I park half of my emergency savings in the current account for the sense of security [provided by PIDM’s protection]. However, I also want to make sure that a part of the fund, which could be deployed at any time over the short term, generates some interest.

“I wouldn’t encourage my clients to put their entire emergency fund in money market funds due to the lack of protection by PIDM,” he adds.

Neoh says, “Money market funds offer flexibility and liquidity. We are sometimes hesitant to park our excess cash in fixed deposits as there is a lock-in period. Money market funds will help investors overcome such an issue.”