Responsible Business: Bringing the underserved into the digital economy

This article first appeared in Enterprise, The Edge Malaysia Weekly, on March 12, 2018 - March 18, 2018.
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When Axiata Digital Services Sdn Bhd CEO Mohd Khairil Abdullah found out that the nasi lemak seller who operated by the roadside near his office would have to shut down her stall to make way for renovations, he suggested that she set up her business in one of the new shoplots nearby. After all, there was often a long line of customers at her makeshift stall, so it was clear that she had a following.

But she did not have the capital and walking into a bank to get a loan proved to be overwhelming. This was despite the fact that her customers included risk officers who worked at banks who could have helped her through the process.

The story has a happy ending, however. This makcik found another corner to purvey her wares and her business lives on, to the delight of her avid admirers.

Mohd Khairil points out that this woman is part of the population that is underserved by the financial sector. She has no access to credit and there is no one out there looking out for people like her. “Herein lies the challenge, that we have a segment of SMEs — which are really micro-enterprises, not even small or medium — that do not have access to a host of financial products,” he says.

Loans and insurance are examples of financial products that can help micro-enterprises grow their businesses. “This is part of the reason we are keen to offer micro-loan and micro-insurance products through our mobile wallet Boost,” says Mohd Khairil.

Boost — a subsidiary of Axiata Digital — came out with a pre-paid, top-up app in January 2017 and added mobile wallet functionality at the end of the year. Users are able to collect loyalty rewards, transfer and receive money as well as send and receive e-vouchers via the app. In January, its CEO Christopher Tiffin announced that it aimed to acquire about 100,000 merchants by the end of this year. The app has breached the one million mark in terms of registered users.

Mohd Khairil says it is challenging for established financial institutions to address this segment as the businesses are considered “small ticket”. “To make it work, the volume has to be big and the distribution has to be different. You cannot use bank branches.

“The current operating model of a bank does not serve this segment. The margins they would make on these — whether it is interest margins or others — are so small that it does not make sense for them to do it.”

For this reason, he feels that it would be a disservice to society if Axiata Digital — which is “sitting on a technology format that allows it to access consumers and SMEs in a very low-cost way” — does not address this gap. “We have to do it. Yes, we are working for Axiata and all that. But at the back of our minds, we have a vision to enable a segment of society that has never been touched.”

Unlike consumer lending, which is discretionary, loans will bring these enterprises into the economy, making them productive loans, says Mohd Khairil. He cites the nasi lemak seller as an example. “If you lend her money and she grows her business into a well-established enterprise, she will contribute to the gross domestic product and her revenue will be part of the GDP calculation. The debt level will go up, but the denominator will go up as well, so the national debt-to-GDP ratio will hopefully normalise or even improve.”

He says he has been told that Malaysia’s debt-to-GDP ratio is not looking healthy at the moment. “That is why we are very passionate about catering for SMEs. We are very excited about this business of reaching out to small enterprises.”


Hope for the underdogs

Mohd Khairil says society is divided into three groups — domestic consumers, expatriates (including foreign workers) and enterprises. Axiata Digital is focused on the third segment, particularly SMEs and micro-enterprises.

“Large enterprises are well taken care of. Somewhere down the pyramid, there are the medium, small and micro-enterprises. Further down, which also overlaps with the micros, are the non-CCM enterprises (which are not registered with the Companies Commission of Malaysia), such as the nasi lemak seller,” he says.

“So, we made a case to Bank Negara Malaysia and told them that Boost is another way to bring these traders into the [formal] economy. There is a lot of trade and commerce happening within the non-CCM segment. Oftentimes, the central bank is just trying out various methods to address this segment. But the whole CCM registration process has proven to be too much for these enterprises.”

There is no available information on the size of this segment of the economy, says Mohd Khairil. This is despite CCM’s efforts to register most of the micro-enterprises.

“That is why we have certain rules on what kind of non-CCM companies can adopt Boost. I am sure there are businesses out there that fall beyond the boundaries of all ethical codes and we do not target them,” says Mohd Khairil.

He says Boost will be going after small traders because some of them have big aspirations. He adds that if they have information about their transactions (the kind of information that would be automatically provided if they use the app), their CCM application would be that much easier. In fact, any record of income would also make it easier for them to apply for loans in the future.

There are three ways Boost is acquiring merchants, according to Mohd Khairil. The first is via field agents, who engage small-time merchants such as night-market and food-truck vendors. The second is through customers’ recommendations.

“Sometimes, our users write in and suggest that we approach their favourite merchants and bring them on board,” he says. The third way is a portal that merchants can visit and register themselves.

It is not difficult to be a Boost merchant, says Mohd Khairil. “All you need is basic registration information, which does not include CCM certification. And you need a bank account for us to deposit the money.

“After a transaction takes place, we deduct the amount from the consumer’s wallet, so we need somewhere to send the money. Typically, there are two places — the merchants’ e-wallets or their bank accounts.”

Boost is working with several banking partners, including AmBank, to allow merchants to withdraw money instantly if they want to. Mohd Khairil says that is because many banks currently operate on a T+1, meaning the merchants only have access to the money a day after the transaction occurs.

For some merchants, this is too slow. “Banks need to clear the account-to-account transactions and in some situations, it takes up to three days (T+3). For traders, the T+1 or 2 or 3 will not work, especially during weekends when the banks are shut and processing does not happen, as they need working capital to operate their businesses,” he says.

“We promise to deliver T+1 and we are going to do T day soon. This means they will be able to withdraw the money on the same day.”


Boost-ing business operations

As at Feb 7, there were 6,500 Boost merchants in Malaysia, who had one less thing to worry about as they went about their daily business — the payment process. “A night-market merchant who uses Boost told me he could focus more on improving or maintaining the quality of his products,” says Mohd Khairil.

“It is difficult to sell and collect money at the same time, so Boost is quite useful. All you need to do is receive the order, prepare the products and let the customer proceed with the payment by scanning a QR code. The merchant will see a message on his mobile phone indicating that the transaction has been completed.”

He adds that this method does away with the need to have a point-of-sale device.

Boost merchants have also decided to adopt the e-wallet to address leakage and theft concerns. These micro-entrepreneurs have to deal with piles of cash. And in certain cases, not having a proper cash register means they will have to stash the cash in a container. “The merchants would feel more comfortable if they could get around the security issues,” says Mohd Khairil.

Merchants are also attracted to the “cool” factor of Boost. “These traders have watched documentaries on WeChat Pay in China. They have talked about how even beggars are using these things. So when someone finally comes to them and offers something similar, they feel that they can advertise this ‘trendy’ thing to their customers. It is a bit of a marketing tool,” he says.

These SMEs and micro-enterprises constitute Boost’s strongest segment, according to Mohd Khairil. The company goes to big brand merchants such as Nando’s and Dôme “to create a little bit of noise around the app”. “We are trying to make it more pervasive,” he says, adding that a merchant’s only investment is a smartphone for the app and a mobile line for data connection.

Mohd Khairil recently attended a launch event by Boost and toll road concessionaire PLUS Malaysia Bhd, which saw 47 traders at the Ayer Keroh stop and rest area (RNR) adopt Boost. Both companies have high hopes about this pilot project, having forecast that all 24 RNRs under the concessionaire will have Boost merchants and will subsequently be cashless.


In the pipeline

Axiata Group Bhd’s Sweden-based sister company Bima offers micro-insurance products, which the group plans to introduce in Malaysia. When Mohd Khairil joined the group in 2012 and was introduced to Bima, he saw it as an effective retention tool for telecommunications customers.

“Axiata operates primarily in the prepaid market. Bima has a product that allows you to earn a micro-premium through the maintenance of your mobile top-up,” he says.

“We launched this product in Bangladesh. It covers personal accidents, healthcare and even death. The payout is not big, but the segment — which has never been insured — is underserved.”

The micro-insurance product took off very aggressively in Bangladesh so Axiata decided to bring it to other frontier markets such as Sri Lanka and Cambodia, where the large insurance companies have yet to make inroads. At the time (2012 to 2014), Mohd Khairil was group chief of marketing operations and was looking to launch the product for foreign workers in Malaysia.

Now, with Axiata Digital, he may finally succeed. He argues that the product can help empower foreign workers who go to places such as Malaysia or the Middle East as they carry the hopes and expectations of home, which could be far-flung or remote places.

“They do not come from big cities, but villages and rural areas. Typically, the whole community invests in a young man who will work abroad. They pool the money to give to him so he can make the necessary payments (such as travelling costs), secure employment and send money home,” says Mohd Khairil.

“The parents will distribute the money and pay the investors. But what happens if this man works in the construction industry and meets with an accident, falls off a building and breaks his limbs? It would mean zero return on investment for the community.”

Then they came up with the idea of building an insurance product that allows customers to earn a micro-premium by maintaining a certain amount with a telco. “This allows them to stay protected. And if anything untoward happens, some money can be sent to their families. That was the idea and we are very keen on it, but it hasn’t been launched here. We are trying to develop it right now,” says Mohd Khairil.

The development of the micro-insurance product is in line with the group’s aim to make Boost an e-wallet from which users may avail themselves of the five micros — micro-payment, micro-lending, micro-insurance, micro-remittance and micro-savings. “The e-wallet will effectively become a virtual account from which you can access all the typical financial services and products, but catering to segments that banks don’t usually focus on,” says Mohd Khairil.


Ironing out the kinks

The lack of awareness is still a major hindrance in the progress of the digital wallet industry. In a two-sided market, making a business proposition attractive to both the merchant and the consumer is no walk in the park, says Mohd Khairil. Creating trust is a difficult task as there needs to be an equal number of consumers and merchants to strike a balance.

“You have to make the proposition attractive for both sides and scale both up, almost in lockstep, because if one side is too big and the other is too small, your usage will be very low. It is similar for payments,” he says.

“Usage cases, either through merchants, online or things like remittance and insurance, have to be quite expansive. They have to be wide and the consumer base has to be large enough. But to grow these things, you need to do massive education and that is the most difficult part.”

The education on the consumer side is hampered by the trust issue, says Mohd Khairil. Simply put, they do not think it safe to put money in their e-wallet. “We intend to introduce biometrics, though not so soon as the penetration of biometric-based phones is still very low.”

Boost is monitoring the transaction downtime from both the consumer and merchant sides. The benchmark is a typical credit card transaction, says Mohd Khairil. “The transactions are slower, for instance, when you go to a mall on a busy weekend as the lines are all jammed. So, we are tracking that right now.”

This will be an issue as it scales up. “We are implementing all the right elements to make sure we never get to a point where it takes too long for a transaction to be completed,” he says.



Micro-lending for SMEs

Boost merchants will soon be able to use Boost Credit — a micro-lending product that will be launched in the near future. Axiata Digital Services Sdn Bhd CEO Mohd Khairil Abdullah says that unlike other digital wallets, Boost does not charge businesses a merchant discount rate (MDR) as that is not where the company makes money.

“We are earning commissions from top-ups. But we really want to be able to provide a full-suite of financial services for the unbanked and underserved segments,” he says.

“You cannot make money out of payments. Visa’s MDRs are very low right now, as are MasterCard’s. So, we decided to put it at zero for 2018 and this is great for merchants.”

Boost is also working on a product that will allow merchants to take a working capital loan. Mohd Khairil says the group will have seen the merchants’ transaction histories and know there will be no problem lending them money.

“They will be small loans. We are still experimenting with different thresholds, but it can be as low as RM500 for a week to RM5,000 for three months. We are now going through the process with Bank Negara Malaysia to see how we can get the approval to do it,” he adds.

“As Boost sits under a company called Axiata Digital eCode Sdn Bhd, which is an incorporated company and a Bank Negara licensee, it is regulated by the central bank. So, if we want to come up with a lending product, we will need to seek its approval.”

Mohd Khairil says for the lending product, the money will be distributed to the e-wallet while payments will be deducted from the wallet, bypassing other traditional routes and lending products.