This article first appeared in The Edge Malaysia Weekly on April 10, 2023 - April 16, 2023

CONTACTLESS and digital payments have gained favour among consumers in recent years, a trend accelerated by the Covid-19 pandemic. Improvements in technology have enabled cashless transactions with smartphones, e-commerce, and internet access, as well as online banking, credit and debit cards, digital wallets and point-of-sales (POS) devices all playing a key role.

This development bodes well for companies such as GHL Systems Bhd, a payment solutions provider that accepts almost all modes of digital payment through POS terminals.

As at end-December 2022, the group had almost 420,000 payment touchpoints with a transaction value processed (TPV) of RM26.2 billion — up 13% year on year from RM23.2 billion.

While riding high on cashless transactions, GHL is starting a new growth engine — offering micro loans to its merchants — as well as online payment transactions as it faces margin compression due to the stiff competitive landscape.

GHL CEO Sean Hesh says the group has so far disbursed a total of RM10 million to more than 200 of its merchants at an average loan size of RM50,000 with a one-year tenure.

“It has been very encouraging, I would say … This is one of our growth engines. We are offering microfinancing to our existing merchants that have at least two to three years’ history with us.

“Moneylending is actually complementary to our existing core business.,” says Hesh,  noting that the money lending is a deviation from its core payment business.

“What differentiates our products [micro credit] from the other providers is that we already know our merchants’ track record [and] that speeds up the turnaround time to about three days,” Hesh tells The Edge.

GHL has over the years recruited a large merchant base and that offer it a platform for its money lending venture.  “Our target is the  Tier 3 and 4 merchants who we know of their daily (sale) transactions and business volume,” he explains.

Having said that, he is targeting RM100 million in micro loan disbursement, more than 10 times the current amount, in three of its operating countries in Asean — Malaysia, Thailand and the Philippines — over the next two years.

GHL’s microfinancing rate averages 15%, as Malaysia’s interest rate on finance charges on cash advances is capped at 18% per year. Other markets have higher limits — Thailand’s, for example, can go as high as 36%, while the Philippines’ is almost 72%.

At present, GHL finances its microfinancing through internally generated funds, as it is a net cash company with RM126 million in its coffers as at Dec 31, 2022.

Hesh says GHL is open to taking on a banking partner for its microfinancing business if the portfolio continues to grow. “It [moneylending] will absolutely change our capital requirements. If the business grows the way we envision it, we will definitely need to look for a partner, or we could also raise capital.”

Going into microfinancing has been an area that GHL has been eyeing for years to address its razor-thin net profit margins from its core business of cashless payment solutions (see chart).

For the financial year ended Dec 31, 2022 (FY2022), GHL posted RM28.15 million in net profit, marginally lower than in FY2021, despite higher revenue of RM410.60 million from RM360.17 million previously.

Back-of-the-envelope calculations indicate that GHL saw a lower profit margin of 6.9% in FY2022, compared with 7.8% a year earlier.

This shows that the cashless payment business is a volume game.

Hesh is optimistic that GHL’s net profit margin will exceed 10% this year, supported by its new ventures, but he observes that the segment is only secondary. “Our bread-and-butter business, which is payments, will continue to be our main revenue base. I think at the end of the three years, our lending business will still be only less than 10% of my total revenue base.”

Nonetheless, money lending is expected to offer much wider margins, but with higher risk.

Hesh, who has more than 35 years’ experience in the payment business in the US and Asia, joined GHL in November 2020, at the height of the Covid-19 pandemic. “I started my career in real estate investment before joining the banking sector. I was one of the early groups that started to sell the POS terminal to merchants to earn extra income,” he says, half in jest.

Although GHL was one of the earliest players in cashless payment solutions in Malaysia, the group has always faced margin compression due to regulatory constraints that cap the fee at 1% to 1.5% per transaction, among the lowest in the region. But, the situation has been further exacerbated by a drastic transformation over the last years, led by e-wallet payments and static QR code payments that charge lower fees, which could pose a threat to companies such as GHL .

Even so, Hesh is unperturbed, as he believes the cashless payment market remains big and relatively untapped. “In Malaysia alone, retail trade is about RM661 billion and 70% of the payments are all cash-based.

“I don’t worry about my competition because the pie is so big for all of us to be successful as governments continue to push digitalisation, and the industry continues to innovate,” he says.

He projects that GHL’s overall payment transactions will see double-digit growth this year on the back of merchant acquisition and higher online transactions through its proprietary payment interface, called eGHL.

Currently, GHL has more than 3,500 online merchants across Malaysia for its eGHL payment gateway and they account for about 20% of its total volume.

To adapt to the changes in the cashless payment environment, GHL continues to expand its partnerships with other payment players, including its support of buy-now-pay-later (BNPL) solutions providers, such as Grab and Atome. This allows it to expand its payment offerings across the region.

GHL has also partnered with global technology company Visa to introduce the Visa instalment solution for its eGHL payment gateway and in-store purchases.

Hesh sees growth potential of BNPL in the business-to-business (B2B). BNPL is a new term for payment by invoice — when items are purchased and payment is received at a later date.

“Let’s say I order 30 cases of paper from you, so how do I pay you? Typically, you send me an invoice, right? That invoice is between 30 and 90 days payable. Why can’t that transaction be in a digital manner?

“If you ask Visa and Mastercard today, they will tell you that they are foucsed on  that opportunity. And that’s an area that we are starting to look at now for potential growth for our future,” he says.

Given its various partnerships with other payment solutions providers globally and in the region, Hesh expects the Philippines and Thailand to be the next most important market for GHL, owing to their growing affluent population. The group also holds moneylending licences in both countries.

“The Philippines is the next most important market for us, as more consumers are adapting to digital payments, [as are] a great number of [small and medium enterprises], and [then] there is a government push for digitisation,” he says.

Indonesia is proving more challenging and GHL is still looking for ways to expand there.

“It’s a very difficult market for us to scale up [Indonesia] and we have a small team. We are trying to figure out the best way to grow in Indonesia. Is it an organic opportunity or is it inorganic?,” Hesh says.

GHL’s share price has been on a decline over the last 12 months. Last Friday, its stock was trading at 82 sen, almost half the price of RM1.55 a year ago, giving its market capitalisation of RM941.7 million.

Analysts are generally bullish on the counter; five research houses recommend a “buy” and two are calling a “hold”, with an average target price of RM1.05, according to Bloomberg data.

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