News and developments
Regulating Malaysia’s FinTech and What to Expect in 2022
FinTech Landscape in Malaysia
The convergence of financial services and technology is not new as the use of digital innovation in finance sector can be traced back to the 1990s. As advances in technology is evolving, combined with the shift in consumer behaviour and social-economic activities around the world, new business solutions and market opportunities for FinTech have emerged. Over the past decade, we saw large organisations, leading banks and financial institutions in Malaysia expanding their footprint by adopting new technology for their front and back-office systems to meet customers’ demands. Meanwhile, a range of new entrants comprising of local and foreign startups, specialised FinTech companies, consortiums of financial firms in collaboration with technology companies have sprouted rapidly to compete alongside with the traditional financial services providers. These FinTech players are the cornerstones in reshaping payments, money-exchange, lending and wealth management to be more diverse, inclusive, competitive and accessible. In 2020 and 2021, the FinTech sector thrived significantly as the Covid-19 pandemic and implementation of the Movement Control Order in Malaysia intensified the need for digital connectivity to replace physical interactions between service providers and consumers. According to the Malaysia Fintech Report 2021 published by the Fintech News Malaysia (with reference to statistics obtained from the Central Bank of Malaysia and the Securities Commission Malaysia), the number of FinTech companies in Malaysia have reached 233 in 2020, while the spike in mobile banking usage and cashless payment options became an inevitable trend as consumers continue to adapt the ‘new normal’ to fit their lifestyle. Consequentially, mobile banking transactions grew more than double from RM200 billion in 2019 to RM460 billion in 2020 given the increase in mobile banking subscribers to 20.2 million in 2020 as compared to 17.2 million in 2019. The transaction volume for online banking, e-wallet, and merchant registration for QR code acceptance surged by 49%, 131% and 164% respectively compared to 2019. Electronic payments and e-wallets are currently leading the FinTech space in Malaysia. Other FinTech sub-sectors are progressively gaining popularity amongst technological-savvy users and retail investors. These sub-sectors include:Digital fundraising through the Malaysian capital markets
- Equity crowdfunding (“ECF”) platforms, which broaden the ability for startups to obtain capital from a pool of individual investors in exchange for shares in startups. Since the SC’s inception and as of 30 September 2021, ECF platforms have raised a total of RM352.11 million, benefiting 222 issuers through 236 campaigns.[1]
- Peer-2-peer (“P2P”) financing, where an individual could lend money to enterprises or SMEs via online platform without the use of a bank or financial institution as intermediary. As of 30 September 2021, P2P platforms have provided financing to 3,824 issuers through 25,259 campaigns and raised a total of RM1.94 billion.[2]
- Property crowdfunding (“PCF”) platforms, which facilitates a homebuyer to obtain funds to pay for property purchase price through investments from multiple investors.
Digital trading and advisory (‘WealthTech’)
- Digital assets (cryptocurrencies limited to BitCoin, Etherum, Ripple, Litecoin and Bitcoin Cash) are traded through digital assets exchanges (“DAX”). In 2020, there were more than 450,000 accounts opened across the registered DAX platforms, namely LUNO, Sinegy and Tokenize Xchange.
- Online platforms harness the benefits of machine learning, algorithms and big data to enhance portfolio risks assessment and investment accessibility such as robo-advisors, digital investment management platforms (“DIM”) and digital broker. By end-December 2020, DIM have acquired 199,224 clients compared to 23,803 clients in 2019.[3]
InsurTech
There have been significant interests from various startups and companies offering InsurTech solutions such as end-to-end digital insurance, digital insurance broker and financial aggregation business.Regulators’ Approach to FinTech
The key regulators are the Central Bank of Malaysia (“BNM”) and the Securities Commission Malaysia (“SC”). Both BNM and SC have been supportive of the FinTech ecosystem, working collaboratively with the Malaysia Digital Economy Corporation (“MDEC”) to facilitate digitalisation and create conducive environment for the ecosystem. In September 2015, the Alliance of FinTech Community (aFINity) was launched by the SC to nurture FinTech development in capital markets. It aims to facilitate interactions between the SC and various FinTech players (including financial institutions, government agencies, startups and investors), where constructive discussions can take place for the FinTech community to explore new ideas and solutions, exchange insights with the SC at policy formulation stage, and obtain clarity on regulatory matters. The SC also organizes a FinTech conference annually, commonly known as SCxSC Conference (which stands for Synergistic Collaborations by the SC), for policymakers, innovators, investors and financial service providers to come together and promote awareness on local, regional and global FinTech developments and trends. As the BNM recognises that certain FinTech business models do not fit into any specific legislation, the Regulatory Sandbox was introduced in October 2016 to enable companies and startups to test new ideas and business models in a live environment without worrying about the regulatory impediments, within a tailored authorization process. According to the BNM’s Annual Report 2020, a takaful operator has recently received approval to live test its peer-to-peer family takaful product through the BNM’s Regulatory Sandbox, and 4 other fintech companies have advanced to the preparation stage for live testing of their solutions. In the third quarter of 2020, MDEC in collaboration with BNM, established FinTech Booster Programme, to assist FinTech startups (both local and foreign) with insights in respect of regulatory compliance, business and technology relevant for developing new products and services. In order to promote the P2P financing and ECF markets, the Government also plays a part by increasing its investment through the Malaysia Co-Investment Fund (MyCIF) by allocating RM50 million in matching grant for P2P financing and RM30 million matching grant for ECF respectively. Although the regulators are aware that they need to be flexible to welcome new entrants and take a more business-friendly approach in allowing sectorial growth, both the BNM and the SC are also cautious in their licensing and approval processes, where only new operators with proper capability and resources will be selected to ensure adequate safeguards and system integrity are in place, and to prevent over-crowding in the FinTech space in Malaysia.Malaysia’s FinTech Regulatory Framework
There is no specific legislation governing the FinTech sector. FinTech companies remain subject to the existing legislations and regulatory framework applicable to the traditional financial services companies depending on the nature of activities undertaken and types of products or services they offer. It is pertinent to carefully assess the activities in determining which framework would apply. For example, if a FinTech company carries on any regulated activity which involve banking, investment banking, insurance or takaful, payment system and payment instruments, or related activities under the Financial Services Act 2013 (“FSA”) or the Islamic Financial Services Act 2013 (“IFSA”), and money changing and remittance businesses governed under the Money Services Business Act 2011 (“MSBA”), then such FinTech company must observe and comply with the relevant provisions under the FSA / IFSA and MSBA, which are under the BNM’s administration and supervision. On the other hand, the SC regulates activities that fall under the Capital Markets and Services Act 2007 (“CMSA”) which include, amongst others, the provision of corporate finance, financial planning and/or investment advice, dealing with derivatives, fund/asset management and stockbroking. It is noted that the licensing regime for FinTech activities can be broadly divided into 3 categories: ‘License’, ‘Approval’ or ‘Registration’, each represents the degree of the regulatory standards based on the risks they may pose to financial and monetary stability, consumer/investor protection and credit/market risk components that may impact the Malaysian economy. “License” being the most stringent and “Registration” are for less risky activities. Some sub-sectors are regulated by more strictly than others. For example, remittance and money exchange service provider are subjected to licensing by BNM[4] as compared to the registration requirement for the provision of merchant acquiring services.[5] In addition to the above, there are various guidelines and policies formulated by the BNM (issued pursuant section 266 of the FSA and section 277 of the IFSA) and the SC (section 377 of the CMSA confers the power to issue guidelines as the regulator deems fit) respectively. These guidelines and policies serve as guidance for the FinTech players to address issues applicable to their activities. Below are some of the pertinent regulatory guidelines and policies (non-exhaustive) issued by the BNM:- Guideline on Electronic Money (E-money and E-Wallets)
- Operational Risk Integrated Online Network
- Interoperable Credit Transfer Framework
- Risk Management in Technology
- Participation Rules for Payments and Securities Services
- Merchant Acquiring Services
- Framework on Electronic Trading Platforms
- Business Continuity Management (Exposure Draft)
- Payment System Operator (Exposure Draft)
- Payment Cards Framework (Exposure Draft)
- Anti-Money Laundering Policy
- e-KYC Policy
- RMOs
- Increase the fundraising limit on ECF platforms from RM10 million to RM20 million.
- Expand the list of permitted issuers on ECF platforms to include unlisted public companies (“UPCs”).
- Introduce prospectus requirements for UPCs seeking to raise funds on the ECF platform.
- Expand the obligation of an ECF operator to assess and register prospectus prepared by UPCs.
- Making editorial amendments and rephrasing certain provision to enhance clarity.
- Digital Currencies and Digital Assets
- DIMs
- Digital banking
Future of Malaysia’s FinTech
On July 2, 2021, the BNM announced via its press release that a total of 29 applicants have submitted proposals for digital banking licences. Barring any difficulties, the highly anticipated event for 2022 would be that, Malaysia will become the second country in ASEAN to issue digital banking licenses, after Singapore which issued 4 digital banking licences in 2020. In 2019, Hong Kong led the Asia Pacific area with 8 licences issued. The BNM intends to grant a maximum of 5 digital banking licences to qualifying candidates, each with a RM3 billion asset threshold requirement for the first 5 years of operation. This serves as a fundamental phase for licensees to establish their viability and solid operations, as well as for the Bank to monitor the licenced digital banks' performance and associated risks. In line with industry digitalisation efforts, the regulators have been playing pivotal roles to strengthen Malaysia’s capabilities and growth in the areas of FinTech and enforcement:- SC entered into a new Fintech Bridge agreement in 2020 to expand regional collaboration with the Indonesian financial regulator, Otoritas Jasa Keuangan (OJK). The agreement sets out a mechanism between both regulators to refer innovative businesses that wish to operate in the other’s jurisdiction and thus, it is envisage that there will be future joint-innovation projects and regular information sharing between both regulators on any emerging developments or regulatory issues in the fintech space going forward.
- The BNM also laid out the major developmental and regulatory priorities for the following five years (2022-2026) in a new financial sector roadmap (Blueprint 3.0). These goals will include supporting technology and data-driven innovation, improving the financial sector's competitiveness, extending access to and responsible use of financial solutions, and ensuring that financial intermediation stays effective to meet the economy's future demands. The financial sector's catalytic role in pushing the sustainability agenda, particularly climate-related risks, will be highlighted in Blueprint 3.0 to promote a smooth transition to a greener economy.
[1] ECF Statistics as at September 2021, Securities Commission Malaysia. [2] P2P Statistics as at September 2021, Securities Commission Malaysia. [3] Securities Commission Malaysia Annual Report 2020. [4] Section 4 of the MSBA.