Fintech as a driver of SME digitalisation

By Jason Loh

Financial technology (fintech) is not only the new kid on the block, but a pivotal game-changer for the digitalisation of SMEs as to how they are operated and funded, especially in the context of the current Covid-19 crisis and beyond.

According to PricewaterhouseCoopers (PwC), fintech is simply the evolving dynamic intersection and strategic overlap between financial services and technology. 

Presently, SMEs are having to grapple with cash flow problems – with growing unsettled and accumulating liabilities in their balance sheet.

They are also expected to shoulder much of the burden to remain afloat, including employment retention as well as settling their tax and other liabilities, e.g. in the form of operating and overhead costs.

Ernst and Young (E&Y) in its Global FinTech Adoption Index 2019 reported that the adoption rate of fintech has been exponential, i.e. leaping from 16% in 2015 to 64% in 2019.

This global trend portends and augurs well for the potential and future of digitalisation of the Malaysian economy as a whole. 

Therefore, the phenomenal growth of fintech can serve to catalyse the digitalisation of our SMEs.

As such, even as calls for SMEs to digitalise picks up momentum, the increasing role of fintech should also correspondingly be brought to the forefront. 

Hence, fintech – although not quite the missing link – in the evolving landscape SMEs are operating in, particularly given the impact of Covid-19, is the one indispensable component. 

That is, in the reconfiguration of the way businesses that have yet to digitalise, survive and thrive. 

According to the Fintech Malaysia Report 2019 by Fintech News, there are 198 players offering fintech services. 

In its Fintech and Digital Banking 2025 Asia Pacific, IDC reported that financial liberalisation, drive towards cost-reduction and saving, intense competition from counterparts as well as P2P players, wafer-thin net interest margin, are pushing banks to further automate

This is through robotic process automation (RPA) software that enables computers to process manual workloads of business processes more efficiently and effectively (e.g. by triggering error-free responses). 

Still, despite the growth of the fintech industry including in Malaysia, many of our small businesses are still reliant on traditional sources of borrowing – savings, loans from relatives and friends, non-bank money lenders such as pawnbrokers.

This persistent trend is in tandem with the current challenge of digitalising SMEs as a whole, where despite the various initiatives undertaken by the government, the momentum has not been as forthcoming.

According to the White Paper, “Accelerating Malaysian Digital SMEs: Escaping the Computerisation Trap” (2018), only 44% of SMEs are using cloud computing. 

Most have not adopted cloud software-as-a-service to drive software process improvements. Instead, cloud storage services such as Dropbox are a common feature.

This means that in the context of a post-Covid-19 era, we are starting at a baseline that requires greater synergy between the government and the SMEs – to achieve the desired outcome of full-scale digitalisation.

Promoting fintech as key driver of SMEs would entail the following two strategic thrusts: 

  1. The government playing an indirect role of incentivising and pushing SMEs to take advantage of fintech financing opportunities; and 
  1. The government directly enables SMEs to move up the digitalisation chain/ladder.

Fintech via P2P & ECF/co-investment opportunities, cutting red-tape 

Fintech is poised to overtake conventional banking and finance as well as non-banking sources as the leading source of financing opportunities for SMEs. 

External factors like MCO/Covid-19 alongside government inducement will lead to increasing pressure (direct and indirect) on SMEs to adapt or be left out and ossified.  

Funding Societies Malaysia and B2BFinPal are the two leading domestic or local players in the market currently in terms of P2P and ECF also otherwise known as co-investment.

Under the ESP, the Securities Commission (SC) has been working with the government to launch the Malaysia Co-Investment Fund (MYCIF) of RM50 mil targeted at our capital markets, including companies listed on the LEAP Market (for SMEs). 

Since 2019, the SC has raised the funding limit on ECF platforms to RM10 mil and allowed ECF and P2P platforms to operationalise secondary trading.

From 21 ECF and P2P platforms registered with the SC that have collectively raised RM587 million for more than 1,600 MSMEs, fintech platforms have now helped more than 2,500 SMEs to raise over RM1 bil, according to the latest figures by the SC.

Simultaneously, fintech will play a critical role in reducing red-tape in the processing of the credit/loan applications. 

Technology, particularly the use of AI and Big Data will be an integral and essential feature and dimension in how credit/loan applications are fast-tracked.

The government as enabler of fintech and digitalisation 

It is vital to ensure that the trend of increasing assimilation of fintech as a major source of funding keeps up with the trend of increasing digitalisation and vice-versa. 

For fintech is simply a subset of digitalisation and digitalisation of SMEs’ operational capacities should logically and organically extend to adoption of fintech as the alternative channel of credit line. 

Fintech is not just a crucial source of funding and borrowing for SMEs in the long-run – as part of the alternative solution to ease cash flow problems – but is also an impetus and catalyst for the growth of digitalisation.

The ecosystems of both fintech and digitalisation, therefore, complement and supplement each other. 

Moving forward, a closer strategic collaboration between the government and the SMEs is needed. 

In this, the Malaysian Digital Economy Corporation (Mdec) has been at the forefront in promoting and augmenting fintech and driving forward the digitalisation of SMEs. 

In August, Mdec – in collaboration with Bank Negara – launched the ‘Fintech Booster’. 

It provides capacity building programmes for fintech companies – which are themselves SMEs – based in Malaysia to develop meaningful innovative products and services by enhancing their understanding of market, compliance and regulation requirements.

And the chairman of Mdec, Datuk Wira Dr Rais Hussin has said Malaysia “is in a strong position to harness various opportunities that Islamic fintech has to offer” which is still in its infancy in the country as only a handful of SMEs are utilising it.

Under Budget 2021, the government continues to nurture the development of the P2P lending and equity crowdfunding (ECF) eco-system. 

A RM50 mil matching grant for P2P lending and RM30 mil matching grant for ECF have been allocated, respectively. Additionally, individual investors are entitled to a 50% income tax exemption with a limit of RM 50,000.

Other potential tax incentives could include the following:

  • The costs for infrastructural migration – to take advantage of digitalisation and by extension, blockchain technology (which is part of the fintech system) – could be borne by a dedicated fund pooled from amongst the contributions of SMEs as well as a nominal levy or hypothecated tax from e-commerce transactions matched ringgit-for-ringgit by the government. 
  • Tax incentives, reliefs and allowances should also be considered where e.g. investment in the upgrading process – not only could both software and hardware be offset against taxable income or profits in the same way as conventional assets (amortisation for intangible and depreciation for tangible). 

There is no doubt that the government is doing its best to help the SMEs’ transition towards digitalisation – in line with the broader move up the value chain for the economy of the future. 

But SMEs on the whole, especially those that have yet to digitalise need to also do their part – by synergising with the government based on the two strategic thrusts mentioned.

Adopting a wait and see attitude in this particular respect should, ideally, no longer be an option. 

Jason Loh Seong Wei is head of social, law & human rights at Emir Research, an independent think tank focussed on strategic policy recommendations.

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