KUALA LUMPUR -- Malaysia is seeing a jump in demand for the payment services that make e-commerce possible, driven by the spread of smartphones. For foreign investors eyeing regional opportunities in the sector, the country's midsize population and relatively developed infrastructure make it an attractive jumping-off point.
The Malaysian e-commerce market is expected to grow 34% on the year to $3.8 billion in 2017, according to a recent report by BMI Research. That projection bodes well for e-payment service providers like iPay88, which controls 70% of the domestic market.
The company, acquired by Japan's NTT Data in 2015, handled 38.2 million transactions worth a total of 3 billion ringgit ($676 million) last year. Those figures were up from 14.6 million trades worth 1.5 billion ringgit in 2015.
"The numbers will definitely double this year, if not triple," Chan Kok Long, iPay88's executive director, said during a recent press briefing.
Chan's bullish outlook is based on the increase in sales volume through the company's payment gateway in recent years. Established in 2006, iPay88 provides business-to-business payment services and partners with over 40 financial institutions in nine countries across the region, with access to more than 10,000 merchants.
Chan said the rise of budget carrier AirAsia exposed Malaysians to a "first wave" of e-commerce in the mid-2000. The second wave came in 2013, with the entry of shopping portals such as Groupon, Lazada and Zalora. That year, iPay88's sales volume jumped nearly fourfold on the year, to 480 million ringgit.
With the emergence of ride-hailing apps, the growth momentum continued through 2016.
Mobile phones, meanwhile, continue to penetrate deeper into the Malaysian market. There were 141 handsets for every 100 inhabitants as of last June, according to government data. BMI Research forecasts the number of subscribers to third- and fourth-generation mobile services to hit 28.7 million in 2020.
Malaysia's population of about 32 million makes it an "ideal" location for tech companies to test new applications, according to Chan.
New regional order
Sure enough, Sumitomo Mitsui Card, a unit of Japan's Sumitomo Mitsui Financial Group, recently partnered with a Malaysian payment startup called Soft Space to gain a foothold in Southeast Asia.
"Malaysia is one of the countries in the region with high internet security compliance," Kazunori Okuyama, Sumitomo Mitsui Card's senior managing director, told reporters recently while explaining the move.
Soft Space's strength lies in mobile devices that enable both real-time and semi-online transactions via cards. The company's mobile point-of-sale system is being used for AirAsia's inflight duty-free shopping. Japanese courier company Yamato Transport is also using it for Malaysian customers who prefer to make card payments on delivery.
"We will partner with Soft Space and expand into Southeast Asia," Okuyama said, adding that his company will target retailers, hotels and other consumer businesses in the region.
Now is the time to prepare for a new regional market order. Based on iPay88's data, Singapore currently leads the way in e-commerce transactions, followed by Malaysia, Indonesia, Thailand, the Philippines and Vietnam. But as the middle class grows over the next five years, the company projects that Indonesia will rise to the top, with Thailand, Malaysia, Singapore, the Philippines and Vietnam following.
Chan argues Malaysia is the place to be at this juncture. "Although the Philippines has a fairly large population of about 100 million, it is too bureaucratic to get business licenses," he said.
Apart from online payments, Malaysia is also a hotbed for international remittances, with over 4 million low-skilled foreign laborers -- both legal and undocumented.
Last year, Norwegian telecommunications company Telenor Group acquired Valyou, a Malaysian remittance provider. Valyou's "mobile wallet," which allows users to send money via their cellphones, is aimed at underbanked migrant workers from seven countries, including Bangladesh and Nepal.
Market players see clear growth potential for online transactions across Southeast Asia, where internet penetration and e-commerce lag behind developed markets like Japan. "When Alipay or WeChat Pay come into the market, they will become the new catalysts for mobile payments," Chan said, referring to the online payment services of China's Alibaba Group Holding and Tencent Holdings.