The i3 programme, funded by MetLife Foundation and implemented by the UN Capital Development Fund (UNCDF), works to catalyse the use of digital technology to achieve the financial inclusion of people with low-to-moderate income in Bangladesh, China, Malaysia and Viet Nam. In Malaysia, the programme enables service providers, including financial institutions and fintech start-ups, to introduce products and services that promote inclusive finance for low- and middle-income Malaysians across the country.

As part of this work, the UNCDF team conducted primary research with low- and middle-income customers in different parts of Malaysia. Eastern Malaysia has the largest proportion of unbanked and underbanked people in the country, so it is very important to understand the digital and financial lives as well as the needs of people living there. A few weeks ago, the UNCDF team travelled to Sabah to talk to people in the aforementioned population segments and to explore the wider digital and digital financial services ecosystem in this eastern Malaysian state, as well as the barriers and pain points Sabahans face when it comes to digital financial services.

UNCDF will publish a full report on its research towards the end of 2018, but it can now share three early insights into what affects low- and middle-income customers’ adoption and use of digital financial services in eastern Malaysia.

1. Digital payments are prevalent—on the surface

One thing that is immediately apparent upon arrival in Kota Kinabalu, the capital city of Sabah, is the surprising number of different digital payment options available. Shops advertise digital payment channels such as Alipay, Boost and WeChat Pay. The ride-sharing app Grab is widely used, and its digital wallet, GrabPay, is an increasingly popular option to pay for rides.

While on the surface these observations may indicate that people in Sabah are embracing digital financial services in a big way, it is not the full story; it is certainly not true for everyone. Although access to these services appears high, actual usage is quite different. The companies offering these digital payments are predominantly Chinese, not Malaysian. The Asian tech giants Alibaba, Tencent and WeChat are omnipresent in China, and they are increasingly present in Sabah too—at least to the casual observer, since many shops there accept these payment channels.

However, their prevalence in Kota Kinabalu is because it is a big market for Chinese tourism. In 2017, 35% of all international visitors to Sabah were from China; in the first half of 2018, that figure rose to 45%. In fact, these Chinese digital payment services are mostly limited to airports, bigger malls and convenience stalls that tourists frequent, and they are not available in non-touristy areas of the city or in rural areas. Research respondents (who were from both urban and rural areas) reported that they rarely use Malaysian digital financial services like Boost, GrabPay and Touch ‘n Go, let alone the Chinese payment services. Those Malaysian consumers who do use digital financial services are much more likely to live in urban areas and be from higher income groups.

2. Infrastructure is a big deterrent to use

Part of the reason that research respondents do not use digital financial services is infrastructure. The mobile Internet network is much slower and less reliable in Sabah compared to Kuala Lumpur or even peninsular Malaysia. During the visits made by UNCDF, the team members’ networks were mostly 3G in Kota Kinabalu, but the connection was weak and unstable at times. As the team members travelled into more rural areas, they were lucky to get Edge or H+ and sometimes there was no signal at all.

This situation is also the reality for low- and middle-income customers. People living in the most remote areas of Sabah are the ones who have the greatest need for digital financial services, as they are the ones who live furthest from physical financial institutions. Yet, they are also the ones who are most excluded from digital financial services because of the unreliable network infrastructure.

Despite being digitally savvy, with a high rate of smartphone and mobile-data usage, respondents felt very strongly that the unstable telecommunications network affects their willingness to adopt and use digital financial services. For them, security is a big concern; they spoke of fears that they would lose signal and be disconnected when they would try to complete a financial transaction through their phone. In such a situation, they said they would worry if the transfer had gone through, if they should attempt it again and who they should ask for help. This feedback indicates that respondents do not want to deal with these worries and so rarely, if ever, use digital financial services.

3. Fewer users mean fewer people from whom to get help or support

Most respondents had limited experience with well-known Malaysian digital financial services such as Boost and GrabPay, and they had not heard of smaller ones. Often they had only briefly been exposed to the Chinese services, namely when they had seen advertisements in shops that cater to the Chinese tourism market.

Many respondents expressed uncertainty about how they would use digital financial services or what they would do if they made a mistake. As the team observed in and around Sabah, there were a few posters and signboards advertising these alternative payment forms, but there was little explanation about how to actually use them. Respondents felt there were few people they knew who could show them how to use these services if needed.

This situation is a catch-22 for the adoption and use of digital financial services in Sabah. Many fintechs offer referral benefits to users who recommend their service to others, as there is a domino effect in growing a user base when people get their friends and family members to join. However, the opposite is also true: if no one in a person’s circle uses or even knows about a service, it is very unlikely that the person will him/herself begin to use it. Respondents in Sabah said that they would give more weight to digital financial services if a friend used them, rather than if they just saw them in an advert. Moreover, they reported that they did not know many people using these services, so they did not use the services themselves.

What this situation also means is that low- and middle-income customers who might need a bit more help using digital financial services have no one to ask for assistance to use them. Therefore, they are less likely to sign up. And, so, the cycle continues.

What is next? How can adoption and use of digital financial services be driven?

Clearly, there are some challenges in driving adoption and use of digital financial services among low- and middle-income consumers in eastern Malaysia. Still, there are some very clear opportunities: the prevalence of smartphones and a big appetite for digital products and services that meet consumers’ financial needs, for starters. UNCDF, in partnership with Bank Negara Malaysia and the Malaysia Digital Economy Corporation, will be launching a call for applications for fintechs and partners to come forward with ideas to meet these needs. Successful applicants will have the opportunity to secure funding and other investments to co-create appropriate digital financial products and services for these populations—ones that meet their needs and improve their lives, working towards greater financial inclusion in eastern Malaysia. Watch this space for more information!

*Sabah Tourism Board, ‘Sabah : Visitors Arrival by Nationality 2018’ (Sabah, 2018). Available from https://www.sabahtourism.com/assets/uploads/visitor-jan-aug-2018.pdf