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AirAsia’s launch of a financial services firm has a lot of mileage given the quantum of data the budget airline generates on its passengers, but the challenges to building a profitable lender are substantial.
AirAsia has already conducted a soft launch for the bank dubbed BigPay in Malaysia and later this year will grow it across Southeast Asia and expand its service offering to remittances and lending.
Nurturing the fledgling’s growth, AirAsia is set to create a cashless cabin for the roughly 66 million captive passengers flown on its fleet of planes annually, encouraging them to use BigPay’s digital wallet if they want to buy duty free items.
“We’ll take cash off the planes very soon,” said Tony Fernandes, co-founder of the airline, which seems to have maintained its startup culture. “That’s just the first step.”
Airline-specific loyalty programmes and credit cards are nothing new in the region, but AirAsia’s ambitions are bigger.
“We will also disrupt the remittance market. A lot of our passengers remit money and we think a lot of them are overcharged, and finally we’ll get into the money-lending business,” Fernandes said.
Never short on chutzpah, the Malaysian entrepreneur who has dabbled in a diverse range of businesses, from Formula One to Premier League football, jokingly noted that when he bought AirAsia in 2001 he knew nothing about airlines.
Now he said he knows nothing about fintech: “So we’re bound to succeed.” He exhorted fellow entrepreneurs in the audience at the Money 20/20 Asia conference not to worry about failing and to have fun.
But owning a bank may become a headache as financial watchdogs gradually figure out how to regulate fintech firms without stifling innovation.
AirAsia will also need to develop the necessary risk-management skills for lending, which may necessitate more partnerships, akin to Grab’s tie-up with Credit Saison and its liasion with Google last year. But such collaborations can become tricky, especially if the partner eventually wants a direct lending relationship with your clients.
All the while consumers are becoming antsier about companies taking their data and using it to earn money -- note the growing reaction to news a political consultancy gained access to the data of 50 million Facebook users.
Governments around the region are also stepping up their efforts to control their citizens' data. China, for instance, implemented a cyber security law last year, while Singapore’s financial watchdog is looking at ways of putting control of data back into the hands of consumers.
DATA CAPTURE
Established bankers across the region have voiced consternation that startups are not as heavily regulated as they are, which means fewer costs. However, many are sanguine about regulators eventually levelling the playing field.
“Banking isn’t just about technology … can you have a big technology company suddenly become a big bank, without doing all the necessary risk management, the answer is no,” said Dennis Khoo, head of regional digital banking and strategic initiatives office at Singaporean lender United Overseas Bank
BigPay calls itself a ‘challenger bank’, a term used to describe a small, tech-savvy bank looking to take business from established firms.
The business plan is to leverage the data that its parent company AirAsia gathers from the millions of people that fly on it fleet of planes each year. In 2017 the no-frills carrier carried 65.7 million passengers.
When booking a flight, airlines typically record passenger data such as passport numbers and dates of birth. As such, the group has built up a database on 400 million customers over the last 16 years or so, Fernandes said. The target for 2018 is for BigPay to contribute more than RM2 ($0.5) per passenger.
Smart planes such as the Boeing 787 aircraft generate upwards of half a terabyte of data (500 billion bytes) from a single flight. Airlines can also use radio frequency identification technology to track passengers’ luggage.
AirAsia has one of the biggest databases that spans Southeast Asia, the group's other co-founder, Christopher Davison, said at the conference. It already has 19 million people enrolled in AirAsia’s loyalty scheme and has issued 10,000 cards.
“The data will enable us to sell more airline tickets but, apart from that, the most valuable thing that they can do with that is financial services,” said Davison, AirAsia's chief executive.
Access to the group’s data gives BigPay a low cost-of-customer-acquisition, something most startups and the incumbent banks have struggled with across developing economies in Southeast Asia.
Davison said BigPay would shortly be available in Singapore and then spread across the Asean region and that it already offered a payment app, budgeting tools, and zero mark-up on foreign exchange for travellers. “Banks rip you off all the time on FX,” he said.
CLOSED LOOP
Other startup banks have been born out of e-commercial parents, such as Alibaba’s Alipay and eBay’s PayPal.
For BigPay, a closer comparison might be entrepreneur Richard Branson’s Virgin Money, part of the airline Virgin Group, which bought a 20% stake in AirAsia in 2007. In both cases, an airlines business is helping to fund a new financial offshoot.
That said AirAsia's initiative is looking to leverage off the huge technological advances made since Virgin Money first launched in the 1990s. So depending on how the venture fares, the pupil could yet turn mentor.
Several successful payment businesses have developed closed loops, which allow customers to load money into digital wallets to buy goods from specific merchants. But the challenge here is getting people to take the time to load the app in the first place.
“Building a closed-loop system of merchants is time consuming and costly and people are going to die in that gap in between,” Davison said. “The big boys are going to come in.”
Other large data gathers with financial service arms are also expanding in the region, such as Google, Alibaba and Tencent.
REGULATORY APPROACH
Crucial to the development of these startups is a supportive regulatory environment. In the UK, the regulator views the growth of such disruptive firms favourably because they could weaken the grip of banks historically deemed “too big to fail”, given the widespread economic damage caused by the country's 2007-2008 financial crisis.
In say Singapore, however, the regulator has emphasised making existing banks more tech savvy.
BigPay, whose app allows users to store credit cards and pay each other instantly, lists its competitors as banks and credit card companies such as MasterCard, Visa and Amex.
In a presentation to investors last month, AirAsia said it eventually plans a New York listing for its digital businesses, of which BigPay forms part.
BigPay is just one small part of AirAsia’s push to become use its data more effectively and while Davison lambasted the large financial incumbents for their customer service and high charges, Fernandes hedged his bets by asking the bankers in the audience to “please continue to lend to me while they [BigPay] build up.”
