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How Malaysia started world’s first digital bank and lost it!
Published on: Sunday, November 20, 2022
By: Tong Kooi Ong
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Phileo launched Paldirect (an online banking and stock trading platform) in June 1995, followed by PALWORLD (a full-scale consumer e-commerce platform) in August 1996 – ahead of Alibaba in 1999 and Google in 1998.
Twenty-eight years ago, on Merdeka Day in 1994, a new Malaysian bank was born. Allied Bank, subsequently renamed PhileoAllied Bank, began ope­rating as a Malaysian-owned bank after taking over the single Kota Kinabalu (KK) branch of the UOB Bank in Malaysia from UOB Bank Group of Singapore.

This was the culmination of a process that began about a year back. From August 1993, Phileo began by acquiring Linatex Process Rubber Bhd from Harrisons & Crosfield Plc. 

Subsequently renamed PhileoAllied Berhad, it went on to acquire Petra Finance and Phileo Peregrine Securities, UOB Bank (Malaysia), which had only the single branch in KK, and took over the ailing Co-operative Central Bank, which had a deficit of RM600 million. 

Back then, the UOB Bank Group in Singa­pore had three banking licences and operated three different banks in Malaysia. 

Besides the UOB Bank with the KK branch, it also owned Chung Khiaw Bank and Lee Wah Bank. 

Through the sons of  Wee Cho Yaw, I met  Wee and convinced him to consolidate his banks in Malaysia. 

That consolidated bank is UOB Bank Malaysia today. The banking industry in Malaysia was far more vibrant and dynamic in those days.  

There were 36 commercial banks, 39 finance companies and 12 merchant banks in operation. 

Needless to say, it was a highly competitive environment. Besides the local giants such as Maybank and Public Bank, there were global banks such as Citi and HSBC as well as many mid-tiered successful banks each serving niche markets, such as Hock Hua Bank and Wah Tat Bank. 

How were we, at PhileoAllied Bank, going to succeed in such a challenging environment? 

The most crucial decision we made, and executed, was that we would be customer-centric with high service quality to serve the upper-middle-class segment of the urban population, catering to their need for investment products and wealth management. 

We knew we had no relative advantage over the large corporations and government-linked companies, nor did we have any advantage in housing mortgages, at least in the near term. 

We were a new start-up, without the branch networks and history. 

But we did have the advantage of no legacy systems. 

It was obvious that we had to employ the latest in technology — to overcome the lack of branches, to facilitate conveniences, to lower operating costs and to enable product innovation and deliveries.  And, voilà, the internet revolution was just taking off — it was the obvious answer.

PhileoAllied the world’s first digital bank

In June 1995, Phileo launched PALDIRECT — the first online platform that enabled stock trading transactions, payments and the execution of other banking services, first via a PC and then through mobile phones. 

Not only were they popular with individuals, but they were soon also installed at coffee shops and mini markets.



The CEO’s note (from PhileoAllied’s Annual Report 2000).

To quote devout fan Dr Loke Kwok Kheong, “PALDIRECT was the best thing on earth”. You could do your banking and stock trades, anywhere and anytime. 

Remember, this was 1995 — 27 years ago. Alibaba was founded only in 1999. Larry Page and Sergey Brin launched Google in 1998, although they had developed their search algorithm in 1996. 

And, to Tun Dr Mahathir Mohamad’s credit, he had the foresight to launch the Multimedia Super Corridor (MSC) in February 1996, recognising the potential of the digital revolution to come.

Although Standard Credit Union and Presidential in the US were beginning to offer online fund transfers and other banking services around the same time, it was clear that Phileo was ahead … in terms of capabilities, customers, services offered and transaction values. 

Unashamedly, I assert that PhileoAllied Bank was one of the first, if not THE FIRST, digital banks in the world. 

And it was proving to be highly profitable, as I will show later in this article.

In August 1996, PhileoAllied Bank launched PALWORLD. 

It transformed the banking and investment platform into a consumer platform, offering online shopping, airline ticketing, insurance sales and others. 

Further additions were made to “lifestyle banking” through partnerships with McDonald’s (banking enabled at the restaurants), at shopping malls (PALVIRTUAL KIOSKS, with a digital link to real-life bank staff), with bookshops and even a café within the bank’s branch premises in Penang.

Not all innovations are technology-driven

One of the biggest challenges confronting any new bank is getting deposits from customers. 

PhileoAllied Bank was no exception. Yes, the focus on a niche market helps win customers. In our case, it was customers with money for investments. But they also had banking relationships with other banks. 

Why would they leave their deposits with the new kid on the block, unless we paid them higher interest rates? 

But if our cost of funds is much higher than others, either our margins would be squeezed or we would have to take on loans that have higher risks. Both options were not sustainable business propositions. 

OneACCOUNT, launched in September 1996, offered the flexibility of a current account while paying a fixed deposit rate on any outstanding balances, for individual accounts. 

A single product, so basic and logical, yet so revolutionary to the entire concept of banking and the “time value for money”, changed public perception of Phileo and, from then on, the bank was never short of deposits.

For PhileoAllied Bank, since there were little customers’ balances in current accounts (which bore no interest at other banks) to start with and having to pay only a matching fixed deposit rate (with the much larger banks), it was able to secure deposits at competitive costs.

It was unfortunate for PhileoAllied Bank that Bank Negara Malaysia suspended our OneCORPORATE product one month after launch, in March 1997. 

This product was an extension of the OneACCOUNT but made available to businesses and institutions. 

By all accounts, it was a tremendous success, as you would expect. There were no official reasons given. Success sometimes can also be the killer. 

The end draws nigh

Following the Asian financial crisis, then Minister of Finance Tun Daim Zainuddin announced that all local banks would be forced to merge into six, subsequently expanded to 10, banks. 

To quote businessman and former banker Tan Sri Wan Azmi Wan Hamzah, “The notion of having six boxes and putting all the banks into them … I don’t know if that was such an inspired thought. Why would six or 10 banks be any better? It would have been better to have gone according to niche. 

The market would have been able to sort itself out. Those with ideas could have survived … whether they survived as big, all-purpose banks or as niche players.”

There were others who felt the consolidation to fewer banks itself might be necessary to strengthen the industry and was not out of the ordinary, as it was also happening elsewhere in the world. 

This included people like Tan Sri Nazir Razak, former CEO and chairman of CIMB Group. 

But what many disagreed with was the way in which the exer­cise was conducted — without any criteria or guidelines as to which banks went and which could stay. 

What was most shocking to Phileo was when we were instructed to be sold to Multi-Purpose Bank (now Alliance Bank). No rationale or reason was given. 

There is no question in our mind that Multi-Purpose Bank was a far weaker bank, with no clear, compelling reason to be accorded an anchor bank status — except, perhaps its shareholders?

For readers to arrive at their own conclusion, we have tabulated the financials of all the chosen 10 anchor banks, and PhileoAllied Bank as a comparison (see table).  

After much protestation, PhileoAllied Bank and PhileoAllied Securities were sold to Maybank instead, in January 2001.

After the sale of the bank and stockbrokerage to Maybank, PhileoAllied Berhad had RM1.2 billion in cash. To our shock and dismay, the chairman of the Securities Commission Malaysia (SC) (Datuk Ali Abdul Kadir) imposed an extraordinary condition on the major shareholders of PhileoAllied Berhad, effectively robbing controlling shareholders of their rights as owners of the company. 

Bona fide shareholders of PhileoAllied Bhd had to first secure the approval of SC before they could dispose of their own shares. 

Singaporean investors will remember what happened to their legitimate ownership of publicly traded stocks on the Kuala Lumpur Stock Exchange and CLOB International then. (See The Edge article “CLOB got clobbered”, published on March 7, 2022.)

What drives the economic well-being of a populace

Let me conclude by explaining why I am now writing this personal account. I have long accepted the past and moved on. 

But this story follows from the last few articles we have been articulating: that investments hold the key to job creation, higher incomes and savings, growth in productive capacity and greater productivity — all of which will result in better living standards for the people. 

And as we wrote last week, the three key drivers are low levels of systemic corruption, a high savings rate and high social mobility (with a culture of meritocracy). (See also The Edge article “Grow foreign and local investments or be left behind”, published on June 27, 2022.) 

To quote from the book The Phileo Story: A Triumph of the Spirit, “To attract investments, either foreign or local, to encourage its business community to nurture companies for the long term, to motivate its workforce, to enable the young to have dreams, businesses must be allowed to operate within the market mechanism. 

There must be legal protection for owners of private properties.”

- Tong was the CEO of PhileoAllied Bank. This appeared in the Edge.



 



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