Warning: This is a very long “Management Discussion & Analysis” but well worth the time. Great management is rare.
The march towards a cashless society, it seems, is unstoppable.
Virtual payments are fast displacing cash. Fewer Nordic banks are using cash in their branches. India recently scrapped 86 percent of its banknotes. South Korea plans to stop minting coins by 2020. Young people especially, as well as the better off and better educated, are increasingly at ease in making payments via cards or mobile phones.
Perhaps the most famous example is that of beggars in China’s big cities holding up signs with quick response (QR) codes to collect alms. With loose change becoming a rarity, charitable passers-by can make donations with their mobile phones through Alipay or WeChat Pay.
In other advanced economies, including Austria, Germany, Japan, Singapore and Switzerland, cash is still king and shows no sign of abdicating. Globally, 85 percent of all payments are still made in cash. “The cashless society, as appealing as it may sound, is probably just as elusive as the much vaunted paperless office”, according to Yves Mersch, a member of the European Central Bank’s executive board.
In tech-savvy Singapore, where almost everyone has a mobile phone, nine out of 10 people, still prefer to pay for everyday transactions the old-fashioned way – with cash. According to interviews conducted by Bloomberg in September 2017, some of the reasons why Singaporeans prefer cash are because it is more convenient than swiping a bank card or in case when they can use digital devices, machines sometimes break down and cannot process a payment.
In Japan, cash in circulation as a percentage of GDP increased to 20 percent in 2017 from 13.5 percent in 2000 and in the United States, it gained to 8.1 percent from 6.0 percent. In the Eurozone, it rose to 10.7 percent from 5.1 percent in 2002.
Similarly in Malaysia, most people have a relatively high dependence on cash for payment transactions. Last year, cash in circulation (CIC) grew 11.5 percent year on year to RM85.46 billion. Meanwhile, CIC per GDP, a measure of a country’s reliance on cash for transactions, expanded from 6.62 percent to 6.95 percent.
One of main reasons why cash remains hugely popular is because cash is the only legal tender in every country in the world, with the exception of Sweden. Cash is accepted practicably by all traders, whereas there is no obligation to accept electronic payments. As interest rates fall – and even go negative in some places – cash is increasingly used as a store of value. Cash is the only payment instrument that guarantees the user’s privacy and anonymity, while all electronic transactions are traceable.
In OpenSys, we believe that the migration of cash to digital payments will be a gradual process – an evolution rather than a revolution. We also believe that cash, cards and mobile payments will continue to coexist for many years to come although we will see more and more micro payments being made by mobile phones.
Based on our big data of approximately 500 bill payment kiosks deployed at the branches of six major telcos and utility companies nationwide over the last 18 months, we noticed that cash booked over 65 percent or 11.0 million of the total number of payment transactions worth RM1.86 billion. In contrast, credit and debit cards managed 21 percent or 3.7 million transactions worth RM1.24 billion, while cheques recorded 14 percent or 2.3 million transactions worth RM13.43 billion. It is pertinent to note that payment by cheques are mostly made by corporate customers hence the absolute amount collected via cheques significantly dwarfed that of cash or credit and debit cards.
Due to the complementary relationship between cash and digital payments, the ubiquitous automated teller machine (ATM) – which celebrated its golden 50th anniversary last year – is still ranked as the No. 1 self-service channel and interactive touchpoint with a bank, even among millennials and smartphone users. From its inaugural installation at Barclays Bank in North London in June 1967, the ATM can now be found everywhere – from the most modern cities to the loneliest outposts, including a mountaintop in the Himalayas.
As the number of ATMs increase, they have also stepped up in sophistication to keep up with modern times. Today’s ATMs are a far cry from that first installed ATM at Barclays Bank. In addition to dispensing cash, today’s advanced machines can accept cash and cheques; issue prepaid cards, stamps and lottery tickets; grant loans and take payments of almost any kind; calculate and convert one nation’s currency into another; remit money to a relative halfway around the world; and most impressively, perform these functions with better than 99 percent reliability.
In the foreseeable future, ATMs will continue to evolve and remain relevant by adopting mobile technologies to cater to millenials and Gen Z. There are already ATMs today that allow customers to perform cardless ATM withdrawals using their mobile phones. Not long from now, customers will sign into ATMs using their fingerprints, pictures of eyes or faces, or voice recognition that are stored on their mobile phones, which will then transmit a code to the ATMs to do the necessary banking transactions.
It would not be inaccurate to consider the ATM as the original “Fintech” disruptor because before it came along, the banks were very traditional and dependent on a lot of human resource to operate. The ATM basically transformed the “brick-and-mortar” bank branch by automating cash withdrawals so that human resources can be redeployed more efficiently to assist and educate customers on the banks’ products and services.
While the ATM provides many upsides to banks as well as their customers, the downside is that it is expensive to set up and operate an ATM infrastructure. In addition to high capital expenditure in hardware, software and network, the cost of cash represents the largest single segment of operating expenses for ATMs.
Cash Recycling Machines (CRM)
To mitigate the high cost of cash, the technology trend in recent years is to merge the separate functions of cash- dispensing or cash-deposit into dual-function machines called cash recycling machines (CRM). CRMs can accept cash from depositors and dispense them to withdrawers so that the cash is essentially “recycled” – resulting in lower cost of ownership in the area of unused cash float, cash maintenance, cash handling and space rental. Besides savings of 25-30 percent in capital expenditure and operational cost, CRMs also provide better service levels to the banks’ customers because they have higher uptimes due to the automatic replenishment of cash in the machines.
OpenSys technology partner in the CRM market is OKI Electric Japan. OKI invented and pioneered the use of cash recycling technology more than thirty years’ ago in 1982. Due to its first mover advantage, OKI is currently one of the leading suppliers of CRMs in Japan, China, India, Indonesia, Russia, South Korea, Taiwan and Brazil.
Besides our CRM success, OpenSys provides business process outsourcing (BPO) for bill payment kiosks to utility, insurance and telecommunication companies in Malaysia. Our bill payment kiosks allow customers to use cash, cheques, credit or debit cards to pay for bills, reload prepaid cards and renew insurance policies.
OpenSys is also the leading supplier of cheque-deposit machines and image-based cheque processing systems in Malaysia. Our image-based cheque processing system uses cheque scanners and software applications to capture cheque images and data at bank branches and send them to the central bank for cheque clearing and settlement. This paperless process saves the banking industry hundreds of millions of ringgit per year.
OpenSys has four business revenue models, namely (i) outright sales, (ii) software services, (iii) outsourcing services and (iv) maintenance services. In outright sales, our CRMs and cheque deposit machines are sold directly to the financial institutions. In software services, we provide software development services to our customers when they need modification to their application software due to changes in their business or regulatory requirements. In outsourcing services, we provide bill payment kiosks to utility, insurance and telecommunication companies over a contract period of 3-5 years. The customers pay a rental for the machines plus a click charge for each transaction.
In maintenance services, the banks pay us an annual maintenance fee of 10-12 percent based on the selling price of the machines that we sold to them. In return, we service and repair the machines to ensure high availability and optimum uptime. It is important to note that all our customers are blue chip companies. Due to the size of these companies, the collection risk for our trade receivables is very low.
For the financial year ended 31 December 2017, our revenue marginally increased 1.5 percent to RM96.10 million from a corresponding period in 2016 largely due to robust sales of CRMs and more transaction volume from our outsourcing business. Meanwhile, our profit after tax rose 11.8 percent to RM6.72 million as compared to the year before.
Our outsourcing business in providing bill payment kiosks to utility, insurance and telecommunication companies continues to remain strong. Not unlike banks, these institutions are transforming their branches to be leaner, friendlier and more efficient by pushing mundane tasks to self-service kiosks. In doing so, they can free up their valuable human resources to perform more sales and marketing related activities with their customers. The companies that are currently using our bill payment kiosks are progressively installing more machines as time progresses.
Our Fintech strategy is to work closely with financial institutions to “disrupt” themselves before they get disrupted and to navigate the dreaded “tipping point” of business cycles. It is our belief that despite the scaremongering, Fintech would eventually be just another product(s) that will be offered by your favourite bank that leverages modern technology. An Uber-like or Airbnb-like disruption by startup companies is unlikely to happen because the banking industry is ultimately based on trust, and requires regulatory oversight to protect the consumer.
Our continued commitment to new product development allows us to be more responsive to changes in technology, industry standards and customer expectations while mitigating any effects of product obsolescence. The carrying book value of our development expenditure for the year ended 31 December 2017 is RM0.18million.
We currently own one floor of office property at Pinnacle PJ and another three-storey shop office property at Putra Heights with an estimated value of RM10.0 million and RM3.0 million respectively. The property at Pinnacle PJ is used as our corporate headquarters whereas the property at Putra Heights is mainly used for the assembly of our cheque deposit machines and CRMs.
With regard to creating value for our esteemed shareholders, we have consistently paid semi-annual dividends to our shareholders for the last 7.5 years since July 2010. In October 2015, we gave a bonus issue of 74.47 million new ordinary shares on the basis of one bonus share for every three existing OpenSys shares to our shareholders. The next dividend payment is on 18 April 2018. As our cashflow is particularly healthy, we are confident that our dividend plan is sustainable subject to unforeseen circumstances that might be beyond our control.
The Board of Directors would like take this opportunity to extend our gratitude and appreciation to our shareholders, customers, suppliers and business partners for the invaluable support that you give to OpenSys.
We would also like to thank each and every member of our management and staff for their dedication and commitment to grow with our Company, without which our success would not be possible.
Annual report 2017