It is not unusual for regulations to chase innovation in the financial services world, but in the case of fintech, it could pay to take a proactive approach to attract businesses.
Fintech has been a buzzword for a couple of years now, and while the US and Europe have seen a lot of activity in that space, it is only in the past two years that the portmanteau really started piquing interest in Asia. According to consultancy Accenture, fintech investment in the Asia-Pacific region more than quadrupled in 2015 to $4.3 billion over the previous year; 78 percent of deal volumes were directed toward banking innovation, which combines both retail and investment banking, with asset and wealth management, combined, accounting for 9 percent of investment.
The notion that fintech companies, with all their talk of how they can use technology to do things better, and how they’re coming to “steal, conquer and destroy” established players in the financial industry, scared many. But the promise was there. What resulted from that was banks smarting up and getting involved by starting their own accelerator programs and innovation labs, either through partnerships or within their own organizations. This way, the banks are positioning themselves for potential collaborations and are involved with the development and growth of fintech startups under their watchful eyes.
Although innovation has resulted in businesses starting the process of becoming more efficient and effective, the product or service has more often than not fallen into gray areas of regulation. While there is nothing new about how regulators often play catch-up with innovation, like the tortoise versus the hare in the early part of the well-known fable, with issues like money laundering and terrorist financing, one can understand regulators’ concerns. That said, some regulators in Asia are taking an aggressive and proactive approach to fintech, with many industry participants labeling Singapore as the leader in the fintech arena. Its approach in fintech innovation is seen as forward thinking and proactive.
“Singapore is positioning itself as the fintech leader in Asia-Pacific,” Astrid Raetze, co-head of law firm Baker & McKenzie’s Global FinTech Group, tells Waters. “The government is investing heavily in the space, both in terms of money backing the initiative and the regulations being passed. The regulator is also strongly coming out in favor of fintech,” citing the FinTech Festival, scheduled to take place in Singapore in November, as an example.
“Singapore, Japan and Hong Kong all have their attractions. There is plenty of room for several fintech hubs across the Asia-Pacific region, in the same way that there are several financial centers; ultimately, economies, business and consumers all benefit from robust fintech ecosystems.” Laura Winwood, Citi
In June this year, the Monetary Authority of Singapore (MAS) issued guidelines to establish a regulatory sandbox for startups and companies innovating in fintech. As part of the announcement, MAS released a consultation paper outlining guidelines for financial institutions and other players experimenting with fintech services. This will allow participants to provide actual products and services to end-users, but within a “well-defined space and duration,” although the duration period has yet to be released. “For the duration of the regulatory sandbox, MAS will relax specific regulatory requirements which an applicant would otherwise be subject to,” the central bank said in a statement. The consultation period ended on July 8, 2016.
The Singapore central bank’s concerns lie with where and how these fintech solutions comply with regulatory requirements. By taking a sandbox approach, MAS will be able to monitor the development of the industry and watch out for red flags or what it considers “unacceptable risks.”
Stephanie Magnus, head of the financial services and regulatory practice at Baker & McKenzie.Wong & Leow in Singapore, says this would allow MAS to fine-tune how these new innovations should be regulated and supervised while the provider is larger than “too small to care” but before it becomes “too big to fail.”
MAS noted that “failure is often a feature of such experiments,” and if that does end up happening, the sandbox provides safeguards to contain the “consequences of failure for customers rather than to prevent failure altogether.”
Soon Kit Tham, risk practice director for Wolters Kluwer’s Asia-Pacific unit, says regulatory support through the sandbox approach helps contain risk by trialing with selected customers in a real-world business environment. “Risks are hence ring-fenced, actively assessed and mitigated to prevent a larger impact to the wider economy,” he says. “Singapore offers its value as a global financial hub sufficient for fintech to experiment with solutions, in an environment representative of international financial business.”
Singapore has also established “fintech bridges” with Australia and the UK. These bridges involve the sharing of information on fintech innovation, which might lead to the speeding-up of regulatory processes in the event that more consensus is created across geographies.
MAS, together with the Association of Banks in Singapore, is organizing the inaugural Fintech Festival in November, which will feature the industry’s first-ever regulation technology (regtech) conference. The week-long festival will also hold conferences on fintech and risk issues.
Similar to Singapore, Malaysia’s central bank had plans to roll out a regulatory framework for fintech by the fourth quarter of this year, after it compiles feedback from banking institutions. Bank Negara Malaysia set up a Financial Technology Enabler Group to “formulate and enhance” regulatory policies in order to facilitate adoption of technical innovations in the financial services sector.
But as Singapore and Malaysia push forward, there are concerns that Hong Kong might be losing ground. While the territory has become known as the financial center of Asia, it has been labelled by some as a laggard in the space due to its regulators’ apparently lackadaisical approach to fintech activity, according to multiple sources interviewed for this story. A source from one of the regulatory bodies in Hong Kong argues that there can be more than one fintech hub in Asia. “We are one of the fintech hubs in Asia. In fact, we can have collaboration with Singapore in certain areas,” the source tells Waters. “We will reference with what they have done or what they are promoting and see how we should do it to fulfill the need in Hong Kong or how to attract people to Hong Kong to offer their services here. We have our own financial system and ecosystem and we have good support from China. We are looking at how to do our job better more than anything else.”
Laura Winwood, who works in Citi’s government affairs, Asia-Pacific, agrees: “Singapore, Japan and Hong Kong all have their attractions,” she says. “There is plenty of room for several fintech hubs across the Asia-Pacific region, in the same way that there are several financial centers; ultimately, economies, business and consumers all benefit from robust fintech ecosystems.”
The first half of 2016 has been buzzing for Hong Kong, with several key fintech events in the form of competitions, forums, and conferences. The Fintech Finals 2016, Finnovasia, and Rise were among them, showcasing fintech startups, and speakers from venture capital and law firms, financial experts, as well as the Hong Kong regulators, themselves. Meanwhile, rising costs and reduced margins are pushing financial institutions to embrace innovation to operate more efficiently, according to Wolters Kluwer’s Tham.
Retail Holding Sway
So far, the innovation in Hong Kong has mainly been focused on the retail payments space, and it is in this area that regulators believe they have taken early action. For example, in 2013, the Hong Kong Association of Banks together with the Hong Kong Monetary Authority issued the best practice for the near field communication (NFC) mobile payment service, to provide minimum security requirements among other best practices for the development of the NFC mobile payment in Hong Kong.
Another regulatory source says: “Going all the way back to 2013 until now, we have been focusing on retail payment services, and on how to make it more efficient. We are trying to look at what fintech means and we are trying to improve the kind of technologies to back the infrastructure even before fintech became a buzzword. From all this, I would say we have embraced financial technologies since back then, but only recently did the momentum increase.”
According to a fintech specialist working for an information provider in the region, “the Hong Kong government is aware that Singapore is ahead in this space, but it has taken steps to establish its footing in the fintech industry with what FinTech HK and InvestHK have been doing,” referring to two entities that aim to attract outside investment into Hong Kong. FinTech HK, founded by Janos Barberis, is the single point of access for the Hong Kong fintech scene, connecting the startups, community and events shaping the fintech ecosystem. The Financial Services and Treasury Bureau (FSTB) of Hong Kong, in charge of developing and executing government policies on finance and treasury, set up a special team under InvestHK with the aim of organizing international events and assisting startups and investors to set up shop in Hong Kong.
In March, the Hong Kong Monetary Authority (HKMA) created a fintech facilitation office with three main objectives: to build a platform for industry liaisons; to be the bridge between industry players and supervisory bodies; and to initiate industry research in topics such as blockchain and cybersecurity. “We are trying to be more proactive and reach out further to the industry to assist them to go through incubation and provide them with support from a regulatory perspective in terms of forming a level playing field for them,” says an officer from one of Hong Kong’s regulatory bodies. “With the office, we are playing a more active role compared to the old days,” the source says.
A founder of a Hong Kong-based fintech start-up, points out: “There is no actual push for the regulators in Hong Kong to be aggressive in terms of pushing the boundaries for fintech in Hong Kong, when it can sit back and watch what the other regulators are doing. Basically, they risk nothing by waiting.”
As though in line with that comment, the FSTB released a statement at the end of June in reply to queries from the Legislative Council—Hong Kong’s legislative branch—about setting up a regulatory sandbox for fintech innovation and activity. It replied that it would “keep abreast” of developments in other regulations that have implemented sandboxes. KC Chan, the secretary for the regulatory body overseeing the Hong Kong market, says the Hong Kong government will examine if and how existing regulations can be applied to fintech activity.
Gateway to China
Whether or not Hong Kong is seen as behind Singapore in terms of regulations and providing an environment conducive for new fintech innovation, its advantage still lies in its position as a connecting point with Mainland China. Earlier in June, the FSTB agreed with the Shanghai Municipal Government Financial Services Office to foster further financial collaboration between Hong Kong and Shanghai on various areas, including fintech. This will allow fintech companies in Shanghai to use Hong Kong as a platform to the global market, while Hong Kong companies will be able to gain access to Mainland China through the former.
“At the moment, there is less talk in China than in Hong Kong about fintech, but more of the action is taking place in China,” says a fintech expert from an intelligence and technology provider.
Meanwhile, Gavin Raftery, head of Baker & McKenzie’s global acquisition finance team who is based in Tokyo, says Japan is also working hard to position itself as a fintech hub. It recently passed legislation that will provide financial groups with more flexibility to invest in fintech startups. It is also among the few countries in Asia to regulate the use of digital currencies like bitcoin. This resulted primarily from the collapse of Tokyo-based bitcoin exchange Mt. Gox, which reported losses of more than ¥45 billion ($430 million).
Both the Ministry of Economy, Trade and Industry, and the Japanese Financial Services Agency have set up working groups to coordinate their approach on fintech together with market participants. “By trying to help the banks, the regulators can keep control,” says Mihai Bistriteanu, head of electronic trading at Phillip Securities Japan Limited. He notes that Japan is probably behind in the fintech space compared with other Asian countries, because more than 60 percent of transactions made are still settled in cash. “The biggest issue with cash transactions is that the entire process of transferring, storing and producing physical cash is expensive. Japan has the highest density of ATMs in the world, so the regulators are looking to reduce that and increase electronic transactions,” he adds.
Follow the Leader
Typically, in relation to electronic trading, Japanese regulators usually follow regulatory decisions coming out from the US and Europe, and then adopt and adjust them to their own trading landscape, Bistriteanu says. “However, given the potential of fintech in changing the financial industry as we know it, and the motivation of the upcoming 2020 Tokyo Olympics to show the world what Japan can do, I am expecting Japanese regulators to take a leading role in enhancing the financial global system by pushing the fintech agenda,” Bistriteanu says.
Citi’s Winwood encourages policy makers to develop regulatory frameworks that enable a level playing field and strike a balance between empowering innovation and managing risk.
“More importantly, startups and traditional players will both benefit from greater regulatory harmonization to support interoperability throughout Asia-Pacific and beyond, as well as cross-recognition of regulatory approval or shared base data structures for account-information exchanges,” she says.
Regulators have a big role to play in determining how exactly fintech in their own backyards develops and while there is no “one-size-fits-all” approach, it will be interesting to see who comes out on top.
- Singapore is seen to have taken the lead in luring the fintech industry with the introduction of a regulatory sandbox.
- A regulatory sandbox allows regulators to keep an eye on developments in the space without having to worry about significant fallout should a new innovation or startup fail.
- Hong Kong argues that there can be more than one fintech hub in Asia. The territory also has strength by virtue of its position as a gateway to Mainland China.
- Developing regulatory frameworks for fintech in the Asia-Pacific region is encouraged as a means of providing startups with an level playing field.
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