Ian Herbison and Saskia Kendall discuss three dynamics shaping the APAC FinTech industry and the need for partnership between the public and private sectors.
As policymakers strive towards financial inclusion goals, financial technology (FinTech) will be an increasingly important sector to watch. However, the pace of development remains uneven in APAC – some markets possess the infrastructure to facilitate the growth of neobanks and interoperable platforms while others are only beginning to lay the foundations such as establishing digital identification systems and clear legislation.
From a regulatory perspective, there are three key facets shaping the dynamics for FinTechs in APAC – fragmentation across regulatory regimes, a swing towards consumer protection, and the influence of ancillary technologies that support the FinTech ecosystem.
These dynamics potentially pose multiple issues for FinTechs – including a stifling of innovation, inconsistent standards, and high costs of compliance – but also present opportunities for players to position themselves to successfully enter and grow in the region.
Fragmented Regulatory Regimes in the Face of New Technologies
The issue of fragmented regulatory regimes at both the local and regional levels is magnified when considering the usual characteristics of FinTech such as its cross-sector nature – with some firms playing multiple roles as banks, insurers, and payment platforms, etc. It is not uncommon to see multiple domestic governing authorities for FinTech.
For example, a split of responsibilities is seen in Malaysia and Thailand between central banks and securities regulators (in Thailand, there is also an additional Office of Insurance Commission). The implication is that FinTechs may be loaded up on the full extent of various entity-based regulations to govern each of their use cases, rather than having a tailored and proportionate approach.
A promising model can be seen in Singapore, where the Monetary Authority of Singapore (MAS) houses all financial regulatory and supervisory functions, bolstered by the recent passage of the Omnibus Financial Services and Markets Bill 2022, which harmonises these powers across the financial sector.
Furthermore, regulations across APAC have been all but consistent, with each country bringing a different formula in approaching the balance between FinTech regulation and innovation. The lack of harmonisation can be difficult to navigate for FinTech disruptors keen to cement their regional foothold.
What’s more is that players can take advantage of regional inconsistencies to dodge stringent regulations, to the detriment of consumers. It is not unimaginable for the personal data of cross-border users to be jeopardised in a foreign market despite enjoying high data protection standards in their own home country.
Exposure to financial risks for consumers can also arise by way of retail investors setting up trading accounts with companies incorporated in markets with weaker regulations. Instead of joining the ‘race to the bottom’, it will be worthwhile for FinTechs looking to become a trusted and credible partner in the region to uphold high standards, regardless of regulatory conditions.
Balance to Swing in Favour of Consumer Protection
The regulatory dynamics are also gearing towards a more cautious approach in favour of consumer protection. This comes against the backdrop of recent financial mishaps, including the meltdown of Terra in May, which cascaded into broader liquidations that brought down various hedge funds such as Three Arrows Capital and jeopardised millions of dollars of investment in the crypto sector.
Cryptocurrency-based financial service providers such as Hodlnaut also suspended withdrawals of user funds due to liquidity issues, prompting MAS to rescind the firm’s in-principle approval granted under Singapore’s Payment Services Act. Such events have precipitated more hawkish regulatory thinking and stronger calls to protect consumers in the face of new risks.
Moving forward, it will be increasingly common to see legislation limiting access to leverage, imposing stringent governance or compliance requirements, and more. For instance, in October, MAS proposed new rules for the crypto sector that will prohibit service providers from offering credit facilities to retail investors and require them to undergo a knowledge test.
Elsewhere, the State Bank of Vietnam has warned credit institutions and intermediate payment service providers that they are not allowed to perform transactions related to virtual currencies. However, the consensus remains that the digital assets industry holds significant economic value and while there will be added friction due to new protocols, there is still keen interest to develop the sector.
We need not look further than Indonesia, which plans to launch a cryptocurrency stock exchange before the end of 2022 with careful consideration for technical requirements for capital, custodianship, and more, to safeguard users.
Dynamics of Ancillary Technologies Within the Ecosystem
Importantly, the nature of FinTech involves a whole range of other technologies such as AI, cybersecurity, cloud computing, open banking, and digital identification systems, which bring with them a whole range of other regulations. In other words, businesses who seek to thrive and leverage the opportunities in this space will find it worth to look at the wider ecosystem.
Data protection regulations for one, have always been a core regulatory space for any technology that operates online and collects user data. In Vietnam, from October 2022, foreign firms including telecommunication service providers and payment intermediaries were required to store users’ data, such as their emails and financial records, locally and set up local data storage and offices to facilitate this.
On AI, all the member nations of UNESCO have adopted a global agreement on the ethics of AI. In Singapore, the so-called ‘FEAT’ (fairness, ethics, accountability and transparency) principles already imposed regulatory expectations on the use of AI in the financial sector. It is not unimaginable that more regulation in this space will follow, especially given that many ASEAN member states have established or are developing national AI strategies and governance frameworks.
Ultimately, the regulatory dynamics around FinTech in the region remains very fluid. As more technologies emerge to provide innovative solutions that promote financial inclusion, governments and businesses will need to pay close attention to such developments and identify the opportunities they present, but also hedge against the potential risks involved.
It is clear that the pathway towards sound and feasible regulation in the FinTech space requires a robust partnership between the public and private sectors. The establishment of engagement channels between policymakers and innovators will help to achieve win-win outcomes.
By Ian Herbison, CEO, and Saskia Kendall, Chief Operating Officer for APAC, at Speyside Group, a global emerging market public policy and communications specialist.