Ant Financial has invested $73.5 million in Wave Money (Digital Money Myanmar), a mobile financial services firm that aims to boost financial inclusion in one of Asia's poorest countries. Per-capita GDP is just $1326 in Myanmar, according to the World Bank, and 75% of its 54.5 million people lack a bank account. Ant's investment in Wave follows the Chinese fintech giant's announcement last November that it was planning to raise $1 billion for a fund to invest in Asean and India-based mobile internet startups. Ant is reportedly keen to back more fintechs in those markets.

On May 17, the People’s Bank of China (PBOC) Shanghai branch announced the launch of the Shanghai Fintech Innovation Regulatory Trial, which follows the trial in Beijing last December. In addition, the Shanghai Fintech Industry Alliance (SFIA) was established to encourage innovative fintech programs in the Yangtze River Delta region.

Regulatory sandboxes provide fintech firms a controlled and supervised environment to test innovative products, services, or business models. Fintech innovation is an important driver of growth in the financial industry, especially in China. However, potential risks need to be addressed, notably customer security and data protection. At the same time, regulatory uncertainty could dissuade investors from investing in a company. For their part, meanwhile, regulators need to develop a deep understanding of innovative applications so that they are able to effectively regulate new business models and technologies. Thus, regulators use a regulatory sandbox to achieve a balance between technological innovation and risk prevention, so as to implement more universal policies.

Project qualification and regulator duties

In mid-January, the PBOC announced the first batch of trial applications, including the Internet of Things, APIs, smart tokens and trusted execution environment. Six projects have been approved to join in the trial scheme in Beijing, including API open banking (CITIC aiBank), supply chain finance based on IoT (Industrial and Commercial Bank of China), automatic loans for micro-credit products (Agricultural Bank of China), mobile POS (China UnionPay, Xiaomi and JD digits), Zhiling products managing smart token (CITIC Bank, UnionPay, Duxiaoman payment and Ctrip) and instant online loan (Bank of Ningbo).

In late April, the PBOC extended the second batch of sandbox experimental cities to Shanghai, Chongqing, Shenzhen, Hangzhou and Suzhou, as well as the Xiong’an New Area, a much-anticipated new economic zone. The Shanghai trial will guide licensed financial institutions and technology companies to join in the scheme, with the aim to protect consumers’ rights and assist SMEs with maintaining their operations during the COVID-19 crisis. The Shanghai financial regulator said that it would apply “soft regulatory methods” such as information disclosure, product notice, and social supervision. It will also support the local sandbox to connect with other sandboxes around the world.

Although there are similar products widely available on the market, such as instant internet loans issued by banks or internet loan providers, putting a project into the sandbox can allow it to grow freely without falling afoul of existing regulations, supporting the creation of new business models and helping familiarize regulators with them.. However, if a project does not progress fast enough in the sandbox, it may stand little chance of succeeding in the real market.  

The Sandbox experience in the UK and ASEAN

The British government first developed the concept of the "regulatory sandbox." The UK Financial Conduct Authority (FCA) launched its innovation program in 2014 and has supported more than 700 firms to test their innovation with real customers in the live market under controlled conditions. The access to regulatory expertise through the sandbox has reduced the time-to-market for firms and potentially lowered related costs. According to the FCA, 90% of the firms in the first cohort have continued towards a wider market launch. And at least 40% of firms that completed testing in cohort 1 received investment during or following their sandbox test.

Across ASEAN, regulatory sandboxes are also playing their role in managing risk in fintech innovation. In Singapore, the Monetary Authority of Singapore (MAS) launched its fintech sandbox in 2016 to encourage more fintech experimentation and innovation. One company, Inzsure Pte Ltd, was forbidden to continue serving as an insurance broker after the sandbox test.

The Bank of Thailand launched a regulatory sandbox in early 2017 and encouraged innovative companies to develop services and products. In the Thai model, a startup’s innovations stay in the sandbox for a fixed period of 6 to 12 months. Successful businesses after this period can apply for operating licenses.

Sandboxes in Zhejiang and the Greater Bay Area

Hangzhou is to release its Fintech Sandbox rules this week. The detailed establishment plan will be set by Hangzhou Central Sub-branch of PBC, Zhejiang Bureau of CBIRC, Financial Bureau of Zhejiang Province, and Hangzhou Municipal Bureau of Finance.

Meanwhile, in order to accelerate financial and trade integration of the “Greater Bay Area”, the PBOC announced the release of the “Opinions Concerning Financial Support for the Establishment of the Guangdong-Hong Kong-Macau Greater Bay Area” on May 14. The PBOC produced the Opinions in collaboration with the China Banking and Insurance Regulatory Commission (CBIRC), the China Securities Regulatory Commission (CSRC) and the State Administration of Foreign Exchange (SAFE). The options include plans to promote a cross-border regulatory sandbox.

These trial projects form part of China’s Fintech Development Plan (2019-2021). According to internet bank XWBank (XinWang Bank), the fintech regulatory trials will test the best regulatory methods and provide corresponding space and system guarantees for fintech innovations based on the “regulatory sandbox” innovative regulation model.

As tensions between the U.S. and China flare up in the financial sector, the future of Chinese fundraising in America's capital markets looks uncertain. Hong Kong has benefited, attracting a growing number of Chinese tech IPOs and secondary share listings from juggernauts like Alibaba and JD.com. Another possible winner in the U.S.-China financial tussle could be London, which began operating the London-Shanghai Stock Connect scheme in 2019.

A unicorn cannot thrive on ride hailing alone. That's why Indonesia's Gojek is betting on fintech to bolster its fortunes. Its arch-rival Grab is taking a similar road. Starting with payments, the ride-hailing giants aim to transform themselves into bonafide financial services providers, monetizing customer data by using it to create different digital banking products. Despite the pandemic, Gojek managed to raise another US$1.2 billion in March to support its expansion efforts. Gojek then acquired the Indonesian payments startup Moka and established a tie-up with the fintech Pluang, which offers digital gold investments.

At first blush, UBS's bid for a digital bank license in China looks rather ambitious. Beijing doesn't give them out too often. In fact, no foreign lender in China has one. There are just four licensed digital banks in China: Ant Financial's MYBank, Tencent's WeBank, Baidu's AiBank and China Citic Bank. Retail banking has long been the holy grail just out of reach for foreign banks in China. Yet UBS sees a chance to develop a digital-first wealth management business in the country as Beijing prepares legislation that could open up the market to more foreign competition.

Tencent has paid US$300 million for a 5% stake in Australia's Afterpay in a bid to strengthen its global fintech services and expand into smart retail. Afterpay allows shoppers to pay in four installments for purchases online or in retail stores. It claims to have 7.3 million users globally.

Singapore's Grab reckons it can become the first loss-making ride-hailing firm to reinvent itself as a viable digital bank. So confident is Grab in its fintech endeavor that it has applied for a digital full bank license in Singapore with telecoms giant Singtel. If Grab succeeds as a digital bank, it will be an outlier. China's Didi launched a fintech unit in early 2019, but has yet to make any progress in digital banking. Uber too thinks fintech can help it monetize and created a dedicated division about a year ago. Like Didi's, it has gone nowhere yet. And of course, there's Gojek, an Indonesia-based variant of Grab. It too is dabbling in digital banking. 

The coronavirus pandemic is a day of reckoning for overvalued, overhyped and overextended fintechs. With a "go big or go home" ethos, these firms are finding that amid the virus-induced downturn they may have nowhere to go. Not so for South Korea's Viva Republica, the country's only fintech unicorn, which has been steadily building a business in its home market for nearly a decade. In fact, Viva Republica's mobile banking platform Toss just broke even in April for the first time in its five-year history. That's impressive given that the South Korean economy is in recession. South Korea's GDP contracted contracted 1.4% year-on-year in the first quarter, its worst performance since the 2008-09 global financial crisis.

Myanmar is gradually opening its banking sector to foreign investment in a bid to boost the economy. International lenders see strong potential in the Southeast Asian nation's underdeveloped financial industry. Myanmar has been one of the region's fastest growing economies in recent years. Thus far, it has not been hit hard by the coronavirus pandemic either. In April, the Central Bank of Myanmar approved seven Asian banks to enter the country: Taiwan's Cathay United Bank and Mega International Commercial Bank, South Korea's Industrial Bank of Korea, KB Kookmin Bank and Korea Development Bank, Bank of China Hong Kong and Siam Commercial Bank.

Indonesia's P2P lending sector has been growing fast for several years now, providing a vital credit channel for cash-strapped consumers and SMEs. In February, online lending increased 225% annually to reach US$6.1 billion, 80% of which was in the P2P segment, according to data compiled by the Indonesian government. Then the coronavirus pandemic hit the country of 267 million, plunging it into a technical recession. While several of the largest P2P lenders are weathering the coronavirus pandemic well, others are not so fortunate. The economic fallout from the virus may end up having a more profound impact on the industry's development than regulatory measures enacted last year to reduce compliance failures and protect consumers.