North Korea's growing nuclear program has long been a point of contention between the U.S. and China. Beijing prefers to handle its mercurial neighbor with kid gloves while Washington favors a tougher approach, namely economic sanctions. To evade sanctions in the digital age, Pyongyang has upped its hacking game. Both banks and cryptocurrency exchanges are victims. Digital currency offers North Korea a way to raise funds and do business outside the US dollar led global financial system. North Korea stole more than US$2 billion from both traditional financial institutions and crypto exchanges - including South Korea's Bitthumb - the United Nations said in an Aug. 2019 report.
The novel coronavirus outbreak has crimped business activity across China, bringing the world's second largest economy to a virtual standstill. Yet amidst those unprecedented conditions, China's fintech giants have been busy developing digital solutions to mitigate COVID-19's impact. Some of the solutions are aimed squarely at the consumer economy, while others support government efforts to track people's health status.
Cambodian and Thai regulators recently announced the launch of an interoperable payment QR code for use between Cambodia and Thailand. Cambodian tourists who visit Thailand may now use their mobile banking app to pay in Cambodian riel when shopping at stores that display a Thai QR Payment sign, while the same functionality will be extended to Thai tourists in Cambodia by Q3 this year.
A collaboration between the Siam Commercial Bank (SCB) and five Cambodian commercial banks, the interoperable QR code was developed upon domestic electronic transfer system PromptPay which runs on Vocalink infrastructure. ACLEDA Bank PCL, Cambodia Commercial Bank (CCB) and the Foreign Trade Bank of Cambodia (FTB) are sponsoring banks of the collaboration, which mean that other banks would be required to work with the three in order to provide the service.
Ant Financial's international expansion runs on two separate tracks. The first is a concerted push into emerging markets, especially in South Asia. In these countries, Ant is laying the groundwork to become a primary provider of digital financial services to the local market. In many cases, incumbents and digital infrastructure are both weak. Ant sees opportunities to leverage both its banking and technology acumen in countries such as Bangladesh, Pakistan and Nepal.
It's a very different story in Western Europe. There, Ant is making gradual inroads. The Chinese fintech giant says it wants to serve the local market, but its products are designed for Chinese consumers and businesses. European incumbents, meanwhile, are often entrenched. There's no easy way around that. Growing in Western Europe through acquisitions in local companies makes more sense than going it alone. With that in mind, Ant recently took a minority stake in Swedish payments platform Klarna, the most valuable fintech startup in Europe alongside the UK's Revolut. Klarna is currently valued at US$5.5 billion and says that it has 80 million customers globally.
Singaporean ride-hailing giant Grab is set upon becoming a top digital bank in Asia. Over the past year, the company has raised billions from investors in a bid to fund the transformation from app-based neo-taxi service into neobank. It has inked numerous deals with financial services incumbents and applied for one of Singapore's coveted digital full banking (DFB) licenses. If Grab's application is successful, it will be allowed to conduct both retail banking and corporate lending in Southeast Asia's financial center.
While Grab has troves of user data and digital acumen, it lacks financial industry expertise. Addressing this shortfall is crucial for the company to gain the trust of customers as a financial services provider. The segue from ride hailing to banking is not as seamless as Grab sometimes suggests. Partnering with a large commercial bank could help Grab bridge that gap, and increase its chances of securing the DFB. Japan's Mitsubishi UJF Financial Group (MUFG), which led Grab's recent US$856 million funding round, is just that type of partner.
The novel coronavirus outbreak is crimping global business as people avoid travel and even going out in public. The sharp contraction in business activity augurs ill prospects for the financial industry. Banks are not optimistic about their first quarter results. If the virus isn't contained soon, the second quarter could be even worse.
For the nascent virtual banking segment, Covid-19 is a double-edged sword. On the one hand, e-commerce demand remains strong thus far. Consumers still need to buy essential everyday items. If they are hesitant about visiting a physical store, the best option is to make the purchases online. In the short term, that means a rise in online transactions and in many cases the use of digital wallets.
Malaysia is set to introduce digital banking following the passage of a new regulatory framework by its central bank in December. The central bank said it would issue up to five licenses to qualified applicants to set up digital banks. The licenses will allow the holders to conduct either conventional or Islamic banking business in Malaysia. Capital requirements are not low, with an absolute minimum of RM 100 million (US$23.7 million) necessary during a three to five year foundational phase and thereafter RM 300 million.
Roughly a year ago, Hong Kong looked set to take a leading position in Asia's nascent digital banking space. In late March 2019, the Hong Kong Monetary Authority (HKMA) awarded three digital banking licenses. It later issued five additional licenses. The eight neobanks, which include consortia led by Chinese tech giants Ant Financial, Tencent and Xiaomi, were reportedly set to begin operations in the second half of 2019.
Then came the Hong Kong protests. The political turmoil that erupted in June 2019 has shaken confidence in Hong Kong's once unassailable position as the region's top global financial center. Amidst the economic fallout, Hong Kong has slipped into recession for the first time since the global financial crisis of 2008-09. Given unenviable economic conditions, all but one of Hong Kong's digital banks have postponed their launch.
Singapore has 21 applicants for just five digital banking licenses. There are going to be many more losers than winners in this race. Speculation about the likely winners is reaching a feverish pitch ahead of the Monetary Authority of Singapore's (MAS) expected announcement of the winners. The decision is expected by June.
MAS has made clear that it has little interest in large-scale disruption of the financial-services sector. The regulator certainly wants to boost competition and the quality of digital-banking services in the city-state, but in a steady, incremental manner. Evolution is necessary. Revolution is not. With that in mind, the MAS designed the application process to ensure that only firms with ample capitalization and strong potential for profitability would meet the licensing criterion.
China has demonstrated a willingness to innovate in the financial services technology sector. For example, the Chinese government has announced accelerated plans for a Central Bank Digital Currency (CBDC), the People's Bank of China (PBOC) has filed scores of CBDC patents and fintech initiatives like Baidu’s Xuperchain network have been introduced to great fanfare. What's more, the PBOC's Fintech Development Plan (2019 – 2021) expresses support for technological innovation, including the use of public cloud.
However, the Chinese government is also traditionally cautious in regard to security and control. Thus, financial services companies in China who are contemplating the migration of critical business applications to the cloud would be well-advised to plan carefully. To that end, Chinese regulators have reportedly engaged in private conversations with information security representatives from several foreign banks, advising them that critical hosting engagements in the cloud will need to be handled exclusively by specialised "Financial Community Cloud" providers who have been certified by the government.
China's fintech giants have been quietly expanding in emerging markets that are participating in China's Belt and Road Initiative (BRI), which seeks to deepen Beijing's economic ties with the world. South Asia has become a geographic area of focus for Ant Financial's Alipay and Tencent's WeChat Pay. Aside from India, major South Asian nations have few domestic digital payments options, and limited foreign fintech investment. They offer Alipay and WeChat Pay a chance to gain a first mover's advantage.
That's why WeChat Pay has been determined to enter Nepal. Of course, Chinese tourists do visit Nepal, which is known for its resplendent scenery, but in the long run that market is not as crucial as local consumers and small businesses. In early February, Nepal Rastra Bank (NRB) approved WeChat Pay to operate in the South Asian country.
Some analysts are adamant that Singapore needs digital banks to boost financial inclusion. That's an interesting argument, given that 98% of Singaporeans over 25 have a bank account, according to research by Allianz Global Wealth. By Allianz's estimates, globally only Israel has a higher rate of financial inclusion than the Lion City.
In Singapore's case, this type of hard data is more instructive than a nebulous concept such as being "underbanked." A report published in October 2019 by Bain & Co., Google and Temaek Holdings found that 4 in 10 Singaporeans were underbanked, implying they don't have access to all the essential financial services they need. The findings might be more convincing if the same report had not also found that 40% of Thais and 45% of Malaysians were underbanked. The latter two countries are middle income, with per-capita GDP levels far below Singapore's.
The Trump administration has not shown much enthusiasm for a sovereign digital currency so far. With China's advances in the area, however, Washington's stance could be set to change. In early February, a member of the United States Federal Reserve Bank board of governors said the Fed is researching and experimenting with distributed ledger technologies and their virtual-currency applications. Among the applications being explored is a central bank digital currency (CBDC).
Lael Brainard, who chairs multiple Fed committees, made the remarks at a speech during an event on payments held at Stanford University. Brainard noted that 80% of central banks globally are researching CBDCs. However, she stopped well short of endorsing a full-throated campaign to create a digital dollar, devoting considerable attention to the challenges and risks posed by digital fiat currencies.
Reform is coming to China's US$27 trillion payments market belatedly. Very belatedly. U.S. credit-card giants have been trying to crack the market for years, to no avail. The market should have been open to them by 2006, per China's WTO commitments. But Beijing has hesitated to open its financial industry to foreign investment. It is finally signaling greater openness amidst the toughest business conditions China has faced in decades, perhaps since the beginning of economic reforms in 1978.
In mid-February, Mastercard announced it had received approval from the People's Bank of China (PBOC) to formally establish a bank-card clearing business in China. The green light for Mastercard comes three weeks after Beijing and Washington signed a phase-one trade deal to ease tensions in their strained economic relationship. American Express has also recently been granted approval to set up a bank-card clearing business in China. Both Mastercard and Amex are working with local Chinese partners in joint ventures.
The Monetary Authority of Singapore (MAS) announced on 28 January of the enforcement of a new Payment Services Act, the first comprehensive legislation of its kind that regulates distinct activities in payment services ranging from digital payments to the trading of cryptocurrency such as Bitcoin and Ether.
The Payment Services Act comes at a well-coordinated time before the MAS awards a total of five digital bank licenses to a select few of its 21 reported applicants. While that may be the case, some have begun to speculate on the effects and ramifications the Act will have on fintechs that are hoping to or have already begun operations in Singapore.