Asia Financial Industry Blog

Australia launched its open banking regime on July 1, ushering in an era of increased competition and customer choice. The regime allows a customer of any of Australia's Big Four banks - National Australia Bank, Commonwealth Bank, Australia and New Zealand Banking Group and Westpac - to ask that their account and card data be sent to a third party accredited by the Australian Competition and Consumer Commission. In November, mortgages and personal loan data will be introduced, while smaller banks will join in 2021.

Cambodia's digital banking initiatives are increasingly on the money. The Kingdom has focused on fast-tracking digital banking to boost financial inclusion and develop the broader banking sector, which only serves a limited portion of the population. Just 22% of Cambodia's population of 16.2 million is banked. The good news is that fintech is bringing more Cambodians into the formal financial system. In 2019, active digital wallets in Cambodia jumped 64% to 5.22 million, according to a June report by the National Bank of Cambodia (NBC).

Taiwan's virtual banks were supposed to go live this summer but the coronavirus pandemic has delayed the launch date. The three neobanks, which include consortia led by Line Financial, Chunghwa Telecom and Japanese e-commerce giant Rakuten, will likely launch later in the year, according to Taiwan's Financial Supervisory Commission (FSC). The three neobanks have yet to start one-month operation simulation tests, a pilot period required by the FSC to ensure the banks are in shipshape.

China and the U.S. have both invested big in Indian fintech. Google Pay is one of the most popular digital wallets in the country, along with Walmart-backed PhonePe and Alibaba-backed Paytm. Facebook recently invested in India's Jio in a bid to build the subcontinent's first super app. There's just one problem: Indian regulators are concerned that foreign companies may dominate India's fintech market. WhatsApp Pay has yet to receive approval to launch in the subcontinent, two years after applying for a payments license. At the same time, New Delhi is cracking down on Chinese apps and enhancing scrutiny of Chinese investment amid rising geopolitical tensions with Beijing.

It was only a matter of time before an erstwhile high-flying fintech crashed amid the pandemic-induced downturn. After all, what goes up always comes down. What surprises us is that the insolvent party is not a unicorn with an inflated valuation in private markets, but a listed company founded in 1999: Germany's Wirecard. One would think that Wirecard would be able to manage the basics of banking and not cook the books. Unfortunately, creative accounting looks like the only explanation for how Wirecard "misplaced" US$2 billion that probably did not exist in the first place.

By now it's a familiar story: COVID-19 is driving cashless payments adoption in Southeast Asia. As one of the region's key economies and recipients of fintech investment, Vietnam is a market to watch. What's notable about Vietnam is that it's better poised for an economic recovery than almost any other country because of how well it has controlled the coronavirus pandemic. While the rest of the world was in recession, Vietnam's economy grew 0.36% in the second quarter, beating a 0.9% contraction forecast by economists surveyed by Bloomberg.

The Singapore digital banking race is accelerating. The Monetary Authority of Singapaore (MAS) has winnowed down the applicant field from 21 to 14. While the MAS did not say which contenders failed to make the cut, observers close to the matter say that the consortia headed by Grab/Singtel, Sea, Razer and MatchMove have all advanced to the next round. Those four applicants are all bidding for a coveted digital full bank (DFB) license, which permits holders to serve both retail and non-retail customers. The MAS plans to issue a maximum of two DFB licenses.

The UK's Starling Bank is that rare neobank that espouses an interest in profitability. Who would have guessed in the wake of the 2008-09 global financial crisis, when fintech was in its naissance, that the banks of the future wouldn't worry about making money? Starling though remains of a more traditional mindset than its contemporaries Revolut, Monzo and N26. That can be attributed in part to its founder Anne Boden, a banking veteran who previously worked at Lloyds, Standard Chartered, AON Corporation, UBS, ABN AMRO and RBS. In May, Starling closed a £40 million fundraising round led by current investors JTC and Merian Chrysalis Investment Company Limited.

Some things just weren't meant to be, like peer-to-peer lending in China. What began as a legitimate way to support financial inclusion through internet finance morphed into a scam-ridden zombie industry. Beijing has moved to shut down the majority of P2P lenders that haven't imploded on their own. The industry is going the way of crypto, another member of the fintech family that ran afoul of China's regulators. In a recent Sina Finance commentary, former Chongqing mayor Huang Qifan gave a scathing criticism of P2P lending, likening it to a digital version of traditional pyramid schemes he says have long existed in rural China.

Ant Group, formerly Ant Financial, has big ambitions for Southeast Asia. By taking strategic stakes in ascendant fintech startups across the region, Ant hopes to gain a foothold in the region's most important economies and perhaps lay the foundation for a regional payments ecosystem. If Ant's bid for a Singapore digital wholesale bank license is successful, the Hangzhou-based company will be poised to serve SMEs in the city-state and could eventually expand to other key regional economies where the financial inclusion rate is lower.

Macau is the only place in China's territory where gambling is legal. Chinese regulators want all the gaming in one place where they can keep a watchful eye over it. That's why the regulators don't like online casinos. Those are much harder to monitor. Located offshore, primarily in Southeast Asia, they aren't subject to Chinese law, even though Beijing forbids its citizens from gambling online. For Chinese authorities, the primary concern is that Chinese people will use online casinos to circumvent China's strict capital controls, which limit overseas remittances to US$50,000 a year. In some cases, criminal activity is involved.

The pandemic-induced economic downturn could be a catalyst for needed financial reform in China, where foreign firms have struggled to gain market share. The Chinese economy contracted in the first quarter and will likely grow just 1.2% for the year, according to the IMF. A new UN report estimates that FDI could drop 40% this year, falling below US$1 trillion for the first time since 2005. At the same time, China's trade surplus is narrowing. Capital outflows are rising despite stringent controls, reaching US$50 billion in March and April, according to Nikkei Asian Review. Capital inflows from foreign investors in the financial sector could help stabilize the renminbi.

Hong Kong's virtual banks will not easily unseat entrenched incumbents, but the newcomers are already succeeding in one respect: They are forcing traditional banks to up their digital game. This trend started well before the coronavirus pandemic, but has accelerated as concerns about the virus impede customer visits to physical branches. The virus is acting as a catalyst for digital transformation among Hong Kong's incumbent banks just as the virtual banks are launching.

Brazil's Nubank is growing so fast it's hard to keep up. In June, Nubank hit the 25-million customer milestone, up from 15 million in October 2019. Most neobanks talk up the need to build scale and grow fast, but Nubank is one that walks the walk. The Sao Paolo-based company is the largest independent digital bank in the world. Granted, it did not happen overnight. Nubank has been around since 2013. But the Brazilian neobank, currently valued at US$10 billion, appears to have found the secret sauce.

Southeast Asia's two most valuable tech startups are determined to reinvent themselves, transforming from ride-hailing giants into digital banks. Singapore's Grab is leading in every Southeast Asian market but one: Indonesia, which happens to be where its arch-rival Gojek is based. Having recently received investments from Facebook and PayPal, Gojek looks to have the edge in the region's largest economy. But Grab is determined to prevail there. That's why the Grab-backed digital wallet Ovo is reportedly planning to merge with Dana, which is backed by Chinese fintech giant Ant Financial. Together, Ovo and Dana might be able to give Gojek's fintech arm GoPay a run for its money.

South Korea's K bank, one of three licensed virtual banks in the country, is planning to reopen in July if it can secure additional capital. K bank suspended most of its services about a year ago amid fundraising travails. It would be an impressive feat for the bank to resolve those capital issues amid the pandemic-induced downturn. South Korea entered a technical recession in the second quarter with GDP expected to contract 2% compared to the January-March period, according to the Bank of Korea.

Indonesia's Gojek is one of Asia's most ambitious unicorns. It leads the ride-hailing and food-delivery markets in Indonesia, and is steadily increasing its digital banking services. In June, it filed trademarks for new business entities that could pave the way for expansion into corporate services, live-video conferencing and electronics repair. Yet the company remains unprofitable eight years after its founding. Gojek needs to boost the stickiness of its app and speed up monetization. That's why it's a wise move for the company to partner with Facebook and PayPal, which took took respective 2.4% and 0.6% stakes in Gojek's fintech arm GoPay, a regulatory filing shows. The U.S. tech giants' investments were part of a fundraising round that reportedly values at Gojek at more than US$10 billion.

In May the European Commission named Cambodia as one of 12 nations at a high risk for money laundering and terrorism financing. The EC's move is a setback for Cambodia, which aims to attract foreign investment and develop a thriving digital economy. The kingdom will likely be added to a list that includes countries such as North Korea Iran, Yemen, Syria and Afghanistan. The EC said that it sought to better align with the international money-laundering watchdog FATF, which put Cambodia on its gray list in February 2019 for having "significant deficiencies" in its anti-money laundering and counter-terrorism financing regime.

Judo Bank has become the first of Australia's neobanks to reach a AU$1 billion valuation and just the second so-called fintech "unicorn" in the country after Tencent-backed Airwallex. Investors shrugged off the coronavirus pandemic and economic doldrums - Australia is headed for its first recession since 1991- and handed Judo an additional AU$230 million in May. Melbourne-based Judo has now raised a total of AU$770 million in equity over three fundraising rounds. Among Judo's existing investors: the Abu Dhabi Capital Group, Bain Capital Credit, Ironbridge, Myer Family Investments, OPTrust, SPF Investment Management, and Tikehau Capital.

Investors appear to have adjusted to a new normal in Hong Kong, one characterized by political unrest and economic uncertainty. As the coronavirus ebbs, protests are returning to Asia's preeminent financial hub. The former British colony remains mired in a steep recession. And yet, large Chinese tech firms are pushing ahead with initial public offerings and secondary share listings on the Hong Kong Stock Exchange. At the current rate, Hong Kong could be the world's hottest IPO market in 2020.

Facebook's virtual currency initiative is getting a much needed boost with the addition of Singapore's sovereign wealth fund Temasek to the Libra Association. Temasek is the first member based in Asia and brings the city-state's fintech prowess to the table. Over the past decade, Singapore has emerged as Asia's preeminent fintech hub. Its government has approached fintech as an enabler of a wider variety of financial services rather than a mere disruptor of the status quo. If Libra is going to succeed, it will need to move in that direction.

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.

German neobank unicorn N26 has a well earned reputation for audacity. In July 2019, its co-founder Maximilian Tayenthal famously (or infamously) told The Financial Times that "profitability is not one of our core metrics." If we had to sum up the fintech bubble's ethos in one line, that just might be it. In that same interview, Tayenthal highlighted N26's "deep-pocketed investors," which include Peter Thiel - the smart money, at least based on his bets on Facebook and PayPal. Despite the coronavirus pandemic, investors handed N26 another US$100 million in early May, while its valuation held steady at US$3.5 billion.

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.

Chinese investment into Indian fintechs is set to slow following New Delhi's decision to restrict foreign investment from countries with which it shares a land border and more carefully scrutinize new portfolio investors from mainland China and Hong Kong. India's immediate reason to target foreign investment is to forestall opportunistic takeovers during the coronavirus pandemic, which has infected about 152,000 and caused more than 4,000 deaths in the subcontinent.

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.

Neobank valuations have long seemed inflated given how few of the banks are profitable. Now the £2 billion valuation of loss-making UK challenger bank Monzo could be adjusted downward as its business slows amid the global economic downturn. Monzo is considered one of Europe's top challenger banks along with Revolut and N26. In mid-May, The Financial Times reported that Monzo is close to reaching a deal with investors that would value it at roughly £1.25 billion, a 40% decrease from the £2 billion valuation it achieved in June 2019. 

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.

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