The Kakao Talk messenger app's financial arm became the majority shareholder of Baro Investment & Securities in February, taking a 60% stake in the brokerage. This is the type of cooperation between incumbents and fintechs that Korea's Financial Services Commission (FSC) likes to see. Kakao is focusing largely on the underserved retail segment, with an eye on financial inclusion. Kakao could likely become the definitive Korean super app if its fintech business grows large enough.
Kakao is nearly as dominant in Korea as WeChat was in China when it moved into fintech. The Kakao Talk app has about 50 million active users in a country of about 51.5 million. Kakao Pay, which is already one of Korea's largest fintech platforms, has about 30 million registered users. Kakao Bank, one of the first two neobanks launched in Korea, has about 11.3 million customers.
Hong Kong's IPO market was expected to be one of the world's best performing this year, attracting Chinese firms eager to raise capital internationally. Whereas such firms may have preferred listing on the NYSE or Nasdaq in years past, tensions in the U.S.-China relationship have caused many of them to reconsider.
Then the novel coronavirus broke out, sapping the steady momentum that had been building in Hong Kong's capital markets since Alibaba's mammoth secondary share listing in November 2019. Artificial intelligence startup SenseTime is the latest major Chinese tech firm to put off a planned Hong Kong IPO this year. SenseTime will instead seek up to US$1 billion in private funding.
Across Asia, the cashless drive had been gaining momentum long before COVID-19 broke out in late 2019. In less than a decade, China, the region's largest and the world's No. 2 economy, has transformed from a cash-dominant into a cash-light economy. Its neighbors have been following suit.
A 2019 McKinsey study found that digital payments in Asia are growing at a roughly 15% annual clip, more than 2.5 times the typical economic growth rate in the region. Overall, cashless payments have been underpinning the rise of digital banking across APAC.
Asia may be at an inflection point for cashless payments as the coronavirus rages globally and hygiene concerns about the use of physical currency are growing.
Japan stealthily has become among the world's most pro-crypto countries. Amidst the boom and gloom that have defined the crypto space, Tokyo has avoided irrational exuberance or draconian restrictions on the use and trade of virtual currency. Instead, it has quietly incorporated digital currency into its existing financial system, linking it to the wider push to boost cashless payments. In Asia, no nation has been more consistent in its crypto approach. The next logical step would be to create a central bank digital currency. Japanese officials, however, have yet to commit to a CBDC. Pressure is mounting though, especially as China pushes ahead with its sovereign digital currency.
The Financial Action Task Force (FATF ) told the Philippines in October to improve its anti-money laundering regime or else face the possibility of being placed on the organization's blacklist once again, an unenviable position. FATF gave Manila one year to get its house in order. The Philippines does not want to be on that blacklist: Banking sanctions could ensue that would make it harder for Filipino workers to remit money home, while foreign countries could increase due diligence checks on Philippine companies. Philippine banks might also charge higher interest rates as their own costs rise due to the tougher business environment.
“We cannot afford to have the Philippines in the FATF’s list of high risk and non-cooperative jurisdictions. Hence, we should be very strategic in our focus for the next 12 months,” Bangko Sentral ng Pilipinas Governor Benjamin Diokno said last October.
WeChat Pay has for several years been trying to develop its business outside of China. The first step is usually to partner with local merchants, making WeChat Pay available at points of sale where Chinese tourists shop. The second step is to target the local market. Thus far, WeChat has been more successful capturing Chinese tourists' wallet share overseas than in becoming a trusted local digital banking provider.
The novel coronavirus outbreak could slow WeChat Pay's global expansion considerably in the short term. Put simply, what happens if your international payments business primarily depends on Chinese tourists and suddenly there are none?
The competition for Singapore digital banking licenses is heating up as yet another fintech throws its hat into the ring. This time, the contender is homegrown fintech MatchMove which is applying for a digital full-bank (DFB) license together with Singapura Finance, the Thai blockchain startup LightNet and the London fintech startup OpenPayd. There are only two DFB licenses up for grabs. They allow licensees to conduct both retail and corporate banking. Digital wholesale bank (DWB) licenses are valid only for non-retail banking.
On March 26th, Chinese internet giant Tencent’s messaging app WeChat launched a test version of a virtual credit payment product called Fenfu (分付). Fenfu, which literally means "installment payment," allows users unable to get a credit card from a bank to spend money first and later pay it back with WeChat. There is no fee for using Fenfu, which is focused on offline consumption. The virtual credit payment product does not support WeChat transfer and red envelope function.
Yes Bank, one of India's largest private lenders, posted a US$2.5 billion loss in the October-December period as non-performing assets surged to 19% from just 2% a year earlier. To stymie further deterioration, the Reserve Bank of India (RBI) stepped in and took over Yes Bank in February. The bank's founder, billionaire Rana Kapoor, was arrested and accused of money laundering and taking kickbacks. Kapoor denies the charges.
Yes Bank's downfall is a cautionary tale of what can happen when a lender in an ascendant emerging market gets too big too fast, while taking on excessive risk. Yes Bank was the most gung-ho of India's non-public lenders established in the past two decades. Deep-pocketed foreign investors liked its focus on growth, which helped Kapoor and his colleagues ensure a steady flow of funding.
Singapore-based Credify, a digital identity startup, closed its US$1 million seed-funding round in late February. Leading the round were venture capital firm Beenext and Deepcore, a SoftBank-backed Japanese artificial intelligence incubator. Credify provides digital identity and trust system solutions aimed at mitigating credibility issues in e-commerce and lending. Credify says that it will use the seed funding to enhance its product suite, boost localization of software development in Southeast Asia and push ahead with client engagements.
The leading enabler of digital commerce across the Middle East and Africa region, Network International, made an agreement with Tencent Holdings Limited in February 2020 that will enable millions of Chinese tourists to transact through Network International’s extensive UAE merchant network with their WeChat mobile wallets.
The largest merchant acquirer in the United Arab Emirates, Network will perform as a settlement partner or acquirer as well as solution provider in order to enable mobile-based transactions via WeChat Pay at points of sale as well as for online purchases.
Gaming company Razer isn't the most obvious shoo-in for one of Singapore's digital banking licenses, but has unique advantages it brings to the table. Those include a user base 80 million strong primarily composed of millennials, one of the key target demographics of neobanks. Razer established a fintech unit in 2018 to respond to the need for in-game payment. If it gets the license, Razer wants to expand its digital banking services beyond East Asia to the Middle East, Europe and North America.
The United States is currently focused on fighting the coronavirus outbreak, which has surged in the country since early March. Containment efforts are occupying much of the government's time, and with good reason. The massive health and economic threat posed by the virus means that Washington has little time for less pressing matters. Yet underlying tensions between the U.S. and China remain, with the financial sector the next front of an emerging cold war.
In early March, U.S. lawmakers sought to curb the access of Chinese telecoms giant Huawei to American banks. The White House had mulled doing so in December but decided against it amidst a flurry of activity to reach a phase-one trade deal with China. The NETWORKS Act introduced earlier this month would effectively ban 5G producers such as Huawei from accessing the U.S. financial system if they are found to be violating sanctions or engaging in industrial or economic espionage.
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.
Well before COVID-19 broke out, Hong Kong's future as a global financial center was in question. The protests that broke out last year have raised concerns about the city's ability to maintain its unique competitive strengths. Further erosion of political stability and the rule of law will augur ill prospects for the former British colony. In the short run, it is true that none of Hong Kong's neighbors can challenge its position as the region's preeminent financial center. But Hong Kong cannot assume that will never change.
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.
Peer-to-peer lending is one of the fintech segments that most struggles to gain credibility. Next to cryptocurrency, it may be the most susceptible to scams. But it is not only borrowers who are at risk. Lenders can easily get burned when borrowers default. Since many borrowers on P2P lending platforms are those unable to get a loan elsewhere, their credit is typically not optimal.
P2P lending began growing quickly in South Korea about four years ago, offering attractive returns to investors amidst very low interest rates. Some P2P businesses began venturing into risky investments such as real estate project funds, non-performing loans and mortgages. South Korea had 239 P2P lenders in December 2019, up from just 27 four years earlier. Their outstanding loan balance totaled 2.38 trillion won.
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.
The India digital payments market makes for a fascinating contrast to China's. Unlike China, India has allowed foreign tech giants to compete on a mostly level playing field against its homegrown firms. In fact, Chinese tech giants are strategic investors in some of those Indian fintechs. Competition in the surging Indian payments market - Credit Suisse reckons it will grow fivefold to US$1 trillion by 2023 - is fierce. Google Pay is the market leader followed by Walmart-backed PhonePe according to research firm Razorpay. India's own Softbank-backed Paytm has fallen behind. AmazonPay is also vying for market share.
Entering into this fray is WhatsApp Pay, the digital wallet of the global messaging giant. WhatsApp Pay is aiming to do what in India what WeChat did in China: Segue from chatting and photo sharing into digital banking on the back of a popular messaging app. The difference is that WhatsApp Pay has a lot more competition. The only major digital wallet WeChat faced was Alipay. Interestingly though, WhatsApp has about as many users in India - 400 million as WeChat had when it expanded into digital banking in 2014. Today, WeChat has more than 1 billion users, mostly in China.
Fintech investment declined 3.7% in 2019 to US$53.3 billion as deals in China dropped off dramatically, according to a report published by Accenture in February. The slow in China deal flow can be attributed in part to the protracted U.S.-China trade war. Investor enthusiasm for the China market has cooled amidst an uncertain business environment. China's economy grew 6.1% in 2019, the slowest pace in three decades. At the same time, it would have been hard for China to equal its 2018 deal tally, buoyed by Ant Financial's mammoth US$14 billion funding round.
It is important to note that some of the most high-profile fintechs which raised millions of dollars last year have yet to break even, never mind post a profit: Revolut, N26, the fintech units of Grab and Gojek, to name a few. Yet, that did not stop investors from continuing to support their costly expansion. Accenture's data show that the 92% drop in China's fintech investment was the main reason for the modest decline in global fintech investment last year.
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.
While virtual banks and mobile wallets may be some things that may come to mind when one thinks about the possibilities of fintech expansion in Asia Pacific, the region is also home to one of the largest untapped markets in the world that few seem to be paying attention to- Islamic finance.
To name a few, Indonesia, Malaysia, Brunei, and Pakistan are all Muslim-majority countries that are located in the Asia Pacific region, where some 986 million believers make up the majority of the fastest-growing religious group in the world. An estimated $3.2 trillion in halal lifestyle spending will be expensed by 2024, according to the 2019 State of the Global Islamic Economy report from DinarStandard.
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.
Back in 2016, when the European Union (EU) released its General Data Protection Regulation (GDPR), lawmakers from the rest of the world welcomed it as a pioneering model to study and cite. So, when European Commission President Ursula von der Leyen announced in 2019 that her organisation had ambitions to take GDPR-like leadership in regulating Artificial Intelligence (AI), technologists and governance professionals across the globe took note. Ms. von der Leyen stated in a speech before the European Parliament last November, "With the General Data Protection Regulation we set the pattern for the world. We have to do the same with artificial intelligence."
Roughly 100 days later, in February 2020, the EU published the strategy paper, "White Paper on Artificial Intelligence - A European approach to excellence and trust." Disappointingly, an initial reading of the document suggests that regulators in Asia and the rest of the world should not expect GDPR-like leadership from Europe on the responsible use of AI. The authors of the EU white paper were certainly limited by the tight, 100-day deadline that was imposed upon them. Nevertheless, from an AI governance perspective, their report and its proposals seem timid, rather than bold. There is little that compares it to the ambitions that the GDPR showed for protecting data privacy. Consequently, the direction of AI governance may continue to be driven by countries like China, whose 2017 Artificial Intelligence Development Plan (新一代人工智能发展规划) highlighted their focus on quietly influencing international standards.
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.
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.
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.
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.
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.
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.
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.
The Vietnam fintech market was Southeast Asia's hottest in 2019 after Singapore, an impressive feat given that the Lion City is a hub for the entire region. From Jan. to Sept. 2019, Vietnam accounted for 36% of Southeast Asia's venture-capital fintech investment compared to 51% for Singapore, according to a December report from the United Overseas Bank (UOB), PricewaterhouseCoopers (PwC) and the Singapore Fintech Association (SFA). Vietnam was far ahead of other Asean economies, including Indonesia (12%) as well as the Philippines, Thailand and Malaysia (2% each).
Vietnam's Banking Strategy Institute reckons that the nation's fintech market will reach US$9 billion in value this year, which will make it the region's fourth largest. Fast growth in the fintech sector and the potential for the industry to boost financial inclusion probably explain why Hanoi nixed a plan to cap foreign ownership in payment service intermediaries at 49%, which was proposed by the State Bank of Vietnam (SBV) in November.
India fintech unicorn Paytm is shifting its focus to merchants in a bid to better compete with rivals Google Pay and Walmart-backed PhonePe. Paytm lags those two firms in its share of the transactions on India's state-backed real-time UPI payments system. As of October, UPI handled more than 50% of India's digital transactions, according to research firm Razorpay.
Credit Suisse reckons that India’s payments market could reach $1 trillion by 2023. Four or five major firms are likely to vie in India's payments market after consolidation, analysts say. A duopoly like Ant Financial-WeChat Pay in China is unlikely in the India market.