As technology has improved over time, so have financial services. Embedded finance – financial services provided via non-financial platforms or apps – is another iteration of this journey, and it is playing out in real time throughout Asia’s financial ecosystem.
Platform companies in Southeast Asia all want to capitalize on fintech opportunities, but Indonesia’s Bukalapak may be better positioned than others to do so. The reason is simple: First of all, Bukalapak’s core offering is e-commerce, which is the online service that best syncs with digital financial services, especially compared to something like ride hailing. Sorry, Grab and Gojek. Second, Bukalapak is based in Indonesia, which has a huge unbanked but digitally forward population. The company can ride the waves of both surging e-commerce and digital finance adoption rates.
Japan’s stock market rally is a pleasant surprise amid intense geopolitical tensions in its neighborhood and a tough year overall for capital markets. It seems global investors have a renewed faith in Japan Inc. The Nikkei has notched a 14% gain so far this quarter, reaching a 33-year high in early June. Up 22% this year, the Japanese benchmark is way ahead of most of its peers. Though some analysts say that structural problems in the Japanese economy could ultimately diminish investor interest in Japanese stocks, for now the market remains red hot, with yet another boost from better-than-expected GDP growth in the first quarter.
If you were wondering how long Binance could avoid a serious regulatory storm, you have your answer: until now. The United States’ Securities and Exchange Commission (SEC) last week announced it would file 13 charges against the world’s largest cryptocurrency exchange. Charges include operating unregistered exchanges, broker-dealers, and clearing agencies; misrepresenting trading controls and oversight on the Binance.US platform; and the unregistered offer and sale of securities. “Through thirteen charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” SEC Chair Gary Gensler said in a statement. Ouch.
For the longest time, the China payments market was an oligopoly of the privileged three: first the state-owned UnionPay, and then as the country transitioned to mobile payments, Alipay and Tenpay. U.S. card giants like Visa, Mastercard, and American Express as well as PayPal could only look on with envy and frustration as Beijing kicked the can down the road on boosting market access – which was supposed to have been complete by 2006 per the conditions it agreed to upon accession to the World Trade Organization in 2001.
The release of a white paper by the Beijing municipal government about Web3 offers a good opportunity to revisit China’s progress in this emerging area of digital finance. According to Chinese media reports, the white paper emphasizes Beijing’s intention to enhance policy support and expedite technological advancements to foster the growth of the Web3 industry. The key takeaway for us from this document is that China will push forward with its blueprint for a unique Web3 ecosystem that minimizes the role of cryptocurrency or even completely omits it.
It was bound to happen: South Korea’s most successful digital bank has started to have global – or at least regional – ambitions. Kakao Bank is one of the few digital lenders in Asia to reach profitability quickly (within just two years) and stay there. In fact, Kakao accomplished the unlikely feat of reaching profitability and going public within five years. One of the reasons Kakao has been successful is that it has eschewed gung-ho global expansion, which has helped keep its costs at a more reasonable level than most neobanks. Now, however, it is eager to try its hand in several Southeast Asian markets.
They say it’s lonely at the top, and once you get there, someone always wants to take you down. Revolut must feel that way. It towers above most fintech startups in this era of slashed valuations, more-demanding investors and scaled-down expansion. Though Revolut’s valuation has fallen from the absurdly high US$33 billion of 2021 to a still-lofty $18 billion today, its ambitions have not diminished. The company is trumpeting the fact it now has 30 million retail customers. But there remains one factor that could cut Revolut down to size: being denied a banking license in the UK.
The paramountcy of the SWIFT interbank messaging network to cross-border payments can be measured in many ways, and SWIFT itself likes to do so with its data on transaction numbers and amounts. For instance, as of December 2022, Swift had recorded an average of 44.8 million FIN messages (payments and securities transactions) per day during the year, a year on year rise of 6.6%.
The last time Japan’s stock market was soaring this high, its bubble economy had yet to burst and the Soviet Union still existed. On May 22, the Nikkei index crossed 31,000, hitting a fresh 33-year peak. With gains about 20% for the year, the Nikkei is the top performing Asian stock exchange and just behind the Nasdaq globally. Brokerage SMBC Nikko Securities expects the Nikkei to end the year at 35,000, while Sumitomo Mitsui DS Asset Management expects the index at 33,500.
Chinese companies keen to raise capital overseas have largely shifted away from the U.S. in recent years amid persistent geopolitical tensions. Europe has emerged as a viable alternative, especially Switzerland’s SIX Exchange. While no European country’s capital markets are as liquid as the U.S.’s, the overall process in Europe is much smoother for Chinese firms these days. That said, new GDR issuance rules mandated by Beijing will probably adversely affect the European deal pipeline.
Raising money is not nearly as easy it used to be for fintechs, but that has not stopped PhonePe. India’s Walmart-owned payments fintech giant just raised another US$100 million from private equity firm General Atlantic as it races towards a US$1 billion fundraising goal. PhonePe is arguably the most prominent Indian fintech unicorn that has yet go public, with a valuation of US$12 billion, massive transaction volume and a commanding presence on the ubiquitous United Payments Interface (UPI) payments rail.
Across Asia’s emerging markets, earned wage access (EWA) has been gaining traction rapidly in the past two years. In a nutshell, EWA platforms allow employees of a company to access a portion of their earned pay before payday. EWA is catching on fast in some of Southeast Asia’s largest emerging markets where per-capita GDP remains relatively low and significant portions of the population are either unbanked or underbanked.
Cryptocurrency may have originated in the G7 – if we assume Satoshi Nakamoto is Japanese – but in practice developing countries have often been the most enthusiastic about embracing decentralized virtual currencies. The reason is simple: Crypto’s promise of financial democratization has a strong appeal in countries where large segments of the population lack access to certain banking services.
While many IPO markets are lukewarm at best this year, the Indonesia Stock Exchange is doing comparably well. Globally in the first quarter, a total of 299 IPOs raised US$21.5 billion, a sharp decrease of 61% over the same period a year earlier. The usual suspects are responsible: high interests, stubborn inflation, geopolitical tumult – as well as some big and unexpected bank failures. Yet IDX had a cracking Q1: Its US$1.45 billion in IPO proceeds from January to March was its best-ever first-quarter tally, outstripping Hong Kong, Tokyo and London.
How many platform companies outside of China have been able to make the super app concept work? Last time we checked, the only profitable one with a thriving fintech unit is Korea’s Kakao, and the jury is still out on that company. Unlike Korea or China though, Southeast Asia is an extremely heterogenous market – if we can even call a region with 11 countries that speak many different languages a single “market” – which means that a one-size-fits-all super app was never going to be an easy sell. On top of that, Southeast Asia’s consumers have limited spending power while competition in digital services is intense. Grab’s first-quarter performance highlights the challenge platform companies in the region face.
Sea Group is no longer losing hundreds of millions of dollars. Instead, it’s making tens of millions. In the quarter ended March 2023, Sea posted a profit of US$88.1 million. With Sea now reaching the promised land of profitability, one would think that investors would react exuberantly. Not so. Instead, Sea’s stock slid almost 18% on May 16, the day it announced Q1 earnings, to close at US$72.45.
This commentary was written in collaboration with Banking Circle.
The majority of cross-border payments are currently carried out via telegraphic transfers supported by SWIFT’s network of correspondent banks. These transfers are often criticized for being slow and expensive. A transfer can take several days to complete, while the World Bank estimates the average cost of a transaction to be about 6% of the transfer value.
In East Asia, digital banks often are incumbent banks and tech giants in disguise, not so much disrupting the market as putting a new spin on an old story. There are exceptions though, and the Philippines is arguably the most prominent. A unique confluence of factors, from its unique island geography (it has about 2,000 inhabited islands) to complacent incumbents to a significant unbanked population to a central government plan that relies on digital finance to rapidly boost financial inclusion, has given online lenders a real chance to shake up the market and challenge incumbent lenders.
In its competition with Hong Kong to be Asia’s top fintech hub, it is pretty clear Singapore has won. Its linkages to Southeast Asia and India – where the fintech growth story is – are superior, while Hong Kong is more narrowly focused on mainland China, where fintech peaked a while back. Singapore also weathered the pandemic better. That said, Hong Kong is emerging as a strong player in green finance, with some analysts giving it the edge over Singapore.
Since China unveiled the digital renminbi several years ago, it has been hyped as a juggernaut that would dethrone the dollar in the international financial system while relegating China’s domestic e-payments duopoly of Alipay and Tenpay to supporting roles. The digital yuan’s biggest boosters – usually not Chinese policymakers – made such predictions without offering compelling evidence to support their arguments.
It’s all about financial inclusion: That’s why buy now, pay later (BNPL) is continuing to grow briskly in Indonesia, why regulators are maintaining a light touch, why venture capitalists and others keep pouring money into the country’s BNPL firms. Indonesia has an unbanked population of 181 million that is larger than the populations of most countries and many more underbanked people. Interest-free (if you pay on time) installment payments seamlessly integrated into e-wallets could become a dominant form of de facto credit in the country.
2022 is a tough act to follow for China’s IPO market. Last year, about 400 firms went public on China’s exchanges, raising a record RMB 560 billion (US$80.4 billion), an increase of 3% over 2021, according to PwC. Investor appetite was strong last year amid a resilient Chinese economy, tech firms continuing to emerge, and large red-chip companies listed overseas returning to mainland stock markets. While Chinese exchanges are unlikely to equal their stellar 2022 performance this year, they still have thus far raised five times as much as their U.S. counterparts.
Vietnam is a unique fintech market. It may be the most fragmented of all the major ones in Southeast Asia, where dominant players have yet to emerge in most market segments. Because of the extreme fragmentation, Vietnam has produced fewer unicorns than Indonesia or the Philippines, and that makes the ones that do exist all the more notable. The one fintech firm in Vietnam that can realistically make a play for super app status is MoMo, which hit the US$1 billion valuation in December 2021 and has continued its steady ascent since.
This commentary was written in collaboration with Banking Circle.
Given the hype around the nascent decentralized third iteration of the internet, it is common these days to read or hear that “Web3 is the future of payments.” But is it?
The rising ubiquity of smartphones together with broader digital transformation in the business world are catalyzing the adoption of artificial intelligence (AI) in the financial services sector. As AI matures and becomes more widely integrated into business operations, this trend is set to accelerate.
Singapore has long competed with Hong Kong in asset management. While the latter’s industry is still larger, the city-state’s has been growing expeditiously, buoyed by an influx of capital from China as well as the broader global super rich. Singapore's assets under management grew 16% to S$5.4 trillion (US$404.6 billion) in 2021. More than 75% of that originated outside Singapore, with about 30% coming from other Asia-Pacific countries.
What is going on with Malaysia’s digibanks? All that hype about who would win the licenses, lots of anticipation, the announcement of the five winners, and a year later there seems to be little demonstrable progress. According to a recent report by The Ken, Malaysian digibanks have a human capital problem: That is, they are having a hard time finding the right talent. Without the right people, the five digital lenders will not be off to a strong start.
Hong Kong’s IPO market had been expected to perform well in the first quarter following the easing of both China’s tech crackdown and zero-Covid policy. With both of those market disruptors in the rearview mirror, it stood to reason that Hong Kong’s capital markets could get back to business as usual. Alas, it was not meant to be. In the January-March period, Hong Kong IPOs raised just US$837 million, a 52% annual decrease and the worst performance since the global financial crisis in 2009, according to data compiled by Refinitiv.
China is currently the world’s largest emitter of greenhouse gases, accounting for nearly 1/3 of the global total. Beijing is well aware of the effect its emissions have on climate change and has pledged to be carbon neutral by 2060, with emissions peaking in 2030.
During the pandemic, the idea of a travel-focused super app built on top of an airline and focused on the Asia-Pacific region seemed iffy. After all, international travel was grounded in Asia for longer than anywhere else in the world. But with the pandemic in the rearview mirror at last, Capital A CEO Tony Fernandes’ idea is starting to make more sense. All the groundwork AirAsia did to build its super app may come to fruition before long.
This commentary was written in collaboration with Banking Circle.
It was one thing for the European Union (EU) to talk about enacting comprehensive cryptocurrency regulation: It is another to pass the corresponding legislation. That is exactly what the EU did in late April with the long-anticipated Markets in Cryptoassets (MiCA) directive. MiCA will regulate the cryptocurrency sector with common rules across all 27 of the EU’s member states.
Several years in the making, MiCA is part of a broader push by the EU to regulate digital finance more like it does the rest of financial services. Other legislation focused on this objective includes the Digital Operational Resilience Act (DORA) and the DLT Pilot Regime Regulation.
Once it goes into effect in July 2024, MiCA will classify crypto in three categories subject to different regulation based on their underlying risk: electric money tokens (EMTs), asset-referenced tokens (ARTs) – both of which are variants of stablecoins – and all others. The “others” will include non-pegged payment tokens like bitcoin.
Under MiCA, any firm providing crypto services in the EU must register in one of the bloc’s member states. Once they do that, they can operate throughout the EU. The European Banking Authority and the European Securities and Markets Authority will be responsible for ensuring compliance by crypto firms to eschew another FTX-like catastrophe.
And it is no exaggeration to say that the sudden, rapid implosion of the erstwhile US$32 billion exchange highlighted the urgency of implementing regulations for the crypto sector.
“Under the MiCA regime, no company providing crypto assets in the EU would have been allowed to be organized, or perhaps I should say disorganized, in the way FTX reportedly was,” Alexandra Jour-Schroeder, deputy director general at the European Commission’s financial-services arm, said in November, shortly after the once-massive exchange imploded.
With the adoption of a unified regulatory framework for digital assets, the EU is taking a step no other jurisdiction has to date. Chances are – barring a dramatic increase in severity of the crypto bear market – that the many crypto fence sitters will feel more pressure to act.
“It would be a surprise if other jurisdictions like the UK and the US aren’t quick to follow suit and further accelerate their crypto regulatory efforts,” Alisa DiCaprio, chief economist at enterprise blockchain firm R3, told Bloomberg.
In fact, in the lead-up to MiCA’s passage in April, crypto venture capital investment in Europe overtook that in the U.S., according to data compiled by Pitchbook. Prior to the January-March period, Europe had rarely, if ever, led the U.S. in that category.
The EU should be commended for its efforts to develop a robust and enduring regulatory framework for digital assets. It is likely that the benefits of the legislation will outweigh its shortcomings, and it could set a global standard for crypto regulations.
That said, MiCA has a few potential problem areas worthy of note. CoinDesk identified one in late 2022: Although MiCA requires companies targeting the EU market to register with a local regulator, certain exemptions exist that could be exploited.
For instance, if a company based outside the EU provides relevant crypto-asset services at the "own exclusive initiative" of a customer residing within the bloc, that company does not have to obtain authorization under MiCA. Similar provisions exist under the EU’s Markets in Financial Instruments Directive 2014 (MiFID II).
Known as “reverse solicitation,” this scenario exists for practical reasons. It is challenging for regulators to control how companies and individuals in the EU engage with overseas crypto firms and a blanket ban on such activity like China has implemented is not feasible for Europe.
EU officials say that the risk of reverse solicitation being abused could be mitigated if other jurisdictions adopt similar regulations to MiCA. Perhaps, but easier said than done. It is too early to say whether other countries will follow the MiCA model.
MiCA also imposes some restrictions on stablecoins that crypto diehards are chafing at. MiCA will require operations to maintain local reserves and face trading caps on non-euro-denominated tokens not backed by fiat currency.
Glass half full
Imperfect as it may be, MiCA represents an important step forward in the ongoing and arduous process of cryptocurrency regulation. Detractors of the legislation, which often point out it does not regulate NFTs, should recognize that effective regulation of a new asset class and its underlying technology does not happen overnight.
What MiCA will accomplish in the short run is an elevation of cryptocurrency from the financial underground to the aboveboard mainstream. Bringing crypto out of the shadows and under some centralized regulatory control will disappoint some decentralization zealots, but more importantly, it will help curb fraud, money laundering and other malfeasance that easily proliferate in the absence of proper regulation.
MiCA could also, in the long run, boost the development of a thriving Web3 ecosystem undergirded by stablecoins. For stablecoins to be adopted widely, two factors are crucial: building the proper infrastructure and implementing the right regulation. To the first point, better infrastructure is still needed to enable Web3 payments. With regards to the second, MiCA is likely to be a key part of it.
MiCA mandates that stablecoins are sufficiently backed, have capital requirements for issuers, and have issuance limits. It also focused on transparency. The clarity introduced by these rules will likely boost the confidence of consumers and business to use stablecoins, ultimately catalyzing much wider adoption throughout the EU.
Asset-backed stablecoins are ideal for Web3 payments given their stability against fiat currencies, giving banks and payments providers the ability to facilitate payments outside traditional bank rails. Stablecoins also have significant reconciliation, speed and cost advantages.
Wider adoption of stablecoins, which are cheaper and faster than other instant payment schemes, could ultimately help break down payment barriers, democratizing finance and creating new international growth opportunities for SMEs, especially in markets where correspondent banking is less mature.
This commentary was written in collaboration with Banking Circle and originally appeared on Banking Circle.
2023 has been an eventful year for renminbi internationalization thus far with China striking deals with several different countries to increase trade settlement in the Chinese currency. The renminbi seems destined to become increasingly important in international trade. While some of the media attention given to these deals would suggest they herald a broader de-dollarization movement, the reality is more nuanced.
In recent years, political tumult and Covid restrictions have dented Hong Kong’s reputation as a global financial center. Yet Hong Kong faces another type of challenge now: how to best capitalize on opportunities afforded by the financial sector’s rapid digitization. That is where Hong Kong’s newfound interest in cryptocurrency derives, especially given how it has lost some ground to Singapore in wealth management and fintech.