Financial Industry Blog - Kapronasia

Rumours are swirling that Alibaba’s Taobao will collaborate with UnionPay. While details are still unknown, this partnership is noteworthy as Alibaba's online payments system Alipay and UnionPay have been fierce rivals for the past ten years.

Apple has turned to the mobile payments industry after the smartphone business has slowed down, as a way to increase revenue streams. Apple Pay, Apple’s mobile payment and digital wallet service, has been very successful in the United States. However, Apple Pay has been struggling to tap into international markets due to technical problems, the lack of user adoption, and resistance from banks.

The Islamic banking system, where neither the borrowers nor depositors are paid or pay any interest, is set to launch in India. It will completely function under the tenets of sharia law, where the bank doesn’t charge interest but the customers share a part of profit or loss of the bank. The idea is to encourage the economic and social development of the region the bank is based in.

As the 'India stack' becomes mainstream, what will banking look like in the future?

Starting from only 18 employees and a small B2B platform, Alibaba has become an e-commerce giant in China and already expanded into many other industries. But Alibaba has no plans to stop, Alibaba is now working on an even bigger ambition: to insert itself into ever part of our everyday lives.

On May 20th, Samsung Pay and Alipay announced their intention to merge their online payment businesses. Now, users can import their Alipay account into Samsung Pay and with just one swipe, users can enable Alipay’s QR code. The whole process can be completed within 2 seconds, even if your screen is locked. This is a huge step for Alipay, since the new user experience increases convenience and eliminates the normal steps of finding the app and waiting for it to load. Alipay’s new process drastically decreases the inconvenience of using the QR code as a payment method. But it begs the question, why would Samsung betray UnionPay to partner with Alipay?

Over the past few years, Alipay, WeChat, and other mobile financial and non-financial platforms have become ubiquitous in China. This ubiquity has led to a fiercely competitive market, so increasingly these companies have begun to look overseas, expanding into foreign markets including Japan, Korea, and Southeast Asia. Although they are tremendously successful domestically, China's large tech players face multiple challenges when expanding abroad including regulation, which has become a real challenge for Tencent in Thailand as of late. 

Even with over 40 Acts directly or indirectly pertaining to pertaining to insolvency and bankruptcy, banks in India are still under tremendous pressure due to rising non-performing assets (NPAs). Multiple agencies are involved in handling these situations, with overlapping jurisdictions that creates complexities and delays.

On May 27th, the People’s Bank of China (PBoC) released the implementation details that will govern foreign investment in China’s interbank bond market. The new rules make it much easier for certain foreign investors to participate in Chinese bond market activities, such as borrowing/lending, futures/forwards, and swaps, including interest rate agreements. 

India's main regulator for capital markets, the Securities Exchange Board Of India (SEBI), has started implementing recommendations from the Special Investigation Team (SIT) appointed by Supreme Court of India to regulate Participatory-notes (P-notes).

The PBOC-backed 'Payments Clearing Association of China' published its annual report in May. We talked about some of the digital payments statistics from the report in our previous commentary, but the report also features ranking for China acquiring market, which is even more significant because such data has never been officially published before.

The Annual Payments Report by the Payment and Clearing Association of China was published on May 19th and showed the continuing growth in payment transactions in China. The total amount of online payments reached RMB 2,042 trillion, spread between commercial banks and payment service providers (PSPs).

On May 6th, the People’s Bank of China (PBOC) changed its policy for investors in the interbank bond market. These modified regulations will open up the market to new types of investors including asset managers, housing provident funds, pension funds and charities.

Global payments operator Fortumo and India’s Reliance Communications (RCOM) have launched direct carrier billing where RCOM’s customers can purchase digital content and games by charging the payments to their mobile bill or mobile prepaid account. Reliance customers can now enjoy a host of digital entertainment content on the move on their mobile devices, across movies, music, games and live TV, starting from just Rs. 10 (15 cents) for 1 day of access, all by paying through their mobile postpaid bill and mobile prepaid account.

For nearly 30 years, India’s double taxation avoidance agreement (DTAA) with Mauritius came in handy for investors to route money through ‘shell’ companies based out of the island nation. These investors saved on capital gains tax liabilities in Mauritius which does not impose these taxes on off-shore entities. A similar treaty exists with Singapore. As a consequence, India receives half of its FDI from just two countries: Mauritius (34%) and Singapore (16%).

Friday, May 20th was the first day when foreign commercial banks were allowed to trade yuan on the recently opened inter-bank forex market. The first batch of the banks will be able to trade both spot RMB and derivatives.

Last week in China, the China Securities Regulatory Commission (CSRC) prohibited listed companies from raising capital earmarked for investment in the following four industries: Internet Finance, Video Games, Film and TV, and Virtual Reality. The new prohibition is an attempt to steer money into the real economy, which is defined as industries producing tangible products and services. Permissions for mergers, acquisitions, and refinancing in those ‘unreal industries’ have been halted, as well.

Blockchain is a distributed, immutable ledger that records transactions using digital tokens. Its distributed architecture is much like P2P services such as Skype and bittorrent and it uses public key cryptography to ensure complete security for users. The immutability of entries on the blockchain is a key design feature that makes it particularly attractive to industries that lean heavily on trustworthy records, such as banks. But is India ready?

India’s banking regulator, the Reserve Bank of India (RBI), recently released a consultation paper on P2P lending in India. This paper aims at regulating India’s fledgling P2P ecosystem, demonstrating that the RBI is positively besieged with the concerns and realities of this nascent industry.

Although China’s newly issued April export/import data may be worrying on its face, when examined from a different angle, it may tell a more positive story.

In China this year, over 3,700 billion RMB (about 570 billion USD) worth of domestic debt will expire, a record-breaking amount. Many companies will face difficulty in rolling the debt over because of the limited size of the whole bond market. Even if just a small percentage of the whole market defaults, the amount defaulting would still be so large, it could start a crushing storm for an already vulnerable Chinese economy. Many defaulting state-owned companies are from sectors in difficulty as China slows, such as mining and heavy industry. This makes the possibility of default more likely to happen. And in the environment of a slowing debt market, things will probably get worse.

For several years the Indian Government has been pushing larger Public Sector Banks (PSBs) to consolidate the market by acquiring smaller and weaker banks. After failing several times in the past, it seems at least the merger of India's largest bank with its five associate banks will be finalised during this fiscal year.

As a growing number of foreign banks wind up operations in India, IT companies’ revenues from BFSI are growing slower than ever (21% in 2015 vs a projected 10% for 2016). Most IT majors derive a significant portion of their revenues from banking and insurance sectors - as high as 40% in some companies. However, this situation could improve with 'Payments Banks' (PB) set to roll out in the third quarter of 2016. 

The long expected payment system of smartphone producer Xiaomi has finally entered the market. By cooperating with China’s dominant card-payment processor China UnionPay, users can now make purchases by using their phone and Xiaomi Pay through China UnionPays’ Quickpass system. The company’s latest offering comes as the third-party mobile payment market continues to grow tremendously. According to research firm Analysys Mason, the market valuation was set at 16 trillion yuan in 2015. This has attracted not only Chinese companies such as Huawei and Xiaomi, but foreign companies, as well.

The pie of banking services in India is well spread out amongst various types of banks, ranging from private sector, public sector, foreign banks, rural banks and even cooperatives. However, market forces are starting to whittle down the once varied field of payment service providers (PSPs), and it is starting to look more like a two horse race similar to other e-commerce markets in Asia. 

Capital Small Finance Bank (SFB) was launched this Sunday (April 24, 2016) with much fanfare. This is the first of the ten small finance banks to become operational. The SFBs had received in principle approval from RBI last fiscal to start operations.

Shanghai Gold Exchange started trading a new gold contract on April 19th. The contract is meant to become a global benchmark similar to the gold fix originated in London and New York, but denominated in RMB.

There's a clearing platform in development that might change the playing field of the payments industry in China. The Payment and Clearing Association of China had a member congress in April and has approved a proposal to build an Internet payment clearing platform for non-bank payment institutions.

And these are not Fintech startups alone. The banking sector is trying to woo this very important and growing ecosystem in the country. Some banks have resorted to novel ways of doing so. RBL (Ratnakar Bank Limited) has announced opening of a branch in Bengaluru dedicated exclusively to cater to the growing startup ecosystem in that city.  This comes close on the heels of SBI recently announcing the establishment of its branch called InCube in Bengaluru recently. RBL bank plans to launch several such branches across the country in the future.

It is well understood that India continues to have acute challenges around financial inclusion. Only 40 per cent of the adults in the country have formal bank accounts, despite the country having 150 domestic commercial banks and over 2,700 co-operative sector banks operating in the country.

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