Hong Kong's future as a financial center is increasingly clear: It will be a global fundraising hub for Chinese firms, especially in the technology sector. These days, the biggest Hong Kong IPOs are almost all Chinese tech firms, whether the listings are primary or secondary. Non-Chinese tech firms are more likely to go public in New York or London. Following Alibaba's mammoth secondary share listing on the Hong Kong Stock Exchange in November 2019 - which raised US$13 billion - its arch-rival JD.com is reportedly planning a $US3 billion share sale in Hong Kong this year. Alibaba's primary listing is on the NYSE while JD.com is listed on the Nasdaq.
For Europe's cash-burning neobanks, the current economic downturn is a rude awakening. In March as Europe went into lockdown, the unicorn trio of Revolut, Monzo and N26 saw their growth rate drop by 18% to 36% in their home markets (The UK for the former two and Germany for N26), according to Sifted. These three digital banks - among Europe's most highly valued - have prioritized rapid growth over profitability. They have spent heavily to build scale quickly, assuming they will eventually move into the black on solid revenue-per-user figures. If growth suddenly stalls, their business models start to look less solid.
Indonesia's P2P lending sector has been growing fast for several years now, providing a vital credit channel for cash-strapped consumers and SMEs. In February, online lending increased 225% annually to reach US$6.1 billion, 80% of which was in the P2P segment, according to data compiled by the Indonesian government. Then the coronavirus pandemic hit the country of 267 million, plunging it into a technical recession. While several of the largest P2P lenders are weathering the coronavirus pandemic well, others are not so fortunate. The economic fallout from the virus may end up having a more profound impact on the industry's development than regulatory measures enacted last year to reduce compliance failures and protect consumers.
Malaysia was gradually moving in a cashless direction long before the coronavirus pandemic hit the country, forcing it into lockdown from mid-March until early May. The virus just may have accelerated Malaysia's cashless push though, as people out of necessity opted for contactless payments instead of those involving contact. Now, digital wallets are offering new incentives to consumers and merchants, while policymakers are tightening regulations around the use of cash. Malaysia's cashless vision appears to have gotten an unexpected boost from the pandemic.
Internet giants outside of China are trying to create a super app like WeChat, which users rely on widely to chat, buy goods on and offline, and bank. The payments application is the stickiest: Once WeChat became a preferred digital wallet, it had a captive audience for a much wider selection of banking services. For Facebook, which is shut out of China, India offers the chance to build a super app. There are more users of both Facebook and its messaging app WhatsApp in India than anywhere else on earth. Facebook has moved one step closer to that goal following its US$5.7 billion investment for a 9.9% stake in India's telecoms giant Jio, a subsidiary of the juggernaut Reliance Industries.
A growing number of global fintechs are eager to tap China's growing remittances business, the world's second largest after India. Given China's strict controls of money flows, the right local partner is important for gaining access to the market. Otherwise, regulatory hurdles are tough to surmount. In April, Singapore-based digital cross-border payments platform Nium announced it would partner with Geoswift, a counterpart headquartered in Hong Kong that specializes in clearing payments in and out of the Chinese mainland.
The economic downturn fomented by the coronavirus pandemic has been a rude awakening for cash-burning fintech startups. They and their backers are finding that there's a price to pay for championing breakneck growth over profitability. In contrast, fintechs with solid balance sheets, like London-based digital money transfer firm TransferWise (profitable for three years in a row), are poised to pursue targeted expansion. Tapping resilient demand for its cross-border payments services, TransferWise recently inked a partnership with China's Alipay and expanded to the United Arab Emirates.
South Korea is eager to introduce more digital applications into its financial system, but unsure how far it wants to go with digital currency. That goes for not just crypto, but central bank digital currency as well. For now, payments is one fintech segment in which South Korean tech giants are poised to launch new applications.
Libra is the most visible profile prong of Facebook's fintech offensive, but it may not be the most important. Not for now, anyway. U.S. officials and regulators remain circumspect about Facebook's digital currency project. Facebook has a long way to go before it wins their trust. In Asia, Facebook has a seemingly simpler task: Roll out the digital wallet of WhatsApp to monetize its large regional user base, concentrated in India and Indonesia. That's proving to be difficult too though.
In every crisis, there are opportunities. While many investors are tightening their belts during the coronavirus pandemic, some are opening their wallets. Now is the time to double down on certain investments. Take Australia's Airwallex as an example. The Melbourne-based cross-border payments platform closed a mammoth US$160 million (A$250 million) funding round in April, bringing its valuation to US$1.8 billion from US$1 billion. Less than half of the capital was raised in January, according to Australian Financial Review. Airwallex managed to raise the rest amid the pandemic's surge.
Xiaomi is the first Chinese smartphone maker to foray into digital banking. The Beijing-based firm secured a digital banking license in Hong Kong last year and began a trial period in late March. It also applied for a digital wholesale bank (DWB) license in Singapore, which allows the holder to provide non-retail banking services.
The Philippines has long been one of the most promising Asian markets for fintechs. The archipelago of more than 7,641 islands has a population of nearly 107 million, second only to Indonesia among Asean countries. Nearly 70% of adults in the Philippines are unbanked, while smartphone penetration in the country is growing steadily. Given the Philippines' geography - with many people living far from retail banks - and development stage, fintech adoption can drive financial inclusion.
Digital banking had been growing steadily in the Philippines prior to the coronavirus outbreak. The pandemic hit the country in early March, resulting in the government implementing a lockdown in the metro Manila area beginning from the middle of that month. Some banks have seen online banking grow more quickly since the restrictions were imposed than previously. Rizal Commercial Banking Corp. (RCBC) posted a 117% increase in new sign-ups for its online banking services from March 17-26 according to fintechnews.sg. RCBC also recorded a 633% increase in the number of times its cardless ATM withdrawal function was used during that period.
Finally after all the discussions about China's central bank digital currency, we're getting close to the actual launch as the platform goes into pilot.
As it turns out, Facebook's much hyped Libra cryptocurrency project is more evolutionary than revolutionary. Libra 2.0, rolled out in mid-April, is modest in its ambitions. Gone is the concept of a global digital currency to potentially rival the dollar and evade regulatory oversight. Instead, Facebook wants to launch a series of digital coins backed by fiat currencies. The proposal includes the idea to build a "digital composite" of some of the coins for cross-border transactions and use in countries with no virtual currencies. Of equal importance, Libra will not be decentralized and "permissionless." That was never going to fly with central bankers or politicians, who don't want to deal with Bitcoin on a much larger scale.
To be sure, many crypto diehards are crestfallen. Even those who are not fans of Facebook liked the idea of an anonymous, decentralized digital currency that might one day challenge fiat currency hegemony. If Facebook could have pulled off such a project, crypto in an iteration close to how Bitcoin founder Satoshi Nakomoto (a pseudonym) imagined it would have finally broken into the mainstream global financial system. When Nakomoto launched Bitcoin in 2009, he sought to reduce our reliance on centralized financial institutions to transfer funds, and instead foster anonymous peer-to-peer transfers on the blockchain.
2020 started well for Australia's neobanks. Deposit bases were growing quickly. Some Australian neobanks were on track to reach their deposit goals well ahead of their sales forecasts. That was before the coronavirus became a global pandemic. The virus has spread like wildfire globally in the past few months, sickening 2.5 million people and causing more than 170,000 fatalities. Australia has not become an epicenter of the outbreak, but it has still had to contend with thousands of cases and entered a strict lockdown on March 23. It is highly likely that the Australian economy will soon enter recession for the first time since 1991.
Under this scenario, neobanks may face a tough uphill climb. Grim economic conditions could affect Australians' willingness to switch their primary banking provider or even open a new account with a different provider.
Hong Kong issued eight digital banking licenses more than a year ago, but just one of the new virtual banks is fully operational, ZhongAn Insurance-backed ZA Bank. ZA Bank began operations this month after completing a mandatory trial in March. Three other Hong Kong digital banks recently began trials: Ant Financial's Ant Bank, Xiaomi and AMTD's Airstar Bank and Standard Chartered-backed Mox Bank. The other four Hong Kong digital banks have not announced when they will launch trials.
Initially, it seemed Hong Kong's virtual banks had arrived in the right place and at the right time. The city has plenty of banking options, but innovation among incumbents has been limited in recent years. Retail customers are eager for new digitally forward banking platforms. But last year's protests and the coronavirus outbreak have delivered a punishing blow to Hong Kong's economy. The city fell into recession well before the global economic malaise brought on by the coronavirus. Hong Kong's digital banks have struggled to gain momentum under these circumstances.
The Singaporean government recently released the second edition of its Model Artificial Intelligence Governance Framework, which includes recommendations for governing Artificial Intelligence that could influence international guidelines and regulations. The updated framework introduces some notable changes from the first edition, which was published back in January 2019. Among them are recommendations that AI developers and operators strive to make their systems human-centric, explainable, transparent and fair. This emphasis on responsible governance is in keeping with the Monetary Authority of Singapore's FEAT guidelines from 2019, and presents a stark contrast to the approach taken by the European Union in their recent white paper on Artificial Intelligence.
Singapore-based Arival Bank is one of the less high-profile applicants for a digital bank license in the city-state. It's easy to get lost in the crowd when you're competing against names like Ant Financial, Xiaomi and ByteDance. Arival Bank, a fintech startup, has applied for the same digital wholesale bank (DWB) license as those Chinese tech giants. In a nutshell, that license allows the holder to serve non-retail clients in Singapore. The Monetary Authority of Singapore (MAS) has said it would issue three DWB licenses.
Here comes China's blockchain bandwagon, ready or not. The novel coronavirus may have slowed the Chinese economy down, but now that life is slowly returning to normal, blockchain hype is back. China currently has about 35,000 blockchain companies, according to information portal Tianyacha. In Guangdong Province alone, there are 20,000 of them. Even amidst the coronavirus pandemic, more than 2,000 new blockchain companies were formed between January and March, according to Forkast News.
Unsurprisingly, most of these firms are not focused on distributed ledger technology. Research by Forkast shows that just over 500 of them have a state-issued blockchain service filing number. Without one of those, a company is not a certified blockchain provider in China. China's 01 Think Tank found that about 1,000 of 30,000 blockchain firms in China are engaged in business that uses distributed ledger technology.
The coronavirus outbreak is weighing heavily on the balance sheets of some neobanks, while others appear to be weathering the crisis well. For digital banks in Europe, which is the second hardest hit region behind the United States, the challenge to their businesses is particularly formidable. Very few of Europe's top neobanks by valuation were profitable before the contagion broke out. In fact, they occasionally played down the need to be profitable. WeWork's abortive IPO helped change their calculations. Yet it is hard to see how they will come closer to profitability amidst a painful economic downturn.
In early April, China's Starbucks rival Luckin Coffee was revealed to be a paper tiger. The company that was supposedly giving the U.S. coffee giant a run for its money in the world's largest consumer market had literally fabricated its success. To be sure, Luckin's 4,500 China stores - exceeding Starbucks' 4292 - were no mirage. But the company's sales figures were bogus. On April 2, Luckin publicized the results of an internal investigation showing RMB2.2 billion (US $311 million) in fraudulent sales from the second to the fourth quarter of 2019.
China's ByteDance, best known as the owner of the popular TikTok video-sharing app, is reportedly now the world's most valuable startup with a US$75 billion valuation or more. That's quite a price tag. Of course, since the valuation is occurring in private markets, it is difficult to assess its accuracy. WeWork was once worth US$47 billion too. Now the company is fighting for its survival.
To be sure, ByteDance is on firmer footing than Adam Neumann's troubled company. In the quarter ended Dec. 2019, TikTok's short-video app revenue increased 310% annually, according to research firm Apptopia. Overall, ByteDance recorded between US$7 billion and US$8.4 billion in revenue in the first half of 2019, data from Reuters show.
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.