Asia Financial Industry Blog

Before fintech took China by storm, visitors to the country only had to remember one simple rule for payments: Make sure to carry sufficient cash. International credit and debit cards often were not accepted outside of five-star hotels and high-end department stores. Inevitably, there was some hassle involved, especially as international bank cards didn't always work at local ATMs. Ironically, now that it's much easier to withdraw cash from local Chinese ATMs with a global bank card, Chinese merchants prefer cashless payments. The trend in China is to swipe a smartphone to pay for just about any ordinary transaction: a coffee at Starbucks, a restaurant meal, a taxi, a bottle of water from a convenience store. It's a breeze as long as you have a Chinese bank account and the requisite digital wallets from Alipay and WeChat Pay on your handset. 

Therein lies the problem for visitors to China. Many of them do not have a Chinese bank account, nor do they have WeChat Pay or Alipay installed on their smartphones. With cash being increasingly unwelcome, problems can arise easily. For instance, a shop may accept cash, but because so few transactions are done in cash, not be able to give a shopper proper change. If the merchant doesn't accept international credit cards, then the shopper is out of luck.

Neobanks are coming soon to Singapore, but the top incumbents appear cool as cucumbers. That's largely because the Monetary Authority of Singapore (MAS) favors a gradualist approach to fintech, rather than a disruptive one. When possible, the regulator encourages incumbents and fintechs to join hands.

Overseas Chinese Banking Corporation (OCBC), Singapore's longest established bank, is following that cooperative route favored by the MAS. Compared to its rivals UOB and DBS, OCBC "is a laggard...in the digitializing processes" according to a September research note by CGS-CIMB but is now eyeing one of Singapore's coveted digital-banking licenses.

The political unrest in Hong Kong has plunged the city's economy into recession for the first time since the global financial crisis of 2008-09. The retail and hospitality sectors have borne the brunt of the blow so far, but that's set to change barring a miraculous easing of tensions.

One of the most obvious impacts of the unrest on the financial sector is the delay of Hong Kong's planned launch of eight virtual banks. The neobanks, which are heavily represented by financial interests from the mainland, were set to swoop onto the scene and shake up a staid banking sector dominated by a handful of incumbents accustomed to high profits and meager competition. That would have been a boon for consumers and forced incumbents to up their game. In fact, ahead of the anticipated arrival of the neobanks, traditional banks had already started to slash some unpopular fees.

Fintech is generally considered a force for good in India, which has a large unbanked population and is eager to use digital financial technology to boost financial inclusion. But not all fintechs are created equal. And not all fintechs have such noble intentions.

India fintechs have begun lending money to people who can't get bank loans because they lack a credit history, the one they have does not instill confidence in lenders, or the banks just don't want to make personal loans. Of course, the lenders want to be sure they get their money back. And just as they can use borrower data to make a decision about whether to approve an applicant's loan, they can use that same data for debt collection. Here's the rub: That practice is often illegal in India, as well as in the United States, where some of startups' key investors are located.

Australia is not considered a country at high risk for money laundering. When the Financial Action Task Force (FATF) grades Australia on different AML criteria, it tends to award a "compliant" or "largely compliant" grade. Only 14 of 40 criteria were graded as "non-compliant" or "partially compliant" during FATF's most recent review of Australia. The most long-running of Australia's AML weaknesses are in the property market, where some analysts say unsavory characters from overseas launder illicit cash.

That's why the the recent money-laundering scandals involving one of Australia's biggest four banks come as an unpleasant surprise. The Royal Financial Services Commission's review of misconduct in the banking sector had already cast the biggest Australian lenders in in an unflattering light. Now Australia's financial intelligence agency Austrac is proceeding with legal action against Westpac, one of the four largest Australian banks, alleging that breached AML and counter-terrorism laws more than 23 million times in $11 billion in transactions. Some of the transactions reportedly involved the exploitation of children.

Brazil's Nubank has 15 million customers, making it the largest fintech in Latin America. Backed by heavyweight investors like Sequoia Capital and Tencent, Nubank has been using its sizable war chest - it raised $400 million in July - to embark on a rapid expansion spree in Latin America's largest country and economy. Analysts say that Nubank is valued at about US$10 billion.

Malaysia's digital payments sector is heating up as fintechs and incumbents enter into partnerships in a bid to strengthen their positions in the fast growing market. Research by Visa shows that 70% of Malaysians prefer to shop at retail outlets where merchants accept digital payments. The Malaysian market of 32 million people has plenty of room to grow, as cash still accounts for 60% of transactions. JPMorgan Chase expects that fast adoption of e-payments by Malaysians could see digital wallets surpass cash use by 2021.

The Chinese banking system is having a tough year. While the big banks are generally in fine shape, many smaller lenders are troubled. At some small lenders, primarily in rural areas, bad debt levels approach 40%. Beijing has already taken the unprecedented step of bailing out a trio of banks in succession this year, beginning with Baoshang Bank in May, and then moving on to Bank of Jinzhou and Hengfeng Bank.

Africa is integral to China's mammoth Belt and Road Initiative (BRI), a $1 trillion infrastructure plan intended to deepen economic links between China and the world. BRI in Africa usually brings to mind the construction of bridges, rail lines, airports and roads across the continent, but it increasingly involves digital infrastructure too. Africa, where China has been steadily building its presence since 2000, offers Chinese fintech investors opportunities they can't easily find elsewhere. It's one of the world's fastest growing consumer markets, is expected to reach a population of 1.7 billion by 2030 and is eager to boost financial inclusion with digital banking.

Recent media reports highlight falling fintech funding in Asia, citing new research by CB Insights. CB Insights reckons that Asia's fintechs will raise about US$4 billion this year, compared to more than US$23 billion last year. Ostensibly, it looks like a fintech winter is upon us, or at least a chilly autumn.

As tensions between China and the United States have escalated, the financial sector has been affected. The future of Chinese firms in U.S. capital markets has never been more uncertain, with the possibility of forced delisting real. Even if the related legislation never makes it to the Senate floor, Chinese firms will face much greater scrutiny than in the past when they file for an IPO on the New York Stock Exchange or the Nasdaq.

Yet, the fintech arm of Ping An, China's largest insurance company, has decided to file for an IPO in the U.S. anyway. Analysts had reckoned that Ping An's SoftBank-backed fintech unit, which is named OneConnect, would go public in Hong Kong, raising up to US$2 billion. OneConnect listed its offering size in the U.S. as $100 million, according to The Financial Times.

Even seasoned fintech observers are sometimes surprised to learn that the world's largest independent virtual bank by customers is not in China, India or anywhere in Asia-Pacific for that matter. Rather, it's in Russia, which despite being the world's largest nation by landmass is one of its least populous with just 145 million people. Founded in 2006 as a branchless credit card issuer, Russia's Tinkoff Bank has 8-10 million customers (depending whom you ask), which even at the lower end is more than any other independent digital bank.

Research by Hong Kong University shows that the city's fintech sector grew steadily from April 2018-March 2019. According to HKU's data, the Hong Kong FinTech Growth Index for 2019-20 increased by 52.9% during that period. Looking primarily at fintech customer adoption rate, the picture is relatively rosy - that figure grew by 113% compared with the 2018-19 fiscal year.

Examining the business environment though, the picture no longer looks so rosy. That metric only grew by 5% during the same period. Despite positive developments in terms of funding and capital allocation, concerns about the investment environment, government policy and regulations weighed on the fintech business environment, HKU found.

The Philippines is in danger of being listed once again as a high-risk money laundering country by the Financial Action Task Force (FATF), a global AML watchdog. To avoid ending up on a list that includes countries such as North Korea and Iran, Manila must address weaknesses in its AML and counterterrorism financing capabilities.

South Korea has been something of a fintech laggard compared to its neighbors in East Asia. Demand for native digital banking services among Korean consumers and businesses is robust, but regulators have erred on the side of protecting incumbents. South Korea's Financial Services Commission (FSC) even rejected all the applicants for virtual-banking licenses earlier this year.

The arrival of open banking could give South Korea's financial services sector a much needed shot in the arm, improving consumer choice and pushing banks to up their game. Customers would be able to manage multiple accounts and withdraw and transfer money from a single smartphone app.

Alibaba's secondary share listing in Hong Kong is back on track and now set for late November. The Chinese e-commerce giant eschewed Hong Kong for New York when it first went public in 2014, to the disapproval of some in Chinese officialdom. The Hangzhou-based company has been planning a secondary listing in Hong Kong to fund large-scale expansion plans. Those plans were put on hold amidst the worst political instability to hit Hong Kong since the late 1960s.

While the protests have yet to abate, Alibaba is ready to go ahead with its Hong Kong IPO anyway, with a probable date of November 26. The IPO is expected to raise up to $13.4 billion, analysts say. A draft prospectus reviewed by Reuters shows that Alibaba plans to use the money to invest in e-travel group Fliggy, Ele.me, an online delivery and local services platform, and YouKu, a Chinese variation of YouTube.

There is no doubt that fintech has boosted financial inclusion in China. Affordable banking services provided by the digital finance duopoly of Alibaba and Tencent have helped millions of individual Chinese and small businesses gain access to credit that traditional lenders would never have extended to them. In Tencent's case, its WeBank has performed a rare feat for a fintech: It has quickly become profitable (in under five years), built tremendous scale and largely escaped the ire of regulators.

India is the world's largest recipient of remittances. In 2018, Indians overseas sent home a record US$79 billion, according to the World Bank. The majority of remittances to India originate in the wealthy Gulf states of the Middle East, where there are many Indian workers. The No. 2 source of remittances to the subcontinent is the United States, followed by the United Kingdom, Malaysia, Canada, Hong Kong, and Australia.

Given the size of India's remittances market, there is a significant opportunity for fintechs, especially as the typical cost of sending remittances remains high. Fintechs who could offer remittances on the blockchain for a fraction of the fee of banks or other transfer services could tap a potentially lucrative market.

Policymakers in Beijing have long chafed at the preeminence of the U.S. dollar in the global financial system. Before the presidency of Donald Trump, it was something that they grudgingly accepted. After all, they weren't ready to let the renminbi float and open their capital account. And they still aren't. Both actions would be necessary to challenge the dollar's dominance as a global reserve currency.

Yet, amidst rising tensions with Washington that are creeping into the financial sector, Beijing is moving to challenge "dollar hegemony" in other ways. Finding a way to circumvent Washington's control over global financial flows is a priority. In late October, Russian media reported that China, Russia and India have decided to work together to develop an alternative to the SWIFT interbank messaging network that undergirds international finance. While Belgium-based SWIFT is independent, the U.S.'s rivals - and even some its allies - say that Washington has too much influence over the organization.

It can be hard to cut through the hype surrounding Facebook's cryptocurrency project and evaluate it objectively. Facebook champions the Libra stablecoin as a powerful vehicle for financial inclusion which would be easily accessible to its many users in developing countries without a bank account. To advance the Libra project, Facebook chief executive Mark Zuckerberg has been playing up its nationalist credentials. If U.S. regulators fail to greenlight Libra, then Washington will cede digital currency ground to Beijing, he says.

"China is moving quickly to launch a similar idea in the coming months," Zuckerberg told the House Financial Services Committee in October. "If America doesn't innovate, our financial leadership is not guaranteed."

Hong Kong's major banks have long enjoyed high profits. Competition has been limited. A few heavyweights dominate the sector: HSBC, Standard Chartered, Bank of East Asia, Hang Seng. With the arrival of virtual banks earlier this year, the market was already on the cusp of a sea change. Retail banks realized that they would have to up their game to stay dominant. Then political turmoil swept over the former British colony in June, bringing into question its viability as a global financial center.

Choppy waters lie ahead for Hong Kong's banks, which have been battered by protests, the Sino-U.S. trade war and the slowing Chinese economy. It's unlikely that Hong Kong banks' profits per employee will remain higher than any other market. That was what Citigroup analysts found in 2018, a recent Wall Street Journal report noted.

Misunderstanding of China's blockchain aspirations remain widespread. Virtual-currency enthusiasts once thought the Middle Kingdom would be crypto central. They were wrong: China doesn't want to be a hub for all things crypto, but it does want to harness the underlying blockchain technology to boost its technological prowess, improve the integrity of supply chains and overcome bottlenecks across many industries - notably the financial services sector.

It was with those goals in mind that Chinese President Xi Jinping recently called for a larger role for blockchain in China's economic development. According to state-run Xinhua, Xi urged "deep integration of blockchain with the real economy," which he said could help SMEs get better access to credit as well as strengthen risk management in banking and the supervision of government agencies. He further said that China has a "solid blockchain foundation" and called for the nation to accelerate the development of blockchain technology and strengthen related basic research.

Hong Kong has had a tough year. Following more than four months of protests, the city's economy slipped into recession for the first time in a decade in the third quarter, contracting 3.2% in the July-September period compared to the quarter ended June 2019. The political instability shows no signs of easing either.

Yet, Hong Kong has led the world in initial public offerings since early September. Data compiled by Bloomberg show first-time share sales on the Hong Kong Stock Exchange are US$7.9 billion since September 1, ahead of the Nasdaq's US$7 billion and the New York Stock Exchange's US$3 billion. Anheuser-Buschs's US$5.8 billion IPO of its Asian unit accounted for the lion's share of new Hong Kong listings.

Indonesia just might have the world's hottest P2P lending sector at the moment. We haven't seen this kind of growth in P2P since before a series of huge scams marked the beginning of the end for China's P2P market. From January to May, the Indonesia P2P sector expanded 44% to reach IDR 41 trillion (US$2.92 billion), according to Indonesia's Financial Services Authority (OJK). That healthy growth represents a moderation from the 645% increase in the year to December 2018.

The Philippines is the world's No. 4 remittance market and growing fast, offering ample opportunities for fintechs. In August, Filipinos overseas remitted $2.88 billion, up 4.6% over $2.76 billion received in the same period a year ago and the highest since May, according to government data. About 10 million Filipinos work abroad. Remittances are the Philippines’ top source of foreign exchange income. A steady inflow of dollars into the Philippines from overseas helps protect the economy from external shocks, analysts say. 

At present, banks and transfer services dominate the Philippines' remittance business. The Philippines received US$34 billion in remittances last year (behind Mexico, China and India), according to the World Bank. Imagine if fintechs could capture even a modest portion of that business.

When it comes to financial reform in China, the devil's not in the details. It's in the implementation. When Beijing wants to enact change in the financial system, it can do so quickly. Consider the rise of fintech in China over the past five years. It's transformed the Chinese financial system. Unfortunately, foreign firms largely missed out on that opportunity. Paypal, who just got approval to enter China, is arriving a bit late to the party. Never mind that, say some observers. If only Paypal can get 3-5% of that market of 1.4 billion people, it will have a sizable business, they say. If only.

That brings us to the latest chapter in the Chinese financial reform saga. In early October, China’s securities regulator announced it would scrap foreign ownership limits on fund management companies from April 2020. Global asset managers would very much like increased access to China's massive $2 trillion retail fund market. This would seem to be their chance.

Singapore is expecting sub 1% economic growth this year, but you wouldn't know it from the city-state's booming fintech sector. Research firm Accenture estimates that investors sank $735 million into Singapore fintechs from January-September, up 69% year-on-year and surpassing the $642 million for all of 2018. The top areas for investments are payments (34%), lending (20%) and insurtech (17%).

Korea's Financial Services Commission (FSC) surprised some observers by rejecting all of the applicants for a virtual banking license earlier this year. The FSC had different reasons for saying no to the applicants. In the case of Toss, a peer-to-peer money transfer app owned by Korean fintech unicorn Viva Republica, the FSC worried about the ownership structure of Toss Bank and its funding capabilities.

Since its return to China in 1999, the former Portuguese colony of Macau has become the world's gambling capital, with a casino industry far larger than Las Vegas's. Macau's huge gaming sector has helped the territory maintain strong economic growth over the past two decades, even during the global financial crisis of 2008-09. However, reliance on gaming exposes Macau to an unusually high level of financial crime risk. Despite government efforts to tackle the problem, Macau remains at high risk for money laundering.

Given Macau's money laundering travails, it may come as a surprise that the territory has plans to launch a stock exchange. After all, strong regulatory compliance is a necessity for any city with ambitions to become a financial center. It goes hand in hand with the rule of law. Neither Hong Kong nor Singapore could have become financial centers without both of these attributes. Nevertheless, He Xiaojun, director of Guangdong Province's Financial Supervision and Management Authority, said in October that Macau had submitted a plan to set up an RMB-based stock exchange to the central government. There is hope that the stock exchange will become “the Nasdaq of the People’s Republic of China," he was quoted as saying by TDM Chinese Radio.

India fintech sensation Paytm plans to reduce its losses by 1/3 to $400 million annually, according to The Times of India. Softbank and Alibaba-backed Paytm is India's most valuable tech startup with a $10 billion valuation, but has been burning cash at a torrid clip for years, like many of its peers across the region. In the 2019 fiscal year, Paytm lost a whopping $600 million, up 300% over the same period a year earlier.

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