2020 is off to a good start for South Korean fintech unicorn Viva Republica. The PayPal-backed firm received preliminary approval from South Korea's Financial Services Commission for a license to operates its neobank Toss Bank. Toss Bank will be permitted to offer a suite a retail banking services, including current accounts, credit and loan products. Toss Bank is expected to launch in the first half of 2021.
Viva Republica can finally breathe a sigh of relief. The FSC rejected its initial digital banking license application last year on the grounds that it had a problematic ownership structure - ie: a tech company holding a large majority stake - and ability to raise funds. The FSC noted that Toss Bank lost 44.5 billion won in 2018, raising doubts about the neobank's plan to increase its capital more than fourfold in three years. The FSC's point about funding was salient, given the tendency of fintechs to burn through cash without blazing a trail to profitability. Viva Republica evidently revised its fundraising plan in a satisfactory manner on the second go.
Although the U.S. and China are on the verge of signing a phase one trade deal, the trade war is far from over. Most of the hundreds of billions of dollars in tariffs the two countries have levied on each other over the past 19 months remain in place. The bilateral relationship is as fraught as at any time since the establishment of diplomatic relations in 1979. Yet, the "financial war" forecast by pundits hasn't materialized.
Vietnam is ready to finalize plans for a regulatory sandbox for fintech banking and cashless payments, according to Asia financial magazine The Asset. The Vietnamese government issued Resolution 01 on January 2, which outlined significant tasks and solutions to bolster the country’s socio-economic development in 2020. The sandbox is expected to support the growing sharing economy in Vietnam as well as numerous local startups.
The State Bank of Vietnam (SBV) has been a supporter of the fintech sector since 2017. In addition to establishing a fintech-focused steering committee, the SBV created the initial proposal for a fintech sandbox in Vietnam. Deputy Director of Payments at the SBV, Ngo Van Duc, said that the Vietnamese government needed to develop new regulations and policies to ensure the continued development of the fintech sector in Vietnam and that the creation of a regulatory sandbox for fintech was an urgent need.
The former Portuguese colony of Macau, China's answer to Las Vegas, has long struggled to diversify its economy away from gaming. Efforts to promote MICE and family tourism have had limited success. After all, Macau is small and faces stiff competition in the region.
Yet, amidst relentless political turmoil in Hong Kong - China's only global financial center - Beijing has found a new opportunity for Macau: offshore finance. While Macau cannot replace Hong Kong, it might be transformed into a secondary offshore financial center for China. Macau benefits from the same one country, two systems model that governs Hong Kong, although the former's legal system is Portuguese rather than British, and doesn't enjoy the same prestige.
Singapore's ride-hailing unicorn Grab is Southeast Asia's answer to Uber. But as Uber's cash-hemorrhaging business model has come under closer scrutiny, Grab has been racing to rebrand itself: first as a digital bank, then as a "super app" that will offer users in Southeast Asia the same bevy of services as WeChat does in China.
Grab has teamed up with a number of financial-services incumbents in its bid to become a digital bank, but there's a problem with that approach: Incumbents want to co-opt Grab, not let in move in on their core revenue drivers. That's why it makes sense for Grab to apply jointly for a Singapore digital-banking license with telecoms giant Singtel. The two firms have plenty of synergies and no conflicting interests. They applied for the license as a consortium just before the December 31 deadline, with Grab holding a 60% stake and Singtel 40%.
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.
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.
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.
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.
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.
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.
In Asia's red-hot fintech scene, Taiwan flies largely under the radar. That's largely because no unicorns have yet emerged among its fintech startups, or any other startups for that matter. Taiwan did introduce a fintech regulatory sandbox in late 2017 and more recently established regulations for security token offerings (STOs), but the policies have yet to activate the fintech market. Fintech investment in Taiwan remains limited, especially compared to regional hubs like Singapore and Hong Kong.
If there ever was a market that could benefit from open banking, it would be Hong Kong. A small group of powerful incumbents has long dominated retail banking in the former British colony, leaving consumers frustrated with the lack of options. Data from Goldman Sachs show that HSBC, Standard Chartered, Bank of China and Hang Seng Bank account for 2/3 of retail banking loans in Hong Kong. Those four banks are even more dominant in the credit card and retail mortgage markets.
Among Asian banks, Singapore's DBS is among the most active in fintech. It has a partnership with Indonesian ride-hailing giant Go-Jek, a fintech accelerator in Hong Kong and a tech-driven Innovation Plan covering machine learning, cloud computing and API development. It has thus far created a platform of 155 APIs across roughly 20 categories. Given that DBS is well ahead of the curve when it comes to financial technology development, should it be concerned about Citibank's recent deals in its neighborhood?
Demand for cross-border remittances is surging across Southeast Asia, home to a sizeable migrant worker population and many of the world's fastest growing economies. The amounts being remitted by the region's 21 million migrant workers are considerable - $68 billion annually, according to Siam Commercial Bank (SCB). Given their modest earnings, migrant workers need affordable banking services. They cannot easily absorb the high fees associated with some traditional remittance services.
In the early 2010s, back when Donald Trump still hosted The Apprentice and the title of "Tariff Man" belonged to Herbert Hoover, China was pursuing high-profile financial reform. Shanghai, tasked by the central government with becoming a global financial center by 2020, was abuzz with the sound of renminbi internationalization. The Lujiazui financial district regularly hosted forums where participants benchmarked the growing use of the yuan in trade settlement, the rise of offshore yuan trading hubs in Hong Kong and London and the renminbi's path to global reserve currency status.
Financial reform in China has been stalled for years. Foreign banks have never managed to hold more than about 2.4% of the market - and that was back in 2007. KPMG estimates their share of domestic assets actually fell to just 1.32% by the end of 2017. The renminbi internationalization process gives new meaning to the term "incremental." The exchange rate remains controlled and the capital account closed, just as they were a decade ago when Beijing began promoting the yuan's use globally.
Yet, there are signs of change. In September, Beijing granted Deutsche Bank and BNP Paribas the right to underwrite onshore debt in China, a first for foreign banks in the world's second largest economy. Later in the month, China removed limits on two institutional investment policies that allow foreigners to invest in Chinese financial markets: the QFII scheme (dollar-denominated) and RQFII (yuan-denominated). Those moves follow Beijing's decision to allow foreign banks to take majority stakes in local securities joint ventures.
In China's peer-to-peer lending sector, there's no such thing as too big to fail. Chinese authorities have since last year been cracking down on widespread impropriety in the once ascendant segment. Even the preeminent platforms have not escaped unscathed, leaving many observers wondering if we have reached P2P's twilight in China.
Two years ago, Laos was removed from the Financial Action Task Force's (FATF) money-laundering grey list after the landlocked Southeast Asia country showed some improvement in its AML policies. Since then, however, progress has been limited. Laos's casinos, property market and money exchange shops remain at high risk for money laundering. No money laundering case has made it to court. The onus is on Laos to better control financial impropriety ahead of a 2020 evaluation of its AML policies. Failure to do so could result in a return to the grey list.
Not even the failure to obtain a virtual-banking license can dampen investor interest in South Korea's fintech unicorn Viva Republica and its digital banking platform Toss. In mid-August, Viva Republica announced it had raised $64 million from a group of investors led by Hong Kong-based Aspex Management. The latest capital injection brings Viva Repubica's total valuation to US$2.2 billion and follows an $80 million funding round in December co-led by Korean investors, Kleiner Perkins and Ribbit Capital.