Roughly a year ago, Hong Kong looked set to take a leading position in Asia's nascent digital banking space. In late March 2019, the Hong Kong Monetary Authority (HKMA) awarded three digital banking licenses. It later issued five additional licenses. The eight neobanks, which include consortia led by Chinese tech giants Ant Financial, Tencent and Xiaomi, were reportedly set to begin operations in the second half of 2019.
Then came the Hong Kong protests. The political turmoil that erupted in June 2019 has shaken confidence in Hong Kong's once unassailable position as the region's top global financial center. Amidst the economic fallout, Hong Kong has slipped into recession for the first time since the global financial crisis of 2008-09. Given unenviable economic conditions, all but one of Hong Kong's digital banks have postponed their launch.
The novel coronavirus outbreak is crimping global business as people avoid travel and even going out in public. The sharp contraction in business activity augurs ill prospects for the financial industry. Banks are not optimistic about their first quarter results. If the virus isn't contained soon, the second quarter could be even worse.
For the nascent virtual banking segment, Covid-19 is a double-edged sword. On the one hand, e-commerce demand remains strong thus far. Consumers still need to buy essential everyday items. If they are hesitant about visiting a physical store, the best option is to make the purchases online. In the short term, that means a rise in online transactions and in many cases the use of digital wallets.
Singapore has 21 applicants for just five digital banking licenses. There are going to be many more losers than winners in this race. Speculation about the likely winners is reaching a feverish pitch ahead of the Monetary Authority of Singapore's (MAS) expected announcement of the winners. The decision is expected by June.
MAS has made clear that it has little interest in large-scale disruption of the financial-services sector. The regulator certainly wants to boost competition and the quality of digital-banking services in the city-state, but in a steady, incremental manner. Evolution is necessary. Revolution is not. With that in mind, the MAS designed the application process to ensure that only firms with ample capitalization and strong potential for profitability would meet the licensing criterion.
Malaysia is set to introduce digital banking following the passage of a new regulatory framework by its central bank in December. The central bank said it would issue up to five licenses to qualified applicants to set up digital banks. The licenses will allow the holders to conduct either conventional or Islamic banking business in Malaysia. Capital requirements are not low, with an absolute minimum of RM 100 million (US$23.7 million) necessary during a three to five year foundational phase and thereafter RM 300 million.
Some analysts are adamant that Singapore needs digital banks to boost financial inclusion. That's an interesting argument, given that 98% of Singaporeans over 25 have a bank account, according to research by Allianz Global Wealth. By Allianz's estimates, globally only Israel has a higher rate of financial inclusion than the Lion City.
In Singapore's case, this type of hard data is more instructive than a nebulous concept such as being "underbanked." A report published in October 2019 by Bain & Co., Google and Temaek Holdings found that 4 in 10 Singaporeans were underbanked, implying they don't have access to all the essential financial services they need. The findings might be more convincing if the same report had not also found that 40% of Thais and 45% of Malaysians were underbanked. The latter two countries are middle income, with per-capita GDP levels far below Singapore's.
China has demonstrated a willingness to innovate in the financial services technology sector. For example, the Chinese government has announced accelerated plans for a Central Bank Digital Currency (CBDC), the People's Bank of China (PBOC) has filed scores of CBDC patents and fintech initiatives like Baidu’s Xuperchain network have been introduced to great fanfare. What's more, the PBOC's Fintech Development Plan (2019 – 2021) expresses support for technological innovation, including the use of public cloud.
However, the Chinese government is also traditionally cautious in regard to security and control. Thus, financial services companies in China who are contemplating the migration of critical business applications to the cloud would be well-advised to plan carefully. To that end, Chinese regulators have reportedly engaged in private conversations with information security representatives from several foreign banks, advising them that critical hosting engagements in the cloud will need to be handled exclusively by specialised "Financial Community Cloud" providers who have been certified by the government.
The Vietnam fintech market was Southeast Asia's hottest in 2019 after Singapore, an impressive feat given that the Lion City is a hub for the entire region. From Jan. to Sept. 2019, Vietnam accounted for 36% of Southeast Asia's venture-capital fintech investment compared to 51% for Singapore, according to a December report from the United Overseas Bank (UOB), PricewaterhouseCoopers (PwC) and the Singapore Fintech Association (SFA). Vietnam was far ahead of other Asean economies, including Indonesia (12%) as well as the Philippines, Thailand and Malaysia (2% each).
Vietnam's Banking Strategy Institute reckons that the nation's fintech market will reach US$9 billion in value this year, which will make it the region's fourth largest. Fast growth in the fintech sector and the potential for the industry to boost financial inclusion probably explain why Hanoi nixed a plan to cap foreign ownership in payment service intermediaries at 49%, which was proposed by the State Bank of Vietnam (SBV) in November.
Australian neobanks are tapping strong demand for digital banking services to swiftly build up their deposit bases. Among the virtual banks reporting expeditious deposit growth are Xinja, Up!, Judo, 86 400 and Volt Bank. Xinja's growth has been especially impressive: It reports amassing $115 million in deposits in just 20 days. That would put Xinja on track to reach its goal of $120 million in deposits for the year by the end of February.
The Monetary Authority of Singapore (MAS) announced on 28 January of the enforcement of a new Payment Services Act, the first comprehensive legislation of its kind that regulates distinct activities in payment services ranging from digital payments to the trading of cryptocurrency such as Bitcoin and Ether.
The Payment Services Act comes at a well-coordinated time before the MAS awards a total of five digital bank licenses to a select few of its 21 reported applicants. While that may be the case, some have begun to speculate on the effects and ramifications the Act will have on fintechs that are hoping to or have already begun operations in Singapore.
Tencent is stepping up its fintech investments outside of China, where it and Alibaba's fintech arm Ant Financial effectively have a market duopoly. One approach for Tencent is direct expansion - the launch of WeChat Pay in international markets. That's a good idea in any country frequented by Chinese tourists or business travelers.
But direct expansion only goes so far, especially in developed economies. Tencent doesn't expect consumers in Europe or the United States will opt for WeChat Pay instead of Apple Pay, Google Pay, or apps created by local banks and fintechs. Instead, the Shenzhen-based company is taking strategic stakes in ascendant startups, including French mobile payment app Lydia and challenger bank Qonto. These investments will give Tencent a chance to grow its fintech business in Europe through local rising stars.
Singapore has never been as large a financial center as Hong Kong. In every major traditional area of finance, Hong Kong has an edge. That is not the case in fintech, where Singapore's Asean location is a boon. The world's preeminent tech giants and venture capitalists have all descended on Southeast Asia, where the underbanked are legion, regulators are keen to boost financial inclusion, and consumers are digitally adroit. Singapore is ideally positioned to take advantage of this opportunity.
Southeast Asian ride-hailing giants Grab and Gojek aim to reinvent themselves as digital banks amidst rising concern about profitability among cash-burning tech startups. Becoming a profitable digital bank is the only way either of the companies will have a crack at super-app status. Bundling ride hailing, food delivery, plus other odds and ends won't do the trick. China's WeChat - the world's first and only super app to date - cemented its dominance by introducing a handy e-wallet and later building out a more comprehensive suite of digital banking services.
In 2019, the Asian tiger economies cautiously welcomed virtual banks. The financial centers of Hong Kong and Singapore as well as the advanced manufacturing hubs of Taiwan and South Korea can all benefit from digital-first competition in their respective financial sectors, where incumbents dominate. That has led to some complacency.
Across Southeast Asia, traditional banks and fintechs have been inking partnerships. The fintechs, despite the "fin" in their name, almost always have stronger technology than banking acumen. In contrast, banks have deep financial expertise and clunky legacy IT systems.
In the Kingdom of Cambodia, the line between traditional banking and fintech is increasingly blurred. ABA Bank, a traditional lender which has become a leader in digital banking, is a good example. In a January report, AsiaMoney notes that the bank has undergone an unlikely transformation. Founded in 1996, ABA did not perform especially well for the first 13 years of its existence. But a decade ago, under the guidance of some deep-pocked investors from Central Asia, the bank hit the reset button and changed its business strategy. Today, ABA is a leader among Cambodian banks with assets of about US$4 billion.
The Philippines has issued a digital banking license to Tonik Financial, a Singapore-based fintech. The firm claims to be both the first native digital bank in the Philippines and the Southeast Asia region. The Philippines central bank, Bangko Sentral ng Pilipinas (BSP), approved Tonik for a license that will allow it to offer a full range of retail banking services, with a focus on retail deposits and consumer loans.
No China fintech segment has fallen faster and harder than peer-to-peer lending. Not even cryptocurrency, which Beijing all but outlawed, has been crippled like P2P lending. The reason is simple: The scam-ridden P2P lending segment robbed hundreds of thousands of retail investors of their life savings. Some distraught victims even committed suicide. There were massive Ponzi schemes. Ezubao, a now defunct P2P lender which was based in Anhui, defrauded US$7.6 billion from 900,000 investors before it imploded. A Beijing court sentenced Ezubao's founder to life in prison in 2017. Shanlin Finance, which was based in Shanghai, swindled US$9 billion from investors before authorities broke it up in 2018.
In Beijing's view, scams of that size threaten social stability. With that in mind, the government had no choice but to crack down on the largely unregulated segment. To be sure, Beijing's dragnet has snagged some compliant lenders as well as miscreants. Yet, from the government's perspective, that's a small price to pay to assert control over the industry and reduce systemic financial risk. As of the end of 2019, just 343 P2P firms were still operating, down from 6,000 at the sector's 2015 peak. Authorities in Gansu, Hebei, Hunan and Sichuan Province as well as the municipality of Chongqing shut P2P lending down completely.
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.