25 October, 2015
2015 has seen a meaningful commitment from Singapore to the Fintech sector both in Singapore and abroad; Temasek Holdings was part of the US$150 million capital raising by UK-based peer-to-peer lender Funding Circle in April and in July, the Monetary Authority of Singapore (the "MAS") committed S$225 million over the next five years to growing the Fintech segment of the start-up ecosystem in Singapore.
So what do these technological innovations mean for South East Asia; what opportunities do they bring; what does the regulatory environment look like; and what are the potential hurdles to progress?
What does Fintech mean for South East Asia?
Generally defined as "the application of technology to the provision of financial services", Fintech is a disruptive technology that is changing the way consumers expect to be able to receive goods and services. The growth in Fintech has been led primarily by the Internet, increased penetration of smart phone technology and other advancements, including mass data storage, the development of sophisticated algorithms and electronic identification techniques, such as fingerprint technology. Non-financial groups have marketed their ability to mirror services traditionally offered by financial institutions (such as digital payments, investment services and online lending) thereby increasing competition for banks and other institutions.
IDC Financial Insights Asia Pacific reported in early 2015 that, in response to this competition, innovation would be the focus for Asia Pacific banks in 2015, with many of them allocating up to 25 per cent of their IT budgets on emerging technologies designed to improve operations and services. One such example is OneTouchTM, launched by OCBC in March 2015, leveraging off Apple's Touch ID technology to allow customers easy and quick access to their bank balances using fingerprint recognition. DBS has also reportedly made several small investments in the sector, including taking a 10 per cent stake in a voice recognition company spun out from Stanford University's research hub.
These challenges, and opportunities, for financial institutions also provide investment opportunities for other regional players. For example Apis Partners, founded a year ago and focused on investing in financial services across Asia and Africa, closed a fundraising of over US$150 million earlier this year and GlobeOneTM announced in May 2015 that it had signed a letter of intent with Eximbank, to bring GlobeOne's mobile banking solution to Vietnam later in 2015 by providing access through a mobile platform to a suite of financial services offered by Eximbank in Vietnam.
Fintech is not a new concept. Starting first in Silicon Valley, Asia is now playing catch-up. As shown below, the United States has dominated investment in Fintech for the past four years.
With this new technology come the regulatory and legal issues of applying existing rules and regulations across the region to constantly evolving technologies and platforms. Mr Ravi Menon, Managing Director of the MAS said earlier this year at the Global Technology Law Conference:
"First and foremost, a smart financial centre must be a safe financial centre. Technology can be a double- edged sword. If not managed well, it can potentially lead to a variety of risks in the financial industry."
The unbanked and underbanked – regional opportunities
The disparity in South East Asia between the size of the population and those with a bank account, combined with the growth in the Fintech sector in the region bring a number of different investment opportunities as the region finds solutions to address the needs of the unbanked and the underbanked.
A closer look at the figures regarding mobile phone ownership reveals one of the highest concentrations of mobile phones on the planet. eMarketer has estimated that by 2017 Asia Pacific will have nearly 3 billion mobile phone users out of a total of 5.1 billion across the globe. The growth is even more impressive. In 2013, Asia Pacific had approximately 738 million total smartphone users; more than four times as many smartphone users as the next largest region by that measure, Western Europe, which had approximately 161 million, and North America, which had approximately 152 million.
Looking at Indonesia, a survey published in 2014 by FII showed that only around 3 per cent of Indonesians were aware of the concept of mobile money and those that were had only heard of one type of service. At the same time, more than 60 per cent of the population had a mobile phone and three-quarters had access to one, according to the FII survey. In Vietnam it was reported that approximately 36 per cent of the population owned a smartphone in 2014.
In Indonesia, banks have started offering existing customers a range of basic services over the Internet and via SMS. The number of transactions is limited by a lack of integrated online payment systems and the need for customers to visit a branch to open an account.
In April 2015, Indonesia's Financial Services Authority (OJK) introduced a program called Laku Pandai to focus on branchless banking by allowing domestic banks involved with the program to select agents who help customers set up basic savings accounts without having to go to a branch. The aim is to promote basic savings accounts, particularly among low-income, rural communities. Branchless banking will also help the government distribute cash transfers to the poor. In Vietnam, mobile banking services may be provided by both banks and (subject to the satisfaction of certain conditions) non-banks, or intermediate payment services providers.
This projected increase in mobile technology will create huge opportunity for investment, both in the underlying technology itself but also in hard infrastructure such as telecommunications towers; a sector that saw a US$100 million investment in Solusi Tunas Pratama ("STP") from a global private equity house in 2012, STP's US$45 million acquisition of 3,500 towers from PT XL Axiata in 2014, and a proposed US$255 million sell-down in April 2015 by that private equity house and STP's parent, PT Kharisma Indah Ekahprima, which was aborted due to market conditions.
Telecommunications is a highly regulated industry in Indonesia and one that requires specialist legal advice on structuring-related matters.
In Vietnam, the telecommunications sector is similarly highly-regulated. Regulations set out requirements on legal capital across different categories of telecommunication networks. Foreign investors are subject to additional requirements, including in certain cases obtaining an investment certificate or an investment registration certificate (as from 1 July 2015) from the relevant licensing authorities.
Ownership proportions for foreign investors in telecommunications companies must also comply with the commitments made by Vietnam when becoming a member of the World Trade Organisation.
The regulatory environment and potential hurdles to progress
For the exciting development of Fintech in South East Asia to continue, it is crucial that businesses looking to develop and invest in the technology in the region have clarity on the regulatory environment and barriers to entry. Existing rules may need to be updated to bring them into line with constantly evolving business practices. In Singapore, the MAS established a new FinTech and Innovation Group in August this year with the task of developing regulatory policies and strategies to facilitate the use of technology and innovation to ensure that risks are managed more effectively and to strengthen competitiveness in the financial sector.
While Fintech models that align closely to more traditional financial services may have a clearer link to existing regulation, those models that go further will need to consider where they fit. The licensing of institutions may well be replaced by specific licences and permits attaching to products and services.
Given the number of jurisdictions and laws prevailing across South East Asia, navigating the compliance maze will be challenging, particularly in newly- developing areas for the region.
Particular legal and regulatory issues include:
(a) Data protection and cybersecurity
Illegal data access and processing are real risks that can seriously damage a company's reputation both externally as well as from an employee and customer perspective. Cyberattacks can be damaging to institutions' reputations as well as being costly. Companies will need adequate data security and disaster response procedures in place.
Regional regulation is not always clear. Singapore, for example, has introduced the Personal Data Protection Act 2012 on a phased basis over 2013 and 2014, whereas in Indonesia, while there are a number of laws that address data protection issues (such as Law No. 11 of 2008 on Electronic Information and Transaction and Government Regulation No. 82 of 2012 on Implementation of System and Electronic Transactions) there is currently no consolidated data protection law. Similarly, in Vietnam there is no consolidated law on data protection. Instead, the relevant framework is derived from a number of different laws. Primary legislation tends to be generally drafted leaving its precise application open to interpretation which may be clarified by detailed regulations, but not in all cases.
(b) Intellectual property protection
The protection of the innovative software being used by Fintech companies will be fundamental to their ability to maintain value and generate investment. Intellectual property laws across South East Asia are not as well developed as in Europe or the United States and specialist advice will need to be taken to ensure this value is not lost.
(c) Non-bank currency and derivative trading
The regulatory market for currency and derivative trading by retail customers through non-bank agents is relatively under-developed in certain areas of South East Asia. Encouraging customers to join such products, while remaining compliant with an evolving regulatory regime, will be challenging for new market entrants.
In summary, encouragement for the development of the sector is clear, but it will take some time for the appropriate regulatory framework across the region to be established in a way that is dynamic enough to keep up with the fast-pace of change in the sector.
This will require collaboration between the regulators and the market players themselves.
Mark Cooper, Partner, Hogan Lovells