By Brian Yap, Asia reporter
Asia, with its unique mix of emerging and developed
economies with different political and financial structures,
has long been at the forefront of fintech's growth. The
world-class financial services offered by Hong Kong and
Singapore, coupled with the technological prowess of Japan and
Korea have driven the fast-growing fintech industry. But while
economic and political similarities have spurred Asia's fintech
growth, the parallels have also fuelled intense rivalry.
Hong Kong and Singapore are traditional economic rivals,
both boasting highly developed financial infrastructure with a
mature, market-driven economy. But such rivalry seems to have
spread to the fintech space in recent years, with regulators
from both city states introducing regulatory sandboxes and
establishing committees tasked with reviewing the regulatory
environment for fintech.
Mark Parsons, partner at Hogan Lovells in Hong Kong, argues
that in Singapore, both the government and regulators are
aligning more closely around fintech than in Hong Kong. He
points to the Monetary Authority of Singapore (MAS) appearing
to have a stronger connection to trade promotion policies than
its counterpart, the Hong Kong Monetary Authority (HKMA), which
focuses more closely on its statutory mandate.
"Singapore's regulatory environment is more supportive of
small companies seeking to make a start in fintech and
regulatory sandboxes are a part of that," says Parsons. But he
added that it is not yet clear which companies will gain access
to the sandbox and which will succeed in making it through the
Hong Kong's regulatory sandbox is only open to financial
institutions, so a small company looking to launch an e-money
or wallet service may opt for a much larger unregulated space
to do that like Singapore.
While there are some exemptions for single-purpose or
limited purpose stored value facilities in Hong Kong, a company
needs to have a minimum of HKD$25 million ($3.2 million) in
paid-up capital and the resources to navigate a fairly lengthy
application process. But it remains a challenge for fintech
companies to open bank accounts in Hong Kong, particularly
those involved in cross-border remittances and payment
Comparatively speaking, Singapore's fintech startups have
received more support from regulations, and the Singaporean
rules contain safe harbours too. For example, in relation to
e-money or stored-value, firms don't need a licence if their
facility holds less than SGD30 million ($21.5 million) in
float. Hong Kong's new regime, effective in November last year,
provides some exemptions but by any fair assessment these safe
harbours are narrower than in Singapore.
"I have seen Singaporean companies trying to replicate their
businesses in Hong Kong and they are put off by the price of
admission," says Parsons.
A report by Accenture from last December shows Hong Kong is
far outpacing Singapore in terms of fundraising. In 2014, Hong
Kong saw $74 million raised while Singapore stood at $10
million. In 2015, Hong Kong went up to $110 million and
Singapore to $75 million. But in 2016, Singapore saw its
fintech investment actually decline to $50 million, while Hong
Kong rose to $190 million.
Parsons argues that the private fundraising figures clearly
show that the regulatory environment is not necessarily a
determining factor, and regulators can influence but cannot
create entrepreneurs or consumer demand for fintech
While Singapore has been more proactive in trying to
encourage fintech by having more public funding and tax
incentives available, Hong Kong has one key structural
advantage: its proximity to China and its vast market. "Many
fintech success stories come from identifying gaps in the
specific financial services market and exploiting those gaps
through innovative technologies," says Parsons.
Race to the top
Elsewhere in the region, Korea and Japan have
been vying to promote fintech startups through the revision
of existing regulations and the introduction of new ones.
Considered two of the world's most high-tech developed
jurisdictions, they have experienced similar economic
transformation with a notable feature being the emergence of an
oligarchy of family-owned conglomerates known as
chaebols in Korea, and keiretsu or formerly
zaibatsu in Japan.
The Japanese government and, to a lesser extent, the Korean
authorities have tried to rein in the monopolistic power and
cross-shareholding practices of these conglomerates by imposing
stricter corporate governance rules. Such efforts are reflected
in their cautious approach to facilitating the growth of tech
startups by relaxing banks' and non-financial companies'
ownership of them to generate funding. But that's where the
similarities end: lawmakers in both countries have expressed
opposite and different levels of concerns with regard to
external ownership of stakes in these startups.
The Diet, Japan's parliament, passed a law on May
25 last year allowing domestic financial institutions to
acquire tech-driven start-ups, with the new regulation expected
to take effect on April 1. Under article 16-3 of the Banking
Act, domestic banks are not allowed to own more than five
percent of non-financial companies, with bank holding companies
being subject to a 15% cap.
But the current regime permits non-banks, such as Sony and
e-commerce firm Rakuten, to operate financial services with a
licence. This has led to major conglomerates running banks as
part of the group, enabling them to offer lending services to
their customers through their existing banking or financial
services arms. While the five percent ownership cap will be
lifted when the Banking Act is amended, all takeover
applications will be approved by the country's Financial
Services Agency (JFSA) on a case-by-case basis.
The Korean government, on the other hand, submitted a draft
bill to the National Assembly in late 2015 to allow information
technology companies to own up to 50% of internet-only banks.
Under Korea's current Banking Act, financial institutions
cannot own more than a 10% stake in a commercial bank. While
non-financial operators are not permitted to own more than a
four percent stake in a bank, they may boost their ownership to
10% in special circumstances, but their voting rights remain
capped at four percent. But as IFLR reported last October,
while the Financial Services Commission (FSC) had granted
preliminary licences to run internet-only banks to two
consortia led by the country's internet giant Kakao and telecom
operator KT respectively, political wrangling over the proposed
revision to the Banking Act raised the possibility of a
While K-bank has since received its final official licence,
the launch of its operation has been postponed to early April
while Kakao bank's application with the FSC having been
delayed. With Kakao's application known to not be on the FSC's
agenda in recent meetings, counsel believe that the recent
impeachment of former president Park Geun-hye and the attendant
political uncertainty may have contributed to the delays.
"It would be a big change in the banking sector if such an
amendment was passed, as the opposition party members were
known to be concerned about passing such an amendment," notes
Jay Lee, partner at Simmons & Simmons in Hong Kong.
But Lee believes that the other proposed amendment, which
calls for allowing industrialist companies to own only up to
30% of internet banks and internet banks only, may be passed by
the new government. He argues that this may allay the
opposition party's fear of industrialist companies exerting
excessive influence over banks, as it is capped at 30% and is
only applicable to internet banks.
"Unless any changes are made to the banking regime in the
coming year, we may see a delay in the significant development
of fintech in general as well given the important status of
internet banks," says Lee.
It is clear at first glance that the difference lies in the
Korean lawmakers' fear of non-financial companies dominating
banks in the country, and Japanese politicians' concern over
excessive influence of banks over tech startups. But much may
rest with Korea's mighty family-owned conglomerates, some of
which have been embroiled in the corruption scandal involving
the former Park administration, whereas Japanese banks, which
used to hold many of the country's conglomerates, have adopted
stronger internal controls than before to prevent any conflicts
of interest. But Masakazu Masujima, partner at Mori Hamada
& Matsumoto, told IFLR in February that the Japan Fair
Trade Commission had expressed concern over banks being able to
purchase non-financial companies, explaining that the worry of
potential conflict of interest and monopoly by bank-held
conglomerates remains to some degree.
"But lawmakers have concluded that the country has changed a
lot and banks have to prevent any conflicts of interest, with
the JFSA vetting every proposed acquisition to ensure that they
are justifiable," says Masujima.
Major Japanese banking groups, such as Mizuho, Sumitomo
Mitsui and Mitsubishi UFJ Capital, have recently invested in
the country's largest bitcoin exchange, bitFlyer, as they rush
to become part of the national fintech drive. But Yuri Suzuki,
partner at Atsumi & Sakai in Tokyo, points out that the
driver for financial institutions engaging in fintech activity
is government policy under Prime Minister Shinzo Abe's
government's Japan Revitalisation Policy, as carried out by the
JFSA and the Ministry of Economy, Trade and Industry.
She refers to the recent drafting of a new registration
system by the JFSA for two types of electronic payment services
providers, namely payment initiative service provider (PISP)
and account information service provider (AISP). But while
there are some Japanese companies providing services as an
AISP, PISP services, which involve conveying a customer's
instruction of transferring money to banks, do not exist.
Suzuki believes that the JFSA's rationale for proposing
legislation before the emergence of such services is to promote
them, which is part of the current government's national
"It appears that each regulator must do something and so the
JFSA has studied what fintech services come next and is looking
at EU legislation," she says. While the new legislation is
intended for regulating AISPs and PISPs, the Tokyo-based lawyer
said service providers have welcomed the proposed legislation.
This is because banks would be required to adopt and connect to
the providers through open application programme interface
connectors, which the AISPs and PISPs could utilise to launch
new payment initiatives.
"That is why the regulators are very active in creating the
new regulations to restrict fintech services, including bitcoin
regulations, to restrict the services in many cases."