Asia’s fintech battleground
The region’s financial hubs are vying for supremacy in the emerging sector. It’s a tight race
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 process.
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 processing.
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 products.
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 veto.
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 policy.
"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."