HOW TO TRAIN YOUR DRAGON - POLICY RECOMMENDATIONS FOR GROWING THE FINTECH SECTOR IN ASIA PACIFIC - Oliver Wyman
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Financial Services ASIA PACIFIC RISK CENTER: PUBLIC POLICY SERIES HOW TO TRAIN YOUR DRAGON POLICY RECOMMENDATIONS FOR GROWING THE FINTECH SECTOR IN ASIA PACIFIC
DRIVING GROWTH IN FINTECH of accelerating access to financial services, policy-
makers, governments, and regulators are often
The emergence of financial technology (fintech) tasked with the challenge of facilitating and ensuring
brings to market new solutions to increase fintech develops in a way that minimizes the risks to
efficiency and financial inclusiveness in areas the financial system and society as a whole.
of payments, lending, broking, trading, capital
raising, and personal financial management, In that context, there are several aspects that needs
among others. to be prioritized (Exhibit 2):
The role of managing the development of
fintech in any market typically falls to the SUPPORTING GROWTH:
government and financial regulators, who have
played either a supporting or inhibiting role for
THE ROLE OF REGULATORS
new entrants. As fintech continues to develop AND GOVERNMENT
across the world, countries have been forced to
The main objective of regulators and government
embrace new financial technologies in order to
remain competitive. in developing the fintech sector is to empower
consumers where conventional banks are
In Asia-Pacific (APAC), many governments and lagging2 – to improve efficiency, increase
regulators have made the development of fintech financial inclusion and to increase access to
an explicit policy objective in recent years. Driven financial services, all while stimulating innovation
by a desire to increase financial inclusion1 for and competition.
significantly “unbanked” or “underbanked”
populations, governments have successfully There are three main actions that regulators
accelerated the growth of fintech financing in and governments must take to ensure the
the region (Exhibit 1). However, this rapid growth smooth development of a thriving fintech
of the fintech sector has the potential to expose landscape – (1) Provide innovation support,
systemic risks for the banking sector and the (2) Ensure a conducive investment environment,
broader economy. Besides being the main enablers and (3) Enhance digital and financial infrastructure.
Exhibit 1: Global and Asia-Pacific Fintech Investments
2010 – 2016 (US$ MILLIONS)
25
20
15
10
5
Asia-Pacific
0 Rest of the World
2010 2011 2012 2013 2014 2015 2016
Source: APRC analysis on CB Insights data
1 The Business Times, 2018. ASEAN to use fintech as financial inclusion boost.
2 World Bank, 2018. Financial inclusion for Asia’s unbanked.
Copyright © 2018 Oliver Wyman 2Exhibit 2: Key priorities for Fintech Development
• Regulatory support
for innovation • Financial System Stability
• Investment Support • Cross-industry risk
• Infrastructure Build-up • Consumer Protection
GROWTH RISK
SUPPORT MANAGEMENT
= =
Source: Oliver Wyman analysis
SUPPORT INNOVATION necessary processes that discuss overall business
plans, risk management frameworks, and reporting
DESIGN REGULATIONS TO requirements. Given that most new entrants to
ALLOW EXPERIMENTATION the fintech sector are likely to graduate from the
sandbox into the final approval process, dedicated
Over the last two years, one of the main policy
teams of financial regulators need to manage
tools used to support the development of the
“final stage” fintech approvals and licensing and
fintech sector has been the creation of regulatory
work closely with teams who run the regulatory
“sandboxes” (see Exhibit 3).
sandboxes to ensure that the right fintech entrants
reach maturity.
This learning process allows new entrants to test
their business ideas with real customers and
better understand relevant regulatory boundaries. INVEST
Meanwhile, adequate oversight from regulators
and policy-makers during this process also allows Governments and regulators are also key to
creating the right investment environment for
for more learnings regarding new fintech entities
fintech companies to pave the way to greater
before actual regulations are mandated for their
access to capital.
products and services.
IMPROVING THE
THE ART OF POST-SANDBOX
INVESTMENT ECOSYSTEM
REGULATORY APPROVAL
The role of governments and regulators is
The process of final regulatory approval before
imperative for developing the fintech sector,
the “go-live” of any fintech company is another
but specific approaches in creating a conducive
area of increasing importance. This final stage is
investment environment may need to differ from
currently a site of significant uncertainty amongst one country to another.
fintech professionals, who undertake a highly
iterative process going through multiple rounds of In China, the government has maintained a
review with the regulator teams. These concerns laissez-faire approach to private fintech investors,
dampen investor appetite and can prevent choosing not to interfere by providing benefits
fintech innovations from going to market, but are or subsidies such as tax breaks. China appears
Copyright © 2018 Oliver Wyman 3Exhibit 3: Success factors for designing a three-staged fintech regulatory sandbox
STAGE 1 STAGE 2 STAGE 3
APPLICATION HEADING
EXPERIMENTATION HEADING
EXIT
Clear articulation of eligibility Well-defined space and Ensure sandbox entity is truly
and evaluation criteria to reduce duration for the experimentation ready to exit, with sufficient
time and cost of getting innovative for containment of failure provision to extend or
ideas into market consequences should it occur discontinue entirely
Transparent and efficient system Produce a final report summarizing Upon exiting, fintech firm can
enables greater access to finance to findings, lessons learnt, and next successfully deploy the financial
innovators and reduce regulatory steps from testing phase service, with full compliance to
uncertainty relevant legal and regulatory
requirements
Source: Oliver Wyman analysis
to be a unique example though – in most of the Besides early-stage seed funds, governments
other Asia-Pacific markets, private funding is less also make direct investments into fintech
abundant, resulting in governments having to take companies through sovereign wealth funds. These
more proactive measures to encourage fintech investments are made with the longer-term view
investment. In 2018, the Australian government of the potential impact on the market and are both
revised and expanded their investor tax incentive financial and strategic in nature. However, such
scheme3 to support fintech start-ups; Singapore direct investments tend to be targeted at more
and Hong Kong have also maintained tax incentives mature fintech companies.
for fintech investors.
While direct government investment is important,
it needs to be done in a way that does not
HAVING A MEASURED APPROACH
compromise the free market. Government direct
Where necessary, governments often channel investment into “national champions” has rarely
funds into the fintech sector through a mix of been successful and creates more problems than
development grants and direct investment. Such it solves. It usually drives a premature selection of
funding ranges from providing interest-free grants winners and losers and undermines the free market
and seed funds, to prudently allocating resources, through undesirable crowding out effects.
to directly funding more promising fintech start-
ups, to indirectly supporting venture capital (VC) The best approach is for governments to identify
firms to invest into these new fintech entrants. the gaps in funding in different stages but take a
passive investor approach through investment
Development grants for fintech start-ups are in local private VCs in order to avoid government
regarded as a crucial source of early funding to crowding out effects. This usually ensures
initiate product development during the testing innovation, while promoting a level-playing field.
phase. The Hong Kong government for example
launched the Innovation and Technology Venture
Fund worth HKD 2 billion (US$ 256 million) for
INFRASTRUCTURE
co-investments in promising fintech start-ups. In addition to regulating and attracting capital in
This Fund has already announced five VC funds as developing fintech, regulators and governments
co-investment partners for identifying promising are also key builders of the foundations needed to
investment targets in Hong Kong. support the fintech sector.
3 https://www.zdnet.com/article/australian-government-to-extend-investor-tax-incentives-to-support-fintech-startups/
Copyright © 2018 Oliver Wyman 4TELECOMMUNICATIONS AND DATA SHARING CAPABILITIES
INTERNET COVERAGE Finally, fintech products and services are limited
One of the fundamental bases of developing a without a supporting framework to ensure data
successful fintech sector is a well-established is accessible to fintech companies. The wealth of
information and communication technology financial and behavioral data owned by incumbents
(ICT) sector. A well-developed technological is both a major competitive advantage and a huge
infrastructure allows easy adoption of new barrier to entry. As such, governmental intervention
fintech technologies. and any regulatory imperative to share this data
across platforms catalyzes the development of
In larger developing markets, many fintech fintech companies.
applications focus on extending financial services
to unserved and underserved sectors of the There are, however, technical challenges and
population. The large geographical spread and liability issues related to data sharing. Conforming
lack of physical infrastructure available for these to universal data standards will be costly, as banks
populations create transmission and distribution will be required to update or map legacy systems
challenges, as well as a high cost to serve. As a to fit the new data standard specifications. Scaling
result, mobile networks become the key financial this framework will also run into challenges, as
services distribution channel. Countries such as new agreements with relevant parties and legacy
India and Brazil see high levels of fintech adoption data systems will all need to be revised. Devising
in payments, credit and savings services, driven by a direct-access platform open to Third Party
a strong foundation of broad mobile coverage. Providers (TPPs) will also place a burden on banks
that may not wish to adequately open the market.
Many fintech solutions, particularly those that
incorporate cloud-based data portals or platforms, Further, regulators and governments need to
require a robust backbone of online connectivity understand the importance of metadata to
for day-to-day operations. Blockchain platforms increase traceability and address any liability
also require consistent connections to maintain issues that may arise when data is shared
registers and run authentication. between traditional banks and fintech entrants.
Essentially, the use of universal metadata
CENTRALIZED PAYMENTS SYSTEM standards enables the mapping of complex,
intricate, and ever-evolving relationships across
Increasingly, governments are recognising the
entities, strengthening governance and building
importance of e-payment infrastructure in creating
confidence in the system.
a conducive fintech environment and broadening
the digital economy. Regulators typically hold
sole authority for supervision and oversight of
their nation’s payments infrastructure and are
PROTECTING STABILITY:
responsible for managing and integrating the REGULATORY REFORMS FOR
various services that make up the platform. RISK MANAGEMENT
However, setting up a national payment There are several key risk management
infrastructure is not without practical challenges. considerations that governments ought to focus
Launched in April 2016, India’s Unified on as they drive the growth of their fintech sector.
Payments Interface (UPI) was seen by many as a Financial innovation reduces costs and improves
success – many major international and local firms efficiency, but it also introduces new risks to
use the system as their payment infrastructure economic and financial stability, hence presenting
(such as Jet Airways and WhatsApp), resulting in new challenges for supervisory authorities.
the steady growth of UPI transactions. However, As illustrated in Exhibit 4, a fintech regulatory
more than 90% of UPI transactions remain peer- program needs clear goals of ensuring financial
to-peer, and the system has not been able to scale stability, coordination among cross-sector
up commercial transactions which reduces its regulators, and strong customer protection and
economic value. empowerment.
Copyright © 2018 Oliver Wyman 5Exhibit 4: Governing risks in the fintech sector through the stability protection pyramid
MAINTAIN FINANCIAL
01 SYSTEMS STABILITY
Ensure regulatory reforms continue to drive fintech
growth without disrupting bank funding, credit quality,
$
or impacting the broader economy
02
REGULATE CROSS-SECTOR
INSTITUTIONS
Better management of interconnected risks and
business implications
03 CONSUMERS
EMPOWER AND PROTECT
Provide safequards while broadening
society’s access to finance
Source: Oliver Wyman analysis
MAINTAINING FINANCIAL framework to proxy the systemically importance
SYSTEM STABILITY selection criteria for selected fintech entities.
While there are currently no compelling signs of Before any fintech entities grow too big and
fintech financial instability risks materializing, become systemically important, authorities should
some emerging (macro-prudential) risks4 would be proactive and agile in policy-making to respond
escalate quickly if left unchecked. For example, to the ever-evolving fintech space. Regular review
fintech may gain prominence through indirect of the regulatory framework is necessary to monitor
network effects between highly-connected entities growth and product evolution. Regulators have
in the form of market infrastructure, so much so developed very sophisticated techniques that
that the importance and prevalence of network allow easy and non-intrusive monitoring process.
complexity and associated contagion effects could However, some of the most successful approaches
be significant. In time, fintech may grow to become like social listening and other advanced analytics
systemically important, exhibiting concerning create legal issues. Because these approaches
trends such as interconnectedness and centrality are sometimes able to predict issues before they
issues, among others. even occur, they might be legally challenged by
market participants.
Thus, regulators and government bodies will
benefit from closely monitoring fintech companies,
especially those that provide banking services
REGULATING CROSS-
and that may grow systemically important in
SECTOR INSTITUTIONS
terms of size, complexity, interconnectedness, Fintech is growing the frequency and complexity
substitutability, and global (cross-jurisdictional) of interactions between technology, financial
activity. Regulators and governments may take services, telecommunications and other sectors,
reference from the denominators under the G-SIB such that a new supervisory system needs to be
4 FSB, 2017. Financial Stability Implications from FinTech. http://www.fsb.org/wp-content/uploadsF/R270617.pdf
Copyright © 2018 Oliver Wyman 6designed to address the corresponding risks to One emerging trend is activity-based regulation.
financial stability. The same traditional regulatory The purpose of activity-based regulation is
framework cannot be applied universally across to move away from regulating entities and
banking, non-banking, or fintech companies, regulate the actual financial activities those
as standalone and uncoordinated regulations entities are performing. That helps address the
could lead to fragmentation. This will give rise to issue of industry arbitrage and allows for easier
businesses easily and quickly moving jurisdictions synchronization across regulators.
to take advantage of and arbitrage the traditional
regulatory framework. EMPOWERING AND
PROTECTING CONSUMERS
Regulators are starting to address this issue. In
2017, the Asia Securities Industry & Financial Finally, regulators and governments need to
Markets Association published their guidelines be more proactively involved in protecting
on best practices for regulating the effective the consumer.
development of fintech. In particular, one of the
guidelines aims to ensure cross-sectoral and PRIVACY RISKS
transboundary policy harmonisation to enhance While greater financial inclusion can empower
inter-agency cooperation and promote consistency consumers by providing them with lower
across different sectors. credit costs and better services, it can also raise
Exhibit 5: Big Data and new business models are changing the data regulatory landscape
FREE BUSINESS LINES AVAILABLE TO COLLECT DATA BUSINESS LINES TO MONETIZE DATA
Online music platforms
(e.g. iTunes, Spotify)
Targeted
advertising
Activities on mobile devices
(e.g. iOS, Android)
E-commerce and
Consumer healthcare platforms online marketing
(e.g. medical data, geo-location)
Social media channels
BIG DATA
(e.g. music and video streaming) Sale of data to
third- parties
Entertainment
(e.g. multi-player gaming)
Potential of still
largely unknown data
Bank accounts and personal
information (e.g. AISP1/ PISP2)
Bi-directional flow of data
1. Account Information Service Providers
2. Payment Initiation Service Providers
Source: Oliver Wyman analysis
Copyright © 2018 Oliver Wyman 7privacy and legal issues, most notably unfair In addition, the financial services sector is the most
lending scrutiny and privacy intrusion concerns. frequently targeted industry by cyber-criminals,
Examples of such biased assessment could include accounting for almost one-quarter of all breaches
consumers being rejected for mortgage loans or in 2017. Financial companies sit on vast amounts of
credit lines based on medical history, or candidates financial assets and personal information – making
being refused employment based on internet
them attractive targets for cyber criminals. Further,
usage or social media data.
the growing collaboration between Fintech
Regulators have taken aggressive steps to protect entrants and incumbent institutions expands
data privacy. For example, the General Data the interconnectedness and network complexity
Protection Regulation (GDPR) was approved by across the financial services infrastructure. This
the EU parliament after years of preparation and widens points of vulnerability for cybercrimes.
debate. It is a progressive first step to protecting
the consumer and stakeholders around the world Regulators and government agencies need to send
have been monitoring this new regulation and a clear message to financial services companies
adopting it across other jurisdictions. responsible for large amounts of consumer data,
whether they are fintech companies or traditional
In mitigating privacy risks, the GDPR aims to
empower individuals through full control of their financial institutions, stressing the heightened need
personal data. It mandates explicit consent for to implement cybersecurity measures with improved
use of collected data. This increases responsibility, levels of compliance. Regulators also need to
accountability, and transparency to individuals and increase international collaboration on cyber security
reduces the threat of data breaches. and aim to standardize key cybersecurity rules.
Exhibit 6: Proactive measures are necessary to protect consumers from financial misconduct amidst
the rapid digitalization
INNOVATIVE PRODUCTS SO REGULATORS NEED TO ENSURE
CREATE OPPORTUNITIES TO BE MORE PROACTIVELY FINANCIAL STABILITY
FOR MISCONDUCT… INVOLVED…
Deposit/Investment
accounts
?
LEGISLATING
Payment provider Regulations, standards, and
Mobile devices guidelines on new products
and E-wallets and consumer protection
Empower consumer
Lending
? REGULATING AND MONITORING
Investment Be proactive in identifying
potential fraudulent fintech
Investments in players and “Ponzi” schemes Protect system and economy
Nonperforming loans
Data misuse
?
EDUCATING
Cyber-attacks Educate customers better on Protect consumer
Emerging technologies credit risks, investment risks,
(e.g. cloud, IoT) and privacy breach implications
Source: Oliver Wyman analysis
Copyright © 2018 Oliver Wyman 4MISCONDUCT RISKS CONCLUSION
The creation of new products may blur the
Done right, the management of Fintech
definitive boundaries of what financial products
development can have dramatic effects on an
entail, allowing some fintech firms to fall through
economy. The expanding reach of internet and
the cracks of regulatory capabilities that often
smartphone penetration means that fintech can
lag technology advancements. As such, the
become a vehicle for financial inclusion for the
deployment of new products is mostly unregulated
unserved and underbanked consumer, as well
and brings about potential compliance risks, as
as for small and medium-sized firms. This can
illustrated in Exhibit 6.
increase liquidity for banks, disposable incomes
Innovative financial products and services often for consumers, and give small and medium-
create opportunities of misconduct, as technology sized businesses better access to much needed
can magnify the potential of unlawful actions financing. Financial inclusion also has important
that were once subjected to intense regulatory implications for tax collection. Fintechs can aid in
detection. This is compounded by the uncertainty the formalization of money and dramatically shrink
around the ownership of consumer data and what gray economies.
is considered appropriate for use and sharing on
The digitization of industries also generally
third-party platforms.
increases efficiencies and pushes workforces
The second and even more important issue is of and firms to evolve. Facilitating innovation and
machine misconduct. The automation of financial efficiencies in the fintech sector will spur the
processes is increasingly replacing tedious and emergence of adjacent digital sectors as well, such
repetitive data-driven algorithms. For example, as advanced analytics and AI. Governments and
once face-to-face conversations with local bank regulatory agencies should not view fintech as a
managers been replaced with automated customer threat to the financial sector, but as a means to
services via AI chatbots. However, the over-reliance strengthen it. Innovation led by fintech will help
on these automated decision-making processes the sector by creatively eliminating structural
can result in systematic errors and/or conceal inefficiencies and developing competitive products
biases, such as discrimination based on race, and services.
religion, or geographic locations.
Thus, it is crucial that fintech services become
The increased speed of automation also spreads integrated into the everyday lives of consumers, as
errors much faster and further, exacerbating much as fintech becomes mainstream in financial
contagion effects. Further, the opaque nature of services. Governments and regulators have a
“black-box” machine learning processes has the pivotal role to play in developing these services:
means to hide biases that may be hard to identify, they must become both incubators and inhibitors
creating intended or unintended systematic errors of the sector, while balancing the evolutionary and
that may be blinded by transparency implications. revolutionary approaches.
Besides putting in place various regulations
and monitoring framework to proactive identify
potential mis-conduct, regulators and government
bodies need to better educate consumers on the
emerging risks of tomorrow’s fintech sector.
Copyright © 2018 Oliver Wyman 5Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in strategy,
operations, risk management, and organization transformation.
For more information please contact the marketing department by email at info-FS@oliverwyman.com or by phone at one of the
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AUTHORS
Tancho Fingarov Jaclyn Yeo
Principal, Finance & Risk, & Public Policy, Senior Research Analyst, Marsh & McLennan
Oliver Wyman Companies’ Asia Pacific Risk Center
tancho.fingarov@oliverwyman.com jaclyn.yeo@oliverwyman.com
CONTRIBUTORS
Peter Reynolds Wolfram Hedrich
Partner, Finance & Risk, Oliver Wyman Executive Director, Marsh & McLennan
peter.reynolds@oliverwyman.com Companies’ Asia Pacific Risk Center, &
Partner, Finance & Risk, Oliver Wyman
wolfram.hedrich@oliverwyman.com
www.oliverwyman.com
ABOUT THE ASIA PACIFIC RISK CENTER
Marsh & McLennan Companies’ Asia Pacific Risk Center addresses the major threats facing industries, governments, and societies in the Asia Pacific
Region and serves as the regional hub for our Global Risk Center. Our research staff in Singapore draws on the resources of Marsh, Guy Carpenter, Mercer,
Oliver Wyman, and leading independent research partners around the world. We gather leaders from different sectors around critical challenges to stimulate
new thinking and solutions vital to Asian markets. Our digital news service, BRINK Asia, keeps decision makers current on developing risk issues in the region.
For more information, please email the team at contactaprc@mmc.com.
Copyright © 2018 Oliver Wyman
All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman
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