Fintech: driving digital transformation in financial services
(First of three parts)
OWhen the smartphone became commonplace more than a decade ago, it was inconceivable for many consumers to make purchases online with their credit card. It seemed far too risky to disclose sensitive credit card information during an online transaction, especially when conducted on a mobile device. Today, we are facing yet another inconceivable wave: that of opening up our banking data to entities other than the bank itself.
Fintech services have spread across Asia and the Eastern Pacific. Advanced fintech systems are now integrated into the fabric of daily life in virtually every market in Asia where the majority of consumers have smartphones that give them access to a growing range of virtual financial services.
Asia seems to be taking the lead in fintech development. In part due to significant concerns over financial inclusion, Asian economies are experiencing a rapid pace of fintech growth. Consumer use of fintech-powered services has doubled in just two years across major Asia-Pacific markets. Fintech adoption was 67% in Hong Kong, Singapore and South Korea, according to the latest EY Global FinTech Adoption Index. China, which leads with an 87% penetration rate, is setting the tone for fintech innovation. The index found that 99.5% of Chinese respondents are familiar with online apps that facilitate money transfers, mobile payments and non-bank money transfers.
Many other changes are expected in the financial services landscape in Asia. We foresee three dominant themes in Asia-Pacific markets over the next two to three years: financial regulation will play a more active role in encouraging innovation; increased competition between virtual banks; and, the increased adoption of open banking, a system that requires banks and customers to give third-party providers access to some of the most guarded information – customer banking data.
OPENING OF REGULATORS TO INNOVATION
Financial regulators must weigh competing priorities, and when it comes to fintech development, they must strike the right balance between ensuring that regulatory processes preserve stability and fostering financial innovation. In many parts of the world, regulators are reportedly trying new approaches to regulation in order to significantly strengthen oversight.
In a study, the leading science and technology think tank Information Technology and Innovation Foundation (ITIF) observed that many governments, recognizing the value of fintech transformation, are taking steps to promote financial innovation. He cited Singapore’s establishment of a fintech and innovation group to facilitate the deployment of technology in its financial sector. He also noted the launch of fintech promotion strategies in Australia and the UK. The level of rigor differs from one economy to another, but the common thread is that they “adopt innovative and interesting approaches to financial innovation with the aim of maximizing their relative competitiveness in financial services”, according to the ‘ITIF.
It’s a role that regulators are adopting as markets continue to deregulate. Where previously financial regulators in Asia tended to be gatekeepers to banking and other financial services, today they are becoming advocates for flexibility, innovation and inclusion.
VIRTUAL BANK CONTEST IS ON THE RISE
Financial regulators in the Philippines have been just as proactive as their counterparts in the region in fostering fintech innovation, even as they strive not to lose sight of their responsibility to foster financial stability. FinTech Alliance Philippines appreciated the role of regulators, citing the establishment of the Financial Industry Forum that brings together representatives from regulatory agencies as a way to streamline regulations.
The Philippines is among the few economies in Southeast Asia where regulators have issued licenses for digital banking services, an area that is expected to see significant developments that will help change the financial landscape in the coming years. The Bangko Sentral ng Pilipinas (BSP) has already approved applications from several digital banks. The emergence of these new entrants is seen as a factor of change in the supply of financial products.
The BSP sees the rise of digital or branchless banks that could drive the digital transformation of incumbent banks to stay competitive and innovate in their service offerings. Digital banking, which essentially eliminates the need for customers to physically visit a bank branch to open an account or transact, is an important part of the central bank’s digital payments transformation roadmap. The level of encouragement from financial regulators varies across Asia-Pacific markets, which may be related to the goal of financial inclusiveness, a key theme in Southeast Asia.
While the entry of virtual banks is fueling competition in banking in the region, their impact on the banking landscape is not expected to be dramatic in the short term. But in the long term, they can lead to significant changes. The big traditional banks realize this. In the case of Hong Kong, incumbent banks are lowering deposit minimums and sweetening account offerings in anticipation of the launch of new digital banks.
OPEN BANK IN ASIA
While virtual banking deserves all the attention it gets, some industry watchers also see the future in open banking, a system that allows fintech providers to access banking data with customer consent. to provide them with additional services or conduct transactions on their behalf. Open banking is expected to significantly improve customers’ digital experience.
This goes far beyond the convenience of digital banking in which the establishment of bank branches is no longer necessary except for an office to receive customer complaints. In open banking, a mobile wallet platform or carpooling service can be a super-app with extended services to include loans, for example, and can quickly assess loan applications by having timely access pre-approved real to a customer’s bank details. . It can also be a personal finance app that lets you program it to “manage” your finances and tell you how much you can invest in stocks based on how much money comes into your linked bank accounts in a given month.
Access is granted through an open application programming interface (API), which establishes a connection between third-party providers and users’ bank accounts. This makes it possible to collect and use banking data to provide a service to the customer.
The International Data Corporation and Finastra’s Open Banking Readiness Index found Hong Kong, Singapore and Australia to be the top three markets in Asia in terms of progressive open banking. In the case of the Philippines, the BSP is laying the groundwork for open banking with the publication of the first version of the draft circular on open finance. Released in December 2020, the draft circular proposes the creation of an Open Finance Oversight Committee, an autonomous industry-led body overseen by the central bank. It would oversee open banking practices and establish procedures and standards, including API architecture, data, security, and outsourcing standards.
In January, Bangko Sentral once again strengthened its support for innovation with the presentation of its three-year strategy to take off open finance to stimulate innovation and competition in the Philippines by allowing third parties, such as fintech companies to access and use customer financial data to develop new applications and services.
Increased fintech adoption and innovation will continue to benefit most markets in Asia, contributing immensely to transforming the financial services landscape in a way that improves financial inclusion in emerging markets.
There can only be leaps and bounds for the fintech industry in the Philippines in the coming years as the market approaches that time when very few Filipino workers would still experience life before the internet. Banks have already had a good look at the digital space due to the limitations created by the pandemic, and this can only lead to more confident steps to integrate fintech products into their offerings.
In the second part of this article, we discuss issues relating to the taxation of fintech companies in the Philippines.
This article is provided for general information only and does not replace professional advice when the facts and circumstances warrant it. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Vicky B. Lee-Salas is a Markets Leader of SGV & Co.