Preparing the Foundations for Fintech to Blossom
Fintech can unleash a new era of innovation, competition, and job-creating productivity. But it will take more than buzzwords to generate meaningful growth.
Financial technology (fintech) has the potential to accelerate the next stage of innovation-led economic growth in Asia and the Pacific. A rising middle class and higher income levels are creating huge demand for financial services.
Beyond services, the region's financial sector also needs to think about diversification and intermediation.
Fintech is not only about digitizing money; it’s also about monetizing data. The ability to capture and process data in real time is changing how we do business. It’s also creating new products and services and transforming the way consumers participate in this process.
Fintech presents an opportunity to unleash a new era of innovation, competition, and job-creating productivity. This is encouraging.
[tweet="ADB’s @chatarup: Meaningful #fintech growth requires more than just buzzwords #DigiFin17" text="Meaningful fintech growth requires more than just buzzwords"]
Meaningful growth, however, requires more than just buzzwords. A lot of what is going on in financial services in these markets is at the infrastructure level, where most countries in developing Asia-Pacific face a significant deficit.
Today, except for a few fintech hubs like Bangalore, Manila, and Singapore, fiber internet broadband capabilities are severely lacking throughout the region. The other essential ingredients of fintech-led growth are universities producing highly skilled graduates, strong financial institutions, and international connections.
As a starting point, governments should concentrate on determining the preconditions that drive rapid development and collaboration to define their niche within the regional fintech ecosystem.
The focus should be on a few limited areas of competitive advantage that have the potential for creating transformational waves across the financial ecosystem. For example, in India they can be security and biometrics, next-generation payments, and financial inclusion across the value chain of financial services institutions.
Identifying and utilizing the different strengths of each city will be vital to lay the groundwork for success. Where talent is not readily available, cities can connect with each other to attract it.
As for infrastructure, it tends to develop around clusters. Fast broadband connectivity and a good supply of office space are key.
The existing payments infrastructure is a tangled web of old and new systems. Paper checks, credit cards, and wire transfers with decades-old legacy platforms might deliver stability and reliability, but they do not meet the evolving real-time needs of customers. Developing regulations around payments and investment in open switches leaves room for fintech players to lure business away from banks.
Another problem is the lack of universal digital identity solutions. Traditional ways of matching a name, address, and identity are insufficient to protect clients against fraud.
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Digital identities, which use microchips or biometrics technology, are much more robust and responsive to anti-monetary laundering/know your client requirements. The additional authentication they provide makes them ideal for fintech transactions.
By assigning identities to legal entities (corporations, partnerships, trusts), tangible assets (cars, buildings, smartphones), or intangible assets (patents, software, datasets), one can attest to their veracity and completeness for data provenance, universal access, and secure privacy in transactions.
Government support is an essential factor in the financial services industry. While there’s already political will to attract fintech players, the most formidable challenge lies in the high cost of developing digital infrastructure. Only adequate financing can fuel the creation of successful fintech ventures.
There is no consensus on what role governments should play to support the evolution of fintech. Governments have so far followed different models to ensure an appropriate balance between encouraging innovation and protecting the financial system from risk.
The ecosystem approach is one model. It focuses on building relationships with fintech startups, academics, and incumbent players, providing them with a forum for constructive dialogue between market players and regulators to drive innovation and test new solutions.
The digital financial infrastructure approach depends on modernizing regulatory infrastructure and processes in the medium term. By streamlining and harmonizing procedures involving regulatory agencies, governments can spur innovation while enhancing data-driven compliance. This approach has significant potential in countries with multiple financial regulators.
The rule and process change approach is about systematically adjusting rules and processes to implement policies for an increasingly digitized financial sector. Essential areas include open application programming interfaces, digital identity, data protection, and machine learning.
Calibrating rules and regulations to address fintech innovation is most effective when regulators collaborate with industry, and adopt a principles-based approach that is flexible enough to adjust to technological progress.
[tweet="ADB’s @chatarup: Regulatory sandboxes help #fintech regulators stay ahead of the curve #DigiFin17" text="Regulatory sandboxes help fintech regulators stay ahead of the curve"]
Regulatory sandboxes integrate all the above. They provide a space for new and existing financial institutions to conduct controlled market tests of new fintech products and services under less stringent regulatory requirements.
This approach lets innovators quickly create proofs of concept, which can guide regulators in adjusting the financial sector infrastructure and rules as required. Tracking developments in regulatory sandboxes can help regulators stay ahead of the curve.
Other options are financial incentives such as grants and tax incentives, establishing a dedicated funding vehicle to drive development as fintech hub, and fiscal concessions for equity and venture capital investment in early-stage startups.
While differences in national approaches to policy and regulation will always exist, governments need to decide on the most suitable option to move forward. Then they should commit enough resources to lay the groundwork early so they are not left behind.