ASIA
07 May 2018
FinTech in Asia
FinTech is a major new development in Asia, which calls for a regional supervisory and regulatory framework, argues John West in a report for UniApro, Asia's trade union leader.
“FinTech” has emerged as a major new trend in the economy with many implications for the world of work, financial inclusion, financial stability and cybercrime, as well as for regional cooperation in light of the cross-border nature of some innovative FinTech transactions.
This paper provides an overview of the FinTech phenomenon, and some of its many impacts and policy implications. It is based on the discussions at the very successful joint Asian Development Bank/UNI Apro symposium on FinTech on the occasion of the 50th Annual Meeting of the ADB Board of Governors, held in Yokohama, Japan from 4 to 7 May 2017.
It concludes by proposing that the ADB initiate a joint study with UNI Apro Finance to examine the FinTech phenomenon in Asia. As the region’s pre-eminent thought leader, with extensive accumulated experience and knowledge, the ADB is in an ideal position to take the lead in proposing an appropriate regulatory and supervisory framework, and relevant capacity building and training to address the many challenges for the world of work, financial inclusion, financial stability and cybercrime in the Asia & Pacific.
The proposed recommendations are to complement the ADB's ongoing initiatives with the ASEAN central banks to come up with an appropriate regulatory and supervisory framework to establish a stable financial system in the region for the smooth economic integration process.
The ADB should also give consideration to launching a policy dialogue on these issues, involving all of the region’s stakeholders, notably representatives from the finance sector, financial regulators and supervisors, and trade unions, as well as other relevant multilateral organisations.
There is no real agreement on where FinTech starts and where it finishes. In the first decade of the 21st century, the universe of FinTech has extended to algorithmic asset management, thematic investing, data collection, credit scoring, education lending, working capital management, cyber security and quantum computing.
Given the multiple and diverse phenomenon grouped under the FinTech umbrella, the term itself is to some extent of questionable validity. There cannot however be any doubt that digital technologies are revolutionising the financial sector, at the same that they are also driving the “Fourth Industrial Revolution”, and the term FinTech is now widely used in public discussions.
It is significant that the FinTech phenomenon came out of Silicon Valley in early 2000s, rather than out of leading financial centres like London, New York or Tokyo. In other words, FinTech firms initially emerged as competitors to financial institutions like banks, insurance company, asset managers, and so on, and even today many remain competitors. A second phase in fintech development followed in leading financial centres with some FinTech firms being service providers for existing financial institutions.
The complexity of the FinTech is highlighted by the fact some FinTech firms are competitors, and others are partners, of existing financial institutions. And regulators face enormous challenges as some FinTech firms like peer-to-peer lenders, are conducting de facto traditional banking or financial services, while others are not. However, one thing in common between the two types that they both replace manpower in the traditional financial institutions.
Many innovative FinTech transactions are cross-border because they are provided in the Internet sphere, so their impact is not limited to one single jurisdiction. This means that a regulatory and supervisory framework and cross-border supervisory cooperation are necessary at the regional level, such as in a framework of the ASEAN Economic Community.
Global investment in FinTech has grown from $1 billion in 2008 to $3 billion in 2013, with one-third of this investment still taking place in Silicon Valley. Financial centres like New York and London are catching up, while in the Asia-Pacific FinTech is growing in Sydney, Hong Kong, Singapore, Korea and Japan. In Japan, in 2016, the amount of investment made in FinTech start-ups was 2.4 times higher than in the previous year. Many of these Japanese players are start-ups, electrical appliance companies, mobile carriers and ecommerce companies like Rakuten.
Lending Club is the world’s largest peer-to-peer (P2P) lending platform (P2P lending is a new method of debt financing that allows people to borrow and lend money without a financial institution) The Lending Club is based in San Francisco, and started as an App in Facebook. It operates an online lending platform that enables borrowers to obtain a loan, and investors to purchase notes backed by payments made on loans. It supports loan trading on a secondary market.
Lending Club went public in 2014 and raised $900 million. The stock soared, valuing the company at $8.5bn. As of December 31, 2014, it has originated $7.62 billion in loans.
(ii) FutureAdvisor
FutureAdvisor is a digital investment manager founded in 2010 in San Francisco and registered with the US Securities and Exchange Commission. It automates portfolio management with software that adjusts for investors' age and risk appetite. Unlike traditional financial advisors that manage investments passively with a "balanced" portfolio, it pursues active strategies like market timing, stock picking and value investing.
Among its investors are Sequoia Capital, Canvas Venture Fund, and Devonshire Investors, the private investment arm of the owners of Fidelity. It has $500 million in assets under management. It manages assets for Fidelity Investments or TD Ameritrade broker accounts and IRAs.
(iii) BillGuard
BillGuard began in 2010 as a service to alert users to hidden fees charged by their banks and credit card issuers. Its iOS and Android apps push warnings to your devices when something is amiss, so you don’t have to worry as much about failing to diligently check all of your monthly statements. To date, it claims to have raised the red flag on over $60 million in suspect transactions for its users. It has expanded (by attracting $10 million investments) to become a comprehensive fraud monitor and spending tracker.
(iv) Avant
Avant is an online personal loan lender located in downtown Chicago that offers personal loans and lines of credit. It was founded in 2012 and now employs over 600 people and has raised over $1 billion in capital to make loans and fund the business. Offers loan and credit line amounts of between $1,000 and $20,000.
Avant uses computer modeling and publicly available information to make lending decisions. The computer modeling also helps to speed up the process of applying for a loan and receiving money. The company claims it can fund users within a day. The company has issued over 175,000 loans in 46 states and the UK.
Such improvements in financial inclusion can be traced back to the advent of the ATM some four decades ago, which relieved the necessity of physically visiting bank branches.
This evolved into Internet banking by which we could do banking from a computer in our living room, and now we can access banking services through a mobile phone. And in some cases, we can use the financial services of the mobile phone company, rather than a bank, such as when the company accepts prepayment for services which are de facto deposits, and can be used as a payment system or transferred to others without going through the banking system.
The case of Bangladesh demonstrates that great progress can be achieved in financial inclusion where there is strong leadership. In particular, as Governor of the Bank of Bangladesh from 2009 to 2016, Dr. Atiur Rahman reoriented the Bank’s institutional objectives and ethos to support a pro-poor inclusive and socially responsible model of banking. In the words of Dr Rahman, he wanted to “make the financial system more humane”, “to reach the poor …, farmers ..., small entrepreneurs ... (to) democratize the system … enhance the social cohesion”.
Bangladesh’s Mobile Financial Services (MFS) programme is a bank-led model for improving financial inclusion which has reached virtually all population segments, including those in the remotest location within just a few years. MFS clients have increased from zero in 2011 to some 42 million in 2017, with about 1.5 billion transactions now taking place every day. Some 80 per cent of Dhaka’s rickshaw pullers now regularly send their money to their families in the remote areas using MFS.
Bangladesh’s garment workers are now able to receive their salaries through MFS, and send money to their families. And over the past five years, the MFS has facilitated the emergence of more than 50,000 new entrepreneurs, especially women entrepreneurs. The service charge of Bangladesh’s MFS in Bangladesh is one of the lowest in the world because it has reached customers are all over the country.
But despite the impressive example of Bangladesh, there are many more cases where poorer people are not enjoying improved access to financial services, where they must pay exorbitant interest rates and fees, and where they can be harassed and pushed to suicide by aggressive lenders seeking repayment. Unlike the case of Bangladesh, very few banks have a sense of corporate social responsibility. Indeed, ADB research demonstrates that financial innovation tends to widen the income gap between rich and poor.
FinTech, the Fourth Industrial Revolution and digitalization more generally, are exciting new developments. But they carry as many challenges as opportunities. They have widespread social impacts on employment, on working condition and on work-life balance. Studies suggest that there will be winners and losers amongst workers. This will become an additional driver of social and territorial inequality and further increasing existing disparities in the market.
It is critical to make sure that digitalization is not coupled with wage dumping, mass redundancy, exceptionally dominant online platforms, including sharing economy portals, precarious working conditions, a rise in precarious employment and the invasion of employee privacy. Adequate protection for workers engaged in digital work is needed to avoid deregulation of the labour market and the emergence of a new “digital precariat”.
Education and vocational training will need to play a crucial role to ensure that employability and obviously also the mobility of workers in this new era. It is necessary to ensure that digitalization leads to economic growth, quality jobs, skilled workforce and social justice. Unfortunately, responses by international regulators to digital development are often too narrow and consumer-focused, and lacking an emphasis on how this development affects workers of the service industry and their rights to information consultation and participation. Digitalization of the economy and society is thus an important challenge for the trade union movement.
Governments, employers and trade unions must work together to enable companies and workers to take full advantage of the opportunities offered by digitalization and avoid job losses, and worsening working conditions. One successful example of such cooperation took place at the International Labor Organization, where the ILO, UNI Finance and UNI ICTS reached common points of understanding with the employers and governments on teleworking.
And last year a similar declaration was achieved on digitalisation. The key principles of these declarations include: the application of existing laws governing information and consultation, and data production; the need for further training of employees to deal with digital changes; dealing in a social way with digital changes to avoid undue pressure on employees; developing leadership recommendations that are appropriate for the digital age, given that we will need to see managers change their style of approaching employee relations, simply because their employees are less and less time in the office; and how to ensure proper employee representation in this new digital age. These examples could serve as sources of inspiration for UNI Apro’s work in FinTech in the Asia-Pacific.
(ii) Financial stability and regulation
While FinTech can bring improved efficiencies and enhance financial inclusion, it can also generate risks of financial instability. It is for this reason that financial regulation needs to keep pace with financial innovation. The case of “Lending Club”, a P2P lender, highlights some of the risks to financial stability.
Although Lending Club started as a P2P lender, as its lending grow rapidly, it became dependent on hedge funds for funding. When the US monetary tightening started, defaults started. Then hedge funds stopped financing. Lending Club tried to resort to real peers for funding but could not, and ended up borrowing from the market as a bank would do, while non-performing loans increased. In these circumstances, it was behaving like a bank and should have been regulated like a bank.
P2P lenders are subject to a credit cycle just as banks are. But experience shows that P2P lenders are much less experienced with dealing with it. It is necessary to have strict lender/investor protection (e.g., information disclosure of borrowers, fair conducts by P2P lenders, etc.) or strict prudential rules or a combination of both.
(iii) Cybercrime risks
The “Bangladesh Bank heist” of February 2016 where hackers issued instructions via the SWIFT network to steal $951 million from Bangladesh Bank, the central bank of Bangladesh, highlighted the very grave risks of cybercrime. There was also a similar involving the Phong Tien Bank in Vietnam. There is also a vast array of other cybercrime risks like money laundering, terrorist financing, and data privacy.
The exponential growth of data is seen as a cyber-risk, particularly in the finance sector, with the unfolding disruptive trends affecting data management. Moreover, with cyber-attacks becoming ever more frequent and increasingly damaging, protection is vital for everyone, especially to retain the customer confidences in the financial systems.
When cyber-attacks take place, many financial institutions do not share the details openly due to repetitional issues. UNI Finance and the international financial institutions, including ADB, need to find out ways and means to build up an international partnership to unearth the details and learn from the lapses to mitigate any future attacks for setting up of a vibrant cybersecurity ecosystem.
This paper recommends that the ADB initiate a joint study with UNI Apro Finance to examine the FinTech phenomenon in Asia, as a followup to the the discussions at the very successful joint Asian Development Bank/UNI Apro symposium on FinTech on the occasion of the 50th Annual Meeting of the ADB Board of Governors, held in Yokohama, Japan from 4 to 7 May 2017. As the region’s pre-eminent thought leader, with extensive accumulated experience and knowledge, the ADB is in an ideal position to analyse the FinTech phenomenon and take the lead in proposing an appropriate regulatory and supervisory framework, and relevant capacity building and training, to address the many challenges for the world of work, financial inclusion, financial stability, cybercrime, and regional cooperation in the Asia & Pacific. As a way forward, the ADB could expand the ASEAN central bank policy dialogues in the aforementioned areas to financial regulators, supervisors, and trade unions, as well as other relevant multilateral organisations.
This paper provides an overview of the FinTech phenomenon, and some of its many impacts and policy implications. It is based on the discussions at the very successful joint Asian Development Bank/UNI Apro symposium on FinTech on the occasion of the 50th Annual Meeting of the ADB Board of Governors, held in Yokohama, Japan from 4 to 7 May 2017.
It concludes by proposing that the ADB initiate a joint study with UNI Apro Finance to examine the FinTech phenomenon in Asia. As the region’s pre-eminent thought leader, with extensive accumulated experience and knowledge, the ADB is in an ideal position to take the lead in proposing an appropriate regulatory and supervisory framework, and relevant capacity building and training to address the many challenges for the world of work, financial inclusion, financial stability and cybercrime in the Asia & Pacific.
The proposed recommendations are to complement the ADB's ongoing initiatives with the ASEAN central banks to come up with an appropriate regulatory and supervisory framework to establish a stable financial system in the region for the smooth economic integration process.
The ADB should also give consideration to launching a policy dialogue on these issues, involving all of the region’s stakeholders, notably representatives from the finance sector, financial regulators and supervisors, and trade unions, as well as other relevant multilateral organisations.
1. Meaning and origin of FinTech
“FinTech” is an umbrella term that covers a vast array of technological innovations to provide more tailored and user-friendly financial services such as internet banking, mobile banking, cryptocurrencies, peer-to-peer lending and crowd-funding.There is no real agreement on where FinTech starts and where it finishes. In the first decade of the 21st century, the universe of FinTech has extended to algorithmic asset management, thematic investing, data collection, credit scoring, education lending, working capital management, cyber security and quantum computing.
Given the multiple and diverse phenomenon grouped under the FinTech umbrella, the term itself is to some extent of questionable validity. There cannot however be any doubt that digital technologies are revolutionising the financial sector, at the same that they are also driving the “Fourth Industrial Revolution”, and the term FinTech is now widely used in public discussions.
It is significant that the FinTech phenomenon came out of Silicon Valley in early 2000s, rather than out of leading financial centres like London, New York or Tokyo. In other words, FinTech firms initially emerged as competitors to financial institutions like banks, insurance company, asset managers, and so on, and even today many remain competitors. A second phase in fintech development followed in leading financial centres with some FinTech firms being service providers for existing financial institutions.
The complexity of the FinTech is highlighted by the fact some FinTech firms are competitors, and others are partners, of existing financial institutions. And regulators face enormous challenges as some FinTech firms like peer-to-peer lenders, are conducting de facto traditional banking or financial services, while others are not. However, one thing in common between the two types that they both replace manpower in the traditional financial institutions.
Many innovative FinTech transactions are cross-border because they are provided in the Internet sphere, so their impact is not limited to one single jurisdiction. This means that a regulatory and supervisory framework and cross-border supervisory cooperation are necessary at the regional level, such as in a framework of the ASEAN Economic Community.
Global investment in FinTech has grown from $1 billion in 2008 to $3 billion in 2013, with one-third of this investment still taking place in Silicon Valley. Financial centres like New York and London are catching up, while in the Asia-Pacific FinTech is growing in Sydney, Hong Kong, Singapore, Korea and Japan. In Japan, in 2016, the amount of investment made in FinTech start-ups was 2.4 times higher than in the previous year. Many of these Japanese players are start-ups, electrical appliance companies, mobile carriers and ecommerce companies like Rakuten.
2. Exploring some examples of FinTech ventures
(i) Lending ClubLending Club is the world’s largest peer-to-peer (P2P) lending platform (P2P lending is a new method of debt financing that allows people to borrow and lend money without a financial institution) The Lending Club is based in San Francisco, and started as an App in Facebook. It operates an online lending platform that enables borrowers to obtain a loan, and investors to purchase notes backed by payments made on loans. It supports loan trading on a secondary market.
Lending Club went public in 2014 and raised $900 million. The stock soared, valuing the company at $8.5bn. As of December 31, 2014, it has originated $7.62 billion in loans.
(ii) FutureAdvisor
FutureAdvisor is a digital investment manager founded in 2010 in San Francisco and registered with the US Securities and Exchange Commission. It automates portfolio management with software that adjusts for investors' age and risk appetite. Unlike traditional financial advisors that manage investments passively with a "balanced" portfolio, it pursues active strategies like market timing, stock picking and value investing.
Among its investors are Sequoia Capital, Canvas Venture Fund, and Devonshire Investors, the private investment arm of the owners of Fidelity. It has $500 million in assets under management. It manages assets for Fidelity Investments or TD Ameritrade broker accounts and IRAs.
(iii) BillGuard
BillGuard began in 2010 as a service to alert users to hidden fees charged by their banks and credit card issuers. Its iOS and Android apps push warnings to your devices when something is amiss, so you don’t have to worry as much about failing to diligently check all of your monthly statements. To date, it claims to have raised the red flag on over $60 million in suspect transactions for its users. It has expanded (by attracting $10 million investments) to become a comprehensive fraud monitor and spending tracker.
(iv) Avant
Avant is an online personal loan lender located in downtown Chicago that offers personal loans and lines of credit. It was founded in 2012 and now employs over 600 people and has raised over $1 billion in capital to make loans and fund the business. Offers loan and credit line amounts of between $1,000 and $20,000.
Avant uses computer modeling and publicly available information to make lending decisions. The computer modeling also helps to speed up the process of applying for a loan and receiving money. The company claims it can fund users within a day. The company has issued over 175,000 loans in 46 states and the UK.
3. Financial inclusion and the case of Bangladesh
While FinTech has certainly benefited larger corporations and high net-worth individuals, it has also improved access to financial services for poorer segments of the population, which may not have previously had access to financial services.Such improvements in financial inclusion can be traced back to the advent of the ATM some four decades ago, which relieved the necessity of physically visiting bank branches.
This evolved into Internet banking by which we could do banking from a computer in our living room, and now we can access banking services through a mobile phone. And in some cases, we can use the financial services of the mobile phone company, rather than a bank, such as when the company accepts prepayment for services which are de facto deposits, and can be used as a payment system or transferred to others without going through the banking system.
The case of Bangladesh demonstrates that great progress can be achieved in financial inclusion where there is strong leadership. In particular, as Governor of the Bank of Bangladesh from 2009 to 2016, Dr. Atiur Rahman reoriented the Bank’s institutional objectives and ethos to support a pro-poor inclusive and socially responsible model of banking. In the words of Dr Rahman, he wanted to “make the financial system more humane”, “to reach the poor …, farmers ..., small entrepreneurs ... (to) democratize the system … enhance the social cohesion”.
Bangladesh’s Mobile Financial Services (MFS) programme is a bank-led model for improving financial inclusion which has reached virtually all population segments, including those in the remotest location within just a few years. MFS clients have increased from zero in 2011 to some 42 million in 2017, with about 1.5 billion transactions now taking place every day. Some 80 per cent of Dhaka’s rickshaw pullers now regularly send their money to their families in the remote areas using MFS.
Bangladesh’s garment workers are now able to receive their salaries through MFS, and send money to their families. And over the past five years, the MFS has facilitated the emergence of more than 50,000 new entrepreneurs, especially women entrepreneurs. The service charge of Bangladesh’s MFS in Bangladesh is one of the lowest in the world because it has reached customers are all over the country.
But despite the impressive example of Bangladesh, there are many more cases where poorer people are not enjoying improved access to financial services, where they must pay exorbitant interest rates and fees, and where they can be harassed and pushed to suicide by aggressive lenders seeking repayment. Unlike the case of Bangladesh, very few banks have a sense of corporate social responsibility. Indeed, ADB research demonstrates that financial innovation tends to widen the income gap between rich and poor.
4. Some risks of FinTech
(i) Impact on the world of workFinTech, the Fourth Industrial Revolution and digitalization more generally, are exciting new developments. But they carry as many challenges as opportunities. They have widespread social impacts on employment, on working condition and on work-life balance. Studies suggest that there will be winners and losers amongst workers. This will become an additional driver of social and territorial inequality and further increasing existing disparities in the market.
It is critical to make sure that digitalization is not coupled with wage dumping, mass redundancy, exceptionally dominant online platforms, including sharing economy portals, precarious working conditions, a rise in precarious employment and the invasion of employee privacy. Adequate protection for workers engaged in digital work is needed to avoid deregulation of the labour market and the emergence of a new “digital precariat”.
Education and vocational training will need to play a crucial role to ensure that employability and obviously also the mobility of workers in this new era. It is necessary to ensure that digitalization leads to economic growth, quality jobs, skilled workforce and social justice. Unfortunately, responses by international regulators to digital development are often too narrow and consumer-focused, and lacking an emphasis on how this development affects workers of the service industry and their rights to information consultation and participation. Digitalization of the economy and society is thus an important challenge for the trade union movement.
Governments, employers and trade unions must work together to enable companies and workers to take full advantage of the opportunities offered by digitalization and avoid job losses, and worsening working conditions. One successful example of such cooperation took place at the International Labor Organization, where the ILO, UNI Finance and UNI ICTS reached common points of understanding with the employers and governments on teleworking.
And last year a similar declaration was achieved on digitalisation. The key principles of these declarations include: the application of existing laws governing information and consultation, and data production; the need for further training of employees to deal with digital changes; dealing in a social way with digital changes to avoid undue pressure on employees; developing leadership recommendations that are appropriate for the digital age, given that we will need to see managers change their style of approaching employee relations, simply because their employees are less and less time in the office; and how to ensure proper employee representation in this new digital age. These examples could serve as sources of inspiration for UNI Apro’s work in FinTech in the Asia-Pacific.
(ii) Financial stability and regulation
While FinTech can bring improved efficiencies and enhance financial inclusion, it can also generate risks of financial instability. It is for this reason that financial regulation needs to keep pace with financial innovation. The case of “Lending Club”, a P2P lender, highlights some of the risks to financial stability.
Although Lending Club started as a P2P lender, as its lending grow rapidly, it became dependent on hedge funds for funding. When the US monetary tightening started, defaults started. Then hedge funds stopped financing. Lending Club tried to resort to real peers for funding but could not, and ended up borrowing from the market as a bank would do, while non-performing loans increased. In these circumstances, it was behaving like a bank and should have been regulated like a bank.
P2P lenders are subject to a credit cycle just as banks are. But experience shows that P2P lenders are much less experienced with dealing with it. It is necessary to have strict lender/investor protection (e.g., information disclosure of borrowers, fair conducts by P2P lenders, etc.) or strict prudential rules or a combination of both.
(iii) Cybercrime risks
The “Bangladesh Bank heist” of February 2016 where hackers issued instructions via the SWIFT network to steal $951 million from Bangladesh Bank, the central bank of Bangladesh, highlighted the very grave risks of cybercrime. There was also a similar involving the Phong Tien Bank in Vietnam. There is also a vast array of other cybercrime risks like money laundering, terrorist financing, and data privacy.
The exponential growth of data is seen as a cyber-risk, particularly in the finance sector, with the unfolding disruptive trends affecting data management. Moreover, with cyber-attacks becoming ever more frequent and increasingly damaging, protection is vital for everyone, especially to retain the customer confidences in the financial systems.
When cyber-attacks take place, many financial institutions do not share the details openly due to repetitional issues. UNI Finance and the international financial institutions, including ADB, need to find out ways and means to build up an international partnership to unearth the details and learn from the lapses to mitigate any future attacks for setting up of a vibrant cybersecurity ecosystem.
5. The next steps
FinTech has emerged as a major new trend in the economy with many implications for the world of work, financial inclusion, financial stability and cybercrime, as well as for regional cooperation in light of the cross-border nature of some innovative FinTech transactions.This paper recommends that the ADB initiate a joint study with UNI Apro Finance to examine the FinTech phenomenon in Asia, as a followup to the the discussions at the very successful joint Asian Development Bank/UNI Apro symposium on FinTech on the occasion of the 50th Annual Meeting of the ADB Board of Governors, held in Yokohama, Japan from 4 to 7 May 2017. As the region’s pre-eminent thought leader, with extensive accumulated experience and knowledge, the ADB is in an ideal position to analyse the FinTech phenomenon and take the lead in proposing an appropriate regulatory and supervisory framework, and relevant capacity building and training, to address the many challenges for the world of work, financial inclusion, financial stability, cybercrime, and regional cooperation in the Asia & Pacific. As a way forward, the ADB could expand the ASEAN central bank policy dialogues in the aforementioned areas to financial regulators, supervisors, and trade unions, as well as other relevant multilateral organisations.