Asia's Fintech Evolution Accelerates for Data Functions

Some regulators in Asia are taking an aggressive and proactive approach to fintech, with many industry participants labeling Singapore as the leader in the fintech arena. In particular, the sandbox approach to regulation of financial products is expected to change how financial data is used and exchanged, according to regulation and risk experts in the Asia-Pacific region.

The sandbox addresses financial services license requirements, shifting the regulatory focus away from data privacy and protection, according to Adrian Lawrence, co-head of law firm Baker & McKenzie's Global FinTech Group in Sydney. A sandbox lets businesses launch products in a controlled environment with targeted oversight to see if they succeed, before a wider launch that is subject to complete regulatory scrutiny.

"For example, organizations may use the data to explicitly target a specific type of customer or provide new services such as payment systems to a select group of customers," he says. "Many of these applications use data in a way that hasn't been done previously, involving many organizations within the ecosystem analyzing the data they hold and how that data can benefit their customers, partners and distribution channels," he says.

Singapore's sandbox approach to fintech innovation is seen as forward thinking and proactive, according to Astrid Raetze, the Global FinTech Group's other co-head. "Singapore is positioning itself as the fintech leader in Asia-Pacific," she says. "The government is investing heavily in the space both with money backing the initiative and the regulations being passed. The regulator is also strongly coming out in favor of fintech." Raetze adds that the FinTech Festival, planned for November, is an example of this.

Many of these applications use data in a way that hasn’t been done previously, involving many organizations within the ecosystem analyzing the data they hold and how that data can benefit their customers, partners and distribution channels
Adrian Lawrence, Baker & McKenzie

While fintech has been a buzzword for several years, with the US and Europe seeing increasing activity in the field, the trend has only more recently attracted interest in Asia. According to consultancy Accenture, fintech investment in the Asia-Pacific region more than quadrupled in 2015 to $4.3 billion. Seventy-eight percent of deal volumes were directed toward banking innovation, which combines both retail and investment banking, with asset and wealth management, combined, accounting for 9 percent of investment.

Fintech companies hyped their ability to use technology to perform functions better, saying they would "steal, conquer and destroy" established players in the financial industry. There was some genuine basis to their claims, however. This pushed banks to start their own accelerator programs and innovation labs, sometimes through partnerships. By doing so, banks positioned themselves for collaborations and could also be involved with the development and growth of the fintech start-ups.

Though innovation has resulted in businesses starting the process of becoming more efficient and effective, fintech has more often than not fallen into gray areas of regulation. Regulators often play a catch-up game when it comes to innovation, yet with issues such as money laundering and terrorist financing, one can understand their hesitation. Singapore, through its regulator the Monetary Authority of Singapore (MAS), has been an exception in the region.

Relaxed Regulation

In June, the MAS issued guidelines to establish a regulatory sandbox for start-ups and companies innovating in fintech. In a consultation paper, it set parameters for financial institutions and other players experimenting with fintech services. This will allow participants to provide actual products and services to end-users, but within a "well-defined space and duration," though the duration period has yet to be released.

"For the duration of the regulatory sandbox, MAS will relax specific regulatory requirements which an applicant would otherwise be subject to," the central bank said in a statement. The consultation period ended on July 8. The MAS is concerned about where and how these fintech solutions comply with regulatory requirements. By taking the sandbox approach, it will be able to monitor the development of the industry and watch out for red flags or what it deems as "unacceptable risks."

Stephanie Magnus, head of Baker & McKenzie's financial services & regulatory practice in Singapore, says this would allow the MAS to fine-tune how these new innovations should be regulated and supervised while a provider is bigger than "too small to care" but before it becomes "too big to fail."

Singapore is positioning itself as the fintech leader in Asia-Pacific. The government is investing heavily in the space both with money backing the initiative and the regulations being passed
Astrid Raetze, Baker & McKenzie

The MAS noted that "failure is often a feature of such experiments," and if that does end up happening, the sandbox provides safeguards to contain the "consequences of failure for customers rather than to prevent failure altogether."

Although the regulatory sandbox allows businesses to launch products without having to fully comply with the total regulatory burden, this does not mean that they are let off the hook in complying with other laws such as data protection and privacy laws. Soon Kit Tham, risk practice director for Wolters Kluwer's Asia-Pacific unit, says regulatory support through the sandbox approach helps contain risk by allowing selected customers to try the technology in a real-world business environment. "Risks are hence ring-fenced, actively assessed and mitigated to prevent a larger impact to the wider economy," he says. "Singapore offers its value as a global financial hub sufficient for fintech to experiment with solutions, in an environment representative of international financial business."

Singapore has also established "fintech bridges" with Australia and the UK. These bridges involve the sharing of information on fintech innovation and could lead to the speeding up of regulatory processes as more consensus is created across geographies.

Evolution of Data Managers

Evolving and new regulations such as the BCBS 239 risk data aggregation guidelines also signal a need for stronger data management, according to Tham. "With new solutions needed for the financial services industry, fintechs provide an innovative channel for the discovery of improved data management and analytical solutions, which could help to scale banks' market operations across geographical borders," he says.

More demand for fintech solutions will ultimately change the role of data managers, Tham adds. "With the advancement of business-enabling technologies and the growing complexity and connectivity of international finance, data managers could potentially look to innovative solutions that help to improve the collection, computation and reporting of data," he says. "This includes overcoming potential challenges in the collection of time series data of business and customer information, and the management and mining of this data for business insights."

Previously, data managers were strongly focused on internal controls and internal management of data, but they have become more concerned with interactions with transaction partners, according to Baker & McKenzie's Lawrence.

With the advancement of business-enabling technologies and the growing complexity and connectivity of international finance, data managers could potentially look to innovative solutions that help to improve the collection, computation and reporting of data
Soon Kit Tham, Wolters Kluwer

"Data is going to be shared on a much broader basis," he says. "Data managers will have to think about not just security within their own organizations, but also what levels of security are needed if data is shared with their customers or channel partners and how the levels of control can be extended to protect the data, especially in the mobile space," he says.

As a result, data managers' roles will broaden and more data management outsourced service providers will appear, such as Australian firm Data Republic, according to Lawrence. "Data Republic has established a business that can facilitate this interchange of data, much like a ‘data bank,'" he says. "Data Republic collects and manages elements of data sets that each participant wants to bring to the ‘data bank' and share with the other participants. They deal with the pooling of those data assets."

Hong Kong Losing Ground?

The MAS, together with the Association of Banks in Singapore, is organizing the inaugural FinTech Festival in November, which will feature the world's first regtech conference. The week-long festival will also hold conferences on fintech and risk issues.

Similar to Singapore, the central bank in Malaysia will roll out a regulatory framework for fintech by the fourth quarter this year, after it compiles feedback from banking institutions.

Bank Negara Malaysia has set up a Financial Technology Enabler Group to "formulate and enhance" regulatory policies to facilitate adoption of technical innovations in the financial services sector.

But as Singapore and Malaysia push forward, there are concerns that Hong Kong might be losing ground. While the territory has gained a reputation as the financial center of Asia, it has been labelled by some as a laggard in the space due to its regulators' seemingly not-as-proactive approach to fintech activity, according to multiple sources interviewed for this story.

A source from one of the regulatory bodies in Hong Kong argues that there can be more than one fintech hub in the region. "We are one of the fintech hubs in Asia. In fact, we can have collaboration with Singapore in certain areas," the source says. "We will reference with what they have done or what they are promoting and see how we should do it to fulfil the need in Hong Kong, or how to attract people to Hong Kong to offer their services here. We have our own financial system and ecosystem and we have good support from China. We are looking at how to do our job better more than anything else."

Laura Winwood, assistant vice president for Asia-Pacific government affairs at Citi, agrees. "Singapore, Japan and Hong Kong all have their attractions," she says. "There is plenty of room for several fintech hubs across the Asia-Pacific region, in the same way that there are several financial centers; ultimately, economies, business and consumers all benefit from robust fintech ecosystems."

As regulators move towards a more fintech-friendly environment while banks seek to collaborate with fintechs, Tham says, institutions will need to weigh replacing existing data solutions, or adding a data management solution onto existing data sources to meet best practice requirements. "After they make that determination, institutions will then need to consider developing the solution internally, or explore the benefits of procuring an external solution that incorporates industry best practices," he says.

Lawrence adds that the industry "will definitely see" the establishment of more outsourced data management and data exchange companies in Asia. These firms will seek answers to financial institutions' limited level of access to data.