Singapore: The Tiny City-State Leading Southeast Asia’s FinTech Charge

Singapore, The Tiny City-State Leading Southeast Asia’s FinTech Charge

by Vikas Nahata, Chairman & Co-founder

Globally, FinTech solutions are on the rise, transforming financial ecosystems and the lives of people across borders. Such solutions have attracted companies and capital in the US, India, and China. In Q1 2018, VC-backed fintech companies around the world raised $5.4 billion across 323 deals, with the largest increase in deals seen in the US, according to CB Insights’ Global Fintech Report Q1 2018.

North America alone is home to 16 of the world’s FinTech unicorns. Meanwhile, eight are located in Europe and China, and one each is found in South America and India.

But one region is especially ripe for digital disruption in the finance sector, and its innovators are rising to meet the demand. Southeast Asia is honing in on FinTech solutions for its underserved and unbanked population.

There’s a proven need for alternative financial services and infrastructure in the region — KPMG reports that only 27 percent of the ASEAN population has a bank account.

Barriers to financial inclusion are high, especially among MSMEs, women, and people earning less than $5 a day in Indonesia, the Philippines, Cambodia, and Myanmar. The Asian Development Bank (ADB) identified these gaps in the areas of credit, insurance, savings, and payments and transfers.

Digital innovations, however, can help bridge such gaps. The ADB noted that a wealth of digital information and digital footprint data, as well as mobile wallets and alternative platforms like mobile phones, may be harnessed to “fundamentally change the provision of financial services” to these underserved sectors.

While the four countries’ markets may exhibit greater need for disruptive solutions, it is Singapore that leads the way in Southeast Asia’s FinTech landscape.

Singapore as Southeast Asia’s FinTech leader

Over the past decade, Singapore has ramped up development of the FinTech sector to make the financial sector more efficient and inclusive for its people and businesses. In 2017, two of Asia’s largest FinTech deals took place in the country – the USD100M purchase of Singapore-based GoSwiff by India’s Paynear Solutions, and the USD13.5M series B round raised by Smartkarma.

One of the drivers of Singapore’s FinTech development is the fact that it is Southeast Asia’s finance hub. If the country’s banks and traditional financial institutions don’t adapt to new tech, they face massive disruption.

As such, both the government and banks are encouraging FinTech innovation. The Monetary Authority of Singapore (MAS) has both defined regulations and encouraged experimentation. It has even opened a FinTech Innovation Lab and is supporting the development and adoption of application program interfaces (APIs) in the financial industry. In addition, the Intellectual Property Office of Singapore has launched the Fintech Fast Track initiative, which will shorten the time for granting patents for fintech innovations from two years to six months.

Plus, a healthy startup ecosystem provides vital support by connecting founders to investors and to a larger tech community. As a result of both government and private sector support, along with a highly educated workforce, some 400 fintech firms have sprouted across the country.

Moreover, tech firms are expanding to the finance space — not the least of which is Grab, which has announced the evolution of its mobile wallet into a payments platform. E-commerce players are also understanding that convenient and safe digital payment platforms help drive sales.

But there is a greater need to share these solutions across the region. Region-wide FinTech adaptation will not only promote better financial inclusion, but also open promising yet under-tapped frontier markets for Singaporean businesses.

This year, Singapore is the ASEAN Chair, and the republic is seeking to lean on this leadership position to foster the sharing of FinTech innovations region-wide. Here are some of Singapore’s breakthroughs in this sector and the potential they have for the greater regional market.

Empowering people to enrich economies

The World Bank reported in 2016 that more than 260 million adults in Southeast Asia are unbanked due in part to the dearth of financial access across the region.

While this problem may be expected in emerging markets, more mature markets like Singapore face the problem of lower-income groups being unable to obtain personal loans, or SMEs failing to obtain credit.

But with 250 million smartphone users and around 142 million mobile broadband subscriptions in Southeast Asia (according to payments platform provider Adyen), the region is well-poised to take advantage of FinTech to better cater for underserved communities. In this space, Singapore is growing an ecosystem where FinTech is making a real difference for financial institutions, regulators, businesses and people.

The growing number of e-payments platforms and digital wallets in Singapore is helping to simplify cash management and distribution between banks, people and businesses. However, inventive technologies are also creating new and more inclusive ways of investing and raising capital.

On this front, Singapore’s public- and private-sector actors are tapping into the decentralised power of the blockchain to nurture the growth of P2P-based alternative investments. Such platforms provide applicants of credit – especially those who do not meet the eligibility requirements of more established loan channels – better avenues for financing.

They also lower borrowers’ vulnerability in dealing with less-than-legal credit channels, such as loan sharks.

Further development in this space can help spur greater economic activity in Singapore for both big and small economic actors.

Sharing solutions ASEAN-wide

While Singapore’s FinTech gaps are nuanced enough on their own, there is also a pressing need to nurture a more inclusive financial system across Southeast Asia.

From a development perspective, Singapore as the current ASEAN Chair has a duty to share its experiences and solutions to help improve the economic capacity of the region’s financially underserved communities.

Business-wise, the export of Singapore’s homegrown FinTech innovations can help generate returns for the republic. At the same time, these innovations are modernising the financial ecosystems of emerging markets, which can help lower investment risks. With more investments channelled to such markets, there will be greater scope for economic growth. This, in turn, can improve the fortunes of the people living there.

As such, Singapore is cooperating with the International Finance Corporation and the ASEAN Bankers Association (ABA) to establish the ASEAN Financial Innovation Network (AFIN).

Apart from supporting financial inclusion in the region’s less developed economies, the network will provide a platform for collaborative innovation for financial institutions and FinTech firms.

SME lending: an under-tapped opportunity

One area in which FinTech has seen large growth is in peer-to-peer (P2P) lending, especially for individuals. A market less catered for is SMEs, especially in the emerging markets of Southeast Asia.

An ADB report noted that Southeast Asia had the second-lowest number of SME lending operations among all regions in the continent from 2011 to 2016. However, digital finance adoption is growing in the areas of digital payment, credit, savings, and insurance for small businesses.

For FinTech companies, there is much opportunity in this area, given that SMEs make up at least 98 percent of all enterprises in Asia. Of these, Southeast Asia alone has some 30 million SMEs facing a $175 billion credit shortfall, as reported by INC. ASEAN in July 2017.

Singapore has responded with several digital SME lending models, specifically equity crowdfunding, invoice financing, and P2P lending. The blockchain is also being deployed to enforce smart contracts and increase the security of funds.

Cybersecurity challenges

Due to Southeast Asia’s FinTech ascendance, the region is becoming increasingly challenged by cybersecurity threats. The Asia Pacific Risk Centre notes that Asian organizations are 1.7 times slower to respond to system breaches than the global median, and that hackers are 80 percent more likely to attack organizations in Asia.

Singapore, despite being the standard-bearer of regulatory protection in Southeast Asia, is not infallible to cyber risks and fraudulent crimes. In February 2017, 850 individuals’ personal data was stolen from the Singapore defense ministry’s online database portal.

With increasing digitisation, stronger security measures are becoming more crucial than ever. These include APIs and smart contracts within blockchain platforms.

Singapore is doing its part to minimise such risks via the MAS and the Association of Banks in Singapore (ABS) to develop more comprehensive guidelines for cyber-risk management.

However, as the finance-sector maturity levels of ASEAN markets are currently unequal, it might take a while to see similar protocols implemented across the region.

What’s the next step?

Since the AFIN was announced during the 2017 Singapore FinTech Festival, Singapore has been busy tying up FinTech collaborations across Southeast Asia.

For instance, the MAS has partnered with the Bank of Thailand to link the former’s PayNow with the latter’s PromptPay.

The Singaporean central bank also signed a memorandum of understanding on financial innovation with the State Bank of Vietnam, which is aimed at facilitating joint innovation projects, helping FinTech firms better understand regulatory regimes, and promoting information sharing on emerging trends and developments.

And Singapore will not be resting anytime soon. The 2018 Singapore FinTech Festival will bring two new elements: the ASEAN FinTech Showcase, which will highlight financial technology developments and opportunities in the region; and a showcase of innovations from all 10 member-states.

Admittedly, there is still much work to do in bringing Singapore and its neighbours to Industry 4.0 via the power of FinTech. Nevertheless, the promise of a seamless financial ecosystem and better financial inclusion is now more attainable than ever before.