The COVID-19 pandemic accelerated the adoption of digital technology such as e-payments and digital banking, and online retail sales in Asia and the Pacific. Post-pandemic economic recovery could greatly benefit from the enormous opportunities financial technology (FinTech) offers for promoting inclusive and sustainable growth. For this, national policies, supported by public and private sector coordination, are vital. Regional cooperation also plays a crucial role in achieving the full potential of FinTech and tackling its associated risks.
Asia is facing one of its worst economic downturns in several decades as the COVID-19 pandemic and measures to contain it stifle activity. Absent digital technology that has proven essential for economic activities amid strict quarantine measures and voluntary self-restraint, the economic fallout could have been much worse. Some firms shifted offline businesses and services online, with potential permanent post-pandemic effects. Workers and students have become adept at online video conferencing and using other digital tools from home.
In fact, financial technology (FinTech) solutions are essential for e-commerce and other digital economic transactions and activities, by allowing financial transfers round-the-clock through online and mobile payments. They also provide critical support for other activities in the digital space, such as retail sales and online banking.
While pandemic risks exacerbate inequality, both within and across countries, FinTech presents a valuable opportunity to forge a more inclusive economic recovery. It is therefore particularly crucial that FinTech solutions reach disadvantaged groups and communities, especially those in poverty and remote areas, during this crisis and beyond.
Nevertheless, unlocking FinTech’s vast potential requires overcoming daunting challenges associated with infrastructure access and adequacy, cybersecurity, consumer protection and data privacy, taxation, and financial risk management. The role of private investment cannot be overstated, and public and private sectors should join the effort. Regional cooperation should certainly supplement national efforts by facilitating information exchange and knowledge sharing, harmonization of standards and regulations, and cross-border investments and partnerships.
Asia’s FinTech Landscape in the COVID-19 Era
The pandemic underscores the importance of digitalization and its role for safe and distant financial transactions and services. Lockdowns and self-restraint measures have forced consumers to embrace change; to shop, bank, and conduct financial and other economic transactions online, thereby accelerating FinTech growth. For instance, in the Philippines, the leading mobile wallet company GCash reported a 254% year-on-year increase in transaction volume in 2020 and expanded its registered users from 20 million in 2019 to 33 million in 2020 (Globe Telecom Inc. 2021).
Even before COVID-19, independent surveys indicated that the Asian FinTech ecosystem was expanding fast. The number of FinTech firms engaged in digital payments, digital lending, and capital crowdfunding in ASEAN rose by more than six times between 2012 and 2019 while disclosed FinTech funding deals increased by about eight times between 2016 and 2019–with Singapore leading the way (Figure 1). ADB (2021) estimates show revenues of digital platforms in Asia, which largely use FinTech solutions to settle the transactions, reached $1.8 trillion in 2019.
FinTech solutions in the region are concentrated in lending and payments, as suggested by CCAF, ADBI, and FinTech Space (2019), while the more mature, sophisticated segments focus on asset management, enterprise finance technology for financial institutions, and InsurTech. In the last few years, payment systems have evolved profoundly as the ubiquity of mobile application payment tools, digital wallets, and QR code-based payment options attests. And Asian economies appear more open to adopting innovations like e-wallets than some advanced economies (de Sartiges et al. 2020).
Adoption is likely to increase toward broader integration of payment systems – including cross-border networks whose efficiency will lower transaction costs (PayNet 2017). SWIFT (2019) notes the growing adoption in the Asia and the Pacific financial services industry of ISO 20022 standards for electronic data transfer and messaging, which will increase the pace and efficiency of data processing and facilitate interoperability of payment systems.
Central banks in the region are taking efforts to digitize their countries’ payment systems. For example, the National Bank of Cambodia’s Bakong Project envisages an “all-in-one mobile payment and banking app [that] redefines mobile payment and banking by combining e-wallets, mobile payments, online banking and financial applications within one easy-to-use interface for any preferred bank account” (Bakong n.d.). Furthermore, several countries in the region are investigating possible introduction of central bank digital currencies.
FinTech’s Role Towards Inclusive Financial System
FinTech can play an important role in supporting more inclusive economic growth and financial system in Asia and the Pacific. Tools that give access to the mainstream payments network are critical in supporting unbanked and underbanked individuals and firms. Survey results from CCAF, ADBI, and FinTech Space (2019) lend support to FinTech’s role in financial inclusion. Forty-five percent of respondents indicated their clients were either unbanked or underbanked (Figure 2). Small and medium sized enterprises comprised about 22% of clients – not far below large corporates’ 28% share – while 42% were individuals. The data set of the Global System for Mobile Communications Association reveals that between 2010 and 2020 the value of transactions through mobile money services for the unbanked surged more than 25 times globally and by more than 34 times in East Asia and the Pacific (GSMA 2021).
Lower transaction costs are among key benefits of FinTech solutions. This is particularly important for migrant workers sending money home. Farooq, Naghavi, and Scharwatt (2016) suggest that the cost of sending $200 using mobile money is about 2.7%, less than half the 6% global money transfer operators charge. FinTech solutions can help achieve the sustainable development goal (SDG) of reducing transaction cost to below 3% of remittance value by 2030 (World Bank 2020). Given the cost advantages and the growing client base, the share of digital remittance in the total global remittances is also projected to rise from about 10% in 2014 to more than 50% by 2023 (Nicoli and Ahmed 2019).
FinTech development is also promoting structural transformation of the overall financial system. For instance, increasingly digitalized banking services are cutting indirect transaction costs for customers (Bachas et al. 2018). Besides website-hosted services, banks have increased their presence on mobile devices by adopting digital applications. Open banking initiatives are likewise becoming a common strategy for traditional financial institutions to keep up to speed with FinTech developments and work around operational inflexibilities.
FinTech is also pivotal in ongoing discussions on central bank digital currencies (CBDCs) in Asia. This has attracted considerable attention, especially with pilot tests for the digital yuan by the People’s Bank of China (PBOC) since April 2021 (Zhang 2021). In addition, the Bank for International Settlements, Hong Kong Monetary Authority, Bank of Thailand, Digital Currency Institute of the PBOC, and the Central Bank of the United Arab Emirates also began working on the Multiple CBDC (mCBDC) Bridge project (Auer, Haene, and Holden 2021). This undertaking aims to create a platform where central banks in Asia and other regions can study distributed ledger technologies and CBDCs, focusing on their implications for cross-border payments (FSB 2020).
Bonafide digital banks are also looming large. The Republic of Korea offered digital bank licenses to Kakao Bank and K bank in 2017 before a third player was approved in June 2021 (Government of the Republic of Korea, Financial Services Commission 2021). In Hong Kong, China, the first licenses for virtual banks were issued in March 2019 and as of May 2021, and eight are already operating (Government of Hong Kong, China 2019, 2021). In Singapore, two digital full bank licenses and two digital wholesale bank licenses were approved in December 2020 (Government of Singapore, Monetary Authority of Singapore 2020). Meanwhile, the first digital bank license in the Philippines was awarded to Neobank Tonik in March 2021 (Tonik 2021) and the Asian Development Bank (ADB) has worked with Cantilan Bank on a cloud-based core banking system to expand financial inclusion and improve the efficiency and security of banking services (ADB 2019). Overall, more than 200 new digital banks have been established globally since 2010, of which 46 are in Asia and the Pacific (Choi 2020).
Yet, these innovations carry risks. As economies become increasingly reliant on digital finance, there will be risks of disruptions to operations; crimes that corrupt or destroy data integrity and privacy; or the theft of funds through fraudulent means. Cyberattacks threaten financial stability, not only through direct costs on financial institutions but also undermining confidence in financial systems and data integrity. An example includes the attack on the Bangladesh Bank in 2016, in which $81 million was stolen and damages to institutional reputation, public trust, and financial stability were significant.
Effective Policies Are Prerequisite for Harnessing FinTech’s Potential
To fully reap the benefits of FinTech while balancing against associated risks, the private and public sectors should take six actions that put countries on an inclusive and sustainable path to recovery from the pandemic.
First, there must be equitable access to digital financial infrastructure. Asia continues to see uneven development of basic digital infrastructure and varying degrees of digital readiness. Steps should be taken to expand investments in digital infrastructure and connectivity by expanding broadband internet access and coverage, and improving the delivery of affordable mobile and broadband services. Digital education and training will also help communities capitalize on the spread of digital technologies.
Second, an effective digital ecosystem needs to be developed to support the creation, diffusion, and scaling up of technology and innovation. The private sector can drive innovation. However, public policy continues to play an important role in providing equal treatment and connecting financial and technology firms. A complementary, consistent, and multifaceted policy framework is needed to nurture a digital ecosystem. This should include measures that ensure fair competition, lower barriers to entry, protect consumers, and promote data privacy.
Third, in developing countries in Asia, lack of digital identification often hinders access to digital services, which require verifiable identities to use. Steps should be taken to make sure that robust, secure, and sustainable digital ID systems are developed. In this aspect, progress is being made. In Papua New Guinea, ADB is helping develop a smart card using Near Field Communications technology. The Aadhaar project, a national biometric digital ID system in India, is another example (Sudhir and Sunder 2020).
Fourth, FinTech offers new ways to catalyze sustainable development finance amid considerable development gaps. Fintech platforms can also be used to increase savings and channel resources into publicly or privately funded investments. Blockchain-based solutions and asset tokenization (which transforms tradable assets into a security token that digitally represents asset ownership) are promising ways of narrowing financing gaps and securing sustainable funding for infrastructure.
Fifth, under growing threats to data integrity and privacy, financial institutions need to adopt a holistic approach to fortify cyberdefense and security. This can be done by proper risk management and strengthening resilience against attack. Governments need to keep their regulatory systems in step with the ever-evolving global digital landscape. International cooperation is essential to safeguard cybersecurity – given that there are no borders in cyberspace.
Lastly, advances in financial technology also enable better regulation of financial systems. Regulatory technologies, or ‘Regtech’, can meet monitoring, reporting, and compliance requirements effectively and efficiently, while ‘Suptech’ relates to how supervisors make use of technology advancements. Together, they can contribute to making financial systems safer in smarter (more efficient and less costly) ways.
Collaborative responses from governments, central banks, regulators, and financial institutions are crucial for building a safe global digital financial architecture. In this sense, strengthening regional cooperation is crucial in fostering exchange of information, best practices, harmonization of standards and regulations, and intensifying investment and partnerships across borders. It is needless to say that issues on taxation; anti-money laundering and combatting the financing of terrorism; cybersecurity; and data localization all require cross-country cooperation and collaboration. A common multilateral framework and coordinated surveillance mechanisms can contribute to making existing national regulations more effective and closing regulatory loopholes.
About the Author
Dr. Bambang Susantono is the Vice-President for Knowledge Management and Sustainable Development of the Asian Development Bank (ADB). Distinguished in providing global thought leadership on sustainable development, he is a published author and active researcher.
He holds a Ph.D. in Infrastructure Planning, Master’s degrees in Transportation Engineering, City and Regional Planning from UC Berkeley, and Bachelor’s in Engineering from the Bandung Institute of Technology.
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