APAC’s catapult into the digital economy

Urszula McCormack of King & Wood Mallesons introduces the 2019 Asia-Pacific Fintech Special Focus with a region-wide look at trends

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Take a region as politically, culturally, economically and legally diverse as it is innovative and ambitious and you find yourself in the Asia-Pacific region (APAC). Comprising over 50 jurisdictions, it spans agrarian-based markets right through to highly developed powerhouses of the global financial services industry.

The common thread within this region is its dynamism.

The APAC fintech market is predicted to reach $72 billion by 2020, a 72.5% increase from 2015. Global investment fintech ventures more than doubled in 2018 to $55 billion, with the top five markets for fintech fundraising being Mainland China, Singapore, India, Australia and Japan.

Unicorns abound. APAC punches above its weight, with "big tech" Mainland Chinese companies dominating league tables, closely followed by other emerging titans of e-commerce such as Singapore's Grab, Indonesia's Go-Jek and India's Paytm. The unicorns are also "paying it forward", with significant multi-billion dollar investments in start-ups, creating a competitive environment with US and European players also keen for a foothold.

High levels of mobile penetration, rapidly evolving telecommunications infrastructure and vastly differing levels of access to traditional financial services create an environment that is ripe for disruption for some markets, whilst an opportunity to leapfrog to a modern digital economy for others.

This whirlwind of fintech development, acquisition and joint-venture activity has been closely matched by regulatory interest and government engagement, although its status and depth varies significantly. Thailand has fully embraced "Industry 4.0" and is keen to see it adopted as a priority for the ASEAN jurisdictions. Singapore has a strong Smart Nation and Digital Government mandate. Technology features heavily in the Greater Bay Area initiative, as does smart banking in Hong Kong. Vietnam and Cambodia have placed the digital economy squarely on the agenda. Numerous sandboxes are in play.

Local market needs, prevailing market infrastructure and funding availability drive very different fintech across APAC. Regulatory idiosyncrasies such as capital controls, data protection standards and even philosophical considerations also inform how technology is deployed in each jurisdiction. The quality of a developer community also counts.

In some cases, markets are being disrupted; in others, they are simply being created – allowing "second mover" economies to leapfrog traditional development paths.

However, despite the differences, a number of key focus areas are emerging.

Three developments dominate this area. First, digital identity technologies are being used to simplify the customer onboarding process by authenticating an individual's identity based on their biometrics (for example fingerprints and voice print). Some countries are also implementing a national digital identity system, which can be used to simplify certain processes. A number of risks need to be managed, including security, anti-discrimination and fairness principles.

Second are KYC utilities or similar technologies that aim to mutualise the identification, verification, unwrapping, screening and ongoing review processes. Third are alternative credit scoring techniques to enhance financial inclusion and mitigate risk amongst populations that do not have traditional credit history, which is a particularly common concern in emerging economies. This is also often expressed as having the potential to better represent a person's risk level, although has inherent vulnerabilities that need to be addressed.

Digital payment services continue to grow in APAC, particularly given the increase in digital transactions and the need to support e-commerce with effective payment mechanisms. Digital wallets and e-payment methods are become increasingly widespread and popular. The move toward a cashless (or cash-low) economy is on the agenda for some as well, although systemic risk and financial inclusion need to be carefully considered.

Digital banking and insurance also continue to grow in APAC, with more consumers willing to go fully digital in relation to banking services. Digital banking allows customers to access services on the go and, for digital-only banks, eliminates the cost of having physical customer facing locations.

Meanwhile chatbots are increasingly being used to improve customers' experience by providing immediate, 24/7 customer service. Chatbots use artificial intelligence / machine learning (AI/ML) to engage with customers and provide answers to customers' queries. Chatbots are becoming popular across several industries including retail and insurance.

In many markets, payments and lending (including microfinance) remain the priority. However, in many jurisdictions, significant development is underway in relation to new types of products that leverage technology.

These include robo-advisory and automated investment management, where AI/ML is being applied in the wealth management industry. It is expected that by 2023, the robo-advisory market in the APAC region will be worth $16.7 billion. The focus of the robo-advisory market is shifting towards embedding digital advice seamlessly into current financial service offerings.

Another key "product line" is virtual assets. This wave hit a number of APAC jurisdictions during 2017 and 2018 but regulatory responses throughout the region have been vastly different. These spanned outright bans through to a more embracing approach of this new asset class. During 2018 and 2019, a significant amount of regulatory development has occurred in several key markets. Depending on the location, this has included regulation of the asset, its mining, its use, the provision of exchange and brokerage services and/or custody solutions. The focus has also now turned to the use of blockchain technology to create programmable securities (also often called security tokens).

In addition to financial crime controls, back office functions are also rapidly evolving. Cloud technology remains in high demand and many companies are using it for storage space and computing power. Cloud technology can provide faster service by eliminating the need for software or hardware. It can also increase flexibility while reducing costs by allowing companies to scale their services based on changing customer demands. At the same, defined parameters are needed before cloud can be deployed by many highly regulated institutions. Guidance is available from some, but not all, regulators.

The focus has also now turned to the use of blockchain technology to create programmable securities

Blockchain and other distributed ledger technology (DLT) has been deployed in a number of areas, including settlement and trade. A number of pilot projects are underway throughout APAC that have close regulatory involvement. Others move through regulatory sandboxes and/or under outsourced models.

In the AI/ML space, there has also been an increase in risk management platforms that help companies detect compliance and regulatory risks. For example, certain platforms can detect hidden associations. These developments speed up the KYC and due diligence process and make diligence and compliance faster, more efficient and cheaper. A number of markets are developing standards for the use of AI/ML, although on the whole, this remains a developing area.

Finally, fintech platforms are also helping companies with their regulatory reporting. This use of regtech solutions is often trialled in regulatory sandboxes, under the supervision of financial regulators.

In the broader economy, similar technologies are being deployed in areas such as healthcare and retail. Interoperability between the financial markets and these segments is key because digital payments can help bolster their success, but also because many of the technologies either need to be, or benefit from being, interoperable or at least consistent.

Fintech has overwhelmingly been embraced by APAC regulators as a driving force for innovation, competition and economic inclusion. However, regulators have also been swift to appreciate the commensurate controls that are required. Second movers have particularly benefitted from watching the pitfalls that have hampered industry developments in other markets, enabling them to bypass traditional development phases.

Across the board, digitalisation, cross-border cooperation and risk management are evident regulatory priorities. Digital payments and online platforms also feature heavily, with the build-out of regulatory licensing and prudential controls and greater granularity for more complex products in larger markets. Individual accountability is a growing expectation.

Cybersecurity and financial crime also dominate regulatory agenda. On the data side, new standards are under consideration across a number of markets, but cross-border flows and cloud storage remain a challenge. AI/ML design, ethics and accountability standards are also emerging from certain financial and data regulators.

Supervision in this new era requires new techniques (including regtech and suptech), specialist resources and consistent data standards. Competition and concentration risk issues will become increasingly important to consider.

Fintech requires a transnational approach to fostering innovation and risk management.

Regional and international bodies will continue to impact the direction of fintech development in APAC. APAC regulators and governments already participate in several key fora. Multilaterals are also helping shape the fintech landscape, particularly in emerging economies.

In the coming year, we are likely to see a number of further emerging technology initiatives take shape. However, their impact will be closely linked to the degree of collaboration, harmonisation and true innovation involved.

About the author
		Urszula McCormack Partner, King & Wood Mallesons Central, Hong Kong T: 852 3443 1168 E: urszula.mccormack@hk.kwm.com W: www.kwm.com Urszula McCormack is one of Asia's leading blockchain and financial regulatory lawyers, with a focus on emerging technologies and financial crime. In 2018, she was recognised as a Financial Times Top 10 Legal Innovator of the Year. Urszula advises virtual asset issuers, new DLT protocol developers, custodians, regulators, global banks, multilaterals, SVFs, payment providers, market makers, asset managers and innovators on new products, compliance and licensing. In the financial crime arena, Urszula advises on digital identity, KYC utilities, AML/CTF and sanctions. Across the spectrum, she advises on privacy regulation, digital transformation and algorithmic design. Urszula is a member of the SFC Fintech Advisory Group, co-chair of the Fintech Association Policy & Advocacy Committee and a member of the Asifma Fintech Working Group. She is admitted in Australia, England & Wales and Hong Kong, and is a Certified Anti-Money Laundering Specialist.