Fintech in Vietnam
Financial inclusion with the participation of fintech companies has been one of the key priorities for many developing countries. Fintech is believed to help customers – especially individuals and small and medium-sized enterprises (SMEs) – access banking and financial services at lower costs and with more accessible procedures than traditional banking services. Vietnam is one of the developing countries that is firmly committed to this development, particularly given its reliable infrastructure for digital finances (eg, internet and smartphone infrastructure) and its young and interested population.
While Vietnam has a high rate of smartphone users, less than half of the country's population has a bank account, according to the State Bank of Vietnam (SBV), which has led to the rapid growth of Vietnamese fintech companies. In 2018 the government took note of the rise of fintech and established a steering committee to improve the ecosystem for the sector. All of these factors have given rise to a vibrant tech entrepreneurship scene for fintech solutions.
Vietnam currently has 77 fintech companies. Among the three different product segments (ie, digital payment, personal or retail finance and corporate finance), digital payment solutions lead the service market share at 89%. In June 2019 the SBV licensed 30 intermediary payment service providers, of which the majority offer e-wallets. The most popular companies that provide e-wallet services in Vietnam are:
- NganLuong; and
- Zalo Pay.
These activities were licensed under the mechanism of non-cash payments regulated in Decree 101/2012/ND-CP issued by the government in 2012 on non-cash payments.
Another notable activity in Vietnam's fintech landscape is peer-to-peer (P2P) lending, which is categorised as personal or retail finance. There are 40 P2P companies that provide a platform for money lending between users in the country (eg, Mofin, HuyDong and BaGang). The lending is believed to help customers, especially household businesses and SMEs, access banking and financial services at low costs. The development of P2P lending will also create a new capital supply channel instead of the credit system of traditional banks.
In corporate finance, the introduction of new technologies such as blockchain – with its main applications in cryptocurrencies – draw much attention in Vietnam, especially in the context of the globally skyrocketing rise of bitcoin and ethereum. In 2017 the Vietnamese dong was used by 15% of surveyed cryptocurrency payment companies globally. Blockchain has opened new doors for data collection and analysis, risk management and treasury management in the country. However, there are only a few start-ups working in this field (eg, cash2vn, Bitcoin Vietnam, fiahub and Verichains).
The activities of P2P lending and blockchain are not currently governed by any regulations in the Vietnamese legal system. In practice, fintech companies operating P2P lending or blockchain platforms must only obtain an enterprise registration certificate. When the companies wish to implement new projects, they may submit official letters to the competent authorities explaining their product and service plan to obtain approval.
However, due to the lack of a legal framework, the competent authorities are often confused when assessing submitted dossiers and allowing new activities in the fintech market. Consequently, the dossiers usually remain pending or are rejected, which leads to projects not being deployed. On the other hand, the lack of regulations enables many companies to operate liberally without satisfying any legal requirements. These operations, without any control from the authorities, carry risks of high-tech, fraud and financial crimes, such as:
- theft of personal information;
- tax evasion;
- money laundering; and
- unlawful capital mobilisation.
To serve the urgent demand for a legal framework for fintech, Vietnam can refer to the experience of developed countries in the formulation and development of such frameworks. One enacted pilot mechanism for operations of fintech firms is the fintech regulatory sandbox (sandbox).
The concept of a "sandbox", which was developed at a time of rapid technological innovation in financial markets, is an attempt to address the frictions between different regulators' desires to encourage and enable innovation. The first sandbox was launched in the United Kingdom in 2015 and many countries have since followed suit. A "sandbox" is a framework set up by a financial sector regulator, typically summarised in writing and published, to enable small-scale, live testing of innovations by private firms in a controlled environment (operating under a special exemption, allowance or other limited, time-bound exception) under the state authorities' supervision. A sandbox typically works as depicted in Figure 1.
Figure 1: sandbox application and approval process
The process can be explained in four stages.
During the initial application stage, the fintech company (ie, the sandbox entity) submits a sandbox package, including four types of dossier. Upon the receipt of the package, the authorised state agency (ASA) will review the dossiers and inform the sandbox entity about the potential suitability of its package. This information helps the sandbox entity adjust its business and resource planning.
During the evaluation stage, the sandbox entity discusses the specific milestones for its project (eg, the time for testing and operation or the time for completion of the experimentation stage) with the ASA. Meanwhile, the ASA sets out a legal framework with which the sandbox entity must comply. Depending on the service's completeness and complexity, the ASA may reject the package. However, the sandbox entity is allowed to re-apply. The rejection must be in writing and contain explanations to assist the entity in resubmitting their package.
Upon approval by the ASA, during experimentation stage, the entity may operate its service only once it has notified its customers that the service is being tested in a sandbox and disclosed all key risks that customers may encounter while using it. Simultaneously, the ASA will establish an expert committee, including financial, legal and technical experts, to monitor the operation of the service. After the experimentation stage has ended, the ASA will decide whether to extend the experimentation time, discontinue the project or officially deploy the project.
Once the decision has been made to deploy the project, it sets out a framework for other fintech companies operating similar services. Such companies would still have to apply to go through a sandbox process. However, they may be exempted from going through the evaluation and experimentation stages if they operate similar services to the sandbox entity that has been approved by the ASA.
To make its decision, the ASA will carefully review the pros and cons of the service and feedback from customers.
Using a regulatory sandbox may affect digital financial inclusion in several ways, including:
- the introduction of new, affordable products or services that address the needs of excluded customer segments;
- the introduction of distribution channels that reach out to dispersed populations in remote and rural areas;
- operational efficiencies that enable financial service providers to serve low-margin clients profitably;
- the introduction of ways to address compliance and risk management barriers to financial inclusion; and
- increased competition, which may prompt traditional service providers to focus more attention on unserved segments and improve procedures to keep their revenues steady.
Although the SBV is preparing and will soon issue pilot regulations on the establishment and business operations of fintech companies, the Vietnamese law system is still lacking regulations that enable the operation of such pilot entities. Therefore, it is recommended that the government creates a legal framework for the sandbox as pilot regulations have already been implemented effectively in various other countries.
For further information on this topic please contact Thanh Minh Vu at LNT & Partners by telephone (+84 28 3821 2357) or email ([email protected]). The LNT & Partners website can be accessed at www.lntpartners.com.