Six trends you need to know
Innovation is booming in digital payments and fintech - and challenging traditional models. Every part of the payments lifecycle is changing: from systems for central clearing and settlement, to authenticating individual transactions.
In Asia, fintech is both leapfrogging developmental stages and driving business model and technical innovation of its own. Many major companies have recently launched new digital payment solutions to cater for the rapidly growing e-commerce sector. Mobile-enabled payments are accepted at a high density of acceptance points in bricks and mortar stores, and payment providers have been coming up with increasingly innovative features and services, such as functions to ‘split the bill’ between friends or integrating payment and investment features with messaging services.
Asia also boasts several major international financial capitals and emerging financial hubs that will provide customers for financial services solutions providers and markets for new technologies. Traditional banking and financial services have achieved lesser penetration in many Asian countries, leaving more opportunities for new players and disruptive business models.
We predict that all these factors will help to accelerate the growth of the industry more quickly in Asia than in other geographic regions.
Here are the six fintech trends you need to know about:
1. More regulation but greater competition
Regulators are encouraging competition in financial services by bringing more services within the regulated regime, to let more players compete on a level playing field.
In China, the People’s Bank of China (PBoC) issued a guideline in July 2015 on the development of internet finance - coordinated with nine other government agencies. The following categories of internet finance are addressed: payments, lending, equity crowd-funding, fund sales, insurance, trusts and consumer finance. Each category of internet finance will be regulated by a different authority that will issue more detailed implementing regulations in due course.
In Hong Kong, a new legal and regulatory regime for stored value facilities and retail payment systems is expected to come into effect soon. It will require issuers of any stored-value payment facility that can be used at multiple merchants to be licensed and regulated by the Hong Kong Monetary Authority in a similar way to banks. The HKMA will also have powers to require large-scale operators of retail payment systems to be licensed.
Proposed changes to the European Commission’s Payment Services legislative package, PSD2, will bring third-party providers of payment initiation and account information services within the scope of PSD2 for the first time.
Other financial services regulators will also use new powers to promote competition. Competition regulators may intervene if data accumulation becomes a new vehicle for monopolistic activity.
2. Governments and regulators are promoting innovation
Initiatives from governments and regulators to encourage the development of the fintech industry can also be seen in a number of countries. In Singapore, the Monetary Authority of Singapore has recently formed a new FinTech & Innovation Group (FTIG). FTIG will be responsible for regulatory policies and development strategies to facilitate the uptake of innovative technology in the financial sector. Regulation is expected to follow in due course.
In China, the PBoC recently issued a set of draft administrative measures on internet payments by non-bank institutions. The stated intention of the draft measures is to encourage the development of the online payment sector by requiring third party payment providers to adopt digital authentication and security measures. On the other hand, if implemented in their current form the rules would also impose restrictions on current practices, such as limiting the annual and daily limits of each user’s online transactions, tightening the regulation of this sector.
In the US, the Federal Reserve Bank has outlined ways to improve the US payment system, and promote fintech innovation and investment by setting up favourable regulatory environments.
3. Different jurisdictions have distinct principles of rights in data
Data could be one of the most valuable assets for fintech institutions. Fintech institutions need solid rights to use their data, and it may be critical to their enterprise value that those rights are exclusive.
Unfortunately the position can be complex and unclear - factually and legally. Data is often aggregated from different sources and includes third-party data. Different legal frameworks affect who owns, and how you can protect, that data. One thing is clear however: data itself is not intellectual property and legislation does not allocate the right to use or monetise data.
The rights that protect data and the extent of that protection vary from one jurisdiction to another. But the absence of standalone protection for the organised contents of databases in most Asian jurisdictions creates a particularly uncertain picture. Contractual protection is therefore vital.
4. How you collect, store and use data will become more regulated than ever
Regulators are demanding greater transparency and greater control for the data subject over what data concerning them is collected and how it is used.
The EU is formulating stricter data protection controls that will come into force within the next couple of years that are likely to impose:
- stricter rules on consent;
- firmer controls over processing beyond the bounds of consent; and
- tighter requirements to dispose of unnecessary personal data.
Data privacy regulators worldwide are becoming more coordinated across borders, and higher standards that originate in one country can quickly percolate down to other countries, particularly in data privacy enforcement hotspots like Hong Kong and Singapore.
In Singapore, one of the offices of FTIG is explicitly responsible for regulatory policies and strategies for developing safe and efficient technology in areas such as cloud computing and ‘big data’. China is also increasingly looking to restrict offshoring of data about its citizens in the pursuit of cyber security protection and anti-terrorism. And Indonesia has recently introduced draft legislation proposing a sweeping requirement for case-by-case approval of all cross-border transfers of personal data.
These are several reasons to expect that the collection, storage and use of data in fintech will be more firmly regulated across Asia going forward.
5. Fintech may be the battleground for the next big patent war
As fintech innovation increases, so does the risk of patent infringement claims.
While many patent systems don’t allow patents for methods of doing business, many patents are being enforced over fintech - especially over innovations that are more ‘tech’ than ‘fin’.
Existing patents are being challenged, in some cases also challenging the exclusivity and the value proposition of the business proposition. And non-practicing entities are looking to buy up and assert patents.
As technical standards develop, standard essential patents, FRAND licensing and competition law will also become an increasing issue. We also expect to see elevated levels of partnering between tech companies and traditional financial services players. It is inevitable that there will also be examples of litigation.
So - for all these reasons - it will be essential to understand the patent landscape.
6. Careful restructuring will be required
Traditional business models are changing, fast. But regulatory constraints on the scope of foreign invested entities to access payments markets in China will mean that looser ownership and control structures such as VIEs and virtual joint ventures may be the only route for foreign investors to access the market. Any structure will require careful consideration of the regulatory position in each country.