The Global Fintech landscape and Asia’s opportunity
The pervasive and sustained growth of financial technology (“fintech”) continues to affect the financial services industry and traditional means of financing globally. At a regional level, US banks and corporations have outpaced every other country in global investments in fintech over the past few years; investments in the country have nearly tripled, supporting startups through the launch of competitions, accelerators and incubators, helping new businesses to seek potential partners and investments.
Indicatively of this reality, of the US$12.2 billion invested globally in the sector in 2014, the US accounted for by far the greatest share – nearly 80%. Europe came in second, with 12%, and the whole of Asia, a distant third at just over 6%. By value, London and New York are fetch’s clear worldwide leaders, between them capturing more than the 90% of fintech investment and revenues.
Generally, the dominance of US corporations in the fintech industry has been made possible through connections between startups and well-established financial institutions and banks made possible by ever more sophisticated accelerators and incubators. In additions, New York and London have successfully capitalized early on from their respective governments’ proactive steps to foster a favorable regulatory and legal environment for fintech companies to thrive in.
The growing Asia Pacific (APAC) opportunity
A closer examination of the micro social and economic trends at the heart of the fintech phenomenon clearly suggest that whilst such dominance is unlikely to end in the very short term, these figures are not capturing the gradual and unstoppable surge of the Asia Pacific (APAC) region. There is no exaggeration in arguing that the fintech revolution has spread from West to East with prospects far exceeding those in the US or Europe, spurring banks and other capital markets participants in APAC to change the way they operate or face an uncertain future, as disruptive technologies and new players threaten traditional operating and delivery models.
The speed of market growth is due to multiple factors. On the one hand, the APAC market is characterized by some important particularities, which make it well suited to benefit from fintech innovation; on the other, in a radical departure from past industry strategies in other fields, governments in the region have become much more responsive and accommodating to fintech. Additionally, on the institutional side, technology spending by traditional banks has been lagging behind levels in Europe and the US; on the public side, there is both a lack of behavioral legacy and lingering distrust in the state-owned banking system due to past corruption and inefficiencies. This encourages the public to look favorably on alternatives provided by private, non-financial companies. The mismatch between physical banking infrastructure and non-physical telecommunications infrastructure makes the introduction of digital banking particularly likely in APAC. It is in this context that mobile-based financial services represent the most cost-effective way to reach individuals, and particularly for the region’s large, young, media-savvy population and the growing middle class.
The transition to digital financial services
In what is perhaps the most telling difference from the highly consolidated and demographically “dense” markets prevalent in the Western hemisphere, Asia’s fintech sector is poised to uniquely benefit from the opportunity to address the financial needs of a 1.2 billion-strong unbanked population and small, independently owned businesses. The APAC market has yet to fully perform its digital financial transition. This affects the number of future digital banking customers, which is set to reach 1,700 million by 2020, up from 670 million in 2012. While commercial banks struggle to offer services to those with low incomes, fintech companies leverage their competitive advantages to create economically viable solutions for this new wealth of clientele. The region’s chronically underserved SMEs present another opportunity for fintech, especially in credit market access. Finally, the fact that certain banks in the region are only too lightly capitalized means that they will have difficulty in extending credit to the emerging middle class, which will demand more unsecured loans. This means that P2P alternatives may provide a likely and cost-effective way for customers to finance their needs, especially if liquidity across Asia can be shared via P2P platforms. Collectively, these factors represent a veritable goldmine for fintech start-ups, and one that has never been faced in any other market.
A survey of the region highlights three markets of particular interest for their unique growth prospects. Let’s review them briefly.
Hong Kong: in the space of two years, the SAR has emerged as a major global fintech center with activity driven by the private sector and recently amplified by the government’s budget spend, not to mention its established role as the world’s gateway to China. Hong Kong is well placed to be a major fintech player, especially in the area of alternative finance: it has long been one of the world's leading financial centres and therefore already possesses many of the important preconditions for being a fintech centre; it is located at the heart of the world’s largest region of opportunity for fintech growth with abundant access to funds and world-class infrastructure, and its financial sector already offers a pool of 230,000 people. The government recognizes how the fintech industry can change the city's financial industry landscape, as proven by the establishment of a Steering Group on Financial Technologies in March 2015 to advise the government on the potential for, and gaps in, the development of Hong Kong into a fintech hub. Hong Kong featured a large number of companies offering B2B solutions for hedge funds and investment firms, big data analytics and wealth management.
China: with its sheer mass and scale, the country already has more peer-to-peer lending platforms than the rest of the world combined, and its leading technology companies, among them Alibaba, Tencent, and Xiaomi, have all already established their own fintech arms aimed at offering online financial services to their massive user bases. Rapid growth in China’s peer-to-peer lending industry has overshadowed the U.S. and UK markets. In a market still dominated by retail investors, the Chinese sector grew 270 percent in 2014 with the number of platforms doubling to 1,700 within the last two years.
The central government is also acting to foster technological innovation. A policy paper published in March 2015 urges leaders to create a flexible legal and regulatory environment by 2020 to accommodate the innovative changes underway. The document also recommends that China break down monopolies to create a level playing field and give entrepreneurs a voice in policy. Another encouraging sign is the recent news that the State Council has publicly backed crowdfunding and alternative methods of finance, a move that should provide adequate growth stimulus to the over 140 crowdfunding platforms operating across the country.
Singapore: the city-state has implemented a full scale, government-led, innovation-inspired “Smart Nation” project that has succeeded in establishing an innovation friendly ecosystem that remains one of the most vibrant and well supported globally. As the finance hub of South East Asia, it is clear that Singapore brings a wealth of expertise, funding opportunities and market access that is beneficial for every fast growing fintech startup. The government’s sovereign wealth funds, GIC Private Limited and Temasek Holdings have both made significant investments in the fintech space recently.
While the above examples are certainly the most notable, additional welcome developments continue to take place in additional jurisdictions, such as South Korea, where thanks due to governmental assistance P2P lending and crowdfunding platforms are emerging, and Australia, where the government has been exceedingly proactive in issuing specific recommendations for policymakers and regulators can take to adapt the financial system to the digital era.
In sum, it appears clear that while it is still too early to tell what place will become the fintech capital of Asia, or whether there will ever be a true champion, governments in the region are, each in their own way, laying the groundwork for fintech growth.
The US and London may be ahead of APAC in terms of their fostering of financial technology, but there is huge potential in the region that both the start-ups and established financial institutions are keen to capitalize on. Whereas in 2014 there was a total investment of US$4 billion into the Asian fintech market, during the first six months of 2015, that sum tripled to US$12 billion. And while such figures may be nominally dwarfed by the investment pumped into the US and European fintech markets, it is impossible not to recognize the clear momentum amongst APAC players.
Many of the Asian regulators seem likely to continue being incentivized to giving their seal of approval, not to mention significant financial backing, to a host of fintech firms either starting up or seeking institutional partners, in a trend that should prove critical in closing the gap between APAC and Western markets.
The hype around fintech in APAC is growing far too loud to ignore, although at present it is still largely a forward-looking issue. Understanding and embracing may be two separate animals, but there is appetite on both sides for fintech across APAC. Those who don't embrace this change, however, may find themselves participating as mere bit players further down the road.
To learn more about how Crestbridge can help you handle your corporate governance requirements for your Fintech fund structure, call George Bashforth on +352 26 215 420 or email email@example.com to arrange a telephone or video call.