13 September 18 The Business Times by JAMIE LEE
THERE are no signs of real haste from global regulators in keeping financial technology (fintech) firms in further check. Yet, it may be time for regulators here to expand their supervisory scope, as large fintech firms start to stake a claim on financial services in Southeast Asia.
The Basel Committee on Banking Supervision has signalled that it believes fintech firms pose little threat to stability for now. "Despite the hype, the large size of investments and the significant number of financial products and services derived from fintech innovations, volumes are currently still low relative to the size of the global financial services sector," it said in a report in February.
Yet, that assessment may be incomplete. As DBS chief Piyush Gupta noted this month, the one per cent of the fintech community represented mostly by the large Chinese players such as Alibaba and Tencent, are a more potent force than the 99 per cent of fintechs that will likely end up collaborating with banks given the high customer acquisition costs.
Speaking at a forum, Mr Gupta said the force represented by that one per cent is cause for worry for incumbents banks in Southeast Asia, as Chinese fintech firms are bringing their game to this part of the world. "It's quite clear that they are beginning to stretch themselves outside of China."
Indeed, it seems odd to ignore that Alibaba is today the largest money market fund in the world, yet does not invite the same regulatory scrutiny as banks. Alibaba's Yu'e Bao held more than US$250 billion under management as at end-March 2018.
In a recent interview with the Business Times, Standard Chartered chairman Jose Vinals pointed out that regulators may actually be too late in regulating fintech, in the same way that regulators missed the threat from shadow banking. "I don't think there is any value in waiting to put in place regulations which may be relevant to the supply of banking or quasi-banking products, especially when it entails maturity transformation or leverage," said Mr Vinals, an experienced regulator previously from the IMF.
DBS's Mr Gupta further pointed out that the large fintechs are gaining from the broader trend of the unbundling of the banking value chain. Yet, fintech firms, while dabbling in some form of deposit gathering, and lending, are shunning the label of being banks precisely due to the regulation that full-fledged lenders invite.
Amid this, there are at least three risks to watch in the years ahead. The first is that several fintech firms - including Chinese players - are eyeing the untapped potential of SME lending. Indeed, the SME lending gap here means that as at 2014, less than 20 per cent of SMEs in Asia got access to bank lending, data from the Asian Development Bank showed. In Asean alone, the SME funding gap has been estimated to be about S$180 billion.
Banks have traditionally struggled to offer more funding to SMEs due to the lack of collateral, as well as a lower confidence in SMEs' accounts, with the common joke being that SME bosses keep as many as four sets of accounts. Regulations which crimp lending to SMEs have not helped either.
Fintech firms are now swooping in with new-fangled forms of credit assessment, backed with real-time data from SMEs to better assess the strength of the underlying business. But these assessment tools have not gone through a true test of a liquidity crisis. And in handling leverage and maturity transformation (where banks make money from the maturity gap between assets and liabilities), the fintech firms are not obliged to be as transparent as banks about how they manage risks of maturity mismatch, or ensure that the loan defaults are monitored on a portfolio basis.
It is not inconceivable that any exuberance in SME lending through fintech firms could lead to instability in the financial system in time, especially once potential domino effects are taken into account.
The second risk comes from cybersecurity. As fintech firms and banks take a "plug and play" approach to collaboration, it remains unclear if fintech firms adhere to proper cyber hygiene. Any form of third-party collaboration introduces risk, as the incumbents are not in control or have full visibility of their partners' standards.
As banks and other large institutions are increasingly fretting over cyberattacks, it would be foolhardy to dismiss potential risks posed by fintech collaboration. The biggest threat ahead for the financial system are in the "unknown unknowns". Cyberthreat is a proverbial black swan.
Cost of digitisation
The third and final risk is more fundamentally perceptible: that regulatory arbitrage leads banks to aggravate financial exclusion. There are already concerns that banks taking an aggressively digital approach can lead to vulnerable groups in society being left out of the banking system.
A Morgan Stanley report this month estimated that Asean banks will look to recover about US$20-24 billion in cost savings from the digitalisation of payments.
Even after netting off the impending revenue loss of some US$15 billion to non-bank operators by 2022 - mainly losing that to "independents" such as fintech firms - the banks from this region still stand to win.
But that also means banks are heavily incentivised to go digital from a cost reduction perspective. Faced with an uneven regulatory landscape and stiffer competition, banks with shareholder pressures would surely find urgency in their digital pursuits.
As large fintech firms from China make their presence felt in the months ahead in this part of the world, regulators would do well to monitor if the competition turns unhealthy and introduces new, untested, forms of instability.
It remains notable that fintech firms have brought some innovation to the table. Fees have come down for consumers. But there may be unintended consequences to having fintech firms run fast and loose in the name of disruption.
Mr Gupta recounted that Chinese regulators once told him the reason Alibaba has shunned regulation was that before, Alibaba was too small, and now it has become too big. Regulators were caught out by the speed of innovation: Alibaba's Yu'e Bao is about five years old.
Still, that's hardly a good reason, he reckons. Touche. Ten years after the crisis, the lesson of moral hazard still bears repeating.