Singapore is well on its way to making financial technology (fintech) a priority in its economy and setting the stage for the country to be a hub for this market. Through the use of new technology, fintech disrupts the traditional operating model of financial institutions. Singapore had a week-long Fintech Festival in November that brewed up topics for discussion ranging from digital payments and digital financial advice to blockchains and big data. With the launch of a regulatory sandbox, a mature start-up environment and connections to the rest of Asia and beyond, Singapore has a good mix of ingredients for fintech growth.
“There is presently a strong government effort to promote Singapore as a fintech hub,” says Eric Chan, partner at Shook Lin & Bok. “I think this is partly due to a recognition by the government, particularly the Monetary Authority of Singapore (MAS), that the continued success of Singapore as an international financial centre cannot depend on conventional financial services alone. Thus, the MAS is not just open to financial services disruptors to set up in Singapore, but also actively encouraging existing financial institutions to get into the fintech space in order to maintain its competitive position.”
Fintech regulatory sandbox
On November 16, the MAS released the guidelines for the fintech regulatory sandbox.
“Financial services is a heavily regulated industry, and many fintech start-ups would not have the resources to cope with the complex regulatory regime for various classes of financial services,” says Chan. “With the release of the new fintech regulatory sandbox guidelines, the MAS has demonstrated the willingness to relax some existing regulatory requirements. Under the fintech regulatory sandbox regime, MAS will relax certain regulatory requirements, decided on a case by case basis, for a limited duration of time, the so-called sandbox period, so as to give more breathing space for experimentation and testing. This should make it slightly easier for start-ups to develop their projects and grow into viable businesses.”
“Upon successful experimentation and on exiting the sandbox, the fintech entity must fully comply with the relevant legal and regulatory requirements,” says Amit Dhume, partner at Colin Ng & Partners.
The areas that the MAS has indicated it would be willing to relax requirements include:
- Asset maintenance requirement
- Board composition
- Financial requirements
- Fund solvency and capital adequacy
- Licence fees
- Expectations in other regulatory guidelines
- Track record
The MAS said, however, it would not be willing to relax regulatory requirements covering:
- Confidentiality of customer information
- Fit and proper criteria
- Handling of customers’ money and assets by intermediaries
- Prevention of money laundering and countering the financing of terrorism
The evaluation criteria for the sandbox include:
- How the fintech solution is innovative
- How the fintech solution would address a problem or bring benefit to customers or industry
- Whether the applicant is prepared to contribute to Singapore in other ways after exiting the sandbox for broader scale deployment
Fintech startups will need to lean on existing financial institutions and funds for financial backup and investment. At the same, protection of information and ideas with intellectual property rights will be crucial.
“Apart from coping with regulation, for fintech companies in general, the other legal challenge I see is in the field of intellectual property rights or how to protect their innovative business models and benefit from it in the long run,” says Chan.
“Singapore is also a gateway to Southeast Asia, which is a large market with a lot of potential for fintech services, and that is definitely a driving factor as well,” says Dhume. “Unlike many other technology focused businesses, as this area of business involves the financial sector, there are also regulatory requirements that needs to be complied with.”
Businesses that are already in the financial services business such as banks and fund managers are better suited to invest in or acquire fintech companies, as they are able to provide support and mentoring to the fintech venture besides providing the capital which any investor can provide.
“A fintech venture that has the backing of a financial institution is also likely to have more opportunities to scale up, but may be seen to be aligned to a particular financial institution,” adds Dhume. A venture capital fund that has the right set of fund managers may be able to provide the support and mentoring, as well as capital, and allow the fintech venture to be continue to be independent.
“For investors who are investing at a very early stage in fintech ventures, they need to conduct due diligence and ensure that the company has a concrete plan on how they will be able to secure the necessary licenses and comply with regulations,” says Dhume. “A senior management team at the company that has a mix of finance as well as technology professionals is generally more appealing to investors.”
With the increase in global concerns around compliance with anti-money laundering (AML) and know-your-customer (KYC) regimes, financial institutions have to deal with higher levels of scrutiny and this is where regulation technology (regtech) comes in. “Regtech will take prominence and will become increasingly cross-border,” says Dhume. “This is where tools that offer real-time monitoring and aggregation tools become important and fund administrators will want to make sure they conform with the latest requirements.”
“Being a start-up jurisdiction, Singapore is a place for Europe looking for a subsidiary for Asia business and at the same time, start-ups in Singapore are looking to expand to Indonesia, India and Vietnam,” says Dhume. “Products such as robo advisors, for example, personal wealth advisors to generate automatic portfolios, and money remittance online payment platforms have been popular.”
Singapore isn’t the only jurisdiction jumping on the fintech bandwagon. Australia, Hong Kong, China and other Asian jurisdictions are fostering a culture of innovation for fintech startups. No one knows yet if sandboxes will help to deploy fintech products more widely and whether success from the sandboxes will translate into new regulations. The rise of regtech and what it will mean for businesses and regulators are other fascinating aspects of a rapidly developing market.