Nick Caldwell, our Managing Director shares his thoughts on overcoming the challenges in the fintech industry. Read his opinion piece published in The Business Times here:
In recent years, we have seen how fintech has evolved as budding entrepreneurs, venture capitalists and financial institutions are taking an active role in growing the sector. However, the road ahead is not without some bumps and curves along the way.
While fintech holds great promise for the society with key benefits being cost-effectiveness, efficiency and exceptional user experience, it is still a fairly nascent sector. As with all industries that are developing rapidly, there are growing pains and issues to be ironed out, especially those surrounding corporate governance and regulatory requirements.
Singapore has been proactively addressing the subject with the Monetary Authority of Singapore (MAS) setting up a fintech and Innovation Group in 2015 to examine regulatory policies and sector development strategies. Now that fintech has become such a popular theme and everyone wants to own a share of the pie, other governments around the world are also starting to take notice of potential risks.
In the past few years, we had some high-profile scandals related to the sector. Lending Club, a peer-to-peer lending platform listed on the New York Stock Exchange, came under fire this year for its problematic lending practices. Since then, its CEO along with other senior managers have resigned and the stock has fallen from an all-time high of US$25.74 to its current trading price of US$4.91.
Besides online lending, cryptocurrencies such as bitcoin have also had their fair share of issues. Bitcoin famously vouched to give a bank account to anyone without requiring identity verification. While the process becomes more seamless, the anonymity of it may expose it to vulnerabilities. In August this year, hackers stole US$65 million worth of bitcoins from bitcoin exchange Bitfinex and in 2014, US$460 million of bitcoins vanished from Mt Gox, the world’s largest bitcoin exchange before it declared bankruptcy after the hack. Incidents such as these are a cause for concern, but it is important to keep in mind that they are rare and far between. These scandals expose the gaps in the sector and provide a valuable learning experience.
But therein lies the dilemma for regulators – while some are calling for greater control, many are also worried that it may suppress innovation and annihilate new technology even before it gets a chance to enter the commercial market. What should governments do then? In Singapore, the MAS has set up a regulatory sandbox to allow startups to experiment with fintech solutions within a well-defined space and duration. For that period, the MAS will ease certain regulatory requirements and provide appropriate safeguards to contain the consequences of failure for customers. Other countries such as Thailand, Australia, the UK and Malaysia are also implementing their own versions of a regulatory sandbox to develop a safe and conducive sector where innovation has the space to flourish.
On the other hand, what about the unintended externalities of fintech? Along with its ability to keep costs down by cutting out the middleman, its rising popularity may mean that jobs at traditional financial institutions will be at risk. A report by Citigroup released earlier this year warned that more than a third of banking jobs will be lost as consumers move towards digital banking. With regard to retail banking, in particular, the future will focus more on advisory roles rather than facilitating transactions as branch staff are replaced by mobile applications and other third-party payment or remittance platforms.
While it may warrant some nervousness across the financial industry, this wave of innovation is happening on a global and industry-agnostic level. Companies need to adapt with the times to stay relevant in this new digital era. Local banks here are leading the way when it comes to digital innovation with their own fintech labs, accelerators and partnerships in place to develop their digital capabilities and diversify their service offerings.
As with every worthy endeavour, growing pains are an inevitable part of the process. With the government’s active involvement in the sector, Singapore is in a good position to learn from experience and embrace change instead of being hampered by short-term challenges. In time, especially with the authorities such as the MAS leading the way, I expect that fintech will be able to develop into a strong and sustainable sector here and Singapore could emerge as one of the leading global fintech hubs.