Global credit ratings firm Fitch Ratings recently released a report which suggested that financial technology (fintech) companies will play an increasingly vital role in the Asia-Pacific (APAC) region’s financial services sector. Analysing the findings of this report, Htet Tayza asks: how will fintech impact APAC’s financial services industry going forward?
Financial publication The Econo Times writes that Fitch believe that fintech businesses are set to find new expansion opportunities in the APAC countries. There are large unbanked populations in nations such India, while the middle classes in countries such as China, the Philippines and Indonesia are gradually becoming more tech-savvy, creating lucrative new markets for fintech firms.
Confronting the risks
Fitch argues that the rise of fintech companies will present risks to APAC banks and regulators who have limited experience managing emerging technologies. A key challenge for regulators will be balancing the new operational risks of fintech with these technologies’ capability to supply more effective services to APAC consumers. The ratings agency argued that APAC regulators must strike the right balance here to prevent the aggressive expansion of fintech companies, at the expense of other companies in their respective financial services industries.
Fitch also commented that if traditional APAC banks fail to adapt to the fintech revolution, they could find themselves facing a whole new set of risks. For instance, if APAC banks do not implement the necessary improvements to their systems and resources needed to facilitate rapidly emerging technologies, they could face operational vulnerabilities and security risks. Fitch added that fintech could also indirectly impact credit profiles as well, because they have the potential to erode a previously profitable source of revenue for APAC banks.
Analysing major markets
The credit ratings agency went on to look at fintech adoption in major fintech markets. India has developed a regulatory framework which seems to facilitate fintech expansion, but it is hard for new fintech companies to enter this fintech market, Fitch added. This is because there is a lack of credit history for some emerging fintech sectors. This makes assessing creditworthiness, to ensure that proper credit-underwriting standards are applied to these sectors, somewhat complex.
Fitch also explored the rise of fintech in China. Banking penetration rates in the People’s Republic are very high, the credit ratings agency noted. Increasingly, there are a wealth of opportunities for Chinese fintech businesses to capitalise on, due to the wealth begin generated by the nation’s fast-emerging middle class. Chinese fintech firms, Fitch noted, have already cultivated viable payment systems that have the ability to compete with the nation’s traditional banks on transaction fees and deposits. By leveraging these systems, Chinese fintech firms could market loans and investments to cash-rich middle class consumers to create additional revenue streams.
But despite the rapid expansion of fintech companies in China and India, Fitch was quick to point out, both countries’ fintech sectors are fairly new and therefore somewhat vulnerable. The ratings agency added that the largest fintech markets in these countries are online payments systems, peer-to-peer lending and “digital wallets focused on retail consumers and small-to-medium sized enterprises.”
Fitch noted: “We expect regulation to play a key role in determining how the sector evolves. Clear and transparent policies will be important for successful development. There is likely to be a fine line between the development of regulation to ensure orderly growth and the establishment of significant barriers to entry to protect the incumbents. Fitch believes the barriers to entry for Fintech firms are greatest where banking markets are more concentrated. For emerging markets, financial systems with fragmented banking systems that have seen limited innovation will be the most exposed.”
Htet Tayza’s analysis
A recent report showed that APAC is driving international fintech investment. Fintech investment levels in the APAC region rose by 517% in the first three months of 2016. This shows that fintech companies are fast becoming major players on the APAC financial scene. But this has the ability to disrupt as well as benefit APAC fintech sectors. New technologies could deprive traditional financial institutions such as banks of business due to the convenience they provide to customers.
Therefore, the fintech revolution could negatively impact APAC’s financial services sectors. But as Fitch suggested, APAC governments can negate this risk by implementing effective regulation. At a recent briefing in Hong Kong, partners at Simmons & Simmons law firm argued that APAC countries should not take a zealous attitude to fintech sector regulation. Rather they should follow Singapore’s example and base their regulation policies on the key strengths of their respective fintech sectors. This may ensure that fintech companies can facilitate financial sector growth, without negatively impacting existing financial services firms across the APAC region.