Will Covid-19 coronavirus accelerate the "Tech" in FinTech across Asia-Pacific?
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News: 20 December 2023
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With the Covid-19 coronavirus pandemic causing some nations to undergo lockdowns and the widespread implementation of social distancing rules restricting physical contact, financial institutions are now being forced to review their operational channels and prioritise the development of digital channels and platforms. We provide below a brief overview of some of the ways in which we expect Covid-19 will accelerate the shift to digital.
Even in the pre-Covid-19 world, traditional Asian financial institutions were facing huge disruption with a surge of digitalisation upending long-standing business and operational norms. While most Asian financial institutions were adapting, many will need to now pick up the pace.
"Socially distant" banking options
Covid-19 and the various government responses to it have forced customers to stay at home and opt for "socially-distant" banking options. Regulators, including those in Singapore, Japan and the Philippines, have been discouraging face-to-face interaction at bank branches and actively encouraging financial institutions to promote as many basic financial services as possible through digital channels. Accordingly, most banks, including DBS and RCBC, are reporting surges in digital usage. A recent Boston Consulting survey on retail banking ("Retail Banking in the New Reality", 6 May 2020) suggests that one in four customers will stop using branches all together (or use them as little as possible) once the pandemic is over – so this trend will no doubt continue. With fears of banknotes in circulation potentially spreading the Covid-19 virus and an effective vaccine potentially years away, the World Health Organisation has also encouraged use of contactless e-payments instead of cash.
Continued development of the digital banking movement: Over the past two years, digital banking has been making headway in Asia with major financial centres introducing digital banking licence processes. Hong Kong has already awarded its licences and seen new digital bank openings. Whilst the Covid-19 pandemic has resulted in a temporary delay to the implementation of these processes in both Singapore and Malaysia, some other countries like the Philippines and Thailand are looking to work within existing legal frameworks to encourage new digital entrants and new offerings from existing players. Covid-19 is likely to accelerate the focus of other regulators across the Asia-Pacific region on digital frameworks.
We are likely to see more interest in this space from both existing players developing digital-only options, as well as new entrants. This is a straightforward conclusion to draw given the current situation and how it has increased consumer attention on digital offerings from traditional banking businesses. Singapore received 21 applications for only five digital licences, and this was before Covid-19. Across the Asia-Pacific region, traditional banks have been pushing the digital-only agenda – for example in Thailand, UOB launched its first mobile only bank TMRW.
Acquisitions and collaborations: We expect that traditional banks will continue to look at how best to marry the tech expertise with financial services in a time and cost efficient manner. Organic growth is one route to ensuring continued development in this area, and we have seen continued commitment from large banks (such as DBS and HSBC) in support of digitalisation plans. We also expect to see a greater number of banks looking at collaboration or joint venture opportunities with FinTech companies to meet their digital needs, and an increase in acquisitions of FinTech companies by banks (and other financial institutions), as the availability of funding for the smaller FinTech companies will likely become scarcer.
In the payment services space, fuelled by a wide variety of digital businesses in the region (such as lifestyle and ride-sharing decacorns like Grab and GOJEK and other e-commerce players), we have already seen extensive growth of e-payment services such as e-wallets and digital remittance services. Consumer habits, as evidenced by the increase in e-commerce spending across the Asia-Pacific region during the Covid-19, will continue to drive this trend.
Consolidation of consumer payment companies: Prior to Covid-19, there had been a proliferation of payment applications across the region, driven primarily by the mobile-first consumer and attempts to replicate the successful platform app/ecosystem model offered by Ant Financial's Alipay and Tencent's WeChat Pay. This has led to a fragmented market in the consumer payments space across Asia-Pacific, with many smaller e-wallet providers engaging in capital-intensive competition driven by consumer and merchant incentives, with a focus on scaling their platform and ecosystem rather than unit economics. With funding harder to come by, we anticipate that many start-ups will face a difficult decision between pivoting their attention and limited capital towards their core at the cost of their in-house payment-linked platform/ecosystem plans, and committing further capital to maintaining or expanding their payment platforms. From this point, it may be that start-ups potentially start to dispose of nascent payments businesses, together with valuable customer data. Existing market players (particularly those with established payments and FinTech businesses) and maybe even established financial institutions will find that this may be an opportune time for them to expand and consolidate their business presence, while valuations are eroded by the economic impact of Covid-19. SoftBank-backed Fintech, SoFi's acquisition of Galileo, a payments platform for USD1.2billion may be an interesting indicator (announced in April).
Rise of contactless payment: As well as the World Health Organisation recommendations mentioned above, the Monetary Authority of Singapore has also announced that it is working closely with the Association of Banks in Singapore to promote greater adoption of e-payments among individuals and businesses. In Hong Kong, Octopus Cards reported a 20% increase in transaction volume and 30% increase in transaction value, year on year, in January and February for its mobile wallet. Close attention should be paid to March through June and future numbers, especially as workforces return to "the office".
With Covid-19 providing an additional push away from cash usage, we expect industry players to position themselves for a permanent capture in consumer and merchant demand for contactless payment solutions such as point-of-sale products; GOJEK may have stolen a march with their acquisition of Moka in Indonesia (announced in April). We may also see industry-led initiatives to standardise quick response (QR) codes, which has already happened in both Singapore and Malaysia – this will help ease the operational burden on merchants and streamline costs.
Enhanced regulatory spotlight on technology risk management: With increased reliance on technology, we expect there to be greater regulatory spotlight on the financial industry. Technology risk management has frequently been noted as a key evaluation criteria for digital banks, and we expect there to be continued refinement and enhancement of the regulatory expectation in this regard across Asia-Pacific. Regulators will want to stay ahead of the curve on technology risk. We may also potentially see a tightening of the requirements around electronic KYC methods, given the heavier reliance on non face-to-face verification for account openings. Consumer expectations for digital banks and payment companies will be in line with that expected of existing financial institutions, where high availability of services and cybersecurity are basic assumptions enforced through the traditional bank regulatory model, rather than the consumer technology space where there appears to be more acceptance that developers may "move fast and break things" as they scale their services.
Accordingly, as adoption of digital financial services is accelerated by the Covid-19 push to socially-distant banking and digital payment models, we anticipate that regulators will tighten the requirements for these services earlier than planned. Challenged by the complexities of regulatory compliance, more partnerships between FinTechs and financial institutions (seen in the Philippines between RCBC and software-as-a-service provider LenddoEFL and CIMB Bank Philippines Inc and Jumio) are also likely to emerge. With the proliferation of cybersecurity concerns and the immediate and heightened need for technology risk management, we expect to see more activity (like Visa's acquisition of Plaid) and interest in this area by both incumbents and start-ups.
Regardless of how society re-emerges from the Covid-19 pandemic, we will undoubtedly have learned some lessons and will likely adapt our behaviour in a lasting way. Consumer realisation of the increased convenience offered by digital banking services and the enhanced concern over health risks are going to drive an increased pace of change for financial institutions. Both financial institutions and FinTechs alike will need to adapt even more quickly, both to regulatory change and in considering investments and collaborations.
Please contact your local Allen & Overy contact if you would like to discuss any of the above, including a more detailed conversation about the regulatory landscape and M&A trends.