COVID-19 has accelerated the adoption of fintech across Southeast Asia. More people now have e-wallets to pay, while insurtech and digital wealth management services are also making inroads.
Countries have started to create the appropriate frameworks and the leading companies are pressing ahead. Singapore’s Monetary Authority (MAS) granted digital full-banking licenses to a venture between Singtel and ride-hailing giant Grab, as well as to Sea Group, and wholesale-banking licenses to Ant Group and a consortium around Greenland Financial. Indonesian decacorn Gojek just invested in Bank Jago, a digital lender.
KrASIA sat down with Pieter Franken, a director with the ASEAN Innovation Network (AFIN), a non-profit organization founded by MAS, to discuss about the future of fintech in Southeast Asia. Franken’s career spans over 25 years in finance, specializing in fintech, operations, technology, and innovation. He has held executive positions with industry leaders such as Citigroup, Shinsei Bank, Aplus, and currently, Monex Group.
KrASIA (Kr): We’ve seen a lot of fintech development and adoption in 2020. Singapore just announced its digital bank license winners and a SGD 12 million (USD 9 million) blockchain research program. Where is the digital financial sector heading in Southeast Asia?
Pieter Franken (PF): As for Singapore, especially in digital banking, everybody tends to talk about retail or consumer finance and consumer products such as payments, trans-border remittances, and savings accounts. That’s what most people are seeing. But it’s very important to highlight the corporate side of the financial industry, as it is very large in Singapore. Capital markets, trade finance, central bank digital currency—there’s a lot of focus in those areas that you don’t necessarily hear about, which I think is going to grow further.
There is also going to be a lot of innovation around regulation tech or trade finance. Singapore is a very large trade harbor. They have a project called Business sans Borders, which is trying to extend the supply chains beyond Singapore. It will obviously influence the fintech or financial services that are around it. That is the non-visible part of fintech.
If you look at the digital banking licenses, we talk about Grab and Singtel, but there are also two licenses that went to corporate banking, for small and medium enterprises or other trade areas. A lot of activities are more visible as Singapore wants to grow that in terms of scale. They are also trying to connect it with other countries, innovate in multiple areas, not only fintech.
Kr: Your organization, AFIN, aims to bridge the gap between fintechs and financial institutions. We did see collaborations, but with the arrival of digital banks, we might also see more competition with services provided by incumbents, such as DBS Digibank. How is this coexistence going to play out?
PF: When we talk about fintech, there are two types of institutions, in my definition. One is what I call the disruptors, non-banks that enter the financial sector with new technologies. Then there are the fintech enablers, companies that are not necessarily conducting financial activities.
If you look at neo-banks, they are buying technology from fintechs to assemble things they need, like clouds. Using those enabling technologies, you can actually build your digital bank, or a platform for payments or to collect money.
In the last five years, APIs have become a common language and cloud services have become available in Asia. With just a credit card you can start buying a lot of financial technology, which would have cost you millions of dollars in the past, but now just a fraction of that. You can just pick pieces, put them together and build a bank. It means that if you are an incumbent, like DBS or OCBC, you can easily go digital.
Then there are neo-banks, the new banks that use the same fintechs to build their bank from scratch. Of course, they only need lower costs, they don’t have to build branches. There are also rural banks, that have been excluded from digitization, but now, since the technology is cheaper for them as well, they are going to compete digitally with the large banks and neo-banks as well. Everybody now has the same weapons and can compete with each other.
The key is going to be three things: cost, speed, and differentiation. Cost is important—we have a lot of people in Asia that live off a very moderate mean, and in order to bank them, they have to dramatically reduce the cost. Speed—there will be a lot of competition so whoever moves faster will be able to lead in the market. And in order to move faster, I would expect these fast-moving companies to use enabling fintechs. Differentiation, in mature markets like Singapore, is about convenience, or innovative ideas, and we talk about how to serve SMEs better and how to integrate things like open banking.
Kr: There is also a plan for more cross-border payment links, like the one between PayNow and PromptPay. Is this also going to be a trend? In Southeast Asia we already have digital companies with regional operations like Grab and Gojek. What are the main hurdles for these companies to enter the cross-border payment sector, considering that they already have the infrastructure and user base?
PF: The biggest hurdle is indeed regulation. The key thing for cross-border tech is how to do it efficiently, allowing the transfer of smaller amounts. This has been traditionally a problem, like when you use Western Union, you pay a large amount of money to send a small amount abroad. And that’s where competition helps to make it more efficient.
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Tech now can detect patterns for fraudulent activities and make the transfer process more secure. The challenge now is cost and the margins are going to be squeezed over time because of that.
So the short answer to this is: it will become more available and cheaper in the future. The real question is how many cross-border activities are there to make this business worthwhile? Is it a business that can feed many fintechs? I would say not many, cross-border payment is not something people do every day.
Kr: What are the upcoming trends in the fintech sector? We’ve seen rapid growth in insurtech and digital wealth management, but what else is going to become big?
PF: It’s a challenging question. If you look at the fintech innovations of the last 30 years, initially financial services were very vertical. You have to go to the bank to do something. The future will flip this around—financial services will be coming to the customers. They not only go digital, but will also be integrated with other things like ordering food, buying items, or booking tickets. Every time you do a transaction, financial services will be there with you.
The amalgamation of verticals is enabled by APIs. More and more fintechs are going to connect with companies using APIs, integrating their services, connecting them to the rest of the ecosystem.
Next is what I call banking-as-a-service. A company might not be a bank but they can provide almost everything a bank does without a lot of integration. The aim is to integrate banking services better with e-commerce or other commercial services.
KrASIA is a media partner of World FinTech Festival Japan, organised by So Inc in partnership with Singapore FinTech Festival. The interview has been edited for brevity and clarity.