Special

ArticleFinTech Developments & Their Consequences for
the Financial Industry & Regulators in Asia & Beyond
By Flore-Anne Messy

Fintech Overview: Opportunities & Challenges
Emerging innovation involving the use of technology for theprovision of financial services, otherwise referred to as Financial
Technology or “FinTech”, is having a disruptive effect in the financial
industry. While the application of technology in finance is not new,the rise of start-up FinTech companies has the potential to transformor reinvent global financial services in both developed anddeveloping markets.
Digital disruption by FinTech companies has potential crosscutting effects in a wide variety of financial services, including digitalbanking, consumer and small business financing, payments,
insurance and pension provision, and investment management.
Technology can have an impact on how financial markets work, anddistributed ledger technologies have applications that go beyond
virtual currencies and are innovating settlement, money transfersand legal transfer of rights in general. Financial innovation has or
could have an impact on the business model, processes, productoffering and distribution of the above sectors, forming a newcompetitive landscape while also triggering behavioral and culturalchanges for services providers and consumers alike.
Although the level and pace of FinTech disruption differs acrosssectors, products and geographies, the main drivers of financial
technology are similar across the board. These involve efficiency(“nimbleness” and speed, and often “cutting out the middle man”),
simplicity, transparency, lower operating cost and scale effects.
Efficiency gains by “cutting out the middle man” can typically beachieved by applying blockchain, or more generally, Distributed
Ledger Technology (DLT), which allows transactions between two
parties without direct involvement of a trusted third party.
Applications of DLT range from payments and settlement to “smart”
contracts, compliance and more.
The benefits to customers can include a superior and seamlesscustomer experience, a wider range of products and services at alower cost and improved access to financial services. Thus FinTech
also has the potential to enhance financial inclusion and the“democratization of finance”. Digital banking, innovation in digital
payments, peer-to-peer (P2P) currency exchange and lending
platforms can offer financial services to SMEs as well as theunderbanked in developing economies and the underserviced inadvanced economies — with implications for sustainable andinclusive growth.
44 Japan SPOTLIGHT • September / October 2017

Author Flore-Anne Messy

Some of these FinTech developments may have been driven by thecurrent low-interest rate environment and the difficult post-crisis
environment for banks more generally. This may be especially thecase for P2P and other lending innovations. Furthermore, search foryield has attracted investors into the FinTech space, which may leadto overvaluations and create problems further down the road. A
reversal of the interest rate cycle can be expected to slow the pace of
FinTech investment and FinTech company creation.
FinTech innovations pose specific challenges regarding privacy,
cyber security and operational risk. New technologies potentially
increase digital security vulnerabilities that could undermine financial
consumer and business customer confidence and trust, andundermine cyber resilience with systemic implications. Privacy
concerns may be especially relevant when big data analysis is used
to evaluate creditworthiness of borrowers or for targeted productadvice, and cloud applications more generally are prone to outside
intrusion. Such vulnerabilities also exist for blockchain technologies
as recent incidents have shown, even though they are supposed tohave a higher level of security and resilience.
Creating and, after negative incidents, restoring trust can be
crucial for certain innovations to survive. This could be supported byproviding appropriately regulated fall-back solutions with humanintervention and judgement along with automated services. In thesame vein, problems of financial exclusion of less tech-savvy
financial consumers need to be addressed. Likewise, contingency
plans for poorer or otherwise disadvantaged consumers that may fall
through “algorithmic cracks” of lending and insurance services, or
are otherwise excluded from the benefits of FinTech services, may
need to be considered. At the same time, to the extent that FinTech
allows low-income borrowers access to financing for which they do
not have the ability to repay, risks of a “replay” of the sub-prime
borrowing crisis could be building up and need to be monitored andcurbed.
In addition to technological penetration, public policy andregulation can influence the pace of disruption by FinTech. Policy
makers may play a key role in unlocking the potential efficiency
benefits of financial innovation, while seeking to safeguard a levelplaying field for market participants, consumer and investor
confidence and trust, and overall resilience in the financial system.
Policy and regulatory approaches may also need to evolve given thepotential impact of technology on risks, information asymmetries,
and other market dynamics, which may require a rethinking ofCHART 2

CHART 1

Annual global financing trend to
VC-backed FinTech companies

Global FinTech unicorns by valuation(Valuation in $ billion)(2012-2016)

Global transaction value ($ billion)
Number of deals (r.h.s.)

725

848

836

14.6
12.7

12

572

Other, 0.3
Europe,1.2

451

Asia, 5.4

2.5

2012

North America,
5.8

3.1

2013

2014

2015

2016

Asia
US
Europe

12
10

500

9.2

8

8.0

6

4.8

4

200

4.0

3.5

2

100

2.7 2.4

2.3 2.3 2.0 2.0 2.0

1.9 1.6

1.1 1.0 1.0 1.0 1.0 1.0 1.0

00

Source: Based on data from CB Insights, The Global Fintech Report: 2016 in Review.

market failure analysis in the financial sector.

18.5

14

700

300

4

0

16

400

7.7

6

2

800

600

10
8

18

.c
om
S
Zh trip
on e
g
A
O n
ne
97
C
re
di So
t
F
O
sc Ka i
ar rm
H a
ea
M lth
oz
id
Ad o
ye
Kl n
a
Ze rnaG nef
re its
en
sk
Av y
P an
La ros tka pe
Tr la ran .c
Ch Fun sfe om
ina di rw
Ra ng isepid Cir
Fi clen
Ka anc
bb e
ag
G e
u
51 Ron sto
Zi g3
nY 6
on 0
gk
a

14

900

Lu

16

20

Source: CB Insights, The Global Fintech Report: 2016 in Review

FinTech in Asia Dominated by China
One way to measure the rise of FinTech is to look at venture capital(VC) investments into the sector. According to CB Insights, in 2016
VC-backed FinTech companies raised $12.7 billion across 836 deals
globally, slightly down from the high in 2015. Of the global
transactions in 2016, $5.4 billion or 43.5% were in Asia, close
second after North America with $5.8 billion (Chart 1). Asia also hassome of the largest FinTech “unicorns”, i.e. non-listed companies
with a valuation over $1 billion (Chart 2). Asia accounts for seven ofthese 22 unicorns globally, of which six are in China. With 11
companies, the United States counts for half of this universe.
In terms of online alternative finance — another measure for
FinTech penetration — Asia is also developing rapidly. This is theconclusion of a first comprehensive benchmarking study led by the
Cambridge Centre for Alternative Finance and local research andbusiness partners and published in March 2016. It is based on
survey data from 503 leading alternative finance platforms (capturing
an estimated 70% of the visible market) operating in 17 Asia-Pacificcountries and regions, out of which 376 were from mainland China.
Indeed, China is dominating the region, as indicated in Chart 3 that
also shows the rapid development of online alternative finance since2013. The Asia-Pacific online alternative finance market grew 323%
year-on-year to reach $102.81 billion in 2015. The report also findsthat this market is characterized by innovative financial instruments
and channels, ranging from reward-based crowdfunding to P2P
consumer and business lending (marketplace lending), to invoice
trading and equity-based crowdfunding. These online alternative
finance activities are directly connecting lenders to consumer andsmall business borrowers, raising venture capital for start-ups,
funding the creative industries and creating new ways for individuals

and institutions to choose how and to whom money is distributed,
lent and invested, the report concludes.

Role of Technology: Leapfrogging Opportunities
for Asia
New technology is at the heart of FinTech innovations, and Asia
seems to be a fertile ground for such innovations to thrive. One of
the reasons why Asia, especially emerging Asia, is seeing strong
development of FinTech may be that its banking sectors tend to besmaller than those of many OECD countries, and thus FinTechs can
CHART 3

Online alternative finance market
volumes in Asia-Pacific region
dominated by China
($ billion, 2013-2015)
120
102.8 101.7

Total Asia-Pacific100

of which: China

80
60
40
20
0
$ bil.

24.6
5.7

24.3

5.6

2013

2014

2015

Source: Cambridge Centre for Alternative Finance et al., Harnessing Potential – March 2016

Japan SPOTLIGHT • September / October 201745

Special

Article46 Japan SPOTLIGHT • September / October 2017

BS o
AG
nc
H
S
ia
l S BC
er
vi
ce
s
BB
VA
C
ap INGBa italOnSo knci of C e
ét
hi
é
na
G
é
BN né
P rale
Pa
rib
as

go

U

na

Fi

C

n

ga

C

&

se

lF

el

ha

W

M

or

Fi

JP

PN

up

ar

ou
p

ro

Gr

lG

ia

nc

na

C

s

ou
p
nc

ial

M

iz

uh

o

ui

Fi

na

nc

na

ial

Gr

ch

r

m

ito

m

o

M

its

FG

Fi

dm

an

Sa

de

an

nt

ol

Su

M

its

ub

ish

iU

Ba

G

nc

o

C

Sa

iti

gr

ou

p

CHART 4step in to cover financing gaps that may exist where
Banks themselves invest in FinTechsbanking sectors are less developed. Furthermore,
Major bank investments in VC-backed FinTech companies, number
financial firms may not be plagued by old and complex ITof deals(2015 Q4 - 2016 Q4)
systems that have been built up over decades and may
now be a hurdle to adopting more innovative systems. In
9888many cases, FinTech development may also amount to8“leapfrogging” technologies for applications and services
Asia
7
that have not existed, or have not been digitalized before.
US
6
More generally, technology is lowering entry costs in
Europe55
55many financial services areas, creating opportunities for4
new service providers. Big data analysis, DLT and the33Internet of Things (IoT) will further support this trend.
3
2
2
2
2
While Bitcoin, the blockchain-based virtual currency that
2
1
1
1
1
1
has been especially successful on the Chinese market
1(also in terms of mining and Bitcoin exchanges) has been0
a source of concern for some policy makers, DLT moregenerally is a “general purpose” technology that will help
to facilitate transfers or values and rights. It will also help
to make financial companies’ compliance with regulatory
requirements more efficient (including via so-called
RegTech applications) and support the automation of
Source: CB Insights, The Global Fintech Report: 2016 in Review
validation processes. The IoT can provide the ability to
expand the DLT ecosystem, even though there are
While FinTechs with their nimbler structure and innovations
challenges in terms of security, compatibility and legal issues
compete with traditional financial institutions and challenge theirespecially related to data sharing.
business models, there are also many avenues for collaboration
FinTech innovations often offer, and compete on, better consumer
between FinTech firms and incumbent institutions. The latter canexperience. As many FinTech companies tend to be specialized, often
offer FinTechs specific financial expertise (e.g. risk assessment,
focusing on one product or service, they can create single-purpose
evaluation and management) and scalability owing to their large
solutions that are designed to offer an improved customer
customer bases. Banks, in turn, can make use of FinTech expertise.
experience with respect to a product or service. Furthermore,
Furthermore, in some jurisdictions remuneration rules and bonus
FinTechs tend to be nimble and quicker than traditional banks to takecaps may make it difficult for traditional banks to attract and keep
advantage of digital technology and in developing banking products
FinTech talent in-house. Likewise, banks that want to try out newthat are user friendly, cost less to deliver and are optimized for digitaltechnologies, solutions and business models may in somechannels. As briefly addressed below, these new players also havejurisdictions be constrained by an existing regulatory framework thatfewer constraints in terms of regulatory compliance that affects
does not allow low-risk and low-scale experimentation to take placebanks, especially in Asia. Many firms operate on a national orunder less stringent rules. This limits competition and may stifle
regional level only and even though successful they may be lessinnovation in financial services and may deprive consumers ofwell-known outside their jurisdictions.
enjoying certain improved value propositions from their trusted
FinTech & Traditional Financial Institutions:banks. Especially in such cases, banks and other traditional financial
Competition & Cooperation
institutions can benefit from cooperation with independent FinTechs.
Indeed, as reported by the industry in discussions held at the OECD,
The rise of FinTech has the potential to disrupt traditional banking
in the United Kingdom 80% of FinTech start-ups are companies thatand other financial services, as can already be observed as digital
support incumbent banks.
platforms, websites and cloud computing replace human-based
It therefore seems that, given the strengths and weaknesses ofservices provided by brick and mortar institutions. But such FinTech
both banks and FinTechs, overall both groups will often do better bydevelopments are not only taking place outside the traditional
cooperating rather than by competing. And if FinTech innovations
banking sector: incumbent banks themselves have been pushing forlead to a smaller traditional financial sector as some observers
automation of most of their services and client interactions with abelieve, this would alleviate the problems brought on by theview to improving efficiency and lowering costs. Furthermore, many
oversized financial sector that existed before the 2008 financial
banks are investing in FinTech companies to benefit from cuttingcrisis. But as is the case in other tech areas, the development ofedge technologies and possibly to generate bespoke FinTech
FinTech could also lead to an unhealthy oligopolization of market
solutions for their needs (Chart 4).
power which may require antitrust and other measures, for example

giving third parties data access to banks.

FinTech & Regulation: No Level Playing Field,& Asia Ahead?
In this context, the regulatory environment and the issue of a levelplaying field is also important. On the one hand, banks would argue
that regulation should be business-model neutral and platformneutral, in the sense that banks should neither be advantaged nor
disadvantaged by regulation and the same should be true for
FinTechs and other challengers. And as FinTechs and banks are partof the same ecosystem, for competition to be healthy, bothincumbents and new players should be allowed to fully deploy theirdigital strategy on an equal footing. On the other hand, FinTechs
would emphasize an appropriate degree of proportionality inregulation such as lighter requirements for smaller FinTechs withlower levels of risk.
At the same time, many banks welcome the fact that they are moreheavily regulated, especially following post-crisis reforms. Recent
regulatory initiatives that have strengthened the solvency of banks
and their supervision can help to build consumer trust, which in turnprovides a certain advantage vis-à-vis competitors. Many years ofexperience allow banks to provide clients with regulatory-driven
products under high levels of operational security and accompanying
their clients throughout their life cycle. Finally, as opposed to FinTech
start-ups, traditional banks have a head start in knowledge aboutrisks and compliance — even though many FinTech start-ups havebeen created by experts that were trained in the traditional sector.
From the FinTechs’ point of view, an unlevel playing field withstricter regulation for traditional banks could also have implications
for venture capital investment in this space. Such a policy approach
could reduce the range of exit strategy options for FinTech investors,
as there would be less appetite for acquisitions from banks which
would seem to be one of their more natural acquirers. This would
also affect earlier stages of the cycle, as this could diminish theappetite for the creation of start-ups that specialize in solutions forthe financial sector and reduce the interest of investors in such startups. Regulators may want to take such considerations into accountwhen designing FinTech policies.
All told, policy makers need to balance the benefits of innovation
with the need for financial stability and consumer protection.
Innovators need to be able to contest markets, stimulate competitionand enhance productivity. This is especially true in financial services
where network effects can create natural monopolies, concentraterents and render financial services expensive and exclusive. Hence,
regulatory frameworks should encourage the introduction of new
business models and technologies — and not stifle them at too earlya stage. As the case of Europe indicates, a favorable regulatoryenvironment may be supportive of innovation (Chart 5).
Regulation will play a key role especially as regards DLT in
fostering competition and creating trust. DLT will enabledisintermediation, and achieve more competitive outcomes, bycreating trust between two contracting parties directly, eliminating

CHART 5

Favorable regulatory environment
can support innovation

Alternative financial transaction (crowdfunding, peer-topeer lending) volume vs commercial banking regulatory
restrictiveness in Europe
70

60

Total 2015
UK
alternative
financevolume percapita (Europe)50

less restrictive

more restrictive

40

30

EE
20

10

0

0.10

NL
LV
FR
DE DK
SI SE
ES
CZ LT
0.15

0.20

FI
AT
0.25

BE

IS

CH
0.30

0.35

Service trade restrictiveness index for commercial banking

0.40

Source: OECD STRI database and Cambridge Centre for Alternative Financethe need for a trusted intermediary and thus substantially loweringcosts of transactions. Regulation can both help to establish DLTapplications (for example with laws that create clear legal conditions
that guarantee ownership of assets that are governed by theblockchain determination) or hurt their development (such as byrequiring that settlement of transactions occur in a given way that
excludes blockchain uses, or by limiting the use of other DLT-based
applications).
In Asia, the regulatory landscape is rapidly evolving with thegrowth of the FinTech sector. A survey of online financial platforms
by the Cambridge Centre for Alternative Finance indicates thatexisting and planned regulation is being regarded as adequate orfavorable in some emerging Asian countries, reflecting a broadly
supportive approach by regulators for this industry, while incountries such as Japan FinTech regulation is often considered too
strict; several gaps in regulation are also noted (Chart 6). It may,
however, be early days to fully assess these approaches, and in light,
for example, of the many failures of online lenders especially in
China, as also noted by the Financial Stability Board, currently morelenient regulators may eventually need to embrace a somewhat morecautious approach as the industry is scaling up.

Regulatory Sandboxes Help Keeping Pacewith Development
That said, at the early stages of FinTech, self-regulation with someJapan SPOTLIGHT • September / October 201747

Special

ArticleCHART 6

National industry perceptions of existing & proposed national regulation
ThailandSingapore

ProposedSouth Korea

Proposed

Proposed

India

Japan

Proposed

Malaysia

Selected Asian countries surveyed, 2015

Existing
Regulation is adequate and appropriate

Existing

Regulation excessive and too strict
Alternative finance (e.g. crowdfunding & P2P lending)is not currently legal in my country

Existing

No specific regulation and needed

Existing

No specific regulation and not needed

Proposed

Not sure/Not specified

Existing
Proposed
Existing
0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Source: Cambridge Centre for Alternative Finance et al., Harnessing Potential – March 2016

48 Japan SPOTLIGHT • September / October 2017

PensionInsurance

CreditSavings

Payments

Internationaltransfers

Domestictransfers

Basic cash in/
cash out

guidance, support or light touch intervention by regulators may beinnovation incentives, such that opportunities and burdens thereof
appropriate. For this, the “regulatory sandbox model”, such as
could be shared fairly.
Project Innovate proposed by the UK’s Financial Conduct Authority
FinTech from a Consumer Perspective
and similar models in Australia, Singapore and elsewhere, may be asuitable approach under the right circumstances. This is especially
As shown in a survey by the OECD’s International Network on
the case as it is difficult for regulators to keep pace with
developments in the fast-moving FinTech space, and their
CHART 7
need to go along nevertheless in order to provide for a
Availability of digital financial services
safe transition into the digital era. Such an experimental
Number of countries and economies indicating that a financial service
stage would also prevent regulation from becoming too
is delivered through a given digital channel
restrictive too fast as this could stall innovative
developments and their adoption. Taking time to assess
35
Internet banking
these developments potentially allows regulation to
Mobile banking
30
Mobile wallet
become “future proof”. As concerns perhaps not only
Simple mobile money
Instruments combining
FinTech regulation, getting it right is more important than25
prepaid cards andmobile phones
doing it fast.
20
The “regulatory sandbox model” can be likened to theway that car manufacturers use closed and secured
15
circuits to test new prototypes, new technologies and new
10
safety features. Digitalization of the financial industry that
relies so much on direct customer contact should also
5
have a secured space to try and fail, in co-operation withregulators. Regulators could help by exploring how to0gear up innovations in order to support it across a rangeof financial activities, working with industry and a wider
circle of stakeholders. Under level playing field aspects,
established banks and FinTechs alike should be allowed
Source: OECD/INFE stocktaking survey, 2015/16
equal access to regulator y sandboxes and otherCHART 8
Financial Education, digital financial services are being
Actors delivering digital financial services
offered across a large spectrum of services (Chart 7)
Number of countries or economies indicating that a given actor isdelivered by a variety of actors (Chart 8) (G20/OECD
involved
INFE Report on ensuring financial education andconsumer protection for all in the digital age, 2017).
Banks
This presents and compounds several challenges toeffective financial consumer protection including issues
Telecommunicationcompaniesof transparency, disclosure and communication ofCredit providers (including credit
terms, conditions, fees, and customer rights.
card companies, mortgage
companies and micro-credit)
Consumers can also be exposed to “digital threats”
including notably the risk of digital fraud and abuses,
Government authorities
misuse of personal financial data, lack of transparency
Insurance or pension
and inadequate information on products and relatedcompanies
redress mechanisms, data privacy and security
Post offices
vulnerabilities, and cybercrime. Additional potential
consumer risks can derive from the digitally delivered
Banking agentsproduct itself (e.g. products not suitable to the
Mutual societies(credit unions,customers, or over-indebtedness in the case of digitallybuilding societies, etc.)
delivered credit) or from the way the product is delivered
0
10
20
30
40
(e.g. mis-selling by agents with limited or no knowledge
Source: OECD/INFE stocktaking survey, 2015/16
about the products).
Also, technology is changing the way in which
CHART 9individuals engage with the financial system. For
Supply-side challenges to development of
instance, consumers are exposed directly to problematic
digital financial services
digital market practices that encourage risky behavior
Number of institutions indicating that a given aspect is a policy(e.g. being able to make impulse purchases using a
concern or priority
single click), and exacerbate personal tendencies such
Monitoring/surveillance/
as short-termism, self-control problems andsupervisory issues
confirmatory bias. Similarly, innovation has led to theRegulatory aspects
increased digitalization of life, with most consumers
leaving important digital footprints behind and often
Competition/market conduct
being unaware of the use and misuse made by big data
Inter-operability
collection platforms of their personal/financial
Infrastructural/
information, including the risk of digital profiling.
technological concerns
At the same time, overall lack of awareness andAccess across population
knowledge about financial concepts and/or digitaltechnologies may pose challenges for consumers in
Product complexity
accessing and using digital financial services. While
Training of agent/bank personnel
digitalization may help to reach out to some vulnerable
groups, it may also exclude others, notably the elderly orAgent/bank liquidity
those with low digital skills, as well as groups with low
0
5
10
15
20
25
levels of financial literacy who may not be able to
Source: OECD/INFE stocktaking survey, 2015/16
understand digital offers and terms of conditions foreasy-to-access online credits (e.g. youth who are often
in dire financial situations and who need access to quick money, thus
consumers are better equipped to detect and to avoid potentiallyleading to over-indebtedness). These and other challenges need to
fraudulent and deceptive commercial practices both digitally andbe met as digital financial services are developing further (Chart 9).
beyond.Consumers, for their part, need to have an adequate level ofawareness of the responsibilities and possible risks they incur when
undertaking digital transactions, but they may also need to beprovided with the knowledge about their rights to redress andFlore-Anne Messy is head of the Financial Affairs Division, OECD, andexecutive secretary of the OECD International Network on Financial Education
recourse, as well as with the skills and confidence to take full
(INFE).
advantage of the benefits offered by the digital revolution. EducatedJapan SPOTLIGHT • September / October 201749