Author: Xun Wang, PKU
Asia has seen a rise in demand for digital connectivity in recent years. Leapfrogging development in China with mobile payments is significantly contributing to increasing financial inclusion. The traditional financial system in China, dominated by state-owned banks, is more inclined to provide credit and other financial services to large enterprises and state-owned enterprises.
This leaves much room for development in the areas of payment, wealth management, insurance, financing and credit rating for households and small and medium enterprises.
The credit card penetration rate in China is still less than 20 per cent. In Southeast Asia, 60 per cent of the population does not have a bank account and the credit card penetration rates in Indonesia, the Philippines, Vietnam and other countries are less than 2 per cent. In India, 60 per cent of business orders are paid in cash, and formal financial services in Bangladesh are even more archaic. Yet, much of the Asian region has a predominantly young demographic — 70 per cent of Southeast Asia is under 40 years old — that has a strong ability to accept and adapt to new technologies.
Without mobile payment, most migrant rural workers are delivered remittances informally through friends or bus drivers. This traditional approach is inefficient and fraught with risks and delays, and fintech is likely to serve as an important complement to the formal financial sector.
Asian economies generally have an open attitude towards the development and regulation of fintech, but different governments hold different motives. Thailand and India hope that fintech can improve their financial efficiency and promote financial inclusion. Meanwhile Hong Kong and Singapore, as international financial centres, are more concerned about maintaining their leading international edge and so pay more attention to cross-border payments. Thailand and Singapore have produced fintech development plans and designated special departments and personnel to coordinate implementation. Both countries have also adopted a regulatory sandbox approach to support fintech innovation.
Payment technology in China is already relatively mature and continues to develop rapidly. For example, the volume of transactions through Alipay has increased from 200 transactions per second to over 250,000 transactions per second. Chinese companies aim to work with local partners to create payment systems that incorporate local technology, culture and policies, allowing innovations to be more integrated into local real-life scenarios.
While the financial sector is among the most strictly regulated sectors and financial cooperation remains a sensitive issue in all countries, business cooperation initiatives by Chinese fintech companies seem to be sustainable and much more successful. Alipay, for example, maintains a relatively low profile in cooperating with overseas partners by providing technological support and holding a relatively smaller market share.
Chinese payment technology has also started to support the development of other mobile payment businesses across Asia. Alipay has cooperated with regional partners to help establish nine local e-wallets — TrueMoney in Thailand, GCash in the Philippines, DANA in Indonesia, Paytm in India, TnGD in Malaysia, easypaisa in Pakistan, bKash in Bangladesh, Kakao pay in South Korea and Alipay HK in Hong Kong. Cross-border payment is available between the local wallets of Hong Kong and mainland China and Hong Kong and Japan. Cross-border remittance supported by block chain from Hong Kong to the Philippines and from Malaysia to Pakistan has also been realised.
Moving forward, a number of issues need to be addressed. First, the issue of data ownership between individuals and big tech companies. Data is becoming an increasingly important resource that companies can make more precise decisions with, but the importance of consumer privacy protection should be at the forefront of these discussions.
Second, there is an inequality problem that must be addressed. Some groups, including foreign visitors, still do not have access to mobile payment services. Extended coverage of digital finance, education on inclusive finance and increased financial openness regarding access to mobile payment services should be adopted across the region.
Third, there are financial risks involved. Strategies to deal with new systemic financial risks, such as cyber-attacks and disintermediation of financial services need to be devised. Digital finance could raise the risk of financial contagion in the absence of effective financial regulation.
Regulation is undoubtedly a key issue when it comes to digital finance. Building on mobile payment services, big tech companies often expand into other financial services, raising the question of how these new financial holding companies will be regulated. The future of fintech in the region relies on effective regulation striking the right balance between efficiency and stability.
Xun Wang is Research Fellow at the National School of Development & Institute of Digital Finance, Peking University.