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Fintech hub poised for next stage

Goola Warden
Goola Warden • 15 min read
Fintech hub poised for next stage
SFFxSWITCH to cement Singapore’s standing as global fi ntech hub as deal sizes and sustainable finance increase and new digital banks emerge
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SFFxSWITCH to cement Singapore’s standing as global fi ntech hub as deal sizes and sustainable finance increase and new digital banks emerge

SINGAPORE (Nov 11): The increasing adoption of fintech by Singapore financial institutions has placed them at the forefront of financial innovation and gained them new customers outside the city state. With fintech, Singapore’s status as a hub — it is a transhipment and air hub as well as a financial centre — is enhanced. The Lion City aspires to be a leading fintech hub in Asia. According to consultants and universities, Singapore is among the top 10 global fintech hubs and, in some rankings, it is No 1.

The fourth edition of the Singapore FinTech Festival 2019 is likely to cement the city state’s hub standing by facilitating deal flows, sustainable products and financial inclusion. Last year, SFF2018 was the largest festival of its kind globally, attracting more than 45,000 participants and visitors from 130 countries. This year, SFF and the Singapore Week of Innovation and TeCHnology will come together as SFFxSWITCH and showcase innovative technologies across five key sectors.

In a report earlier this year, KPMG refers to Paul Romer’s endogenous growth theory. The winner of the 2018 Nobel Prize for economics postulates that investments in technological innovation, the knowledge sector and human capital are the drivers of longterm economic growth. With an increase in the number of people working in the knowledge sector, there will be an increase in new ideas. This in turn raises efficiency and productivity. When incremental annual economic growth compounds over decades, the effect is transformational, KPMG notes.

Initially, SFF’s aim was to bring together financial institutions and fintech players to collaborate, because of the opportunities for them to work together, says Jacqueline Loh, deputy managing director of the Monetary Authority of Singapore. Investors have an opportunity to gain and share knowledge on emerging technologies in the fintech space and discuss partnerships and investments with fintech players.

The opportunities and multiplier effect from the previous SFFs have benefited the financial services sector and the economy as a whole. Fintech boosts innovation, and Singapore has been ranked sixth globally in Bloomberg’s Innovation Index. The Institute of Financial Services Zug (IFZ) at the Lucerne University of Applied Sciences (HSLU) evaluates the performance of fintech ecosystem centres worldwide and, earlier this year, it ranked Singapore as the No 1 fintech hub, ahead of Zurich, Geneva, London, Amsterdam and Toronto.

Singapore continues to take steps to nurture fintechs, or fintech start-ups, by encouraging investments and collaboration. SFF also provides a platform for investors and start-ups that need capital to meet and discuss possibilities. Facilitating fintech deals is now part and parcel of Singapore’s role as a regional wealth and asset management centre.

In a survey by Accenture, it found that the total value of fintech deals in the nine months ended Sept 30 in Singapore jumped 69% y-o-y, from US$435 million to US$735 million ($996.6 million), exceeding the US$642 million raised in 2018. Accenture points out that deal sizes are getting larger even as the number of fintech deals fell 29% in those nine months.

In this year’s SFF, Singapore’s fintech-related assets under management (AUM) should continue to rise, following the introduction of Deal Friday, which is an expansion of MATCH (Meet Asean’s Talents and Champions), introduced in SFF2018, and the Investor Summit in SFF2017. During Deal Fridays, an event held every Friday, start-ups and the investment community will have the opportunity to connect and explore collaborations.

More deals expected

The Investor Summit was introduced in SFF2017 with the aim of matching promising young Asean enterprises with global private equity (PE) and venture capital (VC) managers.

“Last year, we had MATCH, where we brought together promising young Asean enterprises and global PE and VC managers and generated more than 17,000 matches between 380 investors and 840 potential enterprises,” Loh says.

Since June, MAS has been collaborating with Enterprise Singapore to organise Deal Fridays. “This year, we introduced a new Deal Friday component — a partnership between Enterprise Singapore and MAS. We have curated a list of promising growth-stage Asean enterprises and brought them together with investors through weekly matchmaking events. Since its launch this year, we have seen more than 400 potential companies and 400 investors participate in Deal Friday. We are looking forward to positive news on successful matches between investors and these companies,” Loh says.

SFF has also provided an important launch pad for new initiatives. The API Exchange (APIX) was launched in SFF2018 to bring together financial institutions and fintech players. Since then, 140 fintech firms and 60 financial institutions from five countries have signed up on APIX (see: API Exchange not a ‘success’ yet, but will enhance fintech collaboration to solve financial inclusion problem).

In August, MAS and the Infocomm Media Development Authority launched Business Sans Borders to accelerate the testing and delivery of new services for small and medium-sized enterprises. BSB is a hybrid global meta-hub for business and digital services that enhances domestic and international trade opportunities for SMEs and interoperability between SME ecosystems, among others.

Elsewhere, the local banks have tied up with fintechs to provide better services for consumers and to meet their own anti-money laundering and know-your-client objectives. For instance, Oversea-Chinese Banking Corp has collaborated with Clinc, an artificial intelligence start-up to power voice recognition. United Overseas Bank has taken a stake in and collaborated with Personetics, an AI platform that helps it to personalise data, and with another fintech, Meniga, to track and sort large volumes of transaction data (see: UOB’s digital future lies in serving Asean).

Fintech’s role in asset management

PE and VC are chasing fintechs with innovative solutions, resulting in a growth in Singapore’s AUM in 2018.

MAS’s 2018 Singapore Asset Management Survey shows that AUM in 2018 increased 5.4% y-o-y to $3.4 trillion, or US$2.5 trillion. Singapore’s AUM growth was helped by the alternatives sector, which saw AUM rise 15% y-o-y to $646 billion (see Chart 1). In particular, PE, VC and real estate experienced strong inflows and continued valuation gains as investors increased exposure to private assets for return enhancement and portfolio diversification. Singapore, as a leading private-market hub, serves as an attractive location for investment managers and an increasing number of global public investors, including sovereign wealth funds and pension funds.

“We have 240 PE and VC managers, both globally and regionally, based here in Singapore,” Loh says. “We have shared our vision in the Financial Services Industry Transformation Map, which is to be a leading global financial centre, connecting global markets and supporting Asia’s development. One key thrust is to support enterprise financing, leveraging our deep and broad asset management community in Singapore, including those in PE and VC. Deal Friday reflects our position as a natural gateway to Asean for investors globally.”

As part of the Financial Services Industry Transformation Map, MAS has revised regulations to facilitate the activities of venture capitalists and give finance companies greater scope to support SMEs. MAS is also working with the industry on initiatives to support fintechs at various stages of the financing lifecycle and to profile Asean VC and PE activity and the landscape through collaborative research. At the exit stage, MAS is looking to set up private-market funding platforms to help growth companies access a wider network of investors.

VC and PE managers are an essential component of the enterprise financing ecosystem, specifically by providing smart capital. More Asian companies are expanding beyond their borders, which has led to a surge in capital raising in Asia and greater interest to invest in Asian companies.

Besides providing capital, VC and PE managers contribute operational and business expertise to their portfolio companies. Such expertise could improve the companies’ operational efficiencies and unlock new markets for the companies’ products and services.

Singapore’s Financial Services Industry Transformation Map outlines growth strategies by business lines, programmes for upgrading skills, and an agenda for continuous innovation and technology adoption, of which enterprise financing is a component.

PE and VC asset managers would be keen to finance Asean enterprises. In 2018, Singapore’s PE AUM grew 14% y-o-y to $213 billion, and VC growth surged 40% y-o-y to $6 billion (see Chart 2).

Deal value in Asean also experienced a notable increase, up 38% over the five-year average to reach US$13 billion, while deal activity rose in number to 76, up 18% over the five-year average. This was propelled by mega deals such as those by Grab, Gojek and Tokopedia. Consultancy Bain & Co expects the region’s total deal value to reach US$70 billion with the birth of at least 10 new unicorns by 2024.

Fintech a force for good

Last year, SFF focused on financial inclusion across Asean to promote economic growth and improve living standards. This year’s SFF has sustainability as a key theme.

“Fintech can support sustainability by enabling green finance through utilising sensors to collect and digitise environmental data, which becomes the foundation to build different use cases. So, for example, financial institutions can use such digitised environmental data to enhance their risk capabilities and their reporting on environmental impact, as well as use this digitised information to introduce environmentally friendly investment products for customers,” Loh says.

There are plans to include information and data on the use of water, fertiliser and pesticide for various commodities that are traded. This will improve the availability of sustainability data in this area.

“Another use case is leveraging big data to measure the sustainability of companies. One example is Arabesque, which started off as an asset management company and a user of ESG big data. Arabesque provides an innovative tool that allows investors to monitor the sustainability efforts and performance of global companies. For investors who want to invest in companies based on their ESG [environmental, social and governance] commitments, the challenge is, how do we know how well these companies are actually meeting those expectations? Arabesque attempts to provide a solution there,” Loh explains.

Over the past few years, banks have been piloting various projects in relation to blockchain, the same technology that produced bitcoin. Increasingly, blockchain is being used in various processes because of the ability of a blockchain ledger to remain unchanged and for a blockchain to remain unaltered and indelible. For sustainable investments, blockchain is proving a useful technology.

“Another example is the application of blockchain to promote traceability in supply chains. DBS Bank, for example, is working with a company called Agrocorp, which is developing a trade platform that connects 4,500 Australian farmers to supermarkets and restaurants. We understand the working capital cycle has been shortened by some 20 days, and the more you can shorten the working capital cycle, the more savings there are to different players in the supply chain,” Loh says.

Project Ubin’s uses

For the past three years, MAS, the Bank of Canada and partner banks have been taking part in Project Ubin, a collaborative effort to explore the use of Distributed Ledger Technology for the clearance and settlement of payments and securities. Blockchain is a form of DLT.

“Blockchain is easier understood as a technology platform, with applications that are developed on this platform that service different use cases. On the blockchain platform, Project Ubin has brought the industry together to resolve technical issues such as scalability, performance and finality of transactions,” Loh explains.

In May, the Bank of Canada and MAS announced that they had conducted a successful experiment on cross-border and cross-currency payments using central bank digital currencies. This is the first such trial between two central banks, and has great potential to increase efficiencies and reduce risks for cross-border payments, the banks said in the announcement.

Cross-border payments are often slow and costly. They rely on a correspondent banking network that is subject to counterparty risk, inefficient liquidity management and cumbersome reconciliation. The Bank of Canada and MAS have been collaborating on the use of DLT and central bank digital currencies to make the cross-border payment process cheaper, faster and safer.

“Some of the technical solutions developed in the course of Project Ubin have been incorporated into other enterprise blockchain platforms and used by financial institutions as well as other companies for a variety of use cases, such as in trade and trade finance as well as supply chain,” Loh says.

In February, JPMorgan announced the creation of stablecoin, a digital coin representing the US dollar held in designated accounts at JPMorgan. When a client sends money to another over the blockchain, JPM coins are transferred and instantaneously redeemed for the equivalent amount of US dollars, reducing the typical settlement time. One stablecoin is equivalent to US$1. The stablecoin is seen to reduce clients’ counterparty and settlement risk, decreasing capital requirements and enabling instant value transfer.

“Specific to blockchain applications in payments, JPMorgan’s stablecoin, which is a digital coin designed to make instantaneous payments using blockchain technology, was built by the same team at JPMorgan that worked on Project Ubin,” Loh says.

In the sandbox

Fintechs are experimenting with blockchain for various purposes such as crowdfunding and bond trading, and two of these startups — iSTOX and BondEvalue — are in the MAS regulatory sandbox. (A regulatory sandbox allows financial institutions and fintechs to test innovative financial products and services in the market.)

iSTOX is using blockchain technology to provide a securities-based crowdfunding platform that targets fundraising start-ups as well as fund management companies. It also enables investors to access the secondary market for private securities over the blockchain-based platform.

“iSTOX is interesting from a private-market perspective, because in this space, transparency and liquidity are typically not high. iSTOX plans to address these challenges through a blockchain-based platform, which we hope will enhance transparency and liquidity for companies seeking funding as well as investors looking for opportunities in the secondary market,” Loh says.

In August, MAS launched Sandbox Express for faster testing of financial products and services. “BondEvalue is the first company to enter our Sandbox Express. It aims to improve investors’ access to bonds by fractionalising them through a blockchain-based platform,” Loh says.

New neo bank licences

The most exciting announcement from MAS this year is the plan to award five digital bank licences, comprising two digital full bank licences and three digital wholesale bank licences.

Why digital banks? MAS has been working closely with the financial services sector and encouraging the greater use of technology and innovation in the banking industry. Banks themselves have been transforming their business models for a digital future and are providing a lot more digitalised services to meet changing customer needs.

As a fintech hub, the natural progression for Singapore would be to have more digital banks in the ecosystem. MAS has articulated that the new digital banks can comprise partners, including banks, but one applicant must include a firm that can bring deployable technological capabilities to the digital bank. Some examples include firms engaged in developing fintech, advanced data analytics, machine learning AI as well as those that operate digital platforms and provide telecommunications services. “Technologies such as AI are important, as they allow for new business models and innovative ways of providing banking services,” Loh says.

“We asked ourselves: Can we further close the financing gaps for SMEs or expand financial inclusion for certain segments of the economy, and how can innovation in finance bring about a better outcome for consumers? These digital challengers [and banks] can introduce innovative business models that can add diversity as well as choice to our banking system.”

What could the new digital banks bring to the table? “We can expect [digital banks] to be more nimble, leveraging the use of technology, and they are likely to have a lower cost structure than traditional banks. [With] new ways of delivering these needs and possibly lower cost structures, we could see lower-cost alternatives for consumers. For example, digital banks could offer deposit accounts without minimum deposit amounts or fall-below fees,” Loh suggests.

With access to more wide-ranging data, digital banks could also adopt different credit risk assessment models for their customer base, which would allow them to lend to underserved segments of the economy such as the young and micro enterprises. By providing a greater suite of digital banking services, they may also benefit their SME client base by enhancing these clients’ digitalisation.

“Singapore’s domestic banking market is not large. We hope that digital banks anchored in Singapore can also serve Asean’s needs. Financial inclusion is a real and pressing need in Asean; according to the World Bank, some 170 million in Asean with mobile phones are unbanked,” Loh says.

Unlike in other jurisdictions where neo banks have mushroomed, such as Brazil, the UK and Europe, MAS has clearly stated criteria for digital banks, including capital and liquidity requirements that comply with Basel III regulations. MAS has also asked for business models to show a path to profitability.

“[While MAS is keen to promote greater competition in the financial sector,] financial stability remains our foremost consideration and we will not allow value-destructive business practices and unsustainable competitive behaviours that are detrimental to long-term financial stability,” Loh emphasises.

Even as Singapore attracts new neo banks to be based here, the local banks have set up digital banks to serve digital natives outside the city state. Fintech has enabled them to do that, and the city state’s reputation as a fintech hub is given a boost as they employ new technologies to serve customers better.

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