On the third and final day of the Singapore Fintech Festival conference, there was a focus on specific applications of fintech innovation. One was trade finance, which is clearly is ripe for a revolution. Participants in a panel discussion looked at how a new initiative by the Hong Kong Monetary Authority (HKMA) and Monetary Authority of Singapore (MAS) can transform trade finance.
Setting the stage for the discussion, Tin Hill Capital founder Tan Kah Chye said there are challenges around trade and trade finance. First, the regulatory environment has changed. Know Your Customer (KYC) is less of an issue for trade or trade finance, he believes. Instead, what gets banks into trouble knowing your transactions (KYT). Whereas KYC is a once-a-year event, banks manage KYT every day of the year. A second issue is paper. Even though a ship can travel from Singapore to Jakarta in a day, the banking ecosystem takes a week to deliver the related documents. “If we capture the data better, we can manage the transaction better. Legal enforceability of digital paper is less of an issue.” Lastly, Tan said, even though digitisation can happen quickly in B2C, it can be a massive challenge when it comes to B2B. “Without a strong regulatory push, adoption will not move at a pace we would like.”
MAS executive director Bernard Wee and HKMA executive director Li Shu-Pui then gave an outline of the new Global Trade Connectivity Network (GTCN) that will connect Hong Kong and Singapore by early 2019.
There are three parts to the GTCN, Wee explained: Trade, digital ledger technology (DLT), and international connectivity. Starting about three years ago, HKMA and MAS looked at how to get more companies to participate in the trade ecosystem. “We formed a trade finance working committee to develop trade requirements. The process involved bringing together communities and users, and finding pain points for MNCs and SMEs and banks. The group looked at DLT as a technology to build trust. There had been a number of proof of concept (POC) initiatives. “We decided, enough of POCs, let’s put things into production. We signed an MOU yesterday.”
Li said that using DLT is a breakthrough. “In Hong Kong, we were looking for a use case. The banks told us, trade finance. We finished the POC by the beginning of this year. The request for proposal (RFP) will be issued next year.”
Li said four points about the initiative stand out. First, this project is the first in the world to use DLT for cross-border connectivity. “Once we get the model done, we will promote it to other jurisdictions. Two, we can set the standard for the platform. Three, we are facing difficult technological challenges – data privacy issue, scalability. We need vendors’ help. Fourth, to apply DLT and cloud to mission-critical financial applications, supervisors need to think what the regulatory requirements will be.”
Wee and Li expect GTCN to expand well beyond the Hong Kong-Singapore corridor soon after it launches. “GTCN is a solution,” Li said. “Open architecture. It can be connected to any DLT technology. We want global connectivity architecture.” They expect it to expand to more banks and to add in non-banks as well as corporates. And China, ASEAN and Japan are likely to be the next markets to include in the initiative.
GTCN is less about solving the KYC or KYT problems and less about the technology platforms, Tan observed. “It’s more about common standards. Once there are standards, the problems can be solved.” His fear, though, is that if you leave standards) to the market, the standards will never evolve. “Most of the time, we want the government to be hands-off. Creating standards is one the government should be hands-on.”
Capital markets also offers tremendous opportunities for fintechs to create an entirely new model. A panel of experts focused on technology, transparency, democratisation of assets and whether fintech will lead to an evolution or revolution as they looked at the trends.
A key issue in capital markets is transparency, Ayondo Group CEO Robert Lempka observed, and it is one of the largest criticisms of traditional financial institutions. Regulators come in and try to increase transparency by bringing in rules and making sure products are distributed to the right people. However, transparency is at the heart of fintech. His firm, for instance, uses technology to determine how a product is displayed, who is able to use it, and whether customers should use the products, and to provide reliable execution for trading and settlement. “It brings control, empowers the customer and brings more trust.”
It’s not just technology that makes it easier, said Funderbeam CEO Kaidi Russalepp. Transparency includes the whole game, understanding who plays and how it is played. For historical reasons of how investment is provided, many intermediaries and participants have been built into regulations. Technology is there to help. “Regulators have to step in and say we don’t need so much,” she suggested. “Regulation is too detailed now. If regulation goes into the details, it might stop innovation. The regulators role is to make sure investors’ rights are protected.”
Fintechs can also enhance access to capital markets, benefitting both investors and companies that need capital. Indeed, said Our Crowd Managing Partner Denes Ben, “access is our core proposition.” There are two forces: start-ups who need access to capital and a huge investor group who wants access to this asset class. It’s important to realize, though that venture capital is still high risk and not for everyone. “Maybe a marketplace works when you want to sell your iPhone. It’s not going to work with venture capital. We need to curate the companies.”
What fintech has done, Ramaswami believes, is to bring down the minimum amount required before you can get into an asset class. “If you go back in time, that’s what stock markets did originally. Taking that to more inaccessible asset classes is the next challenge. With the amount of private wealth around, the number of firms that come to the public markets is beginning to drop. It has become critical to ensure that the vast majority of us who are investors don’t get locked out of those markets.”
Although technology has to make products more accessible, Lempka added, fintechs should have a sector-specific proposition. “It is not fully democratised because some people are not educated enough to invest in certain products. Data analytics is offering education programs. Technology helps to widen the spectrum of potential investors, contributing to democratisation.”
The change fintechs bring, Ramaswami said, is more likely to be evolutionary than revolutionary. “Individual ideas have to be revolutionary. In aggregate (however), change is evolutionary. When retail investors can participate in private equity, it is revolutionary. It is evolutionary in the entire context. It is a portion of the market. “
The problem, Russalepp noted, is that someone has the money and someone else needs the money. “The revolution would be that companies stand up, say we’ll put SGX out of the business. Evolution is we work together. Evolution is the path the industry has been taking.”
A better future – using technology for financial inclusion
There was also a strong emphasis in day three on financial inclusion.
In her keynote address, Queen Maxima of the Netherlands and the UN Secretary-General’s Special Advocate for Inclusive Finance for Development, focused on the benefits of financial inclusion and the business opportunities.
Financial services are the lifeblood of the economy, she said, as well as a vital tool for addressing poverty. However, 40 percent of adults are locked outside the formal global economy. While governments are increasingly recognising the importance of extending financial services to excluded people, inclusion also represents a tremendous business opportunity. There are three key considerations.
First, fintech offers tremendous potential for achieving global financial inclusion. Although financial services companies have provided $120 billion of nonguaranteed loans to SMEs over the past five years, around half of SMEs still do not get the financing they need. Fintechs hold the best promise for developing solutions, as they focus on customer centricity to provide genuinely useful service.
Second, technology can be a double-edged sword, as data privacy issues, fraud, cyber-attacks and discriminatory lending can undermine consumer trust. If the technology gap widens, so too does the gap in opportunity. “We need to develop a toolbox to understand and address the risk.”
And finally, fintechs need to build the right infrastructure. “We identified key prerequisites,” she said, including data privacy, cyber-security, financial literacy, digital ID, connectivity, interoperability, fair competition and physical infrastructure. Without these, it will be hard to develop rapidly. For this, we need to foster collaboration between government and the private sector.”
“I would like to call on each of you to consider the impact you can have on financial inclusion,” Queen Maxima concluded. “Finance is in the position to create transformative opportunities. People with no accounts can leap into services that meet their needs and reduce their risks. You can be an opportunity for them.”
Carrying on with the same theme, Bill & Melinda Gates Foundation director of financial services for the poor Michael Wiegand shared his vision of how financial technology can change the lives of the poor.
Financial exclusion is a driving factor of global poverty and inequity, he said. About 2 billion people lack access to financial services such as savings, payment, insurance and credit. However, most poor people still live active financial lives and the number of transactions they make is large. They buy food, pay doctors, school fees and borrow through complex financial networks. The poor can also be quite creative about pulling together financial tools. Still, their informal networks are not always reliable, and they face risks and hidden costs.
Digital technology is the only way to deliver financial inclusion, Weigand emphasised. Enable the poor to use, store and management their money easily and safely, at lower cost. “It can make it possible for 1.6 billion people to enter the formal economy for the first time. It would add $3.7trn to global GDP.”
To get there, Weigand said, “we need the right policy, participants, innovation and investments.” He suggested that pro-poor payments systems have five key traits. They need to be accessible, reliable, valuable, affordable and profitable. And the three essential conditions for digital financial systems to support development are use of real-time push-payments, a wide range of financial service providers, and true interoperability among those providers.
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