This article was first published in the May 2017 China edition of Accounting and Business magazine.

In Asia, the top fintech hubs are also the main financial ones: Hong Kong and Singapore. Fostering a fintech ecosystem has not been easy for either city. Both have highly regulated financial institutions; the well-developed regulatory environment creates stronger financial systems but, ironically, this makes it difficult for banks and financial institutions to collaborate with smaller fintech companies. 

Taking a financial technology company from zero to hero is quite an undertaking. The barriers for entry are increasingly high and those for global expansion are even higher. According to a 2016 report by venture capital firm Life.Sreda, there are more than 5,000 fintech startups globally but just 25 have expanded successfully and only 50 have reached the ‘unicorn’ status of a market value of US$1bn. 

‘In Hong Kong, it’s even more nascent,’  says James Lloyd, fintech leader at EY. ‘It’s a global financial player and Hong Kong is typically more of a technology buyer. There are a number of startups, but not to a stage where it’s really a critical mass. Globally, the fintech market is still quite nascent. We are at the start of that journey.’

The speed of fintech adoption in major financial hubs may be disappointing for those who expected a faster and widespread rollout. In a 2016 EY survey of 10,000 ‘digitally active people’ in Australia, Canada, Hong Kong, Singapore, the UK and the US, Hong Kong had the highest fintech adoption rate of 29.1%. Second highest was the US at 16.5% followed by Singapore at 14.7%.

Hong Kong’s rate could seem remarkable given fintech’s short history in the city but may not be anywhere near high enough to satisfy its enthusiasts. For the time being, neither consumers nor financial institutions have seen any truly compelling products in this emerging subservice sector. Given this reality, it is not surprising that many, including Lloyd, believe the hype is getting far ahead of the actual substance. 

In Singapore, some of the excitement around fintech is starting to drop off. In 2016 investment into fintech companies dropped by 65%, according to the KPMG quarterly report The Pulse of Fintech. Total investment dropped from US$605m in 2015 to US$186m in 2016.

‘When it comes to working with issues like technical integration, market deployments [of fintech], real collaboration or service delivery, I think very few large institutions are adequately or sufficiently prepared to do it,’ Lloyd says.  

There are a number of factors dampening the fintech fire. First, marrying a large bank and a small tech startup is no easy feat from an organisational perspective. 

‘Very few banks and startups are adequately geared up to collaborate with each other. For all the talk, very few of these small companies have sufficient control of cybersecurity concerns and financial risks,’ Lloyd says. ‘As for the bigger institutions, they have to see the value in working and implementing fintech.’

Waiting game

When a small fintech company is ready to collaborate, it typically has to wait on the sidelines for as long as a year for larger institutions to finalise agreements. According to Life.Sreda, Asian fintech-startups spend 80% of their resources for integration and licensing in their early stages and this takes more than a year on average. By comparison, fintech startups in the US and UK spend 20% of their resources on their launch, which takes three to six months on average.

The longer the startups have to wait, the higher the risk of going bankrupt, putting an end to innovation before it has even started.

Second, procurement practices are another hurdle that partnerships between small and large players have to overcome. 

‘Procurement policies still largely prohibit or prevent these banks from working with companies of a certain size,’ Lloyd says. ‘Some large institutions don’t have the flexibility to collaborate with smaller companies, even on a trial basis. A lot of the banks and insurers have incubators and accelerators that have marketing budgets. Procurement is the first barrier and it’s a risk.’

Organisational and regulatory issues frequently hinder fintech startups from reaching their potential.  

The silver lining is that the fintech phenomenon will gradually transform into a mainstream business and the transformation is taking place right now, bit by bit, because institutions actually do recognise the value of new financial technologies.
‘To a certain point, much of the push for fintech has been driven by institutions themselves through accelerators, hackathons and public pronouncement from senior executives,’ Lloyd says. ‘Everyone who has been in the market is making a big deal out of it, although, in reality, very few of them have the capability, organisational process and risk appetite.’

Recent trends suggest that banks are looking into different ways to adopt fintech. Banks with aging infrastructure but strong reputation are looking towards embracing open application programming interfaces (API), which allow banks to integrate the services and capabilities offered by fintech startups into their own platform. 

An organisation can use a public API to allow third parties to access their data or services in a controlled environment. Using an API means that only desired aspects of software functionality are exposed, while the rest of the application remains protected.

Single delivery platform

‘The creation of open APIs could be the key to developing a single delivery platform for financial services, and is another part of the larger trend towards collaboration and partnerships in the region, as well as the movement towards an open payment culture,’ Lloyd says.

Still, a lack of awareness is a contributing factor as to why fintech has yet to gain traction. According to the same survey by EY, more than half of the respondents were not aware of the existence of fintech. 

The second biggest reason for slow adoption is a lack of understanding about why fintech might be useful. As many as 32.3% of respondents to the same survey said they did not see why they would need to adopt financial technologies. 

‘People underappreciate that we’re still at the beginning of what is likely to be a big change,’ says Lloyd, who points out that there is plenty of capital available for fintech. Hong Kong, for example, earmarked HK$10bn (US$1.3bn) in its latest Budget to develop innovation and technology.

Jan Reinmueller, head of KPMG Singapore’s digital village, says that the Monetary Authority of Singapore (MAS) is working closely with companies to enable innovation in the financial services sector. 

‘From developing the regulatory sandbox to building fintech bridges with other jurisdictions, there’s no doubt in my mind that the MAS is one of the main reasons Singapore is becoming a global hub for fintech companies,’ he says. 

According to Accenture’s analysis of venture capital database CB Insights, fintech investments in the Asia-Pacific region reached US$10.5bn last year, a record high since 2010. 

Lloyd notes that with fintech in its early stages, now is the time to start seeing key players in the industry make their move. ‘Big institutions that are able to take advantage of smaller institutions will go ahead and do it. They’ll begin to move ahead by partnering with the right players, leveraging the right technologies so they will have competitive advantage. We’re only at the start.’ 

Haky Moon, journalist