The financial technology, or fintech, sector has come of age. In 2014, global fintech investment broke the $12 billion mark, a 201% jump from a year earlier, according to research company CB Insights.
Fintech is largely an American and European phenomenon, with Silicon Valley, New York and London dominating the global landscape. Asia accounted for only 6% of total 2014 investment, but the region is quickly moving to foster its own fintech ecosystems.
The two places with the most immediate potential are the region's most vibrant financial centers: Hong Kong and Singapore. Both are well positioned. First, their high concentration of financial companies gives them a particular advantage in wholesale and commercial banking innovation. Second, their geographic location at the heart of Asia allows them to drive financial inclusion through retail financial services.
On the institutional side, Hong Kong and Singapore provide proximity to some of the largest potential fintech customer bases in the world. Seventy of the 100 largest global banks have a presence in Hong Kong. Some 200 banks with a total asset size of almost $2 trillion have operational headquarters in Singapore. Banking and securities companies have serious buying power. According to research company Gartner, their information technology procurement budgets amounted to $485 billion in 2014.
Globally, a collaborative model of innovation in financial services has emerged. Banks have become more willing to incubate, nurture and fund fintech startups. This openness is driven in part by the banks' need to partner with nimble innovators due to capital constraints, new regulations and legacy systems. As part of the finance sector's efforts to work more closely with tech communities, both UBS and Citigroup have launched innovation labs in Singapore, while DBS Bank and Accenture have started accelerator programs in Hong Kong.
On the consumer side, an estimated 1.2 billion people across Asia lack bank accounts, but Asia makes up half of the world's Internet users. This unique position provides tremendous opportunity for fintech entrepreneurs to introduce digital banking solutions across the region.
According to consultancy McKinsey & Co., the number of digital banking consumers in Asia is set to reach 1.7 billion by 2020, up from 670 million in 2012. At the same time, global fintech development is leading to profound consumer innovations. In the space of just a few years, for example, more than two-thirds of Kenyans have adopted Vodaphone's mobile money service M-Pesa, which gives nonbanked consumers a platform for transactions.
These institutional and retail opportunities provide focus to policymakers on what needs to be done to propel Hong Kong and Singapore into fintech hubs.
On the institutional side, this is about perfecting the emerging model of collaboration between large financial companies and startups. The dynamics of the financial and Internet industries could not be more different: conservative and exclusive in the former, agile and inclusive in the latter. The establishment of not-for-profit fintech spaces and fintech-focused industry associations that bring together startups, established financial players and regulators will drive partnership and dialogue. London's Level39 technology accelerator at Canary Wharf is a good example.
The linchpin of such collaboration is an agile and iterative regulatory system. Ironically, the Internet culture of permissionless innovation is at odds with a highly regulated financial sector, yet banks are more dependent on tech entrepreneurs than ever before.
Having what it takes
For the partnership to work, smart regulations that balance consumer protection and innovation are needed. A safe harbor should be introduced where new entrants can test ideas without the threat of destabilizing the financial system. Also needed is the creation of a level playing field, where startups are given room to grow into bigger players. Hong Kong and Singapore could look to the U.K., where the Financial Conduct Authority's Project Innovate helps fintech startups navigate the regulatory landscape while ensuring their products and services are fair and reliable.
On the retail side, the opportunity to offer financial services to hundreds of millions of people in Asia for the first time through technology is hampered by the region's numerous jurisdictions, each with its own market conditions and regulations. This market fragmentation will restrict the scalability of fintech businesses.
Just as the most successful international cities are those that collaborate to compete, aspiring fintech hubs need to foster links with other key innovation centers and global bodies that are active in promoting financial inclusion. This would have the important benefit of promoting the international expansion of local startups, accessing approaches and intelligence around the world and establishing global leadership in governance and regulatory standards. Groups such as the Association of Southeast Asian Nations, the Asia-Pacific Economic Cooperation forum, the Asian Development Bank and the Bill and Melinda Gates Foundation are potential vehicles in Asia for developing an international network and reputation in fintech.
The above measures will amplify the natural advantages that Hong Kong and Singapore enjoy as emerging fintech hubs. They need to be accompanied by efforts to overcome shortages of engineering talent and venture financing, two oft-cited challenges in the broader innovation ecosystems of both cities.
With supportive local ecosystems, strong international leadership and healthy collaboration between fintech entrepreneurs, financial companies, venture capitalists and regulators, Hong Kong and Singapore have what it takes to become key fintech leaders in Asia and the world.
Andy Yee is the public policy director for Visa for greater China and was previously with Google as an Asia-Pacific public policy analyst. This article expresses only the author's personal view.