How is regtech evolving in Asia? What are the leading countries when it comes to innovation? Matthew Fulco of Kapronasia has the answers to that
Asia has become the world's fintech center over the past decade, buoyed by brisk economic growth, innovative digital finance solutions, and regulatory openness.
At the same time, digital finance's rise increases regulatory complexity and risk. Some incumbent financial institutions have been slow to bring compliance and security into the digital age. Fintech startups are digitally savvy, but usually not as well-capitalized or leveraged as traditional financial institutions. The upstarts also lack compliance experience.
In Singapore, the surge in online scams - notably phishing, social media impersonation, loan, and e-commerce scams - pushed up the overall crime rate in 2020. From January to August 2020, scammers bilked SGD 157 million (USD 118.9 million) from victims, compared to SGD 92 million (USD 69.7 million) during the same period a year earlier, according to data compiled by the city-state's Ministry of Home Affairs.
Hong Kong too faced a sharp tick uptick in cybercrime in 2020. In the first six months of the year, online crime cases doubled to more than 6,400, with victims losing HK 1.52 billion (USD 196 million), according to the city's Cyber Security and Technology Crime Bureau.
While not growing as fast as fraud, money laundering remains a perennial problem in Asian financial centers. Singapore, in particular, is intent on cracking down to bulwark its status in Asia, where it is increasingly seen as the region's most stable financial hub.
‘A robust enforcement regime will be critical in sustaining Singapore’s reputation as a trusted financial center’, Peggy Pao, the MAS’s executive director of enforcement, said in a recent report.
Asia's regtech leaders
Both Singapore and Hong Kong are at the forefront of regtech innovation in Asia, using cloud-based regtech solutions incorporating machine learning and advanced data analytics to strengthen anti-fraud and AML/CFT capabilities. Singapore is home to the headquarters of 25 regtechs, making it the largest regtech hub in Asia and second-largest in the Asia-Pacific region after Australia, according to Boston Consulting Group. Some of Singapore's most prominent regtechs include Centenal, Cynopsis, Dathena, and Merkle Science.
Fewer major regtech firms are based in Hong Kong, but the city's role as a gateway to mainland China offers regtechs focused on that market a unique opportunity. For its part, the Hong Kong Monetary Authority (HKMA) is among the most active of Asia's regulators when it comes to promoting regtech.
A report co-published by the HKMA and Deloitte in January 2021 describes the successful use of regtech by different banks in the city. For instance, ‘Bank A’ used network analytics and data such as IP addresses to identify relationships between customers. By using machine learning for name screening, ‘Bank E’ cut manual alert reviews by 35% across different jurisdictions. By using network analytics for fraud and trade-based money laundering investigations, ‘Bank F’ discovered additional firms linked to known illicit activity.
‘The case studies show the importance of early and continuing stakeholder buy-in; interdisciplinary adoption teams; forums to share views and experience; and being able to track and measure success,’ Arthur Yuen, HKMA deputy chief executive, said in a statement.
For its part, the MAS has developed several regtech tools of its own. One is an STR (Suspicious Transaction Report) network analytics tool that it uses to identify high-risk financial institutions that require closer regulatory scrutiny. Another predicts the probability of a financial adviser engaging in misconduct over two years. A third crunches large data sets of firms' trades to search for statistical outliers and other possible red flags.
The MAS is also exploring how regtech can be used to estimate the credit ratings of loans, taking into consideration financials, adverse news, account conduct, and covenant breaches.
Future prospects
The rise of digital banking augurs well for the future of regtech in Asia. The pandemic has fast-tracked a process that was already well underway. All eight of Hong Kong's virtual banks are now live while Singapore granted four digital bank licenses in December 2020 and may issue a fifth at a later date. Under the watchful eyes of the HKMA and MAS, these digital banks will be laser-focused on getting compliance right and checking all the regulatory boxes.
This will be especially important in light of rising concern about the ability of technology juggernauts to safeguard customer data. Asian Big Tech has an outsize footprint in both Hong Kong's virtual banks - Ant Group, Tencent, JD Digits, and Trip.com - and Singapore's digital banks - Ant again, Grab, and Sea Group.
Meanwhile, to compete effectively against digitally agile virtual banks and beef up their defenses against online crime, incumbents will up their spending on regtech solutions. In January, Singapore-based regtech Silent Eight - known for its use of artificial intelligence in AML/CFT solutions - announced that it would be working with HSBC to strengthen the banking giant's compliance systems and related operations in the coming years. Silent Eight reportedly also works with Standard Chartered.
‘Given the growth in alert volumes and unpredictable spikes driven by global volatility, we saw an opportunity with Silent Eight that would give us the ability to close alerts quickly and accurately,’ Matt Brown, Group Head of Compliance Services at HSBC, said in a statement.
Regtechs based in Singapore will be in an ideal position to serve the burgeoning markets nearby. Malaysia's central bank launched the application process for digital banks in January and will announce the winners by early 2022. The Philippines and Indonesia both recently announced that they would allow digital banks.
Northeast Asia offers fertile ground for regtechs too. South Korea's third digital bank, Toss, will go live by mid-year, while Taiwan's second and third virtual banks, Next Bank and Line Bank, are also expected to launch this year.
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