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When Technology and Finance Truly Merge, will Asia be its home?

The digital tsunami coursing through all facets of modern life continues to make its mark especially with the exponential growth of digital financial services. While the US is typically known to be a leader in digital technology, Asia is increasingly acknowledged to be an undeniable growing force, especially with its young and skilled workforce.

According to a study by Bain & Co., Google and Temasek Holdings, at least USD38 billion of annual revenue is projected to be generated through digital financial services across Southeast Asia alone by 2025, triple compared to USD11 billion garnered in 2019. Meanwhile according to a study by PwC, Asia’s middle class is tracked as being already larger than Europe’s, with global growth projected as 180% between 2010 and 2040. Clearly, the growth of demand for digital services and the supply of a digital work force seems to centre in Asia!

DeFi and Financial Inclusivity

This movement can be seen in recent times with the adoption of digital finance by Southeast Asian ride-hailing giants Grab Holdings Inc. and Gojek. Both invested some of the billions they raised into in-app payments and financial services. As smartphone penetration in the region continues to grow and the imminent expansion of 5G Wireless, the potential to reach out to a wider net of users, including the underbanked and or those left out by traditional banks, also referred to as the unbanked, is tremendous.
This ever-growing base of consumers looking to find convenient financial solutions at their fingertips is rapidly perpetuating the rise of decentralised finance (DeFi), dovetailing with the booming fintech sector, leading some to dub it as Fintech 2.0.

DeFi is essentially a monetary system built on public blockchains like Bitcoin and Ethereum, seen as an alternative to the traditional global financial system. With DeFi, not only anyone with an internet connection and a smartphone could access financial services, it also renders cross-border transactions more affordable as it removes costly intermediaries charging remittance fees. Some have said Defi is the “true fintech revolution”!

Clearly an alternative banking intermediation system provides an array of opportunities including the ability to be truly financially inclusive, driving development, potentially lifting millions of Asian households out of vicious poverty. Access to basic “101” financial services like a savings accounts or mobile money services enable the underserved to store and transfer funds, which can help improve future earning potential.

For example, according to World Bank report, the Global Findex 2017, market vendors in Kenya, especially women, saved at a higher rate and invested 60 percent more in their businesses, after having access to savings accounts. Women-headed households in Nepal spent 15 percent more on nutritious foods (meat and fish) and 20 percent more on education after receiving free savings accounts.

The transparent nature of blockchain transactions or switching from cash to digital payments has led to another benefit: enabling the reduction of corruption apart from improving efficiency. For example, according to the same World Bank report, the leakage of funds for pension payments in India dropped by 47 percent (2.8 percentage points) when the payments were made through biometric smart cards rather than being given cash.

Collaboration is key

With the fintech wave fanning wider and deeper across the globe, traditional financial institutions have been attempting to get on the bandwagon. To gain the best of both worlds however, collaboration is still key. Fundamentally a symbiotic relationship between banks and tech firms is vital – banks need tech firms to develop the digital products and services, while having banking partners can enable fintechs to fully utilise their potential.

In most markets, banking licences are needed to directly provide most financial services. Such licences typically have requirements that traditional financial institutions like banks are more likely able to fulfil but not fintechs. With heightened regulatory support fintechs are now able to apply for digital banking licenses in some jurisdictions such as Labuan IBFC, providing innovative financial services either directly to the underserved, or to wholesale financial partners who are then able to package solutions directly to the end users.

And while fintechs are also able to provide innovative solutions for banks, banks are still key in when it comes to distribution, savings, regulatory compliance, customer base, marketing and customer experience. In summary, win-win partnerships are the only way the full potential of technology can be exploited for greater good. The challenge here is not in the innovation within digital in as much as a curating a sustainable and effective partnership between the old “legacy” institutions and the newer more “egalitarian” digital developers.

In short, the challenge is human.

Championing Digital by Simply Not Discriminating

If a mindset change is what is needed for legacy financial services businesses to survive the “disruption” of digitisation it has to be adaptable. And as an extension would be being able to identify a financial intermediation centre, such as Labuan IBFC, which does not discriminate against digital. As a jurisdiction, our ethos has always been inclusive, not just when it comes to financial inclusion, but also those who are in the frontline of innovation, be it in Islamic financial markets 20 years ago or digital financial markets today!

With Asia’s only “pick and mix” tool box, the ethos of a digital Labuan is that there are no “sandboxes” but the adaptation of legacy licences to facilitate digital players with the usage of existing licenses, which apply digital solutions in their business processes. Of course, the jurisdiction has to be mindful to ensure the need for healthy financial ratios, risk mitigation strategies and prudence is always adhered to. As such a balance is key.

As Asia’s leading midshore international business and financial centre, Labuan IBFC continues to provide a collaborative and facilitative approach that its progressive regulator, the Labuan Financial Services Authority (Labuan FSA) espouses.

And as a midshore wholesale financial intermediation centre, balance has always been our strength.
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