In this webinar Prof Nafis Alam shares on the development of Digital finance, FinTech regulation in Malaysia and how it might be relevant within Southeast Asia, including the need for an effective, new or expanded regulatory perimeter to cover the scope of digital finance and FinTech providers.
REGIONAL ECONOMIC STUDIES PROGRAMME WEBINAR
Webinar Series 2020-2021: Financial Transformation, Credit Markets and Household Debt in Southeast Asia
Tuesday, 18 May 2021 – ISEAS – Yusof Ishak Institute hosted a webinar on “Digital Finance and Regulatory Landscape: Malaysian Experience”, presented by Professor Nafis Alam, Professor of Finance & Head of School of Accounting and Finance, Asia Pacific University of Technology and Innovation (APU), and Mr Allen Sng Kiat Peng, Sheridan Fellow, Faculty of Law, National University of Singapore.
Professor Alam began the webinar by giving an overview of the FinTech (Financial Technology) landscape. The industry has grown significantly during the Global Financial Crisis in 2008 and the European Union (EU) economic crisis. Since then, it has continued to experience rapid growth, especially during this pandemic where cashless and contactless transactions are on the rise. With a large demand for its services by consumers because of its increased convenience and attractive rates and fees, FinTech is now an enormous sector with strong potential to grow even further. Other than venture capitalists and angel investors pouring funds into this sector, traditional banks have also invested heavily in this area, hoping to tap into the large pool of unbanked people that could be accessed via mobile FinTech services, increasing their potential profits. It has also become increasingly pertinent for banks to adopt the technology or risk being left out of the mainstream services. Given the high adoption rates, it is essential that these FinTech firms are properly regulated to maintain the stability of the financial system.
On regulation, Professor Alam shared that regulation is the heart of financial services and it has several key mandates. Firstly, it needs to maintain financial stability as consumers are investing large amounts of money into these companies. If left untracked, these firms may result in the economy going through frequent rounds of instability, which would then affect the whole country. Secondly, there needs to be prudential regulation, making sure that firms have sufficient capital, otherwise they will face a problem with risk sharing. Thirdly, regulation should encourage or maintain competition and innovation within the sector, as it increases the cost efficiency of products. Professor Alam reemphasised that regulation should not stifle innovation or competition. Instead, its main goal is to protect the consumers and the FinTech firms. Lastly, regulations should be transparent, fair, and independent.
Regulations need to be updated frequently to keep up with new business models as well as innovation cycles. With FinTech emerging as a highly profitable sector, many of the big tech firms are venturing into financial services as well, forming TechFin companies. This is a natural progression for these big tech firms as these firms hold the relevant technological resources that plays the dominant role in FinTech. However, Professor Alum highlights that these technological companies are regulated by laws that are outside of FinTech’s regulatory domain. Thus, there is a need to distinguish the two groups of companies, but it cannot be easily done so. In addition, there is a need to ensure that the start-ups’ low-costs model can be retained and not be bogged down by high compliance costs. Technology is also evolving rapidly, creating potential loopholes in existing regulations. Thus, the inability of regulators to move at the pace of technology is also a pertinent challenge.
To avoid potential financial instabilities, large firms in the industry that hold very high stakes are “too big to fail” as governments are incentivised to prevent these companies from failing. However, there are many small firms that are “too small” for government agencies “to care”. Professor Alam highlights that there needs to be tacit acceptances of these small firms; although they are small, their consumer usage rates are exponentially growing and will eventually be “too big to be ignored”. In this regard, Professor Alam highlighted that many FinTech platforms especially BigTechs in Finance are too big to be ignored and thus require supervision and regulatory oversight.
Professor Alam then elaborated on the risks FinTech poses to various stakeholders. Consumers, whom have the largest stake, tend to have products mis-sold to them, are unaware of how they are protected by regulation and the risk involved in such investments. Firms face risks such as business model viability, governance of data, and anti-money laundering and conduct. FinTech also has risks to financial stability as high investment concentration poses potential system-wide vulnerabilities.
On the current landscape, Professor Alam shared that most of the countries in the SEA region have been moving forward in terms of regulation with Malaysia as one of the leaders. The Malaysian government has divided the regulatory role into two: Bank Negara Malaysia regulates the financial market, while the security commission regulates the capital market. FinTech technology that fall between the two are under the purview of both regulators, depending on the specific use of the technology. The Malaysian regulatory authorities abide by three main principles. Firstly, they aim to provide parity, a level playing field for all players. Secondly, proportionality by having regulation that is proportionate to the benefits and risk. Lastly, neutrality by prioritising desirable outcomes over preferences to specific technologies. They achieve this through five main approaches: regulatory coordination, policy and operational flexibility, outreach, education and guidance, regulatory adaptations and enabling shared infrastructure.
The presentation was then handed over to Mr Allen Sng who shared his thoughts and perspectives. Mr Sng shared that the finance industry is a trust scheme; without trust, everything topples. He also agreed with Professor Alam that regulation does not stifle innovation and is essential in protecting consumers. Market players might feel that way as it is easy to quantify compliance costs, but benefits of regulation are difficult to measure. On the Malaysian landscape, he praised the Malaysian government’s infrastructure support given for FinTech development such as talent development, the development of associated technology that supports FinTech such as digital identification, and community education on the regulations and regulatory expectations.
The webinar concluded with Professor Alam engaging in a question-and-answer session. Questions asked included whether the increase in uptake of digital payment products due to the pandemic resulted in any emerging problems, what to expect in Bank Negara Malaysia’s new five year FinTech plan in 2021, and how data is regulated in Malaysia.