Thai­land’s Fin­tech Rev­o­lu­tion – A Reg­u­la­tory Per­spec­tive

Thai-American Business (T-AB) Magazine - - Contents - Writ­ten by: Vi­nay Ahuja, Ku­nal Bir Singh Sachdev, and Joseph Oliver Wil­lan

The rapid rise of Fin­tech in the last few years, cou­pled with the vast op­por­tu­ni­ties it presents for cus­tomers and in­vestors alike, her­alds the dawn­ing of ex­cit­ing times for those stake­hold­ers con­cerned about the le­gal im­pli­ca­tions it holds in store.

The term “Fin­tech” en­tered the pub­lic do­main in 2011, de­spite Fin­tech ser­vices be­ing avail­able long be­fore then. Fin­tech is now com­monly used to cat­e­go­rize the evolv­ing in­ter­sec­tion of fi­nan­cial ser­vices, soft­ware, and in­no­va­tive tech­nolo­gies. From start- ups to es­tab­lished tech­no­log­i­cal and bank­ing giants, com­pa­nies show a huge de­gree of in­ter­est in this new sec­tor, along with gov­ern­ments and pol­i­cy­mak­ers ea­ger to stay abreast of its prom­ise, and tai­lor suit­able leg­is­la­tion to en­sure that it is prop­erly and sus­tain­ably reg­u­lated.

FIN­TECH AND BANKS

A pri­mary cat­a­lyst of the Fin­tech rev­o­lu­tion has been a grow­ing sense of mis­trust in con­ven­tional bank­ing in­sti­tu­tions, es­pe­cially in the wake of var­i­ous eco­nomic shocks and crises that have gripped var­i­ous parts of the world. The hide­bound and com­plex se­cu­rity prac­tices of tra­di­tional banks along with ob­scure and un­wieldy processes clung to by mon­e­tary in­sti­tu­tions are now be­ing chal­lenged by a host of ea­ger, in­no­va­tive start- ups. Some of these new ven­tures are al­ready of­fer­ing cut­ting- edge, high qual­ity fi­nan­cial ser­vices to cus­tomers and in­vestors at com­pet­i­tive rates. Banks, hav­ing found them­selves caught short by this new phe­nom­e­non, are now scram­bling to re­or­ga­nize them­selves, to ad­dress the widen­ing im­pact that Fin­tech is start­ing to ex­ert upon their op­er­a­tions.

Rein­vented cus­tomer ser­vices – Cus­tomers are now more re­luc­tant to visit banks, a de­vel­op­ment that Fin­tech star­tups are tak­ing ad­van­tage of; none­the­less, banks are adopt­ing smaller re­tail units while con­tin­u­ally up­dat­ing and in­tro­duc­ing new apps.

Smart so­lu­tions – Fin­tech star­tups can of­fer ser­vices that banks lack the ca­pac­ity to de­velop or are un­will­ing to im­ple­ment; in light of this, banks are rapidly ab­sorb­ing new start- ups and free­ing avail­able funds to in­cu­bate start- ups with the aim of in­cor­po­rat­ing them into their main­stream busi­ness op­er­a­tions down the line.

Reach­ing out to busi­ness clients – Fin­tech start- ups can side­step costly com­pli­ance pro­ce­dures and be more adept at en­gag­ing busi­nesses and clients. This, in turn, has led to the con­tention by some that cer­tain Fin­tech start- ups are un­reg­u­lated and ex­pose cus­tomers to un­nec­es­sary risk.

Form­ing part­ner­ships – It comes as no sur­prise that tech start- ups have usu­ally tended to have a more nat­u­ral affin­ity for creat­ing part­ner­ships amongst them­selves due to their shared en­tre­pre­neur­ial zeal, mould- break­ing ethos, and sense of ini­tia­tive. Still, cer­tain banks have re­cently been mak­ing fer­vent strides to en­mesh Fin­tech start- ups more deeply into their daily busi­ness op­er­a­tions, form­ing closer syn­er­gies and knowl­edge bases to bet­ter ex­ploit the ad­vent of dis­rup­tive new tech­nolo­gies and in­no­va­tion in this sec­tor.

THAI­LAND AND ASEAN

Fin­tech com­pa­nies, the ma­jor­ity of them start- ups, have in­creased dra­mat­i­cally in num­ber over the re­cent years – from about 1,000 in 2005 to over 8,000 in 2016. They have steadily been de­vel­op­ing and har­ness­ing their tal­ent to in­tro­duce in­no­va­tive tech­nolo­gies in fi­nan­cial ser­vices for con­sumers while by­pass­ing the legacy cost struc­tures and reg­u­la­tory con­straints of tra­di­tional banks.

Glob­ally, Fin­tech fund­ing con­tin­ues to ac­cel­er­ate. The in­dus­try has grown from a level of USD 5.5 bil­lion in 2006, ris­ing by or­ders of mag­ni­tude to its cur­rent level of ap­prox­i­mately USD 79.5 bil­lion.

In Thai­land, the do­mes­tic spread of Fin­Tech has been un­der­pinned by the Gov­ern­ment’s Thai­land 4.0 eco­nomic model. A core el­e­ment of this ini­tia­tive in­volves the Gov­ern­ment tan­gi­bly pro­mot­ing the for­ma­tion of a “dig­i­tal econ­omy,” hav­ing re­cently ear­marked USD 88 mil­lion in funds from in­vestors into a range of Fin­Tech start- ups.

Thai­land now has around 1,000 Fin­tech star­tups with cor­po­rate ven­ture cap­i­tal in­vest­ment val­ued at around USD 200 mil­lion. Kasikorn Bank has also rec­og­nized the sig­nif­i­cance of Fin­tech by in­tro­duc­ing a USD 30 mil­lion fund to in­cu­bate nascent home­grown Fin­tech start- ups. Ad­di­tion­ally, ini­tia­tives such as Pig­gipo ( a fi­nance man­age­ment ap­pli­ca­tion), Stock­Radars ( a trad­ing plat­form), Peak­engine ( an on­line ac­count­ing soft­ware for SMES), Masii ( a price com­par­i­son site for fi­nan­cial prod­ucts), and Omise ( an on­line pay­ment por­tal), to name but a few, have gained no­table trac­tion of late in the mar­ket­place.

As the third largest econ­omy in the As­so­ci­a­tion of South East Asian Na­tions ( ASEAN), Thai­land still faces ro­bust com­pe­ti­tion in a dy­namic re­gion jostling with sev­eral other high- per­form­ing economies, all with the mo­ti­va­tion and abil­ity to en­tice young, am­bi­tious start- ups to their shores. Gov­ern­ments across Asia, par­tic­u­larly in Hong Kong, Sin­ga­pore, Malaysia, and Tai­wan, have ini­ti­ated a se­ries of pro­grams to se­cure their share of the USD 100 bil­lion in­vested in Fin­tech glob­ally. Thai­land’s less af­flu­ent neigh­bors,

such as Cam­bo­dia, Lao PDR, and Myan­mar are also mak­ing in­roads into Fin­tech, al­though these coun­tries re­main ham­pered by sys­temic in­ef­fi­cien­cies cur­rently in­hibit­ing their com­pet­i­tive­ness in this sec­tor. None­the­less, these economies con­tinue to de­velop and di­ver­sify at a rapid pace, open­ing up the pos­si­bil­i­ties of lu­cra­tive and rel­a­tively un­tapped mar­kets in the com­ing years.

PRE­PAR­ING FOR FIN­TECH

Thai­land re­mains at an in­ter­me­di­ate stage in terms of de­vel­op­ing leg­isla­tive cov­er­age and reg­u­la­tions tai­lored specif­i­cally for Fin­tech. Fail­ing to en­act spe­cific laws for this new phe­nom­e­non runs the risk of ad­versely af­fect­ing the econ­omy, in­ter­rupt­ing busi­ness progress and caus­ing costly and un­nec­es­sary com­pli­ance pro­ce­dures. Put­ting in place an ad­e­quate le­gal frame­work is es­sen­tial for Thai­land to stay true to its es­poused aim of be­ing a re­gional leader in this field. In pur­suit of this, the Gov­ern­ment has in­tro­duced var­i­ous leg­isla­tive tools as part of their goal to turn Thai­land into a “dig­i­tal so­ci­ety.”

Na­tional E- Pay­ment Sys­tem – The Gov­ern­ment has re­cently rolled out the Na­tional E- Pay­ment Sys­tem with the in­ten­tion of in­creas­ing ef­fi­cien­cies in Thai­land’s pay­ment in­fra­struc­ture sys­tem, mak­ing e- pay­ments more stream­lined, and less cash- based, in­clud­ing: pro­mot­ing an ef­fi­cient pay­ment sys­tem, known as Prompt­pay; en­cour­ag­ing the use of debit cards; de­vel­op­ing an ef­fi­cient eTax sys­tem; im­prov­ing the Gov­ern­ment e- Pay­ment Sys­tem; and creat­ing e- Pay­ment lit­er­acy.

In­tro­duc­tion of Reg­u­la­tory Sand­box – On De­cem­ber 8, 2016, the Of­fice of the Se­cu­ri­ties and Ex­change Com­mis­sion ( SEC) is­sued Con­sul­ta­tion Pa­per No. Ornor­phor. 55/ 2559 Re: Reg­u­la­tory Sand­box for Se­cu­ri­ties and De­riv­a­tives Busi­ness. This was fol­lowed by the Bank of Thai­land’s ( BOT) reg­u­la­tory Sand­box Guide­lines. The rai­son d’etre for this reg­u­la­tory sand­box is to af­ford Fin­tech firms the op­por­tu­nity to test their fi­nan­cial in­no­va­tion in cap­i­tal mar­kets with­out be­ing sub­ject to reg­u­la­tory ob­sta­cles. Fin­tech start- ups look­ing to par­tic­i­pate in the reg­u­la­tory sand­box are cur­rently not re­quired to ob­tain li­censes from the SEC or the BOT dur­ing the des­ig­nated one year par­tic­i­pa­tion pe­riod.

Draft Bill on Fin­tech – A com­mit­tee is draft­ing a bill on Fin­tech that will pave the way for in­fra­struc­ture and cre­ate an ecosys­tem ca­pa­ble of strength­en­ing com­pe­ti­tion in the lo­cal mar­ket. The bill has the back­ing of the Thai­land Fin­tech As­so­ci­a­tion and var­i­ous other ac­tors, in­clud­ing the SEC, the BOT, and com­mer­cial banks. How­ever, the bill re­mains in draft form only and the con­tents of the bill have yet to be fully de­ter­mined. So far, the draft bill can be crit­i­cized to the ex­tent that it

ap­pears to seek di­min­ished lev­els of for­eign com­pe­ti­tion in a mar­ket that thrives on in­ter­na­tion­al­ism, re­gion­al­iza­tion, and glob­al­iza­tion.

Pro­mot­ing In­vest­ment in Fin­tech – The Board of In­vest­ment ( BOI) in 2016 in­tro­duced “dig­i­tal ser­vices” as an el­i­gi­ble ac­tiv­ity for in­vest­ment pro­mo­tion. The term “dig­i­tal ser­vices” has a broad scope and is in­tended to cover ser­vices such as Fin­tech, med­i­cal tech­nol­ogy ser­vices ( Medtech), and agri­cul­tural tech­nol­ogy ser­vices ( Agritech), among oth­ers. In­vest­ment in the “dig­i­tal ser­vices” in­dus­try will per­mit qual­i­fied busi­ness op­er­a­tors to ap­ply for in­vest­ment pro­mo­tion in­cen­tives ( in­clud­ing five- year cor­po­rate in­come tax hol­i­days for up to 100% of the level of in­vest­ment). A pre­con­di­tion for in­vest­ment pro­mo­tion is that a po­ten­tial project must also se­cure ap­proval from the Min­istry of In­for­ma­tion and Com­mu­ni­ca­tion Tech­nol­ogy.

Ac­cess to Credit In­for­ma­tion – Un­der the Credit In­for­ma­tion Busi­ness Act B. E. 2545 ( 2002), only cer­tain types of busi­ness op­er­a­tors were el­i­gi­ble for mem­ber- ship of the credit bureau. In 2016, the Credit In­for­ma­tion Com­mit­tee opened a pub­lic hear­ing on the draft amend­ment to the Credit In­for­ma­tion Busi­ness Act, where it was con­tem­plated that a pro­vi­sion would be added, per­mit­ting any busi­ness op­er­a­tor in­volved in fi­nanc­ing ac­tiv­i­ties ( dur­ing the nor­mal course of its busi­ness) to be­come a qual­i­fied mem­ber of the credit bureau. The amend­ment to the Credit In­for­ma­tion Busi­ness Act be­came law in early 2017 and per­mits in­ter­me­di­ary busi­nesses such as peer- to- peer lend­ing plat­forms ( dis­cussed be­low) to qual­ify for mem­ber­ship.

Lib­er­al­iz­ing Peer- to- Peer ( P2P) Lend­ing – The BOT is­sued a Con­sul­ta­tion Pa­per Re: Reg­u­la­tory Frame­work for Peer- to- Peer Lend­ing Via Elec­tronic Net­work sys­tems with the aim of draft­ing for­mal reg­u­la­tions to gov­ern P2P lend­ing. It is pro­posed that both fi­nan­cial and non- fi­nan­cial in­sti­tu­tions ( in­clud­ing com­pa­nies and in­di­vid­u­als) will be able to op­er­ate P2P lend­ing plat­forms. The con­sul­ta­tion pa­per dis­cusses in­ter­est rate caps for P2P lend­ing to be a max­i­mum of 15% per an­num. Lib­er­al­iza­tion of this sec­tor will pro­vide new lend­ing streams for bor­row­ers to ac­cess funds along with al­ter­na­tive in­vest­ment pos­si­bil­i­ties for in­vestors.

Thai­land has been mak­ing pos­i­tive strides to ready it­self for the rise of Fin­tech. It has be­gun adopt­ing the nec­es­sary leg­is­la­tion and reg­u­la­tory con­trols to en­sure that the max­i­mum ben­e­fit can be gained from this sec­tor, that it is kept sus­tain­able, and met with sen­si­ble checks, bal­ances, and con­sumer pro­tec­tion mech­a­nisms.

At the same time, bank­ing in­sti­tu­tions are brac­ing them­selves for sweep­ing changes in the ways they do busi­ness, hav­ing to rapidly re­assess var­i­ous sec­tors of their op­er­a­tions, and mak­ing tough choices to pre­serve their con­tin­ued vi­a­bil­ity in the age of Fin­tech.

Vi­nay Ahuja is Deputy Head of Re­gional Bank­ing and Fi­nance Prac­tice Group; Ku­nal Bir Singh Sachdev is Le­gal Ad­viser; and Joseph Oliver Wil­lan is a Bank­ing and Fi­nance Ex­ec­u­tive As­sis­tant at DFDL Le­gal and Tax. They can be con­tacted at vi­nay. ahuja@ dfdl. com, ku­nal@ dfdl. com, and joseph. wil­lan@ dfdl. com.

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