Thailand’s Fintech Revolution – A Regulatory Perspective
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.