Uncage the fintech tigers in Thailand
Clearer and simpler regulations and licensing requirements would be a good start. By Lukas May
There is a long way to go before Asian financial technology tigers can roar on the global stage and Thailand is no exception. Innovation is moving fast and regulators are struggling to keep up, which means people in Thailand are missing out on useful fintech innovations that Europeans have been benefiting from for years: whether in money remittance, wealth management or business banking.
Governments across Asia have been working hard to attract fintech companies that can radically improve the way people send, spend and save money. The Bank of Thailand has made significant progress in this regard: it has set up a “regulatory sandbox” and signed a fintech cooperation agreement with the Monetary Authority of Singapore.
But despite the headline-grabbing initiatives, regulation remains the biggest barrier to customer acquisition, efficient scaling and expansion of fintech ventures in the country.
“Fintech” is a broad term covering many different markets, but some barriers affect almost all fintechs and governments would get the best bang for their buck if they can fix them.
Offline anti-money laundering rules in an online world: Antimoney laundering rules in the region continue to be biased towards an offline world. Many fintechs in Asia, including Thailand, need to physically meet each new client in person for face-to-face verification. Although Thailand has now issued electronic know-your-customer (KYC) guidelines, specific regulatory approval is needed, and video conferencing at the very least is mandatory.
For fintech businesses to scale successfully, these old-fashioned requirements need to be stripped away. Rules should mandate outcomes, but l et the firms decide how best to achieve them. If firms comply with these rules, they should not need to obtain a specific approval to use online methodologies. They can design processes that use the best technology available to fight financial crime.
Regulators will benefit too: once they enact future-proofed regulations, this will save them the effort of playing catch-up every few years and revising the rules in light of new technology.
Slow and opaque licensing: Understanding which regulations apply to a fintech business is difficult in Thailand, with a patchwork of different central bank circulars in place.
Regulators should create a single document for each regulated activity, such as peer-to-peer lending, payment and deposit-taking, that clearly summarises all the relevant requirements. This would help fintechs quickly figure out what licence they need and how to comply. It will also help regulators ensure that their expectations are being met.
Then, regulators should set out estimated licensing timeframes, including a clear overview of how long each step will take. Data should be published on actual time taken, in the same way that airlines and rail companies publish data on punctuality.
Bucks, boots and bytes on the ground: While regulatory categories have multiplied to include several nonbank licensing categories — often used by fintechs — capital requirements have not been tailored accordingly.
Banks need to hold significant capital at all times to minimise the risk of bank runs. However, non-banks do not create this type of risk, because they do not make leveraged loans off the back of deposits. When fintechs hold customer funds, they are normally required to keep the entire amount segregated — this is sensible and grants important consumer protection.
Beyond this, capital requirements are simply a barrier to entry with no real regulatory benefit — for example, over US$3 million required for a basic money transfer licence in Thailand. Contrast this with Singapore and Malaysia which require around $100,000 for the equivalent licence.
Countries serious about encouraging fintech need ensure capital requirements are reduced to match the actual risks, and allow the parent company’s capital to be counted towards the requirements too.
Regulators across Asia require staff in specific functions to be based in the country as a precondition of getting licensed. This is often unnecessary for online businesses to serve a new market and therefore increases the cost of the service, ultimately at the expense of customers.
Regulators want commitment and accountability from the firms they regulate. But they should be creative about how this can be achieved: a letter of guarantee from the parent company; binding legal commitments by senior management based overseas; or recognition of regulatory licences held in appropriately strict overseas jurisdictions.
A similar requirement sometimes exists for physical hosting of data. These rules inhibit the ability of a global fintech provider to choose the most efficient solutions, wherever the servers may be based. They therefore add unnecessary extra cost, complexity and operational risk.
The desired regulatory outcome is to have direct access to data in case something goes wrong. However, this can be achieved just as effectively even when data is not “in the country”. The most important factor is the firm’s ability and willingness to provide data on demand, which should be tested in the licensing process and ongoing audits.
Banking on the banks: Every fintech company — as with most businesses — needs access to a payment system, either to receive payments from customers for a product, or because the core product is itself actually a payment service (remitters, crypto exchanges and e-wallets).
However, access to the main electronic payment system in each country is controlled by banks — this is true for Prompt-Pay in Thailand. So to run a fintech business successfully, the company will need to obtain and maintain a bank account in each market.
If fintechs can access payment systems directly, they can bypass the banks. This will cut out cost and reliance on the technical limitations of banks, which means payments get faster and cheaper for consumers.
Uncage the tiger: In summary, regulators interested in supporting the growth of fintech in their countries need to tackle this to-do list: update anti-money laundering rules for an online world; publish licensing summary documents for fintechs; remove requirements for people, capital and data to be held locally; and help fintechs to access payment systems directly.
The Bank of Thailand is currently reviewing the relevant legislation, including in relation to electronic payments and international money transfers. If Thailand manages to tackle all the topics on this list, foreign fintechs would flock here and home-grown fintechs would multiply, bringing cheaper and better financial services to the public. An influx of talent will expand the fintech ecosystem — and may even lead to the birth of a unicorn or two.
It’s a rare win-win for policymakers. They should seize it.
Rules should mandate outcomes, but let the firms decide how best to achieve them. If firms comply with these rules, they should not need to obtain a specific approval to use online methodologies.
LUKAS MAY Head of banking, TransferWise