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| Michael Armstrong (FCA): ICAEW Regional Director for the Middle East, Africa and South Asia |
The efficiency, convenience and reach of financial services have been significantly enhanced by the development of the fintech industry. Today, services including payments, insurance, lending, capital raising and investment management have all benefited from the boom in fintech.
These opportunities are reflected in the fast-growing investment value of the fintech sector, with global fintech investment almost doubling to US$38.9bn between 2014 and 2017.
One of the most transformational opportunities presented by fintech is financial inclusion, as new technologies enable more people to access financial services. Around 2 billion people worldwide do not have a bank account and rely entirely on cash; however, many of the people in these areas have mobile phones.
Kenya is among the countries where financial inclusion has been developed through the mobile money system. The model is increasingly defining the day-to-day running of businesses in the country. Clearly, the country’s fintech sector is among the fastest growing in Africa.
But on the global stage, London and Singapore are classified as excellent hubs for fintech activity. A recent report on Fintech Innovation by ICAEW, explores the key strengths and challenges of these two hubs, while highlighting successful drivers of fintech innovation more generally.
Interaction, learning and collaboration
Fintech is most effective when innovators, investors and regulators can interact, build networks and learn from each other. As a result, the development of fintech solutions is generally concentrated in specific geographical locations, or ‘hubs’, where five key elements co-exist and work together – markets, talent, capital, progressive regulation and strong government support.
Both London and Singapore benefit from having all of these elements in a single location, as well as mature and successful financial services sectors which provide strong foundations for fintech. Both have investors who are providing capital to fintech companies. Both have deep talent pools in financial services, technology and regulation.
However, no hub operates in isolation, and the characteristics of the fintech hubs in London and Singapore highlight the importance of strong links with other hubs. In Singapore, there is a clear need to collaborate given the small size of the population, and it has positioned itself as a ‘hub among hubs’ and a gateway to Southeast Asia.
London also needs to work with others, for example drawing on talent from across the UK and internationally. Therefore, there is need to draw on markets and global talent, and develop strong links with other hubs.
Sustainable customer benefits
Fintech innovation must focus on delivering essential financial services in a way that better serves the needs of customers and ultimately delivers value to investors. As the sector matures, successful fintech businesses face new challenges of scaling up businesses and providing an exit strategy especially in the UK.
In Singapore, the sector is younger and the focus is still primarily on early stages of business development and building customer and user bases. It’s therefore essential for fintech hubs to be cognisant of these issues if they are to build profitable and transparent business models.
They may also encounter new questions about ethics, especially how they are generating revenue through the use of customer data. Sandboxes can help regulators to develop appropriate interventions which manage risk and promote innovation.
In the case of Singapore, technology companies enter the sandbox on the basis of two criteria. First, the proposed financial service should include new or emerging technology, or incorporate the use of existing technology in an innovative way. Second, the proposed financial service addresses a problem or brings benefits to consumers or the industry. However, the ultimate purpose of fintech developments may not always be clear.
For example, cryptocurrencies do not easily fit into established concepts of financial services such as stores of value, means of exchange, or investments, making it harder to understand their long-term risks and benefits.
Local differences
While the five core elements of innovation are common, there are also many differences between fintech markets. Therefore, businesses, regulators and governments need to adapt and tailor their fintech strategies to meet the particular needs of the country.
London and Singapore show the importance of tailoring detailed measures to reflect local differences. Singapore, for example, puts stronger emphasis on collaboration between start-ups and the established sector, and acts as a gateway to new markets across Southeast Asia.
By contrast, in London, there is more of a push for start-ups to disrupt the incumbents and more focus on the challenges of scaling up fintech businesses.
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