Law firms interviewed: Drew & Napier, Baker McKenzie Wong & Leow, Norton Rose Fulbright
The era of technology is currently prevailing, with Southeast Asia emerging as a prominent hub for fintech. However, even the leading markets for groundbreaking fintech startups are facing challenges due to economic instability and increased regulatory scrutiny. Fintech lawyers discuss significant developments and regulatory playbooks in the industry, particularly with the integration of artificial intelligence.
The innovative force of fintech has been sweeping across Southeast Asia as the fast-growing region embraces the technological disruption with open arms.
Ever since the IPO of rock-star Indonesian tech company GoTo burst the fintech scene wide open, tech startups have been dreaming of reaching skyrocketed valuations as their countries continue to cruise towards digitalisation.
However, the momentum driving the industry seemed to have reached a critical juncture as concerns of overvaluation have put fintech companies in doldrums. Fintech startups in the region have been bracing for potential funding challenges and market consolidation.
“The current macroeconomic environment presents several significant challenges for fintech startups in our jurisdiction, including heightened regulatory scrutiny, access to capital, and maintaining operational resilience,” says Grace Chong, head of financial services regulation at Drew & Napier in Singapore.
Stephanie Magnus, principal of financial services regulatory and fintech practices at Baker McKenzie Wong & Leow in Singapore, expects potential consolidation and an increase in M&A activity in sectors including the payments space. That will partly be driven by the closing gap of valuation expectations between the buyer and seller, and thus introducing opportunities to look at distressed assets.
“Fintechs would need to look at new opportunities so that they do not enter a market which is already crowded, particularly with potentially shorter runways from a funding perspective,” adds Magnus.
Another area that has been gaining the favour of fintech companies is digital tokenisation especially with Singapore being a cautious aspirant for the region’s virtual assets hub.
Digital tokenisation refers to the process of documenting an asset’s ownership rights utilising the blockchain technology, which in theory could give rise to permissionless liquidity and boost efficiency by reducing transactional friction compared to traditional assets.
“Digital tokenisation is garnering wide discussion with technology players, small fintech companies and larger financial institutions being interested in the potential of greater liquidity on a cross-border basis. This is a space which will grow,” observes Magnus.
Chong also underscores the tokenisation of real-world assets, such as real estate and art works, as a trend that has the potential to become mainstream in the fintech realm, boasting the prospects of fractional ownership and increased liquidity.
“Financial institutions are working to democratize access to high-value assets and create new investment opportunities for a broader range of individuals. Tokenisation also presents an opportunity to enhance fund distribution and facilitate secondary market trading of fund shares, to facilitate greater efficiencies in the industry,” notes Chong.
Other notable developments include embedded finance, which involves integrating financial services into non-financial platforms. Such platforms enable businesses to offer banking, payments, lending, and insurance services directly within their ecosystems by utilising application programming interfaces (APIs) linked to their financial partners.
Notable examples include an e-commerce merchant providing insurance, a coffee shop app that offers one-click payments, or a department store’s branded credit card.
“This trend is driven by the demand for seamless and convenient financial services within everyday applications,” says Chong. It also marks a fundamental shift from traditional banking and fintech models by tapping into the unbanked population at an unprecedented scope.
OUTSIDE THE SANDBOXES
When it comes to fintech regulations, Etelka Bogardi, Asia head of fintech and financial services regulatory at Norton Rose Fulbright in Hong Kong, observes an increase in regulatory activity both in the front-end (policymaking) and at the back end (investigations).
Chong believes the heightened emphasis placed on consumer protection has been underpinning the fintech regulatory playbook, which encompasses data privacy, transparency, and fair treatment.
This trend poses several challenges for fintech startups, Chong says, which must now implement robust consumer protection frameworks to comply with stringent regulations. Requirements including ensuring data security, obtaining clear and informed consent from consumers, and providing transparent information about products and services have all become essential to ensure compliance.
In addition, data privacy and security have also increasingly come into the regulatory horizon, with aspiring fintech hubs Singapore and Hong Kong both introducing robust protection of personal data privacy. As such, “Fintech startups must invest in advanced cybersecurity measures and develop comprehensive data management policies to meet these regulatory demands, which can be resource-intensive and complex to implement,” says Chong.
Bogardi believes the major challenges testing fintech startups is the actual deployment within existing regulatory frameworks, which includes licensing issues (and associated cost) and the feasibility of cross-border models.
All in all, “New licensing regimes as well as business conduct and consumer protection measures mean that previously unregulated players need to quickly get up the curve in terms of compliance know-how and spend,” she says.
Supportive government policies characterised by financial assistance, streamlined visa processes for international talent, regulatory sandboxes and clear regulatory guidance would be conducive in keeping fintech players in line without suffocating innovation, adds Bogardi.
AI IN FINTECH
With generative AI (gen AI) coming into play in almost every aspect of the economy, the fintech industry has been gearing up to harness its prowess. Magnus notes that there will be interest to see how to leverage AI opportunities to introduce efficiencies within the fintech space.
“AI systems, particularly those using natural language processing (NLP), can process and integrate regulatory changes 60 per cent faster than manual methods. However, while the integration of AI in the financial services industry is inevitable, it is essential to proactively address the accompanying challenges.”
- Grace Chong, Drew & Napier
Magnus’ observation on the nexus of AI and fintech is shared by Chong. Specifically, Chong points out that AI and machine learning are already being leveraged for various applications, including fraud detection, personalised financial services, credit scoring, and risk management. These transformative technologies enhance decision-making processes and improve customer experiences by providing tailored solutions, she says.
“AI systems, particularly those using natural language processing (NLP), can process and integrate regulatory changes 60 per cent faster than manual methods. However, while the integration of AI in the financial services industry is inevitable, it is essential to proactively address the accompanying challenges,” notes Chong.
One of those challenges falls on the proliferation of data, which heightens the risk of leaks or breaches especially on data-intensive fintech applications. Other pivotal issues include the ethical application of AI in the financial sector, which has further accentuated the need for regulatory responsibility.
“Resilience is a significant concern, and financial institutions must have robust contingency plans if their third-party providers fail,” says Chong. “Accountability and governance are also a top priority for regulators, emphasizing the need for clear responsibility frameworks.”
Bogardi of Norton Rose Fulbright points out that while the trend of fintech leveraging AI is not necessarily new, the underlying large language models (LLMs) have expanded the availability of the technology to a much broader portion of market participants veering towards complete automation.
What is new, in such case, is seeing AI-driven fintech platforms operate in replacement or on behalf of the user. “This means a lot of the regulation on wealth managers, financial advisers, accountants, and even other professional services in the financial sector will need to translate to the technology automating such services,” says Bogardi.
“It also brings new and interesting questions as to regulation, for example, in relation to robo-advisers,” she adds.
