‘Unbanked populations to spur growth of FinTech firms in Asia-Pacific’

Large unbanked populations in countries such as India and the emergence of tech-savvy middle classes in countries such as China, Indonesia and the Philippines, will offer significant growth opportunities for financial technology (FinTech) companies, according to Fitch Ratings.

Observing that technology firms will play an increasingly important role in Asia-Pacific's financial services industry, the global rating agency said the size of these markets will provide FinTech firms the opportunity to gain substantial scale and potentially change the banking status quo. 

However, Fitch cautioned that this disruption to the financial sector will come with risks, especially where banks and regulators have limited experience in managing new technologies. 

How regulators balance the need to allow for the use of new technology to provide better services while controlling new operational risks and preventing the aggressive growth of unregulated financial services, will be a key challenge in the next few years, it added.

The agency noted that FinTech remains a nascent sector despite rapid growth in large markets such as China and India. Peer-to-peer (P2P) lending, online payment systems and digital wallets focused on retail consumers and SMEs (small and medium enterprises) represent by far the largest markets.

"We expect regulation to play a key role in determining how the sector evolves. Clear and transparent policies will be important for successful development. There is likely to be a fine line between the development of regulation to ensure orderly growth and the establishment of significant barriers to entry to protect the incumbents," it added.

Fitch said India has been pro-active, and recently unveiled a consultation paper for P2P lending, which seems to favour the continued growth and development of the sector under a regulatory framework. The Reserve Bank of India noted the potential positive contribution that P2P lenders could have, especially in bringing formal financial services to the almost-50 per cent of the population that is unbanked.

However, there are major challenges for new entrants. The lack of credit history for some new markets makes it difficult to assess their credit worthiness to ensure appropriate credit-underwriting standards.

"Importantly, the rise of FinTech could raise risks to traditional banks, which fail to transform over the long term. The rapid adoption of disruptive tech could raise security and operational vulnerabilities for banks if systems and resources to manage the new technologies are not enhanced. 

"New technologies could also alter banks' business and operating models in the long term by eroding a previously lucrative business line or reliable funding source, and thus indirectly affect credit profiles as well," the agency said.

Fitch believes the barriers to entry for FinTech firms are greatest where banking markets are more concentrated. For emerging markets, financial systems with fragmented banking systems that have seen limited innovation will be the most exposed.

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