FINTECH: Innovation unlocked | Asian legal business

Today, the technology era is dominating, with Southeast Asia emerging as an important fintech hub. However, even leading markets for disruptive fintech startups face challenges due to economic instability and increased regulatory scrutiny. Fintech lawyers discuss significant developments and regulatory playbooks in the industry, particularly regarding the integration of artificial intelligence.

The innovative power of fintech is spreading across Southeast Asia as the rapidly developing region welcomes technological disruption with open arms.

Since the IPO of Indonesian rockstar tech company GoTo opened up the fintech scene, tech startups have been dreaming of skyrocketing valuations as their countries continue to move toward digitalization.

But the dynamics driving the industry seemed to have reached a tipping point as fears of overvaluation pushed fintech companies into the doldrums. Financial technology startups in the region are preparing for potential challenges related to financing and market consolidation.

“The current macroeconomic environment poses several significant challenges for fintech startups in our jurisdiction, including increased regulatory scrutiny, access to capital and maintaining operational resilience,” says Grace Chong, head of financial services regulation at Drew & Napier in Singapore .

Stephanie Magnus, director of financial services regulation and fintech practice at Baker McKenzie Wong & Leow in Singapore, expects potential consolidation and an increase in M&A activity in sectors including payments. Part of this will be due to the gap in valuation expectations between buyer and seller narrowing and therefore introducing the ability to look at distressed assets.

“Fintechs would need to look at new opportunities to avoid entering a market that is already crowded, especially with a potentially shorter runway from a financing perspective,” adds Magnus.

Another area gaining favor with fintech companies is digital tokenization, especially as Singapore is a cautious contender as a regional virtual asset hub.

Digital tokenization refers to the process of documenting asset ownership using blockchain technology, which can theoretically create permissionless liquidity and increase efficiency by reducing transaction frictions compared to traditional assets.

“Digital tokenization is generating wide discussion with technology players, small fintech companies and larger financial institutions interested in the potential for greater liquidity on a cross-border basis. This is a space that will develop,” notes Magnus.

Chong also highlights the tokenization of real-world assets such as real estate and art as a trend that has the potential to become mainstream in the fintech sphere and boast the prospects of partial ownership and increased liquidity.

“Financial institutions are working to democratize access to high-value assets and create new investment opportunities for a wider range of people. Tokenization also creates an opportunity to improve fund distribution and facilitate trading of fund shares in the secondary market, which promotes greater efficiency in the industry,” notes Chong.

Other noteworthy developments include embedded finance, which involves the integration of financial services with non-financial platforms. Such platforms enable enterprises to offer banking, payment, lending and insurance services directly within their ecosystems, using application programming interfaces (APIs) associated with their financial partners.

Notable examples include an e-commerce retailer offering insurance, a coffee shop app offering one-click payments, or a department store’s branded credit card.

“This trend is driven by the need for seamless and convenient financial services in everyday applications,” says Chong. It also represents a fundamental shift away from traditional banking and fintech models by tapping into the unbanked population on an unprecedented scale.

OUTSIDE THE SANDBOXES

When it comes to fintech regulation, Etelka Bogardi, director of Asia fintech and financial services at Norton Rose Fulbright in Hong Kong, sees an increase in regulatory activity on both the front-end (policy-making) and back-end (investigations).

Chong believes that a greater emphasis on consumer protection underpins the fintech regulatory playbook, which includes data privacy, transparency and fair treatment.

This trend poses several challenges for fintech startups, says Chong, which must now implement a robust consumer protection framework to comply with stringent regulations. Requirements to ensure data security, obtain clear and informed consent from consumers and provide transparent information about products and services have become essential to ensure compliance.

In addition, data privacy and security are also increasingly on the regulatory horizon, with aspiring fintech hubs Singapore and Hong Kong having introduced robust privacy protections for personal data. As such, “fintech startups need to invest in advanced cybersecurity measures and develop comprehensive data governance policies to meet regulatory requirements, which can be resource-intensive and complex to implement,” says Chong.

Bogardi believes that the main challenges facing testing fintech startups are actual implementation within the existing regulatory framework, which includes licensing issues (and associated costs) and the feasibility of cross-border models.

Taken together, “new licensing regimes, as well as business conduct rules and consumer protections, mean that previously unregulated players must quickly catch up in terms of compliance knowledge and expenditure,” he says.

Supportive government policies characterized by financial assistance, streamlined visa processes for international talent, regulatory sandboxes and clear regulatory guidelines would help keep fintech players in the market without stifling innovation, Bogardi adds.

As generative artificial intelligence (AI gene) appears in almost every aspect of the economy, the fintech industry is preparing to take advantage of its opportunities. Magnus notes that it will be interesting to see how AI capabilities can be leveraged to bring efficiencies to the fintech space.

“Artificial intelligence systems, especially those using natural language processing (NLP), can process and integrate regulatory changes 60 percent faster than manual methods. However, while the integration of artificial intelligence in the financial services industry is inevitable, it is necessary to proactively address the accompanying challenges.”

– Grace Chong, Drew and Napier

Chong shares Magnus’ observation about the intersection of artificial intelligence and fintech. In particular, Chong points out that artificial intelligence and machine learning are already being used for a variety of applications, including fraud detection, personalized financial services, credit scoring and risk management. These revolutionary technologies streamline decision-making processes and improve customer experiences by providing solutions tailored to their needs, he says.

“Artificial intelligence systems, especially those using natural language processing (NLP), can process and integrate regulatory changes 60 percent faster than manual methods. However, while the integration of AI in the financial services industry is inevitable, it is necessary to proactively address the accompanying challenges,” notes Chong.

One of these challenges is the proliferation of data, which increases the risk of leaks or breaches, especially in data-intensive fintech applications. Other key issues include the ethical application of AI in the financial sector, which has further highlighted the need for regulatory accountability.

“Resilience is a serious issue, and financial institutions need to have robust contingency plans in place in case their third-party vendors fail,” Chong says. “Accountability and governance are also top priorities for regulators, highlighting the need for a clear accountability framework.”

Norton Rose Fulbright’s Bogardi points out that while the trend of fintechs using AI is not necessarily new, the underlying large language models (LLM) have expanded the availability of the technology to a much broader segment of market participants moving toward total automation.

What is new in this case is that AI-based fintech platforms act in place of the user or on his behalf. “This means that many regulations governing wealth managers, financial advisors, accountants and even other professional services in the financial sector will need to be translated into technology that automates such services,” says Bogardi.

“It also raises new and interesting questions about regulation, for example in relation to robo-advisors,” he adds.