Regulating Fintech in Singapore

Welcome to Pacific Exchanges. A new podcast from the Federal Reserve Bank of San
Francisco. I’m Nick Borst.

And I’m Sean Creehan. We’re analysts in the country analysis unit here at the San
Francisco Fed. Our job is to monitor financial sector developments in Asia and as part of
the Feds public mission, share information and analysis with listeners like you. Today we
inaugurate the podcast with a series of episodes that look at the state of innovative
financial technology, commonly known as FinTech, in Asia.

FinTech is a buzzword that gets thrown around a lot, but what exactly is it? One simple
definition would be the use of software to provide financial services online or through
mobile phones. This can involve banks, but just as often involves startups. FinTech firms
operate in a number of sectors ranging from lending to personal finance, digital mobile
payments, and virtual currencies. We’re excited for you to join us in episodes to come as
we explore how FinTech is impacting people’s lives in Asia. In today’s episode we sat
down with Sopnendu Mohanty, the Chief FinTech officer for the Monetary Authority of
Singapore, or MAS for short. We invited Sopnendu to speak with us about the role of
FinTech in Singapore’s financial systems and the MAS’ approach to encouraging
innovation while managing risk.

So welcome to the San Francisco Fed Sopnendu, thanks for joining us. SO we wanted to
start, maybe you could tell us about the monetary authority of Singapore and the
FinTech innovation group that you lead.

So I am the Chief FinTech Officer for MAS. I have two jobs. I run the policy for FinTech or
Financial Technology and also do the [inaudible 00:01:39] in the space of FinTech. What
it means essentially is that we look at how do we get the new technology to the banking
sector by working with the banks, with the FinTech companies, and how do we bring
that ecosystem together so that the process of innovation becomes more natural than
what it is today. On the policy side I look at the broader risk and implication of the new
technology and what are the policy implications as we go forward and make it part of
the FinTech agenda for the financial sector.

So this position of having a Chief FinTech Officer is a relatively new development for
central banks. Can you talk about … What was the thought process in MAS that they
decided they needed a Chief FinTech Officer and have other central banks followed
MAS’ lead?

A very interesting question. I think it was not by plan. It so happened that while my
interview process was going on that they just decided that okay let’s go for the FinTech
as a corporate title. But I always fun of a Chief FinTech Officer because if you think
about 10 years back there’s something called dot-com and imagine you call yourself the
Chief Dotcom Officer and 10 years back you look and say it got busted. The Chief
FinTech Officer is actually a bit of … It has created a bit of confusion. What it essentially
means is Chief Financial Technology Officer because FinTech is not new, it has been
there for many years. Things have changed now if we compare against the dot-com era.
If we look at the dot-com era there are 3 things happening then and that’s why it got
busted. New technology was coming in, consumers were changing their mind from
analog to digital, and new business models were coming. 3 variables happening at the
same time led to this technology imploding and that’s when the bust happened. This
time it’s quite different. This time you have the infrastructure. You have consumers in a
digital mode, they’re no more analog. What we need is a good business model. So this
time around FinTech is going to stay, but for a … I’m going to really impact the industry
on a long run. They needed a Chief FinTech Officer who has to look at the changing
technology and speed at which they’re getting adopted by the sector. That’s the history
of having a FinTech officer. Also it sends a strong signal to the startup industry that the
banks and the regulators are willing to work with those startups as against the current
status quo of large incumbent technology company working with banks. I think that is
not really taken the banks to the latest and best technology available in the market.

So what do you see as the biggest opportunities for FinTech in Singapore and Asia more
broadly? Are there certain underserved markets or unsolved problems that traditional
financial sectors maybe not responding to.

So let me take the question in two parts before we answer the opportunity. When we
started putting together our strategy in place for what we are going to do in the next
few years we built something called the smart financial architecture. What it means …
We go to start with technology, given it is FinTech. We fairly understand well the Fin
part, but the tech part is where it’s the big mystery. We went through a little survey and
study around the tech part and we came together and put a broader 9 technology stack.
This essentially infrastructure technology which we believe the interplay very strongly
and they are going to effect the FinTech industry going forward. What are the
technologies? Cloud computing, machine learning, APIs, cyber security, payments. We
had a list of 9 technologies which we believed the industry should look at and then we
thought of applying these 9 technologies to [inaudible 00:06:07] class. FinTech until
now, if you look at the last 5 years is around payments and lending only. That’s where
the big news has been. We think that entire 9 technology can apply to 4 asset class.
Retail, corporate, financial markets, and insurance. So 9 technology, 4 asset class, but
for them to work effectively we need to put some public infrastructure which may not
be the interest of private of players to invest in. Things like payment rails, faster
payment rails. National identity, online KYC. National consent architecture. How do we
allow consumers to consent data in the internet of things so that it can be applied to
multi sector. We go to build in a public infrastructure where this 9 technology and the 4
asset class can run on. And then apply that to 3 segments: individual, corporate, and
small/medium enterprise. That’s the broader smart financial architecture. As a central
bank our job is not to direct technology, our job is to enable technology to be adopted
by the sector so what we do it we put the policy in place, put this financial architecture
in place allow the industry to experiment on those things. What other opportunity do
we see? We see a lot of opportunity in actually reducing banks operating expenses. If
you look at the broader FinTech portfolio almost 80% of those companies are what we
call them is FinTech are looking to solve banks problem. Only 20% are the disruptors.
We kind of hear more about those disruptors, less about those companies that are
trying to help bank. To the banks infrastructure, the cost, the efficiency is not
necessarily great, so a huge opportunity for FinTech companies to come and claim that
space. We see big opportunity in the efficiency, productivity, and make the systems
more secure. Of course there will be opportunity to disrupt some business model, but
we just have to observe it until it becomes [inaudible 00:08:24] significant for us. That’s
where we see the future is going.

That’s interesting. As you mentioned a lot of the attention gets focused on FinTech as a
disruptive force within the financial industry, but there’s also lots of potential for banks
to improve efficiency, cut costs, those sort of activities. What do you see as MAS’ role in
trying to bring together both FinTech startups and banks? You mentioned that your
trying to create a regulatory sandbox for them to experiment with. How do you go
about implementing this on the sort of ground level?

Actually we don’t go straight into the sandbox. There are 3 ways we encourage FinTech
company or banks to do innovation. We just say banks … If you think about … When I
spent the last 4 years before I joined MAS as the head of innovation for the retail side of
Citi Bank. One big struggle for bank’s innovation head was always to deal with the
compliance and the risk structure of the bank. They typically second guess the regulator
saying, “no, they’re not approved.” So we are encouraging banks to go and experiment
themselves with asking MAS approval. That’s very simple, step 1. If you are not sure
come to MAS and we can co-create. There are projects which risks are not known and
yo are not sure, MAS can come and participate in the process through a scheme
called …. [inaudible 00:09:55] scheme which MAS co-funds with the industry. We cofund
up to 70% of the project cost with a cap of $200,000. If that doesn’t work then
come to the last option: the sandbox. Sandbox is where we are not sure, the industry is
not sure, but there is a value in experimenting. So let’s put together a plan or a process
in production with … Constraints predefined and experiment for 6 to 9 months and see
the outcome and then decide about the right regulation after that. So sandbox is almost
the last option for this journey of experimentation. That’s how we see these 3 playing
together to help banks and the FinTech to innovate and the sandbox is available both
for the FinTech companies and for the banks, but when FinTech companies play in the
sandbox … When they exit out of that they’ve got to be part of the licensed
infrastructure. We cannot have a regulator going in that box so we kind of put a
constraint around the number of customers, the ticket size, transaction volumes, so that
is purely for experimentation not for making money.

Is there a length of time that the sandbox …

Yes, we are looking at somewhere between 6 to 9 months, but … That’s the last option
we have to tightly monitor that process and ensure that we are not creating risk in the
system, but that’s not a non-negotiable … Things like AMLCFD which cannot be taken as
an exception in the sandbox process. The rest we can try.

So as Singapore tries to attract FinTech startups to come establish their headquarters in
Singapore … While it is a large financial market in Asia it is still a relatively small
economy and I’m wondering if you can talk about how you see FinTech companies
scaling up to serve the broader region.

Very good question and I get this question regularly. Singapore is not a marketplace for
FinTech companies. We have 5.5 million people and that is not going to an excite a
FinTech company to come to Singapore. But we have the 4th largest … In some case 3rd
largest financial center after New York and London as a financial center hub. We have a
strong regional headquarter presence there. This isn’t because they’re there. The way
we have positioned ourselves is also as a FinTech hub, not as a marketplace. So if a
FinTech company wants to start the journey they need some place to deploy their
minimal viable product. With our policy support … With our ability to work with other
sectors and the regional headquarters of the banks we have created an ecosystem
where a FinTech company can come there and start their first proof of concept. The first
pilot. When a FinTech gets the first pilot successfully deployed plus we provide the
ecosystem support like getting VCs to support them and … Policies for them to come
and set their companies … They tend to get attracted to that business model and come
to Singapore. Do those initial work and then they scale out of Singapore by using
resources near Singapore. We have 2 billion people who stay within 5 hours of plane
ride near Singapore. We have [inaudible 00:13:45] which is roughly 0.6 billion, India 1.5
billion people. So Singapore becomes almost like a gateway for them to go and deploy
their solution across the region. Singapore is a nice place where they can register their
IP. They can register their headquarter. They can try out new experiments and they get
a policy support from us and then they use this policy support and they experiment as
their product set while they go to other regions to sell and talk to the respective
regulators and try to deploy the same product. So Singapore becomes an attractive
center point of creating those IPs and new solutions. With that model we will be almost
replicating our financial center model as a hub for Asia
Pacific when it comes to FinTech.

Now Singapore is clearly on the cutting edge of a lot of these FinTech technologies and
also in the regulatory space. Can you talk about what you see as best practices for other
financial regulators. Not only in the region but around the world to sort of promote and
nurture this FinTech industry while also trying to contain some of the risk you identified.

When we talk of FinTech or the new financially technology innovation … There’s a lot of
dependency on the other sectors. For example: a lot of FinTech companies working in
the space of insurance where they’re trying to bring real time IoT. Like for example your
health record data or your driving data and use those data real time to apply to your
premium computation. If you have a good driving behavior if you have good health
habits you will be charged a smaller premium for your insurance. Now that needs lot of
cross sectoral policy support. It needs multiple agencies to come together to provide
that policy framework for such a cross sectoral product to work. It is not only limited to
the financial sector. I think that’s a great practice which other … Regions can take a look.
How different agencies can come to together … Government agency can come together
and create a framework for FinTech to grow. Because of how small … In terms of as a
country the city state it is easier for us to do that, but I can understand why other
regions may not have that luxury of being flexible to bring multiples of agencies to
create a common framework for this industry to succeed in the way we have come
together and trying to build what we call a smart nation. Singapore has by 2020 an
agenda to become a smart nation. As part of that we have created a smart financial
center and that leads us to this multiple agency coming together to put a
comprehensive policy framework. So that’s clearly a best practice in … Other
jurisdictions should take a look at. The other big place is cyber security. As we get more
digital, as we get more connected, as we have IoTs all over the place the kind of
criminals focus will shift from analog to digital and that will create the other downside
of this opportunity. So we have to be very careful about that. Singapore is putting a lot
of focus to build national infrastructure around cyber security. More research in that
space. We are trying to bring great technology so that we can be ahead of those
criminals who are constantly looking at creating risk in the sector. So cyber security is a
big focus for us. A lot of policies are being looked at so that we build the right national
infrastructure for ensuring the cyber security strategy is well though through. It is not
limited to the financial sector, it is a broader implication because multi sector … For
example the [inaudible 00:17:59] have to be secure … Your [utilities 00:18:03] have to
be secure. It’s not about only financial sector has to be secure when it comes to cyber
security. It’s all inter-connected. So that’s the second good practice for other
jurisdictions to take a look at it. I think the rest everybody can replicate because talent is
there on the market. The financial systems are well established, well mature. What it
needs is better coordination and better inter-connection between different agencies to
provide the future framework for FinTech to succeed.

So you’re talked a lot about creating this … Domestic environment to foster FinTech, but
really in essence what you’re saying in terms of a smart financial hub … It relies on cross
border activity and that’s always been Singapore’s strategy. I’m wondering if we can talk
a little bit about cross-border cooperation. Maybe for a listener at home who’s less
familiar with the vagaries of global financial regulation. Sitting there with an iPhone or
an Android phone could in theory go onto an app and borrow from a bank in the United
States from Singapore. Of course, financial regulation makes it a little more complicated
then the technology might imply. What is the role for regulators here, how do
regulators cooperate across borders with some of these FinTech developments where …
Things can move quite quickly technically speaking, but there’s a lot more complicated
regulation to keep in mind.

I think that’s a good question. It is the most difficult part. I think you’re right … We can
create the most efficient process, most collaborative process in Singapore. We can
provide the most efficient experimental framework for FinTech to do their first product,
but as you rightly mentioned the success of FinTech companies is not what they do out
of Singapore. It’s what they do outside Singapore. So how do we work with the other
regulators so that there is some synergy in what we do? So cross-border is clearly a
challenging task for us so we are working with our fellow regulators across the region in
spaces like payments because that’s very fundamental. How do we create common
standard in terms of payment rails … The new payment infrastructure. We also were
looking at collaborating with other regulators nearby on some strategy projects. We
recently signed a FinTech partnership with the UK, FCAUK. Also we did a partnership
with ASIC in Australia. The idea of such partnerships by little partners is to create a
synergy in our policy making … Share our effort in FinTech space and eventually make it
easier in FinTech companies working in each others market to be able to deploy their
product in their respective market. So by these little agreements we are creating that
opportunity for FinTech to be cross-pollinated across multiple markets. It’s a long
journey, but I thin our progress to date has been very good.

Given how closely you work with FinTech startups and other people in the industry what
do you see as the big trends over the next couple of years that are really going to shape
things going forward and possibly things that people from the outside might not quite
recognize the scale or importance of what’s going on right now.

Big trends … I’m just skipping the obvious one of the payment revolution and the
lending side of the FinTech market which has been well documented and people know
about it. To my mind it is the insurance sector which will be completely reconstructed
because so much data driver … So much dependent on external data. As we see more of
IoTs coming to play. As we see more … Public infrastructures will be in place for such
data to be captured and shared the big data implication I think the industry that will
completely reconstruct and completely reconfigure itself will be the insurance sector,
which has historically not been that innovative. Both from a distribution perspective as
well as a consumer experience perspective. Also the product design itself.
The second big trend which I’m seeing more and more are in the … Making the financial
market platforms more efficient. The settlements. The entire transparency and the
processes and the cost of running large platform for a financial market will be subjected
to huge disruption. In fact, I did talk about it in some of my previous talks about … Really
the FinTech are not disrupting banks. They’re disrupting large tech companies who have
traditionally not been that progressive in deploying smart technology. So FinTech
companies are actually eating their share of engagement with the banks so when they
build great technology for all this back office infrastructure. The APIs, all the micro
services, they will significantly re-architect the core infrastructure of financial industry.

So they’re replacing some of the existing service providers.

Absolutely. I think that’s going to completely reshape itself. Especially once banks build
an API infrastructure, the open architecture, you will see thousands and thousands of
FinTech companies are building plugins to be plugged into the backend infrastructure of
the banks. Retail and corporate are known industry which will go through that shift in
the way the current status quo is going through a transformation. To me the insurance
adnt the financial market infrastructure are two big trends that are going to come out.
Of course people talk about Blockchain which is a topic we never skip in any of the
FinTech discussion and I strongly believe that that technology will definitely reshape the
financial architecture the system architecture of the finance industry. Two parts:
significant part of the Blockchain will re-architect the backend infrastructure and the
remaining will be the architecting the front end part of the experience. The settlement
part and those transparency and the processes and the security aspect of the processes.
So that’s … Those are the things which comes top of my mind when you think about the
future of FinTech.

So I know you hold a few patents perhaps related to FinTech. Maybe on that Blockchain
point this can be a very confusing topic to many people that … Maybe pretty educated
on other topics within finance. Why do you need Blockchain to solve some of those
problems that you just talked about?

Absolutely. I think … If you think about at least the financial sector we can use existing
technology to solve those issues, but Blockchain does bring some uniqueness. The way
they have … The system is designed. Especially the underlying [inaudible 00:25:19]. If
you look at current technology architecture is a word that is central structure always
validating the transaction. I think that the entire process of this implies validation. Will
force system architects to look at designing the system differently. I think that to me is a
big difference when it comes to Blockchain. But you’re right, existing technology is good
enough to re-architect the processes, but any new technology attracts a lot of good
attention. We also are not that much … I must admit we are also not that much
competent enough to comment on that and I make this joke … I was in [inaudible
00:26:06] couple of months back somebody asked this question about Blockchain and I
made this joke that it is like … Applying a technology which is supposed to fly the planes
to railroad. So if Wright brothers in 1905 would have come to a regulator to talk about
their new mode of transport which will fly people the only regulators then were the
railroad regulators. If you think about central bank being asked an opinion about
Blockchain which is almost opposite of central bank, this interlaced process, there’s a
conflict of opinion there. I think it’s going through the process of understanding.
Anybody claims that they understand Blockchain, well … I’ll suspect that’s not true. We
still have to experiment a lot before we can make some comment on Blockchain and
that’s what Singapore is doing. We have created a lot of experiments ongoing before we
make a final choice in what we should do.

Great, well thank you for joining us. This has been a great discussion.

I hope it is useful to all of you.

Excellent, thank you.

We hope you enjoyed today’s conversation with Sopnendu. For more episodes like this
you can find us on iTunes, Google Play, and Stitcher. For even more content look up our
Pacific Exchange blog available at frbsf.org. Thanks for joining us.