Regulating Fintech in Singapore

By Nicholas Borst and Sean Creehan

We are excited to launch Pacific Exchanges, a new podcast from the San Francisco Fed’s Country Analysis Unit. In the months ahead, our analysts will interview experts from the world of economics and finance to explore developing trends in the Asia-Pacific.

The first episode series of Pacific Exchanges examines the development of financial technology—commonly known as “FinTech”—in Asia, assessing how technology impacts the financial system, affects access to finance, and changes the competitive landscape for banks. With experts like the Chief Fintech Officer of Singapore’s central bank, a senior officer at the Bill & Melinda Gates Foundation involved in technology-enhanced financial inclusion, and a Stanford University scholar focused on FinTech’s potential for small business lending, we discuss what makes financial technology in Asia so unique and exciting.

In Episode 1, we sat down with Sopnendu Mohanty, the Chief Fintech Officer at the Monetary Authority of Singapore (MAS). We invited Sopnendu to speak with us about the role of fintech in Singapore’s financial system and the central bank’s approach to encouraging innovation while managing risk.

Singapore is one of Asia’s leading financial centers, a hub of global trade, and a natural place for fintech to take root. The rapid growth of Singapore’s fintech sector has implications for both the financial sector and real economy. The MAS has recently announced a new “regulatory sandbox” approach to encourage existing financial institutions and non-traditional firms to develop fintech solutions in Singapore. The MAS itself has acted as a middleman to bring together banks and startups and has created a “regulatory sandbox” a space for experimenting with new technologies on a small scale without running into regulatory barriers.

As Chief Fintech Officer, Sopnendu is responsible for creating MAS’s development strategies and regulatory policies around technology innovation to “better manage risks, enhance efficiency and strengthen competitiveness in the financial sector.” Prior to joining MAS, he was with Citibank as their Global Head of the Consumer Lab Network and Programs, which included driving innovation programs and managing innovation labs across multiple geographies globally.

Sopnendu has held various roles in technology, finance, productivity, and business development over the past twenty years and he has been awarded four patents in the area of retail distribution of financial services.

Transcript

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Nicholas Borst:

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

Sean Creehan:

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.

Nicholas Borst:

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.

Sean Creehan:

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.

Sopnendu Mohanty:

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.

Nicholas Borst:

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?

Sopnendu Mohanty:

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.

Sean Creehan:

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.

Sopnendu Mohanty:

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.

Nicholas Borst:

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?

Sopnendu Mohanty:

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.

Nicholas Borst:

Is there a length of time that the sandbox …

Sopnendu Mohanty:

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.

Sean Creehan:

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.

Sopnendu Mohanty:

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.

Nicholas Borst:

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.

Sopnendu Mohanty:

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.

Sean Creehan:

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.

Sopnendu Mohanty:

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.

Nicholas Borst:

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.

Sopnendu Mohanty:

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.

Nicholas Borst:

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

Sopnendu Mohanty:

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.

Sean Creehan:

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?

Sopnendu Mohanty:

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.

Sean Creehan:

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

Sopnendu Mohanty:

I hope it is useful to all of you.

Nicholas Borst:

Excellent, thank you.

Sean Creehan:

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.


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