Fintech and fraud, like a horse and carriage
By Lum Ka Kay March 9, 2016
- Digitisation comes with great risks, SC warns
- Working with startups on fintech regulatory support
FINANCIAL technology (fintech) players should be cautious, because the increasing digitalisation of the financial services industry brings with it an extra element of risk, warned the Securities Commission Malaysia (SC).
SC executive director and general counsel Foo Lee Mei (pic above) said that the democratisation of the industry has also increased the potential and impact of fraud, citing global examples like the Bernie Madoff and Ezubao Ponzi schemes.
The former disguised itself as a wealth management company while the latter disguised itself as a peer-to-peer (P2P) lending company, and together caused a total loss of over US$70 billion involving more than a million investors around the world.
“Clearly the democratisation of finance that has been made possible by technology may affect investor confidence, given its far-reaching consequences,” she said in her introductory speech at the recent SWIFT Business Forum Malaysia 2016 in Kuala Lumpur.
Foo said that the digitised nature of the capital market and the huge volume of transactions and information processed by exchanges and market participants make it extremely exposed and vulnerable to cyberthreats.
In the Global Risk 2015 report by the World Economic Forum, 90% of companies worldwide recognised that they were insufficiently prepared to protect themselves against cyberattacks, she added.
According to the Centre for Strategic and International Studies (CSIS), cybercrimes cost the world economy about US$400 billion per year.
But the SC is also aware of the potential of new technology, with Foo saying that the Commission would be working with the fintech community to understand the needs of startups so that it can provide the proper regulatory support.
“SC has recently established alliance of the fintech community, aFINity@SC. Through this, we have gathered 43 expressions of interest in fintech which included P2P platform operators, blockchain technology providers, and global advisors.
“Discussions and focused group meetings have provided invaluable feedback to the SC in designing the regulatory framework for P2P lending in the capital market,” she said.
She argued that capital market players would also need to evolve, acquire new skills, search for a competitive edge, and rethink their long-term strategies in order to remain relevant.
To streamline and consolidate cybersecurity initiatives, the SC will issue regulatory guidance to provide a base for constructive engagement with industry players, and to monitor developments in cybersecurity practices in general, Foo said, with giving any specifics.
The SC had first announced its fintech initiative at the World Capital Markets Symposium 2015 in Kuala Lumpur last September.
Such fintech regulation would be “flexible and nimble” to support innovation and digitisation, Foo said.
Tech outpacing regulations
Meanwhile, in a discussion at the SWIFT Business Forum titled Fintech Evolution in the Asean Community, a panellist argued that technology would always be one step ahead of regulations.
S.T. Chua (pic above), chief marketing officer of fintech startup Perfectsen, said this is one reason why his company helped its first customer, Malayan Banking Bhd (Maybank), explain its solution to the central bank, Bank Negara Malaysia.
“As a startup, that is sort of our role – to explain the technology, as regulators actually prefer us to reach out to them via a bank,” he said.
Chua argued that financial institutions have to adopt fintech in order to be more competitive.
“It’s very simple: If you don’t do it, others will. It’s more of a mindset issue – you should look at how to disrupt yourself before someone else disrupts you,” he quipped.
The Fintech Evolution in the Asean Community panel session was moderated Philippe Dirckx, the head of markets and initiatives at SWIFT Asia Pacific; and included Chris Leong, chief strategy officer of digital payments technology provider Soft Space International.
Perfectsen and Soft Space were semi-finalists at SWIFT’s Innotribe fintech startup competition in 2013 and 2014, respectively.
Banks and hand-holding
Soft Space’s Leong (pic above) argued that if banks do not attend to the needs of their more tech-savvy consumers, they will lose them to tech companies that do so.
But he also advised fintech startups to “go slow” with the banks first.
Soft Space started off with an mPOS (mobile point of sale) solution that converted tablets and smartphones into machines that could accept credit card payments.
“A few years ago, fintech wasn’t as popular as it is now, so when we designed our solution we knew our target audience was going to be different from the ones in the United States, for example,” said Leong.
“Regulation in this region is still heavy, so we provided a business model that did not conflict with regulations and the banks’ own policies, as much as possible.
“This worked out well for us because if we tried to introduce something too drastic, it would have been very difficult for the banks to work with us,” he added.
Perfectsen’s Chua argued that the key to collaboration between fintech startups and banks is the ability of the former to solve the latter’s pain points.
“You (startups) have to create a system that’s better than the initial one,” he said.
But the bank have to let the startups know what their pain points are, as startups do not have as much insights into financial institutions as they do, he added.
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