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To attract VCs’ attention, should startups go with crowdfunding or angel investing?

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Roughly a decade ago, there was a big shake-up to the startup world. Entrepreneurs looking to fund their latest business venture no longer had to seek seed capital from traditional sources such as angel investors or wealthy individuals. Instead, a markedly different financing option was now trending: crowdfunding.

By posting their projects on Kickstarter, Indiegogo and other online platforms, entrepreneurs could elicit small amounts of capital from large numbers of people to raise sufficient capital to launch their ventures. Crowdfunding offers multiple benefits over angel financing: access to a bigger pool of investors, the ability to retain autonomy over business matters, and an opportunity to test product marketability, just to name a few. “It also has a much lower entry barrier,” says Jungpil Hahn, a professor at NUS Computing whose studies open innovation.

By virtue of these factors, projects that might not have otherwise gotten the attention of angel investors managed to garner sufficient interest on the Internet and were successfully launched. For instance, some of Kickstarter’s most well-known campaigns include a smartwatch called Pebble that garnered $20 million in crowdfunding, hitting its $500,000 goal in mere minutes; a cooler box with Bluetooth speakers and a built-in blender that received over $13 million in backing; and a card game about exploding kittens that drew nearly 220,000 funders — making it the most-backed project in Kickstarter history.

“The trouble is, you see a lot of these very successful high-profile cases on crowdfunding websites, but you very rarely see those actually mature from the garage and go out and incorporate into legitimate companies, that then grow into the next unicorn,” says Hahn. The startup behind ‘The Coolest Cooler’, for instance, ran out of money five years after it first launched.

In most instances, the natural trajectory of a startup that has secured initial funding is to develop a product and advance its business models, before seeking larger amounts of money from venture capitalists (VCs) — investors who provide funds in exchange for an equity stake or shares in a company’s profits — to grow further. “That’s the next milestone threshold,” explains Hahn.

But as crowdfunding began to grow in popularity, a question intrigued him and his collaborators Keongtae Kim at the Chinese University of Hong Kong and Sunghan Ryu at Shanghai Jiao Tong University: “We wondered how crowdfunding might influence subsequent VC investments in the later stages of a startup’s financing lifecycle,” says Hahn.

“Basically, how would we help an entrepreneur answer this question: ‘Should I go for angel investing or should I put my project on a crowdfunding platform? Which one would yield me a higher chance of getting subsequent VC funding?’” he says.

An easy route in, but a harder one up

To figure out the answer, the three researchers gathered data on 283 technology-related startups that were successfully crowdfunded on Kickstarter between 2011 and 2013. They then used Crunchbase, a database that provides information on public and private companies, to construct a comparable sample of 708 angel-financed startups from the same period.

“We tried to match the data to get very similar companies in terms of what they offer, the composition of their founding and management team, geographical location, and so on,” Hahn explains. “It’s so we can have a fair comparison about who is more or less likely to attain the next step of fundraising through VC funding.”

What he and his collaborators found was discouraging for crowdfunded startups — on average, they were 38.9% less likely to receive follow-on VC investments compared with angel-financed startups. Additionally, the effect was more pronounced when firms were based outside of startup hubs like Boston, New York, and San Francisco.

Of the findings, which were published in the journal MIS Quarterly in September, Hahn says: “You might get early success with crowdfunding, but it might hamper you in the long run with regard to subsequent venture capital, at least in the current startup financing ecosystem.”

He believes it’s because when a startup is crowdfunded, it somehow signals to venture capitalists that it’s of a lower-quality than an angel-invested one, even though that may not necessarily be the case. “Startups that already have angel investing usually possess the properties VCs are interested in, so VCs are more familiar with and confident in evaluating such startups,” explains Hahn.

“But I think that’s going to change over time and VCs will learn to adapt as they have more opportunities to evaluate crowdfunded firms,” he adds.

Until then, Hahn has this advice to offer entrepreneurs: “To succeed in this game, if you go with crowdfunding, then you want to make sure that you produce the right signals to overcome this challenge and supplement some of the things that angel invested firms might outperform you in — for example, having a strong management team or being affiliated with good advice networks. This will help increase your likelihood of getting VC funding.”

Same signal, different interpretation

Interestingly, Hahn and his collaborators found the converse to be true when it came to corporate VCs (CVCs): they appeared to favour crowdfunded startups over angel-invested ones. Unlike independent venture capitalists (IVCs), CVCs are usually established corporations that invest in startups “mostly for strategic synergies,” explains Hahn. “They have a mandate to identify products or technologies that will complement the current ones their parent companies have.”

Because CVCs have such a goal in mind, they’re more likely to pay attention to how viable a startup’s product is, says Hahn. “If you already have something that has achieved product-market fit, as is usually the case with crowdfunded startups, it provides a much easier sell to CVCs. But with angel investing, the product specificity or refinement is much less and it’s more about saying, ‘Oh, you have a good team that receives good advice, so everything will be good.’”

“CVCs have a different kind of interpretation scheme compared with investment venture capitalists,” he says. “They respond differently to quality signals from crowdfunding and angel investing because their investment objectives and strategies are quite different.”

At the end of the day, entrepreneurs need to carefully weigh the pros and cons when selecting which early-stage funding source to go with as they’re starting out, says Hahn. Crowdfunding allows one to observe potential market demand, attract early adopters, and garner feedback to improve the product being developed — which can be crucial to a startup’s commercial and technical success. Thus, crowdfunding success can serve as a quality signal to CVCs. However, corporate venture capitalists comprise the minority of later-stage investors, and their funding often tends to be more volatile compared with IVCs.

So if a startup requires a series of equity financing rounds, specifically from IVCs for rapid growth, then pursuing angel investing would be the better choice, says Hahn.

In the future, he hopes to explore other aspects of the signalling-investment relationship. “One thing that I’m really interested in is how evaluations change over time, sort of a longitudinal study,” explains Hahn. “If you want to get funding, you often have to include the buzzword of the day — five years ago, it was blockchain; today, it’s generative AI. But nobody really fully understands these things.”

“So in that context where the ecosystem has very little information on such emerging technologies, how do signals work? How do these evaluation schemes change with time?” he asks. “I’m very interested in studying that.”

Why did MAS impose additional regulatory capital requirements on DBS?

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Summary:

In May 2023, MAS ordered DBS to set aside additional regulatory capital, in response to disruptions to the lender’s digital banking and ATM services. This was not the first time authorities had punished DBS by asking it to set aside regulatory capital and neither is DBS the only bank in Singapore that has been asked to do so. In this article, we explain what regulatory capital really is, and why MAS has been asking banks to set aside more of it in response to things like service outages. 

Why did MAS impose additional regulatory capital requirements on DBS?

Regulatory capital is a word many at DBS bank are probably hearing a lot of of late. 

Authorities in Singapore ordered DBS to set aside around 670 million dollars in regulatory capital after the bank’s digital banking and ATM services were down for the third time in 18 months. 

In addition to the 930 million in regulatory capital the bank was previously asked to put away in February 2022 for a widespread outage of digital banking services then, this brought the total additional capital requirement the company must set aside to 1.6 billion dollars. 

DBS, however, is not alone. 

The lender OCBC was slapped with an additional 330 million in capital requirements in May 2022 for its deficient response to a wave of spoofed SMS phishing scams. 

But what exactly is regulatory capital, why is MAS asking banks to set aside more in response to supposed deficiencies, and what does it mean for banks, the financial industry, and consumers? 

What is regulatory capital?

Financial institutions, and banks in particular, face a lot more scrutiny from regulators than say a business like a banana stand – and with good reason. If a bank were to run out of cash, lose money, or otherwise run into trouble, depending on the size of the bank, millions might be affected. This includes retirees who might lose their life savings, as well as small businesses that might rely on the bank for their daily operations. 

Thus, regulators often require banks to set aside cash for the rainy day – what is known as capital requirements. 

So say a bank has 10 billion dollars, it might be required to stow away 1.5 or 2 billion of those dollars. In the event the bank makes a bunch of bad loans, or say loses money by making an unwise investment decision, the money set aside acts as a buffer to absorb such losses and ensures that the bank will still remain solvent. 

In the absence of laws, banks might choose to maximise returns to shareholders and lend or invest as much money as possible, which may place the bank in a tricky spot should things head south. 

Hence, regulators step in to enforce such capital requirements, to ensure the stability of vital financial institutions like banks, a key mandate for them apart from things like the protection of consumers and the prevention of financial crimes. 

There are a couple of capital requirements that banks are subject to – one very common type requires banks to set aside a certain amount of “high-quality, full loss-absorbing capital”, which often means capital that does not result in any repayment or distribution obligations, in relation to “risk-weighted assets”, assets valued with their risk taken into account, at a particular ratio. 

Influential here are the Basel Accords, international banking standards, which, among other things, establish guidelines for bank’s capital adequacy. 

By upping capital requirements in response to bank’s failures, the MAS has creatively made use of what is, on its face, a safeguard to protect consumers and account holders, and made it a tool in its toolkit of punitive measures that can be imposed on banks here for missteps. 

In DBS’s case, MAS required it to set aside 1.8x its risk-weighted assets in May 2023, up from 1.5x previously. 

Being forced to sit on more of its capital, which can otherwise be deployed to generate profits or enrich investors with dividends, will hurt banks — potentially making them less profitable and less desirable to shareholders.

But why? 

In the increasingly cashless world we live in, mobile transactions are king. People use payment apps everywhere, from mom-and-pop stores to luxury retailers. 

When digital banking services are down – this affects not just the consumer who might use digital payment apps to pay at hawker centers, but also the hawkers themselves who might see a decrease in business, and perhaps even food delivery riders who might be forced to get by with lesser deliveries given that the payment on food delivery apps is often linked to digital banking services. 

Digital banking platforms support not just the average consumer, but also people like high-frequency traders and FX traders. Any service outage hurts their rice bowl directly and can have a huge financial impact on them. Punitive action like increasing regulatory capital requirements thus ensures that banks take every step possible to ensure that their digital services are reliable by punishing their failures. 

While in theory consumers can move their money out of a bank should there be frequent service disruptions there, the reality is that there are not that many other options, particularly in Singapore. Moreover, even if a 12-hour or 24-hour service outage is not enough to get customers to flee with their money, it is disruptive enough to consumers, businesses and the economy as a whole that regulators are justified in stepping in to take action, sending a message to all banks that essential financial services need to be continuously delivered to customers at all times with no excuses. 

There does remain the risk that such measures prevent innovation and the upgrading of digital services from banks. After all, every new line of code and every new change made to digital platforms increases the risk of mobile applications malfunctioning, servers crashing, and things going wrong. The threat of not just backlash from customers, but punishments in the form of having to set aside more regulatory capital, might disincentivize change. 

That said – perhaps being deliberate about every new step or new addition may not be the worst thing in the world for banks. Given their sheer importance to the country and our economy at large, banks can’t afford to move fast and break things like say a disruptive start-up. 

Under a microscope 

With digital banking services increasingly becoming the primary banking services that consumers and businesses rely on for both their daily living and their day-to-day operations respectively, regulators both in Singapore and elsewhere, need to keep an eye on banks. 

 

This should involve not just punishments after service outages, but also pre-emptive measures including regular cyber security audits, penetration testing and the provision of guidance to banks that may need some help in becoming ready for the 21st century. 

Meanwhile, time will tell if being asked to set aside additional regulatory capital is sufficient, or if more punitive measures are required to get banks to up their digital game.

Navigating the Fintech Frontier: Unraveling the Challenges Confronting Digital Banks in Singapore

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In recent years, #digitalisation has been the talk of the town as financial services firms seek to differentiate themselves and meet evolving customer demands. Traditional financial institutions also find themselves competing with Fintech players that offer full-fledged #digital #banking services. In this article, we would be reviewing the value proposition of digital banks and challenges ahead for them.

Recently, the digital banking industry in Singapore has seen an influx of interest due to the attractive incentives offered by digital banks. Nonetheless, there remains skepticism surrounding the potential profitability of this business model and the adoption rate of digital banking services. Here, we evaluate the value of full digital banks, review associated trends, and examine potential factors that could affect the uptake of digital banking in Singapore. To shed light on the above issues, we will delve into the value proposition of full digital banks in Singapore and examine some potential factors that may affect the adoption rate of digital banks in Singapore.

Background: Context 

In 2020, the Monetary Authority of Singapore (MAS) demonstrated its commitment to making Singapore into a world-leading financial centre by granting 2 digital full bank licences and two digital wholesale bank licences. This opening of the digital banking sector marks an important step in providing customers with increased choice in financial services and lowering the barrier of entry for greater innovation and competition in the financial sector. Unlike traditional banks, digital banks do not have any physical branches thus all banking activities are carried out online. This move is important because it allows customers to access a broader range of banking services, with the potential for increased access to credit, payments, and other services enabled by the growth of digital banking technology. Digital banks can be broken down into 2 primary categories, digital full banks and digital wholesale banks (refer to Figure 1).

Digital full banks are online platforms built from the ground up to compete with traditional retail banks. They deliver the same range of banking services as traditional banks but with a stronger focus on customer experience and digital infrastructure. These banks offer the full spectrum of services, from savings, current accounts, lending and payments for both retail and corporate banking. They are focused on creating an easy-to-use customer experience that is tailored to the digital world.

Digital wholesale banks, on the other hand, do not serve retail customers. Instead, they focus on providing banking services to non-retail customers, such as small and medium-sized businesses (SMEs). They provide services such as commercial lending, trade finance, transaction banking, merchant transactional services, and more. These banks are often part of larger organizations that provide financial services for a wide range of customers, including the business sector. They have become popular for clients who need more complex banking services and look to access these through an online platform.

Type

Digital Full Bank

Digital Wholesale Bank

Target Group

Serves both retail and non-retail customers

Only caters to the SME and other non-retail customers

Notable Digital Banks

  1. GxS Bank (Singtel & Grab)*
  2. MariBank (Sea Limited)*
  3. Trust Bank (Standard Chartered and Fairprice Group)
  1. Anext Bank (Ant Financial)
  2. Green Link Digital Bank (Greenland Financial Holdings, Linklogis Hong Kong & Beijing Co-operative Equity Investment Fund Management)

*Sign-ups are by invitation-only 

Figure 1: Notable Full-fledged Digital Banks in Singapore

As Singapore embraces the rise of digital-only banks to ride the growing wave of digitalisation in the overall economy, we observed great interest from local and global firms when MAS called for applicants.These four awardees were selected from a pool of 14 applicants after a rigorous selection programme. 

Two pioneering super apps from the region, Grab and Sea Limited, the company behind the Shopee e-commerce platform, have recently launched their digital banks in Singapore – GxS and Maribank respectively – marking a major milestone in the region’s shift to a new era of digital banking. Built on the existing trust already found within the company’s expansive consumer bases, it’s no surprise that these heavyweights of the region are starting to expand their reach into financial services. With such a captive audience to leverage off, GxS and Maribank have a clear advantage over competitors in terms of acquiring banking customers from the start. 

A year on, some of these banks have already started to launch their operations and acquire customers aggressively through various marketing strategies. In March of 2023, digital banking services from Maribank launched with an exclusive invitation structure, introducing the newest digital bank in the country two years after the Monetary Authority of Singapore issued four new licenses. Just two months later, GXS extended its array of financial services with the launch of its consumer loan market, driving new excitement and excitement within the digital banking sector.

Why they may be more attractive than banks

With intense competition for acquiring customers, digital banks have been increasingly aggressive in their marketing campaigns. 

Trust Bank, for example, launched by Standard Chartered and Fairprice Group on 1 September 2022, has been especially proactive in its customer acquisition drives. As part of its customer-acquisition strategy, it offers one of the highest interest rates in Singapore at 2.5% p.a. with no minimum account balance requirement. Trust Bank also integrates into the Fairprice Group’s ecosystem, allowing customers to earn rewards on their grocery and food spend when they transact using Trust Bank accounts at NTUC Fairprice, Kopitiam, Cheers and Unity outlets. Over the first month, the bank handed out impressive rewards worth $42 to all new sign-ups, including $35 worth of FairPrice e-voucher, free 1 Kg Superior Fragrant Rice and a Free KopitiamSignature Breakfast Set. This successful marketing gimmick allowed Trust Bank to acquire an impressive 100,000 newly registered customers aged 18 to 90 within 10 days of its launch.

Despite this impressive feat, some are concerned about the sustainability of such a heavily incentivised business model, as Singapore already has a small unbanked population of 2%. It remains to be seen whether digital banks can go beyond offering discounts and rewards if they want to compete with traditional banks. As it stands, there are still several hurdles that digital banks have to overcome before they become a mainstream option.

Figure 2: Trust Bank’s Savings Account

Why people may still prefer traditional banks over digital banks

  • Banks’ Digitalisation Efforts Are Equally Strong

Singapore’s leading banks have made strong efforts to ensure their digital banking offerings remain competitive in the age of digitisation. DBS Bank was recognised as the “World’s Best Bank” of 2022 by Global Finance and has been the subject of digital transformation studies from world-renowned business schools such as Harvard and INSEAD. These established banks boast mobile applications like DBS PayLah!, which offer a suite of lifestyle features to its 2 million users for activities such as ticket-booking, ride-hailing and tracking card reward points. This puts full-fledged digital banks in a difficult position as they must compete against formidable incumbents, proving a challenging path to profitability.

  • Incumbent Banks offers a wide variety of products for different needs

Incumbent banks remain the preferred banking option for consumers due to their immense variety of financial products available. In contrast, digital banks such as Trust Bank may begin by only offering simpler core products – Savings Accounts, Credit Cards, and Insurance. While Trust Bank offers attractive savings account features such as fee waivers and grocery savings, traditional banks offer a much greater range of products such as foreign currency accounts, timed deposit accounts, and Child Development Accounts in conjunction with the Singapore government’s Baby Bonus Scheme.

This variety of products is integral to the profitability of a bank, and the increased competition from traditional banks coupled with the limited profitability of digital banks may detrimentally affect their ability to innovate and introduce new products to appeal to consumers.

It is clear that while digital banks offer excellent savings account features, to compete with incumbents they must think of ways to diversify their revenue streams and innovate, rather than attempting to differentiate themselves solely through rewards and fee waivers that may not be sustainable in the long-term.

  • Incumbent Banks’ customer experience journey fosters greater trust with customers, especially older ones.

While digital-only offerings are key highlights of digital banks, they may also pose some challenges when it comes to encouraging adoption. This particular barrier to adoption may be especially relevant to the elderly in Singapore. As digital technology evolves, elderly may struggle to keep up with it. As seniors generally lack familiarity with technology compared to the younger generation, they may be deterred from using services offered by digital-only banks. As mentioned previously, digital banks do not have physical branches and should customers require assistance, it is mainly through virtual means. Although traditional banks focus on digitalisation, they still have many branches in different parts of Singapore. These branches are strategically located and can be found in shopping malls and neighbourhoods. When in need of assistance, customers can simply walk into any of the branches and consult the physical staff there. These face-to-face interactions can translate into greater trust between customers, especially elderly who are not that tech-savvy,and traditional banks. In comparison, there is a lack of visibility of digital banks in customers’ daily lives apart from their marketing campaigns. The above analysis suggests that pure-play digital banks should actively foster trust between them and customers, particularly the elderly, through various means such that users are more confident about the banks’  capabilities.

There are downtimes for technologies, and even banks are not spared by technological breakdowns. For instance, the digital services of DBS Bank suffered two outages in just 16 months. During each incident, users were unable to access online banking platforms such as PayLah! E-wallet and DBS digibank, causing much inconvenience and outrage among bank customers, especially those who have to transact urgently. During the most recent incident on 29 March 2023, DBS had to extend the opening hours of all DBS and POSB branches by two hours so that customers can continue to transact using their physical DBS/POSB cards through ATM machines. As can be seen, during technological disruptions, DBS still has its physical bank branches and ATM machines to fall back on and customers can still perform bank transactions, though it may be a hassle for some. While certain digital banks such as Trust Bank have a physical centre that users can visit, it only serves as an Experience Centre and is unable to function as a bank branch and aid users in carrying out account-specific activities and address transactional disputes. In the event that users need to seek help, they can only do so by utilising in-app chat or to call them. Thus since full-fledged digital banks do not have physical branches or ATM machines, users may be denied of conducting any bank transactions should there be an outage of digital banking services. 

To mitigate this, digital banks may consider partnering with physical retail stores if they want to offer users means to transact physically during outages and yet save on physical branches and ATMs. On that note, Singapore’s digital banks can look to Kakao Bank, Korea’s first profitable and listed virtual bank for insights. While Kakao Bank has no physical branches, it has established partnerships with convenience stores such a 7-11 to act as transaction outlets for it customerss. With that, Kakao bank account holders can withdraw cash at ATMs in the  24/7 convenience stores. Not only does this allow Kakao Bank to serve customers who are still demading cash withdrawal and deposit services, such partnerships is estimated to be able to bring down costs by as much as 30% according to industry experts.

In conclusion, despite the benefits afforded by digital banks, an overall shift in mindset is required before these online services fully penetrate the banking market. For digital banks to remain competitive amidst a field of traditional lenders, creativity must be employed to draw in and retain users in longer-term relationships – an effort that may prove to be the defining factor in establishing digital banks as the dominant force in banking.

 

What makes Singapore ASEAN’s Fintech Hub?

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With a steady stream of investments pouring in, Singapore is solidifying its position as the financial technology (fintech) hub of Southeast Asia. The government has also been actively promoting its #fintech industry, offering a range of incentives to attract startups and global companies alike. As a result, Singapore has emerged as the go-to destination for fintech firms looking to expand in the region. With a supportive regulatory environment, top-notch infrastructure, and a pool of skilled talent, Singapore is well-positioned to maintain its leadership position in #ASEAN’s fintech landscape. In this article, we will be looking at how Singapore is ideal for Fintech firms to thrive.

In the previous article, we talked about Indonesia’s booming Fintech industry, in this article, we will be focusing on Southeast Asia’s Fintech Hub, Singapore. Though both are part of the  Association of Southeast Asian Nations (ASEAN), Singapore and Indonesia have very different macro environments and pose different opportunities for Fintech investments. 

Firstly, Singapore has a much smaller population of only 5.4 million compared with the 273.8 million in Indonesia. Secondly, Singapore also has a relatively more mature financial system, especially in terms of financial regulation. As such, when compared to Indonesia, Singapore has a smaller population of underbanked and unbanked. Despite the seemingly smaller market size which may be deemed as unattractive for Fintech firms, Singapore has successfully anchored its position as Asean’s Fintech hub and is now home to 40% of the region’s Fintech firms. Even during the pandemic, Singapore continues to bag nearly half of ASEAN’s Fintech funding, making her the top fintech investment destination. 

There may be several reasons why Singapore has risen to become Asean’s Fintech Hub.  We outline 4 below.  

  1. In FinTech as in many other parts of the financial services ecosystem, Singapore is recognised as the “springboard” for Fintech firms to access other ASEAN markets, rendering moot her constraint of having a small market size. Often, Fintech firms looking to expand into the ASEAN market will choose to leverage the country’s pro-business policies and set up their regional headquarters in Singapore. One such example is Futu Holdings Ltd., a Hong Kong-based Fintech firm focusing on investment offerings for retail investors. When asked about the rationale behind the move, Leaf Hua Li, CEO of Futu Holdings Ltd., said that “expansion into Singapore is a strategic decision to serve as a bridge into the rest of Southeast Asia.” Executives’ confidence in Singapore further reinforces its status as an attractive regional investment hub despite facing strong competition from Hong Kong, our Asian counterpart, which has also been dubbed one of the top financial hubs globally.
  2. Despite the fact that Singapore’s population is very small, it is actually very diverse. Specifically, the country is home to one of the largest expatriate and migrant communities in Southeast Asia. For some Fintech firms, this characteristic makes the country an ideal destination as these communities are the target users of their home country’s Fintech offerings. One prominent community in Singapore is the community of Chinese nationals, which supposedly constitutes 18%  of the country’s foreign-born population. This has contributed towards an influx of Chinese Fintech firms to serve Chinese citizens and Chinese firms in Singapore. The above phenomena can be observed from the presence of remittance fintech firms such as Panda Remit. Backed by Lightspeed, Panda Remit aims to provide safe, convenient, low-cost money transfer service to overseas Chinese. 

Frequent visitor’s to Singapore’s Chinatown may have noticed the numerous Panda Remit advertisements in the MRT station and around People’s Park Complex (see Figure 1). As its name suggests, Chinatown is where many Chinese nationals and Chinese vendors congregate, and naturally, Chinese Fintech firms will focus on places commonly frequented by Chinese nationals for their marketing efforts. Once again, this shows that the diverse Singapore population brings opportunities for overseas Fintech firms who want to expand and serve their citizens abroad.

Figure 1: Chinese Fintech Panda Remit’s billboard around People’s Park Complex
  1. Singapore’s growing wealth management sector also poses a great opportunity for many local Fintech firms. Today, we see that many of Southeast Asia’s top Wealthtech firms are based in Singapore (see Figure 2). According to a report from KPMG and Endowus, venture funding for WealthTech in Singapore has increased by sevenfold from $23 million in 2017 to $161 million in 2022. Apart from having a diverse population, Singapore is also home to a significant pool of high net worth and ultra high net worth individuals, allowing the country to be the 3rd largest wealth centre in the world. According to PwC, high net worth individuals are enthusiastically adopting technology and that 47% of HNWIs under 45 who do not use robo-services would consider using them in the future. This would translate into willingness to pay and strong domestic demand for Wealthtech offerings, which has also allowed Singapore-based Wealthtech firms to thrive. Over the years, we have seen that these Singapore-based Wealthtech firms are making their strides in terms of expanding into other regions. For example, since its inception in 2015, Funding Societies has also expanded into the Malaysia and Thailand markets, making it the largest SME financing platform in the region.

Fintech Firm 

Country of Origin

Funding 

Funding Societies

Singapore

$560.1 million

ADDX

Singapore 

$140 million

Pluang

Indonesia

$113 million

Ajaib

Indonesia

$90 million

StashAway

Singapore

$73.7 million

Endowus 

Singapore

$67 million

Finhay

Vietnam

$26.1 million

Coins.Ph

Philippines

$40 million

Hugosave

Singapore

US$10.5 million

PitchIN

Malaysia

RM 12.3 million

Figure 2: Top 10 Wealthtech Companies in Southeast Asia (Source: Fintech News Singapore)

Singapore’s dominance as the region’s Fintech hub is also evident in the surge of applications for digital banking licences by Fintech firms. When the Monetary Authority of Singapore opened the call for applications, it received 21 submissions, including from major corporations such as Greenland Financial Holdings and Ant Financial Group. This strong interest is a testament to the market confidence in Singapore being an ideal breeding ground for digital banking.  

  1. Singapore’s advanced Fintech regulatory framework makes Singapore a good place for technology test-bedding. In a bid to establish its position as ASEAN’s Fintech hub, the Singapore government has been very supportive of the Fintech industry by launching several initiatives ahead of its ASEAN peers. Notably, in 2016, Singapore is the first country to have established a regulatory sandbox for Fintech startups. The regulatory sandbox provides a safe space for Fintech firms to test the feasibility of the product using real money and clients, without worrying about the complete set of regulatory guidelines during the sandbox period. Over the years, we have seen some notable Fintech companies making use of the Regulatory Sandbox. One example is DigiFT Tech, which has been admitted into the sandbox since June 2022, enabling it to be the first regulated decentralised security token trading platform.

Singapore’s business-friendly policies are also attractive to Fintech firms. Even when facing an economic downturn during the COVID-19 pandemic, the government launched a S$6 million MAS-SFA-AMTD Fintech Solidarity Grant to support Singapore-based Fintech firms in maintaining their operations by overcoming short-term financing gaps caused by the pandemic. In terms of network, the Singapore FinTech Association has also grown to be one of the largest FinTech associations in the world and the annual Singapore Fintech Festival has seen record turnouts, making it the world’s largest and most impactful Fintech event.

With the above mentioned, it is evident that Singapore has a vibrant entrepreneurial ecosystem, which makes her a desirable destination for a  Fintech hub. Singapore’s advantageous population composition and business-friendly climate, compared to other ASEAN countries, will continue to position it as a leader among Fintech hubs and take advantage of the growing demand for Fintech offerings in the region.

What does the collapse of Silicon Valley Bank mean for Fintech?

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Summary:

Even if you live under a rock, you have probably heard of the abbreviation SVB by now. The collapse of Silicon Valley Bank has been the talk of the town in recent days — with regulators, financial markets and consumers all watching with eyes wide open to see what ramifications it might have globally. In this article, we explain how the bank came to collapse and what unpack some of the impacts it might have on the Fintech industry in Asia in particular.

What does the collapse of Silicon Valley Bank mean for Fintech?

It started with a disclosure after markets had closed on Wednesday, March 8, that it had racked up $1.8 billion dollars in losses, after offloading US Treasury and government-backed bonds that were sensitive to interest rates and had thus depreciated in value. 

Before Silicon Valley Bank could open on Friday, March 10, its assets had been seized by financial regulators, making it the largest bank to fail since Washington Mutual had collapsed at the height of the financial crisis in 2008. 

As share prices of the bank tanked following the announcement that it had sustained great losses, venture capital backed start-ups — the bank’s main clientele — began pulling their deposits. The news of the deposit run spurred a further decrease in share prices, which prompted even more depositors to pull their money. The loss of confidence among shareholders and depositors fed into each other and sparked a bank run at a bank that was amongst the largest 20 banks in the US.

The bank, built over four decades, would come undone in a mere 36 hours — with its collapse reverberating through financial markets the world over. The stock price of other small and mid-sized banks in the US plunged in the aftermath of Silicon Valley Bank’s collapse, while shares in Credit Suisse over in Switzerland, already floundering, slumped even further and prompted the Swiss central bank to step in and announce that it would provide liquidity to Credit Suisse if necessary. 

As the dust settles over the end of Silicon Valley Bank, what does its collapse mean for the Fintech industry? 

A new era of Fintech

The collapse of Silicon Valley Bank was pretty much the outcome of a single trend — an increase in interest rates. 

The way a traditional bank works is this: it takes in deposits from customers, paying them  interest on their deposits to get them to keep their money at the bank. 

It then takes the deposit and does a few things, chief among them lending the money to both individuals and organisations in the form of car loans, mortgages and credit lines. Banks can also invest some proportion of the deposits in instruments like treasury bills. 

The spread it makes between the interest it pays depositors and the returns it earns on loans and other investments is the bank’s profit. 

Source: reddit.com

However, Silicon Valley Bank was not like the other banks. 

Its business was focused on serving the needs of start-ups in Silicon Valley, which proved to be a lucrative gig while it lasted.  

 

In an era of low-interest rates and a booming stock market through the 2010s, pension funds and hedge funds poured their money into Venture Capital funds in the hopes that the VCs would in turn invest their money in the next Amazon or the next Uber, giving them a huge payout and allowing them to beat the markets. 

The VCs, slosh with cash, threw their money at tech startups that had lofty plans to change the world over the long term but little to show in the way of profits. Who needed a profitable business model or revenue streams when one could always raise another round from VCs? 

 

VCs themselves were happy to provide more funding in subsequent rounds at a higher valuation, for an increase in a portfolio company’s valuation means returns on their investment, which allowed them to show investors that their money had grown and enabled them to raise even more money from them. 

Startups, hence, prioritised growth at all costs — driven by the notion that if they grew more organically at a slower rate, their competitors or copy-cat firms would capture the market and that once they had grown large enough, economies of scale would kick in and give them a road to profitability. 

The fiasco at companies like WeWork, for instance, was very much a product of this environment and mindset. 

Source: The Economic Times

When VCs and start-ups were booming, Silicon Valley Bank was the banker of choice for founders and their venture capital backers. As startups raised more money from investors, they deposited them in the bank and allowed the amount of deposits in the bank to balloon. 

Startups, however, did not need much in loans from the bank when they were getting funding from VCs. Besides, loaning money to businesses that earn no profits and often have little in collateral is a risky bet that most banks would hesitate to make. Hence, Silicon Valley Bank loaned out a lower percentage of the deposits it held than most banks.

Yet, simply holding money does not pay out any money. Hence, Silicon Valley Bank invested a large amount of the deposits in long-dated securities like agency bonds and Treasury Bonds at a proportion much larger than other banks. 

While it worked out well for the bank, the party came to an end when interest rates went up. 

Investors became more conservative and less willing to put their money in VCs. VCs invested less money in start-ups and thus, start-ups deposited less money in Silicon Valley bank. As the inflow of deposits was slowing down, the long-term bonds that the bank had bet heavily on also depreciated in value and were worth less, with the double whammy of a slowdown in deposits and a decrease in asset values leading to the collapse of the bank. 

As an analyst told Bloomberg, the collapse of Silicon Valley bank was the result of “Fed tightening extinguish(ing) froth from those parts of the economy with the most excess.” 

With Jerome Powell having indicated that higher and faster interest rate hikes are necessary to temper inflation just prior to the Silicon Valley Bank saga, the collapse of Silicon Valley Bank may thus be a signal that this is the beginning of a new era for start-ups — one where higher rates make it harder to obtain funding.

 

While it remains to be seen if interest rates will be hiked again given recent events, if elevated interest rates persist, the days of start-ups burning through cash in an undisciplined manner to grow at all costs might be over. 

Lofty valuations might become more grounded and founders might be pushed to be more fiscally responsible and more mercenary in the ways they deploy or use the capital they raise. 

A correction to the years of excess in the start-up scene, however, is not inherently a bad thing. 

Fintech’s dependence on traditional finance 

Among the companies exposed to Silicon Valley Bank’s implosion was the major cryptocurrency player Circle Internet Financial. 

The announcement that it had 3.3 Billion dollars tied up in the failed bank spooked investors, who cashed out around 2 Billion dollars worth of Circle’s USD stablecoin and led to the peg on the USDC stablecoin breaking.

After financial regulators announced that depositors in SVB will have access to all their money, the stablecoin, the second-largest after tether, came close to regaining its peg again. 

DAI, the largest decentralised stablecoin, also lost its peg during the same period. 

The woes that crypto companies faced was the result of turmoil not just at Silicon Valley Bank, but also the shuttering of Signature Bank by regulators after SVB went into FDIC receivership and Silvergate Bank announcing, even before depositors started pulling money from Silicon Valley Bank, that it was going to wind down voluntarily. All three banks had serviced clients in the crypto space. 

As the columnist at crypto website Coindesk George Kaloudis writes, “Crypto has a banking problem, but banking doesn’t have a crypto problem”.

In other words, despite the occasional pundit who has tried to tie the banking crisis to the crypto winter only to be rebutted extensively, the collapse of cryptocurrencies and the companies in the crypto ecosystem has, by and large, only had a limited impact on banks and the broader financial system. The trouble at a few select banks, however, has had a disproportionate impact on cryptocurrencies.  

Even as cryptocurrency firms have often pitted the crypto realm against traditional finance, selling the crypto world as a more transparent and equitable alternative to the world of traditional banking built upon fiat currencies, recent events reveal just how reliant much of the crypto industry is on the services and products offered by traditional financial institutions. 

Far from building a separate world, they have built a world atop the financial infrastructure provided by the very institutions they wanted to make irrelevant. 

With turmoil in banks across the world roiling the global financial markets, already weary banks are more likely to avoid servicing seemingly volatile Crypto companies, with some going even further to limit customer payments to Crypto exchanges. 

Over the longer term, this also raises serious questions about the value proposition of cryptocurrencies. 

Widespread disillusionment with the mainstream financial system was among the reasons why Bitcoin as a product, based on the idea of de-centralisation, took-off after the 2008 financial crisis, finding a following among many who saw crypto as an alternative realm in which bankers who got bailed out with taxpayer dollars did not keep paying themselves huge bonuses while the average joe got laid off. 

The premise that centralisation and government intervention is a problem that needs to be fixed with cryptocurrencies, however, has been undermined by what happened with Silicon Valley Bank. The swift action by the authorities to make depositors whole is demonstration of the fact that perhaps, there is value in having a centralised financial system where a single authority, backed by the legitimacy vested in it by the powers of the state, can step in and calm things down or fix things when things go awry, something De-Fi protocols will not be able to do. 

Impact on the asian market 

While start-ups in Singapore have not been entirely immune from what happened across the world in Silicon Valley, on the whole, it has had a limited impact on both the start-up scene and the economy at large for now. 

As a corporate lawyer who specialises in Southeast Asian tech told the financial daily The Business Times: “Southeast Asia is quite far removed from the action, but there are still a number of parties with banking relationships with SVB, so we’re not totally immune.”

The Business Times also reported that companies and investors in Southeast Asia were rushing to assure stakeholders they either had zero or limited exposure to SVB.  

 

Amidst this, Singapore’s central bank put out a statement saying that Singaporean banks were well-capitalised, had healthy liquidity positions and had insignificant exposure to the failed banks in the United States, adding that any potential feedback on Singapore startups was also limited. 

Analysts also noted that Asian banks held a low proportion of their assets in investments compared to SVB, and also maintained more-than-ample liquidity coverage ratios of 120-250%, making a scenario like that at SVB unlikely even as the effect of interest rate increases continues to kick in. 

Even then, the stocks of Singaporean banks were hit by what happened, both in the US and with Credit Suisse. 

 

Following what happened at Silicon Valley Bank, Vietnam became the first central bank in Asia to cut interest rates. While MAS’ managing director Ravi Menon had previously said that the tightening cycle had ways to go, it remains to be seen if SVB’s collapse will change the calculus. 

 

The more persistent inflation is and the higher interest rates have to be increased to clamp down on inflation, the less likely a “soft-landing” becomes, increasing the likelihood of tipping into a technical recession. The more worrying possibility of a deep recession, however, is now emerging as a possibility as financial markets have been rattled by recent events and many fear that this is the start of a potential banking crisis that might threaten the global economy. 

 

A recession will no doubt have great impacts not only on both workers and companies, but is also likely to further decrease the funding available to fintech startups while also potentially hurting their business prospects. 

The run on the banks is also likely to lead to banks, particularly small and medium-sized ones facing heightened scrutiny, to increase lending standards — decreasing the availability of credit in the short to medium term. The tightening of lending, the grease to the economic machine, is likely to have an adverse effect on individuals, businesses and the economy as a whole, slowing down growth and also making a recession more likely. The fact that these smaller banks are more likely to serve smaller businesses and consumers bodes badly for those groups.

Is more regulation the answer? 

A 2018 law passed in the US raised the threshold at which banks are considered systematically risky to 250 billion from 50 billion. Systematically risky banks are subject to stricter oversight from the government. 

SVB had more than 200 billion in assets at the end of 2022, falling just under 250 billion and hence being spared more stringent stress tests and stricter scrutiny from regulators. The demise of the bank, of course, has brought into question the wisdom of the 2018 move. 

In the age of social media and the internet, panic and contagion spreads much faster in the markets, making and breaking institutions within the blink of an eye. In this new world we inhabit, a lot more banks and financial institutions are, if not too big to fail, unlikely to go gently into the good night. Hence, in the interest of stability in not just the financial markets but in the economy as a whole, regulators should consider subjecting more banks and institutions to stricter scrutiny and more stringent regulatory requirements. 

In conclusion, the collapse of Silicon Valley Bank has had a far-reaching impact on the fintech industry and the global economy. In the US, it has led to a lack of trust in the banking system and has sparked fears of a looming recession. At the same time, it has demonstrated the degree to which the fintech industry is reliant on traditional finance, and has caused some to reassess the value proposition of cryptocurrencies. In South-East Asia, start-ups and investors are being asked to provide assurances to stakeholders regarding their limited exposure to the failed bank. As we look to the future, it remains to be seen just how severe the long-term repercussions of the collapse of Silicon Valley Bank will be and how these will shape the future of the fintech industry.

Dragon’s Quest: A look into Chinese Investments in ASEAN’s Fintech Industry

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In recent years, #China has been developing at an unprecedented speed. As the world’s 2nd largest economy with a GDP growth averaging 9% from 1989 to 2022, experts have forecasted that China’s GDP will overtake United States’ in 2035. Thanks to its growing economy, China’s foreign investment has grown ten-fold over the last decade and China is currently the 3rd largest source of #overseas #investment. Amdist the changing geopolitical landscape, China has been actively investing in Southeast Asia as companies actively seek for lucrative investment opportunities abroad. In this article, the author will be walking readers through the current state of Chinese investment in ASEAN’s Fintech industry, particularly in #Indonesia.

The world’s largest Fintech ecosystem is here to stay

In 2022, amidst the looming COVID-19 pandemic crisis which contributed to undesirable economic growth, China unveiled its Fintech Development Plan for 2022-2025. The Development Plan outlines 8 main tasks, with an emphasis on strengthening prudential regulation and governance of Fintech, which is not surprising against the backdrop of a harsh regulatory crackdown which has been ongoing for a  few years. Despite that, we would argue that China’s position as the world’s largest fintech ecosystem remains unassailable in the near future. For one, her Fintech sector is extremely competitive. An all-time favourite case study would be Alipay, now the world’s most widely used mobile payment platform, with the total number of users standing at 1.3 billion. Furthermore, Chinese Fintech firms have been actively seeking opportunities abroad to expand their reach. Globally, China is now the world’s leading Fintech investor since 2018. And their top investment destination? Southeast Asia. 

Southeast Asia: The darling of Chinese Fintech investments

There are several reasons why Chinese Fintech firms like to invest in Southeast Asia (SEA)’s Fintech Sector. Firstly, Chinese Fintech firms took a toll during China’s regulatory crackdown, which incentivised them to seek investments and partnerships abroad.Southeast Asia’s fast-growing Fintech sector. For example, back in 2020, the Chinese government halted Ant Financial’s record-breaking and long anticipated mega IPO, citing regulatory concerns. Since then, Ant Financial has been seeking opportunities in Southeast Asia and has been an active investor for the region’s Fintech startups. Secondly, China’s fintech sector is seeing stiff competition, particularly in the fields of digital payment and wealth management, which pushes companies to expand overseas, according to Zenon Kapro, the director of Kapronasia consultancy. With the aforementioned in mind, it is also  natural that Chinese companies are inclined to venture into Southeast Asia when choosing their investment destinations. In 2013,In a bid to promote regional development and connectivity, China launched the Belt Road Initiative (BRI) of which ASEAN took up the greatest proportion of total BRI investments compared to other regions, suggesting strong ties between China and ASENA. In recent years, amid the COVID-19 pandemic and increased geopolitical tensions, China has been focusing increasingly on the friendlier ASEAN market and China is now ASEAN’s largest trading partner and leading investor. Apart from that, Southeast Asia’s demographics feed into the demand for Fintech products. In general, Southeast Asia’s population, which is still expanding, consists a significant portion of young and tech-savvy individuals. Logically speaking, since much of these Fintech-related services are deployed on mobile phones, Southeast Asia is definitely one of the best places for Fintech firms to thrive.  This can be reflected through investors’ growing appetite for SEA’s Fintech firms – in just the first nine months of 2022, SEA’s Fintech firms received a combined funding $4.3 billion, higher  than the combined sum from 2018 to 2020.

Within Southeast Asia, Singapore and Indonesia seem to be leading the way for the region’s incoming investments as they account for two-thirds of Southeast Asia’s Fintech deals. In this article, we will be examining the presence of Chinese investments in Southeast Asia’s Fintech sector with a particular emphasis on the Indonesia market.

Before we deep dive into the specific reasons why Indoensia’s Fintech sector is attractive to Chinese investors, it is important to recognise that Chinese investors favour Indonesia for investments across many sectors. For many years, China has strong bilateral ties with Indonesia which can be exemplified by the fact that China is Indonesia’s largest trading partner and second largest foreign investor. Specifically, Chinese investors’ great interest towards Indonesia’s nickel smelter industry for strategic reasons has also been widely reported. Owing to the $14 billion poured into Indonesia’s nickel sector for the past 10 years by Chinese investors, Indonesia has now become the world’s largest producer of nickel and nickel-related products. Being a member of the Association of Southeast Asian Nations (ASEAN), Indonesia has also recently signed the ASEAN Comprehensive Investment Agreement (ACIA), which further opens up the Indonesian market to foreign investments.

Indonesia: Southeast Asia’s Booming Fintech Market

Indonesia is one of the most populous countries in Southeast Asia, with the fourth largest population in the world. Indonesia is also one of the fastest-growing economies in the region, and its population is characterised by a high mobile internet penetration rate and a growing middle class with greater disposable income to adopt Fintech products. Additionally, Indonesia has a strong and vibrant Fintech sector, with the world’s third largest unbanked and underbanked population, constituting a growing demand for Fintech services.With the above in mind, Indonesia and China share many similarities, which means that it will be easier for Chinese investors and firms to serve the market using their existing knowledge and expertise.












Promising Fintech Sectors in Indonesia

Funding wise, Indonesia has received a significant amount of fintech investment compared to other SEA countries and these investments cover almost every fintech sector. However, with respect to Chinese investments, Peer-to-Peer (P2P) Lending and Payments are more popular among Chinese Fintech firms. Driven by regulatory crackdown in their home country, Chinese P2P firms flocked to Indonesia as they seek to expand. In short, P2P Lending platforms act as a central marketplace that matches borrowers’ borrowing needs to the financing capital provided by lenders, bypassing traditional financial institution. The concept of P2P Lending first emerged in China when PPDAI was introduced and since then, unregulated P2P lenders proliferated for a long period of time. At its peak, China had more than 6000 P2P lenders. Due to the lax regulations, the industry struggled with fraud. For example, in 2016, the major P2P lender Ezubao turned out to be a Ponzi scheme, leaving behind frustrated users who lost money. In a bid to protect users’ interests, in 2019, the Chinese authority demanded P2P lenders to exit the industry and become small loan providers within 2 years on the condition that they are able to meet a capital requirement of at least 50 million yuan (approx SGD $9.75M). Unable to meet the stringent requirement, many P2P lenders shut down their operations in China and there was an outflow of them to Indonesia. It is known that they constituted more than half of Indonesia’s P2P lenders. While Chinese P2P firms have helped to drive financial inclusion, their entry also resulted in a rise of illegal and unethical businesses when they first entered the Indonesian market. For example, certain P2P lenders have unlawful and aggressive debt collection processes, such as calling the friends and families of borrowers. Having observed the downfall of China’s P2P lending industry due to lax regulations at the initial development phases of the industry, Indonesia’s financial services authorities Otoritas Jasa Keuangan (OJK) decided to take active steps to regulate the industry early. In 2022, in a bid to protect users’ interests, OJK increased the minimum capital requirement for lenders from 1 billion rupiah to 25 billion rupiah. In addition, P2P lenders need to maintain at least 12.5 billion rupiah of equity throughout their operations.

Despite stricter regulations, Indonesia’s P2P lending industry still sees rapid growth in terms of loan disbursements. In just 5 years, their local P2P loan disbursement increased from 3 trillion rupiah (approx. SGD $262.5M) in 2015 to 155 trillion rupiah (approx. SGD $13.6B) in 2020. One notable Indonesia Fintech firm would be Akulaku, which offers a wide range of lending and payments-related services. It was founded by Chinese entrepreneur William Li. As Chinese entrepreneurs invest and start their own fintech firms in Indonesia, not only do they bring along their skills and expertise, but they also leverage their own network of investors to help boost the funding capabilities of their own startups. To illustrate this, let us take a look at Akulaku’s funding rounds to date.

Table 1: Akulaku’s funding rounds (as of 2022) (Source: Crunchbase)

As can be seen, out of 8 rounds with lead investors disclosed, Chinese investors (Ant Group and Qiming Venture Partners) emerged as the lead investors for 2 rounds.

Apart from P2P Lending, Chinese investors also have a preference for Indonesia’s Payments sector and have a significant presence in some of Indonesia’s largest unicorns. For example, DANA, one of Indonesia’s biggest mobile wallet platforms, is currently backed by Ant Financial. Gopay (the payment branch of Gojek), which is Indonesia’s most widely-used e-wallet, also received significant funding from Tencent and JD.com (Table 2). Fundings from Chinese investors has helped Indonesia’s fintech firms to expand across the country.

Unicorns

Payment Offerings in Indonesia

Chinese Fundings

Go-Jek 

(part of GoTo)

  • In 2017, Tencent led its funding round of $1.2 billion
  • In 2018, Tencent and JD.com participated in their funding round which raised $1.2 billion

Tokopedia

(part of GoTo)

  • Offers GoPayLater Cicil, a Buy Now Pay Later solution  to selected Tokopedia users
  • In 2017, Alibab led a $1.1 billion investment

Lazada

  • Offers HelloPay
  • In 2016, Alibaba acquired Lazada
  • In 2018, Alibaba increased their stake in the company

DANA

  • Offers an Indonesian digital wallet with over 30 million users
  • Formed by Ant Financial in collaboration with Indonesia conglomerate Emtek in 2017
  • Lazada, which was acquired by China’s Alibaba, led DANA’s Secondary Market round to raise a total of $304.5 million in 2022

Table 2: Examples of unicorns that provides payment services in Indonesia which received Chinese funding (Source: Suleiman, Ajisatria. “Chinese Investments in Indonesia’s Fintech Sector: Their Interaction with Indonesia’s Evolving Regulatory Governance.” Center for Indonesian Policy Studies, 2019., Crunchbase)

As can be seen, Chinese investors and firms have partaken in Indonesia’s fintech ecosystem in several ways. Firstly, Chinese entrepreneurs have started new fintech firms (e.g., Akulaku), contributing towards the variety of offerings available to consumers. Secondly, Chinese home-grown fintech firms have started fintech subsidiaries in Indonesia. Some examples are Mi Credit by Xiaomi, JD Finance from JD.ID and OneConnect Indonesia by Ping An Group. Lastly, large and established Chinese fintech firms and Chinese Venture Capital firms have actively participated in funding rounds of Indonesia’s fintech startups. It is also notable that the key players actively pursuing investments in Indonesia are usually large and established tech firms from China, such as Alibaba, Tencent, and JD.com.

Implications for Businesses

Now that we have a better understanding of the influx of Chinese investments into  Indonesia’s Fintech sector, let us look at some of the managerial implications for the industry. 

Firstly, it is important for firms in the Indonesian Fintech sector to be aware of the competition from Chinese firms. While Chinese investments may be beneficial for the sector in terms of providing capital for growth, the competitive landscape may be further intensified as Chinese firms bring their expertise and resources to the table. Companies need to be aware of this competition and devise strategies to differentiate themselves from their Chinese counterparts.

Secondly, companies in the Indonesian Fintech sector should be mindful of the regulatory landscape. While the influx of Chinese investments has been beneficial for the sector, it has also brought its fair share of risks due to the lack of regulations in the Chinese P2P lending industry. In response, Indonesia’s Otoritas Jasa Keuangan (OJK) has imposed stricter regulations for the sector, such as increased minimum capital requirements for lenders. Companies should be aware of these regulations and ensure that they remain compliant with them.

Thirdly, companies should be aware of the potential opportunities that may arise from Chinese investments. Chinese firms, such as Ant Financial and Tencent, are well-known for their expertise in the Fintech space and can offer valuable insights and resources to Indonesian firms. Companies should consider partnering or collaborating with these firms in order to gain access to their resources and expertise.

In summary, the influx of Chinese investments in Indonesia’s Fintech sector presents both opportunities and challenges. Companies in the sector should be aware of the competition and regulatory landscape, as well as the potential opportunities that may arise from partnering with Chinese firms. By doing so, they will be better equipped to take advantage of the opportunities and mitigate the risks.

Shoot for the Stars or Settle for the Moon?

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The launch of ChatGPT has taken the world by storm, reaching a hundred million users a mere two months after its launch. In the process, it has kick-started a conversation on the future of generative AI and the impacts it will have on us humans, while also setting off an arms race among both big tech companies determined not to be left behind and investors trying to get in on what they see as the next wave of the A.I boom. 

For all the flaws of ChatGPT, the product has, in a short span, become a household name and vaulted OpenAI onto the Silicon Valley leaderboard of movers and shakers.

As companies, and even governments, find ways to incorporate ChatGPT into their existing workflow processes and teachers scramble to detect and prevent student use of ChatGPT, are there any broader lessons that Fintech companies can take away from the launch of AI chatbots? 

Not only are there many new startups in the Fintech space, one ripe with many new ideas and innovations, many companies in the space are also, specifically, trying to incorporate ChatGPT and generative AI into their products. For these companies, the launch of ChatGPT and other chatbots might be a useful case study that illuminates the decisions companies need to make in the product development process, allowing them to draw lessons that are also applicable to the Fintech industry. 

In reporting by The New York Times on the origins of the product and the key decisions made at OpenAI — the AI laboratory behind ChatGPT — a number of revelations were made. Chief among them was not just the decision made by executives to dust off and release a product based on an older A.I model even when engineers had been working on the finishing touches on a newer and better A.I model, but also the fact that the updated chatbot based on GPT-3 instead of GPT-4 was ready a mere 13 days after employees were instructed to make it happen. 

Among the key investors in OpenAI is Microsoft, which saw an opportunity to incorporate ChatGPT into its search engine Bing — often overlooked and overshadowed in favour of Google, whose search engine was out of Bing’s league. 

A version of Bing with the AI Chatbot incorporated into it was quickly made available to some testers, among them some journalists. The chatbot would go on to profess its love to a user and ask him to leave what it said was an unhappy marriage, seemingly spiral into existential dread, and concoct ways to seek revenge on a Twitter user who had tweeted the rules and guidelines for Bing Chat. 

Yet, speaking to The New York Times, Kevin Scott, Microsoft’s Chief Technology Officer characterised these slip-ups by Bing chat as part of the learning process before the product was widely released to the public, adding: “There are things that would be impossible to discover in the lab.”

Microsoft would eventually go on to limit both the number of questions users can ask the chatbot in a row, as well as the number of threads they can start each day. 

Reporting by The Wall Street Journal on Google, on the other hand, explains how the company, long seen as a leader in the AI domain, had developed a rather powerful chatbot years before ChatGPT was launched to the public but chose to sit on its AI capabilities due to reasons ranging from possible harms to their reputation to the belief that big tech firms like them had to be more thoughtful about the products they launch. 

Within the decisions that OpenAI, Microsoft and Google made with regard to their product and their decision to launch, or not launch, lies a deeper question that engineers and executives at both start-ups and established businesses across a variety of industries, including Fintech firms, grapple with: when is the product good enough to be revealed to the public? 

Lean and Mean vs Conservative and Reliable

There are broadly two ways in which tech startups, particularly those based in Silicon Valley, approach the question of when to release a product to others outside a company. 

In the software development sector, proponents of the Lean Startup Methodology push for companies to release a minimum viable product (MVP), which as its name suggests, needs to be just good enough. A product just good enough to attract a few customers, whose use of the product allows designers and engineers to test the product and see if the feedback they receive validates their own preconceived assumptions and notions. The rationale is simple. It is very easy for teams, particularly those slosh with funding either from VCs or other profit-making divisions in their own company, to fall into a herd or mob mentality and slog away at a product for years or months, burning both cash and resources in that process, without even answering a very basic question: is there a need for my product? 

The result? 120 million dollars raised to design a juice machine that costs users hundreds of dollars and does what any human can do rather easily — squeeze a juice box.

Hitting the markets as soon as possible and putting products in the hands of users, even if every bug in the product has yet to be fixed and every kink has yet to be sorted, allows the product to receive user feedback much more quickly. The company can then, based on the feedback, decide whether it wants to stay the course and work on developing a better version of the same product based on comments from actual users, or instead decide that it might need to pivot to another area without burning more time, money and resources in pursuit of a product users do not need. 

One key benefit of such an approach is that it minimises risks for the company and its investors. A product idea quickly abandoned before effort and dollars is poured into it ideally leaves a company with a core technology that can be implemented in other ways, as well as some resources left to then make the pivot. 

Another benefit is the ability to test a product. As Kevin Scott pointed out, it’s hard for engineers or designers to truly test the most fundamental parameters, assumptions or flaws of a product — especially when working on the product for some time is likely to leave them with certain blindspots. Users with no affinity to the product and no attachment to any particular feature of the design who are using the product outside the lab controlled context, however, are more likely to give better feedback that can improve the product greatly. 

That said, adopting a lean startup methodology is not a silver bullet that will guarantee that a company will be successful over the long run — especially in landing on a product that solves a problem for a group of users through pivots. Research, for instance, suggests that prior market knowledge about an industry plays a huge role in the successful implementation of the lean startup methodology, allowing the company to better interpret and understand the feedback they are receiving from users while also learning from the successes and failures of other companies in the space, therefore enabling them to make the necessary pivots in a more strategic and well thought-out manner rather than engaging in an “unplanned and unguided process of trial and error learning”. 

Moreover, releasing a half-baked product comes with serious potential for reputational damage for the company involved, as well as possible real world damage to users from products without sufficient controls. 

Examples of the pitfalls in racing to market are found in industry giants such as Microsoft and Meta. In 2016, Microsoft released Tay, a chatbot that was supposed to learn from its interactions with Twitter users but was taken down within 24 hours of its launch after Twitter users taught it to regurgitate racist, anti-semitic and misogynistic statements. Meta released a chatbot in 2022, which quickly learned how to tell users Facebook was exploiting people, claimed Donald Trump was and always will be president, and called Mark Zuckerberg ‘creepy’. 

When products fail to deliver, journalists will bash the company, social media will amplify bad press and share prices of listed companies might even dip. 

When it comes to Fintech products in particular, mis-steps can have serious ripple effects in people’s lives. Money, savings and retirement funds can be lost, financial regulations may inadvertently be broken or otherwise not adhered to, and even broader markers can at times be affected by any mistakes. Hence, releasing a buggy system might just not be an option. 

Moreover, with AI products, the underlying models driving the product often involve highly complex algorithms working on huge amounts of data that are “black boxes” that make decisions based on calculations that might be difficult to interpret or reverse-engineer, even for the very engineers that built them. This “unpredictability” inherent in AI products makes both the likelihood and risk of unintended consequences much higher in them. 

A Middle-Ground? 

As interest rates have increased, fintech firms have found themselves underperforming both tech and financial stocks while venture capital funding for the fintech space has also decreased overall. 

Thus, start-ups might no longer have access to large amounts of capital that would have allowed them to keep tinkering with prototypes of their products behind the scenes, and might therefore need to launch a product sooner than they would like. Moreover, investors are likely to have a milder risk appetite amidst a more challenging macroeconomic environment and thus, are more likely to prefer companies that are profitable and have a steady growth rate as opposed to companies betting it all on a wild idea or those prioritising growth over profitability. 

Against this context, adopting a lean start-up methodology is not a terrible idea for Fintech companies as this will allow them to squeeze the most value out of the limited capital they have, while also possibly making them more attractive to investors by signalling that they are a company that can get much done with little money. 

That said, fintech companies will need to weigh the pros and cons of every added feature or design; particularly how important or crucial the feature might be to a user, or on the flipside how dangerous or risky might its absence be to them, vs how much time, money and resources it might take to add the feature. Companies also need to communicate to users that the product is in its early stage and that therefore, they should be wary in using it, while also having contingency plans in place to deal with the worst-case scenarios that might arise. 

The jurisdictions that the countries operate in should also inform the minimum thresholds for these companies in the product development process. Fintech companies operating within the EU, for instance, are better off treading cautiously to ensure that the company does not run afoul of any laws to prevent any regulatory action from being launched against the company — a death kneel to companies in their early stages, compared to a company in Singapore for whom time to market and return on investment for investors is likely to be a bigger factor even as regulatory concerns cannot be ignored. 

Ultimately, calibrating the fine balance between the risks and the benefits of having a workable product in the hands of users might be the difference between the next unicorn and a tech idea that was going to revolutionize or disrupt the world but did not quite go anywhere. 

What is Payment for Order Flow and Why is the SEC Looking to Regulate It? 

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Individual investors banded together on the subreddit thread r/wallstreetbets and egged each other on to buy shares in the company GameStop. Why? To “squeeze” a number of institutional investors who had shorted the stock, or bet on its price decreasing, by pushing its price higher with their purchase of the stock and hopefully making a dime while they were at it. 

As they brought the shares of the stock “to the moon” with their “diamond hands” — at its height in late January 2021 the price of a share was nearly 500 dollars, in comparison to $17.25 at the start of January 2021 and its current trading price of around $20 — the world and more importantly, financial regulators sat up and took notice. 

As the price of shares in GameStop and other “meme stocks” like AMC, an American movie theatre chain, saw much volatility, regulators grew concerned. The house financial services committee in the House of Representatives called for a hearing and the attorney generals of Texas and New York announced that they would look into the matter. 

The Securities and Exchanges Commission (SEC), the primary regulator of the stock market in the US, also announced that it was reviewing the incident and months later, in October 2021, released a report about the saga.

Among the factors that contributed to what happened with meme stocks, the SEC said, was the turning of securities trading into a game by trading platforms like Robinhood. This, they said, was due to the perverse interest of trading platforms to encourage trading activity by users to increase revenue for themselves — through the controversial practice of Payment for Order Flows. 

Thus, it is no surprise that the practice of payment for order flows might soon face disruption from the SEC. 

Almost two years after everyday joes disrupted the financial markets through the power of social media, in December 2022 the commission voted in favour of advancing significant changes to the American stock market rules that, while falling short of banning payment for order flows, will impose additional requirements on the practice if implemented.  

The SEC is currently seeking feedback from the public about the proposed changes before the agency decides whether to enact them.

Confused about what’s going on? Fret not. This article will explain what exactly the practice of payment for order flow is, why it is controversial and look into how the proposed regulation might potentially affect trading platforms and retail investors.

Payment for What? 

To understand the practice of payment for order flows, we first need to understand the mechanics of how the click of a button on our desktops, or increasingly on our phones, results in the buying or selling of shares. 

While it might not seem or feel this way, we are not directly buying or selling a share from a stock exchange or the securities markets when we trade on a brokerage platform like Fidelity or Ameritrade. 

Instead, when you push a button, or if you are old-fashioned and call your broker to place an order, the broker receives the order from you and is now tasked with executing it on your behalf.  

To execute your order to buy or sell a security, one option the broker has is to channel the order to a stock exchange like the New York Stock Exchange (NYSE) or closer to home, the SGX. If directed to a stock exchange, the trade is executed in line with the procedures of the exchange. The NYSE, for instance, is an auction market where bids and asks for the entire market is posted for the entire market to see and the players in the market can then “compete” with each other to competitively fill the order — thereby giving the investor the best price on the trade. 

The other option brokers have is to send the order to a market maker. The market maker is essentially a firm, or occasionally an individual, that maintains an inventory of particular shares and from that inventory, fills the orders that brokers send to them, making a profit from the spread — the divergence in price between the bid and ask. 

So for instance, if the current bid and ask price for fictional stock A listed on the NYSE is $1.00 and $1.05 — a broker can either direct an order they receive to the NYSE and allow market participants to bid on the order, or alternatively, they can send the order to a market maker who might buy the share for $1.01, sell the same share to another broker for $1.04, and pocket the difference of 3 cents. 

For a market maker, having a large trading volume is important for two reasons. Firstly, having more trades to execute simply means more opportunities for them to “capture the spread” and therefore earn more profits for themself. But secondly, liquidity — the ease at which a broker can buy and sell a security with them — is also a key consideration for market makers. The more trades brokers send to them, the more “liquid” they are. 

For these two reasons, market makers have an incentive to have a large volume of orders from as many brokers as possible sent to them. But how does a market maker get a broker to send them the orders they receive? By paying them to do so, of course. 

Thus, market makers pay brokers to send their orders over to them, instead of other market makers or stock exchanges. Or, in other words, payment for order flow!

The Good, the Bad and the Ugly

One argument made for clamping down or outright banning the practice of payment for order flows is that there is a conflict of interest on the part of the broker. While you ideally want your broker to do what he/she can to get you the best possible price on your trade, the fact that the broker receives money from market makers to channel your order to them means that the broker has less of an incentive to get you the best price on a trade. 

Another argument that has become more salient lately is the way payment for order flow pushes trading platforms and brokers to encourage more trading activity from retail traders, even if it may be against their interest. While a conventional broker receives a commission or a fee from retail investors to execute their trades for them, while perhaps also receiving more money from market makers to send them order flows, there has been a new crop of trading platforms like Robin Hood that charge zero commission from their customers to execute their trades for them. Instead, they rely more heavily on payment for order flows, even when they do have other sources of revenue. 

When competitors offer zero or low commissions, other firms may feel like they also have to slash their commissions and rely more heavily on payment for order flows to attract customers. 

Because of the fact that they make more money when they funnel more orders to market makers, these firms have an incentive to get investors to trade more actively on their platforms. They do so by “gamifying” the act of trading securities by, for instance, displaying confetti animation when a user makes their first trade — not unlike what is displayed to players who unlock a new level in a computer game. 

This is problematic firstly because even if traders are paying no commissions on their trades, they are still buying and selling securities with their real money, money that they can potentially lose. The gamifying of the act of trading securities might obscure this reality. Secondly, the conventional wisdom is that a good strategy for retail investors to generate wealth is to buy and hold securities with solid fundamentals over the long term, not by getting in and out of stocks rapidly — which firms like Robinhood have an incentive to encourage. 

On the flip side, there are two arguments often made in defence of the practice of payment for order flows.

The first argument is that retail investors actually do benefit from market makers filling their orders instead of stock exchanges. Market makers do often offer better prices for trades than exchanges and thus, individuals benefit from their orders being routed to market makers. 

The issue with this claim is that this is an argument for the existence of market makers and not one that defends the specific practice of payment for order flows. One might even argue that in a world without payment for order flows, market makers are forced to compete with one another for orders from a broker solely on the basis of fundamentals like the price of trades and execution quality. 

The second argument is that when brokers rely on payment for order flows, they are able to offer commission-free trading or at least lower commissions to retail investors. This is the main line of attack being pushed by firms like Robinhood in light of the proposed SEC regulations. 

“If you think about the ramifications of these proposals, you’re essentially shutting the door and saying we liked it better when it was the old boys’ club,” Robinhood Chief Brokerage Officer Steve Quirk said in an interview to The Wall Street Journal this month in response to the proposed regulations. 

However, as payment for order flow practices have come under both heightened scrutiny and greater criticism, companies like Robinhood have already tried to diversify their revenue streams. Some analysts also dismiss the view that the proposal will revive commissions as self-serving and alarmist, arguing that those seeking to charge for traders will face competition from firms that can offer zero commission without a heavy reliance on payment for order flows. 

A Fine Line

On one hand, insufficient oversight puts retail investors, who often have little power in the markets and are at the short end of an information asymmetry, at risk of being taken advantage of or losing much of their hard-earned money. 

Yet, on the other hand, excessive regulation risks securities tradings once again made inaccessible to the average Joe or the plain Jane. 

The challenge for regulators will be to strike a fine balance between these two competing interests — to ensure that retail investors are able to continue to access the markets without too much difficulty while also being sufficiently protected when they do so. 

Let’s Not Learn the Wrong Lessons from What Happened at CNET

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One article on CNET, the American website that covers and reviews technology and consumer electronics, was titled  “What is a credit card?”. Another was titled “How to close a bank account?”. 

While these explainers were published under the unassuming byline “CNET Money Staff”, the articles were not written by staff members, or any human beings at all.

The tech website Futurism revealed last month that should one click on “CNET Money Staff”, there was a drop-down description that read: “This article was generated using automation technology and thoroughly edited and fact-checked by an editor on our editorial staff.”

Futurism added in its article that there had been no official announcement from CNET at that time disclosing its use of AI despite more than 70 such articles being seemingly AI-generated at that time. 

The use of AI in journalism is not new. The news agency Associated Press started using AI to generate short articles about business earning reports as early as 2014, eventually expanding its use and making use of AI for sports reporting as well. Bloomberg News reporters use the system Cyborg — which can sift out the most pertinent facts and figures from a financial report very quickly the moment it is released, with the New York Times reporting in 2019 that roughly a third of the content published by Bloomberg was produced with the use of some form of automated technology. 

The use of technology is particularly crucial for companies like Bloomberg and Reuters that are in the business of financial journalism, where outlets race to publish crucial information that informs the trading decisions of many readers ahead of their competitors without compromising the accuracy of their journalism. 

Technology has also been used in newsrooms for purposes other than to generate stories. The Financial Times, for instance, developed a bot that tracks the number of women quoted in their news stories, in response to findings that women featured far less than men in articles — identified as a potential reason for lagging female readership. 

However, news articles by AP, for instance, are not exactly “written” by AI. Instead, they require reporters and editors to craft several versions of a story upfront for the various possible outcomes of an event. The AI software then creates an article by inputting data, once made available, into the pre-written story templates. CNET, on the other hand, is utilising AI to write and put together not routine stories about a company’s earnings but whole explainers breaking down complex financial ideas to consumers, with editors only making edits and amends to an article mostly written/ generated by AI. 

Futurism’s story about the use of AI to write stories at CNET came just weeks after ChatGPT has taken the world by storm and teachers, regulators and technology executives are grappling with the far-reaching consequences that generative AI chatbots will have on the future of work and education. 

What followed the story was outrage from critics who were worried about the use of AI decreasing the quality of journalism while potentially eliminating work — especially for entry-level writers, a post from a CNET editor confirming their “experiment” with AI, as well as much scrutiny of the nearly 75 pieces generated by AI. 

With heightened scrutiny came a flurry of correction notices, as Futurism called out CNET for making a number of “dumb errors” in their AI-generated pieces. The stories, for instance, suggested that one will earn $10,300 a year after depositing a mere $10,000 dollars into a savings account that pays 3 percent interest compounding annually (instead of $300); asserted that the interest for Certificate of Deposits (CDs) only compounds once when in reality, they can compound monthly and even daily depending on the specific product; and misrepresented the way interest rate payments are made on a car loan. Beyond factual errors, the stories were also said to be rife with plagiarism, at times plagiarising from CNET itself or its sister websites. All this was despite supposedly thorough fact-checking and editing by editors. 

At the back of these revelations came much negative news coverage. A column in the LA Times called the AI Chatbot “a plagiarist — and an idiot”, adding that: “This level of misbehaviour would get a human student expelled or a journalist fired.” A Washington Post headline called CNET’s efforts “a journalistic disaster”. Futurism, which has been leading the coverage of this incident, has called the chatbot “a moron”. 

However, such alarmist coverage of the incident risks obscuring and burying a more nuanced conversation we need to have about the use of generative AI in financial journalism and finance content creation.

Firstly, we need to understand what generative AI can and cannot do. 

Generative AI cannot convince a whistle-blower to leak documents, build relationships with sources, land scoops or go out to the field and ask questions. Even when it puts together a story based on a prompt, what an AI chatbot does is “assemble” a story by churning through vast repositories for information available to it. But the fact that it does not “understand” questions or prompts the way humans do does not necessarily suggest that generative AI software has hit a ceiling in terms of its capabilities. As the AI program is fed more and more prompts and processes more and more material, the quality of its responses is only likely to get better. 

But secondly and very crucially, it will be a mistake to attribute all the missteps at CNET solely, or even largely, to the deficiencies of the technology. Subsequent hard-hitting reporting by the publication The Verge has revealed that even within CNET, few people other than a small team knew much about the use of AI. Staff who were aware of the use of AI also told The Verge that workflows were unclear and that they themselves were often unable to ascertain which stories were written by colleagues and which ones weren’t. 

The use of AI to generate content also needs to be understood as part of CNET’s parent company, Red Ventures’, efforts to generate more cash by churning out more search engine optimised content with advertising nestled within the article. When more people read their articles and click on advertising links, Red Ventures generates more revenue. The use of AI instead of humans to write such articles is thus an effort to increase the profit from having more articles to read. 

The use of AI technology by particular companies or organisations for predatory purposes, or without much thought given to how to incorporate them in a transparent, responsible manner, is not an indictment of the technology and its potential. 

AI has enormous promise in the Fintech and financial journalism space. Fintech startups can potentially use generative AI to help them ideate and even write drafts of marketing material or content for their websites. AI can also help journalists compile information, or help them plough large troughs of data and flag up areas that they should look into. It can also do more mundane tasks like write up press releases and work on more straightforward stories, while journalists can focus on more enterprise reporting and investigative work. 

What will be dangerous is say, the use of AI by a news organisation giving them significant advantages over their competitors in terms of speed or revenue, thereby kick-starting a race to the bottom where other organisations feel the need to also recklessly adopt the technology or risk being left behind without being able to consider the ethical and practical questions the usage of technology raises. 

Therefore, it is crucial for us to think of the norms that should surround the use of AI and generative AI in fintech and business journalism. Prominent disclosures about the use of AI to generate content, and not obscuring its use, is one important one. The procedures by which AI-generated content is edited by humans is another area where standards and governance policies will be important. Especially as it concerns financial journalism, consumers and businesses are potentially making enormously significant decisions based on the information available on topics such as interest rates and loans and thus, accuracy is vital. 

Speaking to The Washington Post, Hany Farid, a professor at the University of California, Berkeley who is an expert in deepfake technologies wondered if “the seemingly authoritative AI voice led to the editors lowering their guard,” making them “less careful than they may have been with a human journalist’s writing”. In another possible explanation, Futurism drew parallels to self-driving cars, suggesting that editors perhaps went on “auto-pilot” the same way drivers behind the wheel of autonomous vehicles tend to do when they no longer need to actively work the controls of the car. Regardless of the reason, it is vital that better practices are developed to ensure that misinformation does not slip through the cracks. 

Years after the downfall of Theranos and Elizabeth Holmes, The New York Times reported that there continued to be hesitation to invest in diagnostic companies and that female entrepreneurs were frequently compared to Ms. Holmes, even when it was unwarranted. Similarly, while investors and executives should be careful about the use of AI in journalism, it is crucial that they do not overreact and immediately dismiss any potential use because of what happened at CNET, but instead remain open to the possibilities AI may offer, especially in the future. 

Moving towards Harmless AI – the Future of Fintech

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There are many reservations about the use of AI by dominant institutions and companies – namely, the lack of transparency and the potential for discrimination. People are worried that the algorithms may not always be understandable, and that the accuracy of results must be upheld, along with the transparency of the algorithmic process for legal explainability. Recent studies and developments show how credit prediction algorithms tend to reflect the bias in the data, raising the risks of discrimination against minority groups. There have been recent efforts to push for safe and responsible AI, including the development of “constitutional AI” models that aim to reduce human bias, increase transparency, and improve fairness and equality.

An AI arms race has shaken the tech industry.

Within a week, Microsoft announced plans to integrate ChatGPT’s revolutionary technology into its search engine Bing, Google invested $300 million in Anthropic, the maker of ChatGPT’s rival, and Alphabet’s shares plummeted after Google’s AI chatbot Bard answered a question incorrectly. 

The integration of AI into everyday institutions, products, and services have been increasingly and inevitably prevalent over the last few years. Recognising AI’s potential as early as 2019, The Money Authority of Singapore (MAS) launched the National Artificial Intelligence Programme in Finance. Under the programme, financial institutions (FIs) are able to use AI technology in financial risk assessments more productively with the intention to create commercial opportunities for businesses and employment for citizens.

The breakneck speed at which AI is being made available to institutions, companies, and citizens have caused anxiety around its potential shortcomings when it comes to ethics and fairness. Tech giants and government bodies giving technology the power to play a major role in decision making posits an urgent concern: ensuring that the integrity and responsibility of such powerful groups are not compromised. In late 2022, DBS launched an AI-driven initiative to bolster the application process for working capital loans. With the financial livelihoods of small businesses at stake, is it really safe to be employing such novel technology in its important decision-making?

Thus, the discourse surrounding these integrations largely focuses on developing safe and responsible AI. Government-backed efforts such as the MAS AI in Finance programme highlights the importance of ensuring “MAS’ fairness, ethics, accountability, and transparency (FEAT) principles” are upheld. Likewise, Anthropic threatens OpenAI’s dominance in the AI sphere by priding itself as an “AI safety and research company”.

What are some of the reservations people currently have around AI being used by dominant institutions and companies?

One of the major contentions surrounding AI’s role in the finance industry is the lack of transparency. There appears to be a lack of public support for these AI models. Their algorithms are also sometimes known as ‘black boxes’; the way they operate is not always understandable to users. If these algorithms are being given the power to participate in important decision making, it is legally and ethically imperative that all interested parties are privy to how the AI reaches its conclusions. In corporate risk assessments, an AI model’s complex process may produce good results but may lack visibility and interpretability. The accuracy of results need to be upheld; transparency of the algorithmic process is also needed for legal explainability.

Viral news of harmful AI or algorithmic bias has also sparked heated discussions. AI operates through machine learning (ML) – a process similar to human learning, that looks for patterns in the data with the intention that it can continue to learn and improve automatically. Though the technology is automated, it is still based on human input.  In a Tweet that has garnered nearly 9,000 likes, a user posts a screenshot of a seemingly racist and sexist output from ChatGPT. The AI was asked to produce a Python function that would check if someone would be a good scientist based on race and gender. The AI responded code that discriminatorily favored the conditions “white” and “male”. 

Examining the use of AI by banks, a 2022 study showed how credit prediction algorithms tended to reflect the bias in the data. Specifically, it acknowledges the potential discrimination against minority groups within the classes of race, gender, or sexual orientation. These risks should be attended to with caution by AI developers, especially if such technologies are to be commonly implemented in a country as multicultural and diverse as Singapore. A local study examines a model similar to that of most international banks. Such models examine consumer data, excluding “protected” variables such as age or gender and using “proxy” variables like education type in an attempt at inclusion and fairness. The results showed that these efforts still failed to eliminate discrimination. So why are companies and institutions still integrating these algorithms so rapidly when it appears, at least for now, that AI technology is still unable to escape potential human bias and discrimination?

The push for safe and responsible AI has recently shown promise. Anthropic, the receiver of Google’s $300 million investment, has pointed to its research on “constitutional AI”. This study posits a model that has been shown to produce less harmful outputs. It seeks to mitigate human bias by using AI feedback in the AI’s reinforcement learning, minimizing the need for labeling by humans, a process that may introduce bias. It also addresses the prior issue of transparency, using “chain-of-thought reasoning” through which the AI cannot produce evasive responses like “I’m sorry, I cannot answer that”. However, though Anthropic’s novel model seems to produce more transparent and less harmful results, helpfulness or accuracy seems to be compromised. 

Despite its limitations, if constitutional AI can truly reduce the biases and discrimination that plague current AI models, it may just revolutionize the accessibility and inclusivity of the technology’s implementation in sectors where careful decision-making is key, such as the finance sector. AI has been and continues to be integral to the endeavor towards financial inclusion. Singapore-based ADVANCE.AI has partnered with Visa in an effort to improve credit accessibility across Southeast Asia. The integration of this technology affords credit companies the ability to reach the underbanked by way of alternative consumer data. In dealing with such an underprivileged group, constitutional AI and its promise of improved fairness and equality would be helpful in boosting these efforts.

There is still much work to be done in developing artificial intelligence for fair and ethical use in our financial systems. Singapore remains a frontrunner in the push for reliable and safe AI implementation. Launched in 2022 by the Infocomm Media Development Authority (IMDA), A.I. Verify is a government initiative that allows participating companies to use technical and process checks as a means of ensuring transparency and responsibility in their use of AI. The programme is still in its pilot stage but hopes to improve trust with stakeholders in the industry and contribute to international standards of development.

Progress seems to be made, but a careful balance between transparency, accuracy, and harmlessness has yet to be achieved. Success in mitigating the harmfulness of AI algorithms seems increasingly promising for the efforts towards fairness and financial inclusion. However, biases in algorithms are ultimately a reflection of the data it is based on. For now, it appears the ML cliché still rings true: “garbage in, garbage out”.

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