There has not been a year like 2020 in our lifetimes. Hopefully there won’t be another: COVID-19 has not been fun.
But the pandemic has fast-forwarded many trends in the making. The future, when it comes to digital finance, is now. The scramble from February to April to distribute work from offices to homes, while dealing with unprecedented market volatility and volumes, has led to permanent changes. Many of these are welcome, even if the way they arrived was horrible.
Every innovation in fintech has been mirrored by a response by governments, however.
Crypto went mainstream: Bitcoin is now an accepted asset class, Ethereum finally moved to a more scalable protocol, and DeFi applications showcased what could be the shape of things to come.
Governments, led by China, are racing to introduce their own digital currencies. Facebook’s stablecoin project, now called Diem, has been watered down, although it remains significant. The greater Bitcoin’s success, the increased risk that governments will try to curb it.
The Ant Group IPO is another indicator of fintech’s success, and government reaction. China’s technology companies have transformed daily life, and Ant’s listing was going to cap this achievement.
Perhaps its platform model is genuinely questionable, as Ant and Tencent’s WeBank are incentivized to enable lending but it’s the banks’ balance sheets that are put at risk. But the cancelled IPO looks to be more than a reaction to a business model. It’s a reassertion of Communist Party control over a critical part of the economy that has been left to private companies. More regulation is coming and the possibility of Beijing nationalizing internet giants is real.
In the U.S., meanwhile, Big Tech is under fire like never before. Facebook is at risk of being broken up, which throws its payments ambitions into question. American tech companies have been cautious about entering finance, but we saw in 2020 Google, Amazon and others take bolder steps, both in the U.S. and in markets such as India.
India, by the way, has taken the politicization of tech to a new level, banning dozens of Chinese apps. Just as COVID has erected barriers to travel, political impulses are raising barriers to digital technology. Finance may be a little less affected because it is already highly regulated: what we are seeing instead is governments getting more involved in fintech.
This is especially true in Asia. Look at Hong Kong and Singapore. Their regulators this year have become more enmeshed than ever in supporting fintech on their terms.
The Hong Kong Monetary Authority created its own API exchange. The Securities and Futures Commission decided to regulate all institutional crypto dealings. MAS, always more activist, is revamping licensing under a consolidated payments law finalized early in 2020.
The arrival of virtual banks this year is the greatest expression of how fintech is evolving in the region. Hong Kong had announced its licensees in late 2019, with eight banks launching over the course of 2020. Singapore only recently announced its four V.B.s, while ASEAN saw its first V.B. launch in the Philippines and Malaysia will probably issue licensese in 2021.
Virtual banks represent the institutionalization of digital finance. Unlike “digital transformation” efforts among incumbents, as they convert existing processes into automated ones, virtual banks represent the apogee of licensed new builds, based on cloud-first tech stacks and ecosystem business models.
Such banks have existed for a decade in the U.K. and elsewhere, but the Asian versions are beginning life with bigger demands, heightened competition, and greater expectations. Regulators are becoming tougher in demanding access to data. The rules over access, consent, privacy and ethics in data and the artificial intelligence-driven applications data drives are going to become even bigger battlefields.
We are transitioning to a world that is a little less mobile, a little more regulated, and more volatile. Digital finance has won all the major arguments. Its biggest companies are now vast multi-billion-dollar empires. What looked fringe is now mainstream, or at least relevant.
We continue to deal with the fallout from COVID-19. We are grappling with social questions around economic equality and opportunity. Technology’s advances in data, computing, networks and analytics will not only advance but will grow exponentially.
Digital finance and the innovations it breeds are more vital than ever. The challenges used to center around use cases, and either resistance from financial institutions or how they adapted to it. Heading into 2021, digital finance’s challenges will now begin with policy and politics.