Tencent wants to see regulatory sandboxes lower the barriers to entry for technology companies.
Timothy Ma, Hong Kong-based director for legal at Tencent, applauded the decision by regulators in Hong Kong and Singapore to establish these sandboxes to foster innovation, but he is critical of the restrictions and high costs associated with them.
These sandboxes are important to mainland Chinese companies such as Tencent. To outsiders the company is a giant, but all of China’s fintech giants find it difficult to export their business model.
Tencent’s WeChat messaging app boasts 767 million monthly users, as of January 2017 (more if you count overseas users, although they cannot access the app’s full power, such as payments).
Third-party mobile payments in China totaled nearly US$6 billion in 2016, according to Forrester Research, with Tencent’s WeChat Pay accounting for 38% and Alibaba’s Alipay 50%. Tencent has not broken out revenue details from payments, but according to Reuters, may be facilitating over $550 billion per year now, and charging a 10 basis-point fee for the service.
Desperately seeking scale
Yet size isn’t everything when it comes to taking WeChat Pay overseas: legal and regulatory differences are a huge barrier. Tax, intellectual property rights, labor laws and cultural habits are part of the challenge, but the biggest one is the lack of privacy laws in China and the ease with which data can be collected, collated and used. China’s market also provides scale.
The rest of the world, in contrast, offers fragmented markets. While Alibaba’s Ant Financial is internationalizing via acquisitions (with stakes in India’s PayTM and Moneygram in the US), Tencent has relied on expanding its WeChat user base.
But whereas WeChat is a sophisticated aggregation of services when used inside China (where it’s called Weixin), overseas it’s just a messaging app, without payments or other capabilities.
The sandboxes, therefore, are a useful means for Tencent to see what it can or cannot do abroad. “The question is how we can innovate as well as educate and work with regulators worldwide,” Ma recently said at a conference in Shenzhen sponsored by Latham & Watkins. “Regulators get fintech is a world trend, particularly in Asia, where Hong Kong and Singapore have been more embracing. The sandboxes are welcome, but they are disappointing in the details.”
Let us in
Commenting to DigFin, Ma was particularly unhappy with Hong Kong Monetary Authority’s exclusion of fintech companies from its regulatory sandbox. Hong Kong only allows licensed financial institutions to participate.
“This raises the question of how much innovation can actually take place if the most dynamic companies are not present,” Ma said. He also noted that the level of relaxation around rules in the sandbox is too limited.
A spokesman at HKMA says its sandbox was limited to banks at the outset because HKMA only regulates banks. However, the HKMA argues that it does provide space for fintech companies too.
“Fintech firms including startups may collaborate with banks to make sue of the sandbox to conduct pilot trials of fintech services that they have implemented jointly with banks,” the spokesman said in an email to DigFin. “In fact, there are already cases where banks have worked with fintech firms to use the sandbox to test their fintech services.”
He added that as of February, six banks have been given access, with respect to 11 fintech applications, covering biometric authentification, securities trading services, API services, blockchain technology for use in mortgage valuation, and other pilots. “These banks consider that the sandbox is useful in reducing the lead time for launching their fintech services…and collecting useful customer feedback at an earlier stage,” said the spokesman.
HKMA also launched a fintech innovation hub in November, he added.
The concept of the regulatory sandbox emerged in the UK in 2015 and has been taken up by Singapore and Hong Kong. The sandbox is meant to provide clarity around rules and a testing environment for new tools or business models. The regulator provides some guidelines, within which participants can safely experiment; the regulator may also offer waivers or no-action letters in the case of breaches.
Ma praises the Monetary Authority of Singapore for its relative openness, its responsiveness, and its allowing fintech companies to participate alongside financial institutions. But he would like to see MAS broaden the experience. “It requires high costs to participate, has strict expectations about usable outcomes, and may deter smaller but innovative companies from participating,” Ma told DigFin.