Fintech (or financial technology) is a hybrid sector that utilizes the advancement of information and communication technology to deliver brand new financial services to customers. Fintech involves wealth and property of individuals, thereby an adequate risk management is critical for the mitigation of possible risks.
In Mongolia, several Fintech companies such as LendMN, Ard Credit, and Hi-pay provide financial services and have already put their foot in the door of foreign markets. The Fintech startup Mobi Finance offers a candy system that provides services to 1,5 million users in total and facilitates almost 200,000 payments daily, amounting to 4 billion tugriks. Furthermore, the GSMA, an association that represents the interests of 750 mobile network operators worldwide, reported that Fintech services are emerging at greater speed in countries with lower GDP per capita and a higher population density.
Financial Technology
The technological revolution immediately changes the course of the financial sector which aims to ensure economic growth through capital accumulation and investment mobilization, and as a result, the circulation of goods and services sharply increases.
An era of Fintech 1.0 begun when Alexander Graham Bell registered his telephone patent in 1876 and undeniably set the foundation for the development of financial technology. After 100 years, the scope and use of financial services expanded dramatically when Fintech 2.0 came to light along with the internet boom. Subsequently, Fintech 3.0 has been rising with smartphones and portable internet since 2008. The financial services are accessible to anyone and have notably contributed to the reduction of poverty worldwide as it became easier, cheaper, and faster. The Fintech 3.0 is increasing workforce productivity and certainly reshaping our lifestyle by offering various types of payments, savings, loans, and insurance services. Typically, the digital currency, a transaction tool, saves the 3 to 5 percent transaction fee charged by card companies.
Technology is not only driving Fintech, but also other new businesses such as big data, artificial intelligence, value chain, and blockchain.
KPMG Pulse of Fintech report 2018
Financial Services
M. Carney, a governor of the Bank of England, pointed out that Fintech is unbundling banking into its core functions of settling payments and adequately allocating capital.
Fortunately, as a phone number began serving as an account for transaction, millions of people who did not have prior access to banking services were now able to make quick payments and get loans. In East African countries, a digital platform called М-Pesa was placed on the market and is disrupting the financial sector. The World Bank reported that there are 110,000 M-Pesa agents, 40 times more than ATMs, provide financial services in Kenya. In developing countries, a new capital that is necessary for the development of manufacturing, infrastructure, and human capital, is being accumulated as several millions of individuals are finally able to open accounts.
Ali Pay and WeChat Pay have introduced QR code-based Fintech in China, a country that accounts for over 50% of global e-commerce transactions. Similarly, Kakao Pay, Siam pay, Аu wallet, and Аpple pay have introduced their own Fintech services in South Korea, Thailand, Australia, and the US respectively. In Mongolia, a variety of point-collecting payment applications are being widely used. However, the Mobi Finance’s candy is a single digital currency that is approved by the Bank of Mongolia and backed by cash. Users can make payments using candy systems at over 8000 locations not merely through smartphones but also cell phone messaging.
Challenges
The revolution in information and communication technology brought new initiatives and changes in the financial sector. Nonetheless, those changes are not accurately reflected in the country’s legislation. For instance, the laws or regulations on privacy and protection of property have not been amended in a timely manner.
Consequently, the Fintech companies that collect private information and exchange the loan data have no guidelines on how to protect privacy, who is held accountable, and existing penalties. The Law on the National Payment System which is in effect since 2018 regulates payment and guarantee of digital currency. In order to offer payment services to the public, a private enterprise must meet certain requirements to get approval from the Bank of Mongolia. Just as commercial banks, a Fintech company is required to have both primary and backup data centers to ensure uninterrupted and safe payments. Nevertheless, Fintech companies are carrying out their operations without acquiring approval from the Financial Regulatory Commission and without fulfilling costly requirements set by the Bank of Mongolia. The Communications Regulatory Commission is eager to regulate Fintech companies because all Fintech services are based on communication technology.
In light of these circumstances, the Mongolian Fintech Association suggested regulating bodies to follow the best practices of other countries and adopt regulations in accordance with the “sandbox” principle. The Association and regulators have agreed to observe Fintech services, support their initiatives, and set regulations suitable to their maturity by “fencing” all Fintech companies in the sandbox. Since then, they have not taken drastic actions in that regard for half a year.
If we keep wasting time, the space of digital currency will be taken over by foreign companies, the Bank of Mongolia will lose its control over monetary policies, and Mongolia will fail to seize a valuable opportunity again. Needless to say, Fintech hardly attracts foreign investments. Thus, if WeChat connects to Mongolian bank accounts or if Facebook introduces its Calibra, a digital wallet, into the market, Mongolia will inevitably lose its control over digital payments.
Nowadays, the market is demanding an adhesion of contract without the simultaneous physical presence of the parties. Hence it is time to endorse, create, and validate a digital signature. Yet, a notary service, which became obsolete a few hundred years ago, is primarily used for authentication in Mongolia. Surprisingly, the Ministry of Finance is far behind compared to commercial banks due to the fact that it still carries out transactions through papers.
To make the best possible use of the Fintech opportunities and increase competitiveness, Mongolia has to recognize the need to regulate companies in a sensible way instead of restraining operational initiatives.
If you hold a bird tightly it will die. If you hold it loosely, it will fly.
2019.11.13
Trans. by Riya.T and Ariunzaya.M