EFFECT OF COVID-19 ON FINTECH: DEVELOPMENT OPPORTUNITIES IN MONGOLIA

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Introduction

Overview on Fintech worldwide

The coronavirus has driven a massive 72% rise in the use of fintech apps in Europe, according to new research published on the 30th of March, 2020 by deVere Group. Meanwhile, banking apps in Asia and the Middle East have also announced a strong increase in usage, with one bank in the Philippines seeing more than double the usual registrations for its online banking service. Due to lockdowns and restrictions on the day to day services many consumers are turning to fintech applications and digital banking services for convenience.

Reaction from Mongolian government vs measurements taken by other governments around the world

The Mongolian government has managed to prevent the spread of the Covid-19 virus through certain strategies and lockdowns since January 2020; currently, the infected numbers are at 313, with 8 active and 308 recovered cases as of 28th of September 2020. At the beginning of the lockdown, private sectors such as restaurants and coffee shops had a curfew from 10:00 pm while other public places such as bars, lounges, large events, and gatherings had been canceled altogether. In addition to that, the government closed schools. After the condition became more stable, they extended the working hours of those sectors and from the end of this month, everything is becoming normal again.

Due to the negative impact of the pandemic, the world economy is declining and along with that many problems have arisen and Mongolia has a severe macro economical condition. On one hand, the prices of raw materials are decreasing and on the other hand, the prices of alimentary products are Mongolian are increasing as the foreign trade turnover is going down. On account of the lockdown by the Mongolian government, there is an increasing amount of unemployment since many SME, and other big companies’ revenue dropped, some of them are closed, some of them had to cut their costs. As a result, the poverty level has increased and we are facing a serious financial crisis.

According to the study conducted by The Mongolian National Chamber of Commerce and Industry last March named “ The impact of Covid-19 on employment”, the sector being influenced by Covid-19 the least is international technology and communication while 42 percent of the banking and financial sector has been affected. Moreover, as claimed by another survey about the effects of the prevention of pandemic on business, traditional businesses have been more affected than others.

Instead, quarantine restrictions have raised the use of remote services such as online shopping, delivery, and mobile payments. People are appreciating the advantages of the digital world and are likely to keep using it actively in the post-Covid-19 period. The perfect example of this is online payment. Thus, the United Kingdom, Germany, Ireland, Poland, Norway, Egypt, and other countries have raised limits on the size of contactless payments. In some cases, it has more than doubled. Another outcome is the regulatory progress. Thus, coronavirus has pushed the adoption of fintech and regulatory technology (regtech) in China. In South Korea, it facilitated the introduction of cryptocurrency law.

Lower incomes of the population, swelling unemployment, and the financial uncertainty decrease the number and size of bank deposits and purpose loans, such as mortgages, car loans, and others. Berenberg Bank predicted that the decline in revenues of the European and American banks in 2020 would amount to 8.5 percent, while profit would be 30 percent lower than it predicted a year ago. In Asia, the situation is similar—banks in Singapore are also expecting a significant revenue drop. Changes in the operating model and digital transformation are the means for banks to save their time and money to overcome difficulties. Thus, banks are considering that the fintech sector is the core partner that can help them and tending to collaborate on future events.

In Brazil, during the lockdown, they provided government subsidies for 9 million citizens who were previously unbanked via digital/ mobile banking solutions proving the flexibility and readiness of the fintech players in the region. Operation wise large banks are too heavy and sluggish for the current requirements and fintechs are stepping up for the job, bridging the government to people.

From another point of view, there are many assumptions about the future of COVID-19 in the world. New cases in some countries that had successfully managed the first wave of COVID-19 are shooting up as the citizens become unwary, relieved, and forget the importance of social distancing and wearing masks after long quarantine. Some say the first wave of COVID-19 will not end while others say the second wave has already begun in some countries or will arrive this October. Yet in Mongolia, if the only way of battling the pandemic is keeping businesses in quarantine, this will bring more bad effects on not only the economy but also our general health.

Thus, we have to think about what we should do if the same events occur in the future. Based on our current experience and the measurements other countries have been taken during the pandemic, it is crucial to develop the fintech sector.

What should Mongolia do?

  1. Regulatory sandbox implementation
  2. Open banking system

Regulatory sandbox implementation

In our recent experiences, Mongolia used to manage this kind of financial difficulty by cooperating with the state and private sectors. Therefore also this time, the government should support the market with proper policy and regulations. A regulatory sandbox is a framework set up by a regulator that allows FinTech startups and other innovators to conduct live experiments in a controlled environment under a regulator’s supervision. This framework is vital for the success of the fintech sector and can be the catalyst for innovation in a developing country.

Currently, worldwide 32 countries have started the regulatory sandbox implementation with 11 countries following their footsteps and have officially announced the start of regulatory sandbox implementations.

Some countries and states even proposed a bill to change their current regulations and licensing requirements as a result of a successful sandbox test run.

To understand and improve the current services and products and to provide suitable regulation and requirements as quickly as possible we must jointly implement the sandbox in a short amount of time.

Countries such as Dubai have been running in the front line when it comes to nurturing Fintech. They started a Regulation Lab that is supported by the UAE Minister’s office directly. Their Fintech Sandbox is one of the best situated to bring mash-ups among techs. Dubai’s strategy is to keep its talent pool positioned within the region to boost fintech innovations. They stand firmly with their opinion that no innovation can happen when a country is binding to the fintech industry with heavy regulations and licenses. They see that the traditional banking system is not resilient nor fast enough to react to situations like the Covid-19 pandemic thus they rely more on their fintech sector for adaptable and flexible solutions.

Open banking

Open banking is also known as “open bank data.” Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs). Open banking will allow the networking of accounts and data across institutions for use by consumers, financial institutions, and third-party service providers. Open banking is becoming a major source of innovation that is poised to reshape the banking industry.

2019 Global Financial Services Consumer Study, of the consumers surveyed:

  • Half expect their financial providers to offer propositions addressing core needs — not only traditional financial services.
  • Half indicate an interest in personalized financial advice from banks that are shaped by their circumstances.
  • 80 percent of consumers are willing to share their data with their providers in return for better service and product offerings.

Digital banks

Digital banks, also known as Neobanks, are increasing all around the world. Europe, Australia, and Singapore are among the top nations to support Digital Banking. Retail and corporate Digital Banking licenses are being provided to new players to stabilize the banking economy and boost healthy competition and smoother customer experience. The Monetary Authority of Singapore (MAS) has said it will be issuing up to five digital retail and wholesale bank licenses, intending to “add diversity and help strengthen Singapore’s banking system… with innovative business models and strong digital capabilities.

  • Banks will be able to get access to external data sets for added consumer insight.
  • Banks can open up new revenue streams by selling access to their data.
  • New revenue streams will arise from selling access to a bank’s core systems.

The EU, UK, Australia, and Hong Kong are supporting open banking internationally – PSD2 in the EU, UK is the top country with banks obtaining PSD2 certificates leading the transformation in Europe. Other countries that are adopting the Open banking trend: Singapore, Japan, Malaysia, USA, Taiwan, South Korea, New Zealand, Indonesia, China, Sri Lanka, and India.

The United Kingdom has positioned its Fintech sector well enough that it stands more resiliently compared to the public sector and banking, in addition to which the Bank of England persists to be more and more pro-fintech and considers it as a trusted sector. The Government of the UK will be issuing up to 5M GBP to help the economy of which 85% will be designated to the Fintech sector. Fintech becoming the main lenders compared to traditional banks as they are more automated and require less human to human interactions and are more efficient. They established the Corona Fintech Task Force to automate loans for SMEs. The UK is supporting Open Banking as there are innumerable people who are self-employed and are being affected by Covid-19 as it is hard to prove their income. Therefore, to enable extra credit lines and savings they can use their data to get loans from fintech companies to deal with the financial crisis more effectively. Since there are a mass number of elders and people with health conditions that are unable to leave home, the UK Open Banking system has allowed them restricted accounts and banking access. For example, people who are unable to leave their houses can designate authorized personnel to use their credit cards with a given timeline and amount to spend.

In short open banking is the future for the partnership between banks and fintechs and will be vital for the development of fintech in Mongolia. To support the partnership of banks and fintechs regulatory bodies should understand the benefit and purpose of Open banking implementation in the country.

Conclusion

Why should Fintech be treated equally as important as the Banking sector for a country like Mongolia?

The Mongolian financial market is dominated by the banking sector with the capital market and insurance market only sharing about 0.5-1%. In order to create a powerful financial market, we need different types and sectors. On the other hand, it is possible to improve our economy by serving customers with proper, cheap, and fast financial service. Mongolia’s fintech sector has a solid foundation to develop.

The Fintech sector has evolved dramatically in the past few years with companies like Lend, Ard, Steppe Group, Trade.mn, Most Money, Mobi Finance, and GrapeCity Mongolia LLC; the establishment of these companies has influenced other fintech companies to emerge leading to the expansion of fintech services and products. To understand why Fintech can grow and prosper in Mongolia we need to view the current readiness level of the society as a whole.

Mobile phone usage

There are 4.42 million mobile users in Mongolia. 64% of these users are accessing via broadband(3G-5G). The consumer readiness score was 81.41 in terms of smartphones.

Social Media usage

  • 2.2 million active Facebook users.
  • 2019-2020 more than 120,000 new users have registered.
  • 99% of all users are accessing from mobile phones.

Financial inclusion

  • 93% of the population has an account with a financial institution.
  • 17% of the population makes online purchases or pays bills online.
  • 22% of the population has a mobile money account.

With high mobile usage and financial exposure, citizens can access and view their bank accounts via online banking channels and fintech applications. Like the banking sector the fintech organizations are providing the same services and products to consumers but with less cost and complexity due to the nature of their business model and organizational structure. It may also stipulate banks to provide smaller loans and assess customers less formally so that they can overcome their difficulties.

A solid partnership between regulators, the banking sector, and fintech organizations is more than capable and will boost the current financial sector of Mongolia, especially during the vulnerable times of pandemic.

Mongolian Fintech Association’s role

The Mongolian Fintech Association is trying to bring the best benefits of fintech solutions and services to the market via government approval and works for solving the problems facing fintech partners by uniting them and contributing to the legislation and regulations.

With solid support from the regulators, Mongolian companies will be able to rollout adaptable and flexible solutions to end-users via mobile phones and applications to support the economy and current payment infrastructure.

Especially during pandemics like COVID-19, the importance of remote services and products are of great importance in the interest of national safety.

Through the joint partnership of the Central Bank of Mongolia, FRC, and the Ministry of Finance the Mongolian Fintech Association can implement a sandbox environment for new and existing fintech organizations and create new services and products that the current market needs.

2020.09.28

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