The Fourth Industrial Revolution has far-reaching effects on the socio-economic life of countries around the globe, due to the application of digital technologies across many industries especially in critical sectors such as the banking sector.
To maximize the benefits and minimize the downsides new technologies bring to the economy, innovation and competition needs to be promoted, barriers to market entry reduced and legal risks addressed.
Fintech - A new trend in the finance industry
Fintech plays an important role in resolving one of the key priorities for many developing countries, which is to boost financial inclusion of the unbanked and underserved. Fintech can help individuals and small- and medium-sized enterprises (SMEs) to have easier access to banking services at lower costs. Vietnam is one of the countries with strong growth potential for fintech and has demonstrated firm commitment to providing reliable infrastructure for digital services in the banking sector.
Among different fintech product segments, fintech products relating to digital payments, personal/retail finance and corporate finance comprises 89% of the total fintech market in Vietnam. The fintech ecosystem of Vietnam is diverse and encompasses many different areas, such as payment intermediaries (e.g e-wallets), personal finance, peer-to-peer lending (aka P2P Lending), insurance technology (aka insurtech), digital banking, credit scores, crowdfunding, etc. The two most popular and most well-developed segments are e-wallet and P2P Lending.
In the e-wallet segment, the most popular e-wallet services in Vietnam are MoMo, Zalo Pay, AirPay and Moca. These services operate based on licensing under the non-cash payment mechanism stipulated in Decree No.01/2012/ND-CP issued by the Government in 2012 on non-cash payments.
In the peer-to-peer (P2P) lending services segment, a few well-known P2P lending companies in Vietnam are Mofin, Fiin, Tima and Lendbiz. The P2P lending helps customers, especially household businesses and SMEs access banking and finance services at low costs. Traditionally, banks have treated household businesses and SMEs as high-risk and have been reluctant to lend to them or do so at high interest rates. The development of P2P lending will also create a new capital supply channel instead of the credit system of traditional banks.
Another notable area in fintech is the application of blockchain technology. In Vietnam, blockchain technology has been applied only in successful tests of interbank money transfer and has not seen wider application in the banking sector.
Sandbox Regulation - A key to Fintech innovation
Fintech activities in Vietnam are currently not well-regulated in the legal system. In fact, fintech companies operating P2P lending services or using blockchain platforms only need to have a “Business Registration Certificate”.
If a company wants to implement new projects, it must send a dossier to the authorities explaining its product or service plan and wait for ad-hoc approval. This is problematic as the lack of a legal framework means that the authorities are unsure on how and on what basis to assess dossiers submitted and to allow new activities in the fintech market. As a result, dossiers are usually left pending or rejected. On the other hand, the lack of regulations allow many companies to operate without satisfying any legal requirements. Such operations fall outside the control of authorities and pose significant risks related to high-tech crimes and fraud or financial crimes, such as theft of personal information, tax evasion, money laundering, or unlawful capital mobilisation.
To cope with the rapid development of fintech, financial management agencies in Vietnam face challenges and difficulties in controlling risks related to information security and preventing unauthorized use of customer personal information. This underscores the urgent need for a legal framework for fintech, to which Vietnam can refer to the experience of developed countries in developing those legal frameworks.
The pilot mechanism enacted in other developed countries for fintech companies is called the Fintech Regulatory Sandbox. It aimed to create experimental legal frameworks for new business models, when the current regulatory framework does not yet contain proper regulations specific to the new technology or business model of the fintech companies. The first Sandbox was deployed in the UK in 2015 and now, more than 30 countries are also implementing Sandbox. Particularly in Southeast Asia, there are 4 countries that have built and deployed regulatory sandboxes, namely: Singapore, Thailand, Malaysia and Indonesia.
A sandbox is a framework set up by a financial sector regulator to allow small-scale live testing of innovative technology or business models by private firms in a controlled environment (operating under a special exemption, allowance, or other limited, time-bound exception with limited legal liability) under the authorities’ supervision. A sandbox typically works as depicted in the image below:
The process of Sandbox’s scheme can be divided into 4 stages, and as shown in the image below:
Currently, the State Bank of Vietnam (SBV) is seeking feedback from organizations and individuals on "The draft of a dossier to compile a proposal to develop a Decree on Fintech Testing Mechanism in banking activities" and submit it to the Prime Minister for consideration. The draft allows for 7 fintech segments to participate in the regulatory sandbox:
3. P2P Lending;
5. Open API;
6. Application of innovative technology solutions: Blockchain, AI, etc;
7. Other banking support services such as: credit scoring, crowdfunding, savings etc.
According to the SBV's proposal, the approved fintech solutions will be given 1-2 years to prove themselves. The time period, specific rules and scope is dependent on the specific solutions and fields, and is calculated from the time the Prime Minister approves the testing, and the scope for operation. The scope allowed will include at least one of these three factors: geography, transaction limit and number of customers participating in the service.
At the end of the testing period, organizations participating in the test submit a final report detailing the following:
i) test output product information;
ii) test indicators for success or failure of the solution;
iii) test results, incident reports and resolving customer complaints; and
iv) lessons learned from testing.
Based on the summary report and monitoring process, the SBV will submit its recommendations on next steps to the Prime Minister, including: stopping the test, certifying the completion of the test or extending the trial. At the same time, the SBV is expected to officially receive and approve applications for fintech banks as well as fintech solution providers to participate in the testing mechanism of fintech activities in the banking sector from 2021.
The completion and application of the regulatory sandbox for Fintech activities can help to catalyze innovation in new products, competitively-priced services that meet the needs of customer segments; distribution channels to access dispersed population in remote areas; improved performance in financial services for customers; address compliance barriers and manage risk for financial inclusion. The regulatory sandbox will spur increased competition in the Fintech market, forcing service providers to focus more on serving customer segments and continually improve procedures to maintain and improve service and product offerings to protect and grow revenue.