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Singapore plays fintech evangelist on global mission

MAS pushes fintech gospel with cross-border payments in Asean, blockchain experiments

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"The killer app is really to go cross-border. If we can make a blockchain- based system support payments from one country to another, that could be potentially transformative in bringing costs down," says Mr Menon.

Singapore

IN TWO short years, Singapore has zipped into pole position in the fintech space, challenging rivals such as London in drawing intellectual and funding capital into the city-state with its open adoption of new technology and more broadly, innovation.

The strategy, led by the Monetary Authority of Singapore (MAS), is now widening to a regional and global endeavour, as MAS expands into cross-border projects that could pay significant digital dividends in time.

This will chiefly include blockchain experiments, with MAS now looking at ways to expand an inter-bank payments pilot to create a cross-border payments system between two countries, Ravi Menon, managing director of MAS, said in a wide-ranging interview with The Business Times.

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"The killer app is really to go cross-border. If we can make a blockchain-based system support payments from one country to another, that could be potentially transformative in bringing costs down," said Mr Menon. His comments come ahead of the second Singapore FinTech Festival next week, set to be the world's largest fintech festival again.

Blockchain refers to technology that allows users to digitally authenticate and secure "blocks" of information for a distributed ledger which, in this case, would be shared among financial institutions and central banks.

There are significant cost savings if MAS's blockchain experiments bear fruit. Cross-border settlement takes two to three days and exposes counterparties to settlement risk in that time. As banks hold capital and collateral against those risks, a reduction in settlement time would translate to huge savings for the banks.

The progress will ride off its earlier pilot known as Project Ubin, with which the MAS tested the use of blockchain technology for inter-bank payments within Singapore.

MAS proved that such payments can be done without MAS as a central party, and that netting of payments can be done without having to give up on transactional privacy. But the prize is not found in inter-bank payments in Singapore, which is already efficient on the existing system.

Singapore is talking to some central banks to take the payments idea across borders, noted Mr Menon, without naming the central banks. There are two other central banks in the world that have made some progress in this area of blockchain payments - the Bank of England and the Bank of Canada.

In late October, MAS also inked a fintech partnership with its counterpart in Hong Kong, with the partners committing to work on a strategic project on trade finance cross-border infrastructure based on blockchain technology.

Given Singapore's heavy dependence on trade and its experiments in blockchain, this partnership is of significance. Blockchain technology holds the promise of reducing risks of fraud in invoice financing, and can cut down the onerous paperwork involved in this age-old form of banking that has put a drag on efficiency.

"We're trying blockchains. The advocates of blockchains are very seized by it. We, too, are quite excited by the technology but it remains to be seen how much it can be scaled up," said Mr Menon.

Indeed, he accepts that it could take years before blockchain in global trade finance is widely applied, even if the experiments prove successful.

The practical reality is that Singapore would have to test this bilaterally within one trade corridor and with other early-movers in this area. But the hope is that such experiments among pioneers would eventually lead to global norms.

In the meantime, MAS has kept itself busy by signing more than a dozen fintech agreements with partners from all around the world to keep itself connected, and ready for global collaborations. Singapore likely has the most number of fintech partnerships in the world.

"We've obviously gained a lot of mindshare globally. I think when most people mention fintech, they would mention Singapore as one of the leading hubs," said Mr Menon.

Singapore is also working on payments projects in Asean, as the country steps into the Asean chairmanship position in 2018. MAS is talking to some Asean neighbours about connecting to one another's real-time retail payments systems, making e-commerce and person-to-person transfers for migrant workers, for example, much easier, said Mr Menon. Thailand is one country that may link up.

MAS is also looking to create a digital marketplace where traditional banks in Asean can access fintech services to boost the level of financial inclusion in emerging Asia.

"Many of our Asean neighbours, while they have a growing middle class, still have large segments of the population who are unbanked or uninsured or do not have access to basic payments services. They need solutions which traditional banks would find hard to provide at a competitive price," said Mr Menon.

"We are working to create a cloud-based platform where these traditional banks can access fintech solutions to experiment."

Even as MAS is offering room for fintechs to test out ideas, it is also clear that not all innovations will pan out, said Mr Menon.

"If you look at peer-to-peer lending platforms, some of them claim to be better than the banks in making credit assessments. Sceptics say: 'Well, those models have not been tested across credit cycles, and really, what do these correlations that you get from say, social media data, tell you about a borrower's ability to repay?' If the data suggests that your likelihood of repaying a loan can be assessed on the basis of your handwriting, is that a robust result? I don't know," said Mr Menon.

"Certainly, there are many peer-to-peer lending platforms that are based on fairly sophisticated and robust models. But I think we need to be prepared that many less-robust platforms will go bad when the credit cycle turns."

Yet, Singapore as an international financial centre would need to make a concerted effort to promote innovation and harness technology, said Mr Menon. This approach calls for more patience, knowing that not all experiments will succeed.

"It is in the nature of innovation that there will be some hot air and hype. Some of it could be flawed premises or theories that don't pan out. Which is why we need to be open to more experimentation, and find ways to manage the downsides when experiments fail.

"If a few activities are disrupted or a few consumers inconvenienced as a result of failed experiments, we should see it as part of the innovation process and just get on with it.

"It's something that the financial sector and the economy as a whole needs a lot more of: a spirit of experimentation."

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