4 Trends Shaping the Future of the P2P Lending Regulation in Southeast Asia P2P lending has become one of the key directions in the light of the initiatives promoting financial inclusion

Asian fintech has grown exponentially in the past few years. In particular, Southeast Asia is standing out. As CB Insights revealed, in the third quarter of 2019, SEA set a new annual record with $701 million invested across 87 deals. The active inflow of investments made countries intensify their efforts in the development of fintech ecosystems and the regulatory environment. P2P lending has become one of the key directions in the light of the initiatives promoting financial inclusion. At the same time, governments have not only appreciated the advantages of alternative financing and its positive impact on economic growth, they have also considered possible threats. Several trends prove it.

Regulatory Open Points

Regulatory initiatives in fintech and alternative lending are gaining traction around the world. In particular, it is highly relevant for emerging countries with limited opportunities and lack of foreign investments. Governments have to be very careful when setting requirements to avoid excessive restrictions that would refrain both foreign and local players from entering the market.

Overall, as a recent study of the Cambridge Centre for Alternative Finance showed, 51 per cent of Southeast Asian companies consider the current regulation for fintech as adequate and not hampering their activities. However, 24 per cent of firms find the conditions as excessive and too strict. Still, 14 per cent say that the sector is lacking special rules.

At the same time, authorities in SEA have proved their openness to both fintech and alternative lending, particularly. Some countries, such as Indonesia and Thailand, have already introduced standards to control and support alternative finances and P2P lending. Vietnam has also stepped on the path leading to the regulation of P2P lending by starting to prepare the legislative framework earlier this year. It contrasts with the absence of related requirements in Singapore, the Philippines and other countries now. However, it does not mean that the rest of the region has no plans on special standards at all.

Quite the opposite, the idea is growing popular across the whole region. It becomes particularly relevant when it comes to establishing and running innovative offices and regulatory sandboxes. At the same time, it raises the importance of RegTech facilitating improvements in legal procedures. Altogether, they improve quality, efficiency and accessibility of financial services and serve as a channel to share best practices by bringing together experts, startups and other officials. In its turn, it drives financial inclusion, which is a key point on the agenda for most countries in the region.

There are four main trends observed in this process:

1. Regulators are expanding cross-border cooperation
Authorities in Southeast Asia have recognized how disadvantageous the development of isolated standards may be. Harmonization of requirements for the industry across the borders has become a point for discussions in several markets. The brightest examples are Indonesia and the Philippines. To reduce discrepancies, they started sharing best practices with other governments. Although full conformity is unlikely, these efforts are important. In the end, it will help to lower financial and other business costs arising because of regulatory differences.

2. Pro-market policies are driving innovation.

An increase in discussions between regulators and market players is one of the keys to a sufficient and adequate environment for fintech and alternative lending in Southeast Asia. Regulatory sandboxes that have grown in number across the region in recent years confirm the trend. Allowing testing new financial services and business models, they help governments bring innovations on a wider scale in case of success to serve for the benefit of people. Moreover, Southeast Asia was one of the first regions to develop a sandbox accessible for players from different countries. The APIX platform created by the International Finance Corporation, the Monetary Authority of Singapore and the Association of Bankers of SEA supports digital innovation and drives financial inclusion.

3. Benchmarking supports regulatory changes.

Even though Singapore and Malaysia do not have a specific regulation for P2P lending, they have the highest impact on regulators in other countries in Southeast Asia. The practise shows that more than 90 per cent of governments use regulatory benchmarking when considering policies for the industry. Their framework provides a valuable example of how regulatory standards have balanced the development of lending and investor protection. At the same time, the use of digital technologies covers quite a wide range of issues, including policies on the use of artificial intelligence, big data analysis, personal data privacy and protection, etc. Singapore's principles on promoting fairness, ethics, accountability and transparency (FEAT) in the use of artificial intelligence and data analytics in the financial sector is one of the most vivid examples here.

4. An increase in innovations in RegTech and SupTech.

The benefit of RegTech has already proved itself by improving the transparency of operations and reporting of market players. At the same time, it helps companies to save costs when meeting regulatory requirements. In this sense, the supervisory technology (SupTech) is only gaining traction. Over time, retrospective reports will give place to preventive supervision. Structural in-depth data analysis applying algorithms based on machine learning and artificial intelligence will help to identify violations and negative trends in operations of supervised enterprises. One of the promising areas of SupTech is the transition of legal requirements into a machine-readable form to automate the control and update of regulatory information. Currently, these technologies are expensive and inaccessible to most market players. However, these solutions will continue developing, get widespread and become a necessity soon.