EVEN as the Monetary Authority of Singapore (MAS) is welcoming of fintech players, it will draw a clear line to prevent shadow banking from emerging from payment startups.
In an exclusive interview, the managing director of MAS Ravi Menon told The Business Times that under an upcoming piece of payment legislation, larger mobile wallet operators must ringfence e-wallet funds; they will also be barred from using that money to make loans.
Once the Payment Services Bill becomes law, mobile wallet operators with an average daily e-money float of more than S$5 million would have to secure the funds fully under rules set to govern the licence for e-wallet operators.
"The float in the e-wallet has to be secured fully if it is above S$5 million in aggregate - the fintech cannot lend that to somebody else," he said. "Once you take a deposit and lend it out, you become a bank. That's a clear line that a fintech cannot cross, unless it obtains a banking licence."
The principle of ringfencing is similarly practised by securities dealers, who ringfence the proceeds obtained from customers selling shares, and by insurers who separate insurance funds from shareholders' funds.
The Payment Services Bill, to be passed next year or so, homes in on regulating entities according to the payment activities they provide.
The move to ringfence funds held by larger e-wallet operators sets jurisdictions such as Singapore apart from China, where there has been no clear ringfencing of deposits or payments held by fintechs. This has enabled large fintechs there to earn a spread from using these deposits as loans, operating in effect as unregulated banks.
Fintechs in general have shied away from being labelled as banks, which are heavily regulated entities.
This policy move in Singapore will put the spotlight on large fintechs with an emerging business arm for financial services, such as Grab.
For larger payment fintechs, there may be room to explore a fee model from offering advisory services. But Mr Menon pointed out that any fintech firm that moves into advisory services would need a separate financial advisory licence from the MAS.
As large fintechs nudge uncomfortably into the banks' space, top bankers have argued that fintechs are less regulated, a situation that gives them more room to innovate and to take market share through digital means from the incumbents.
But capital requirements and other Basel III regulations are deemed as unrealistic for pure e-wallet and payment operators, with PayPal commonly cited as an example.
For the regulator, the test of materiality and proportionality still applies in deciding how to regulate fintechs. "We want to achieve a level playing field from the perspective of risk," said Mr Menon. "If a fintech poses one per cent of the risk that a bank poses, how can we impose the same burden on them?"
That being said, he noted that MAS will not yield on two main areas - cyber security and anti-money laundering standards. However, it will calibrate the rules according to the scale of the fintechs' operations
"A big bank can be used for money-laundering, but a small payments provider can also be abused. There, the risk is not very different, so there must be roughly the same requirements," he said.
"The second hygiene factor is cyber security. Both a large bank and a small fintech can get hacked. If both are licensed, they will be subject to roughly similar requirements, but we're not going to find the resources to inspect the smaller fintech players. But with banks, we will scrutinise a lot more. We can't take a chance."
As MAS ramps up for its third run of the Singapore Fintech Festival, to be held from Nov 12 to 16, the regulator is also looking to refine the way it runs its "sandbox model".
Introduced in 2016, the MAS sandbox is a limited testing model for fintechs that has opened the way for startups to test new ideas amid relaxed rules for a set period. Examples of regulatory requirements that have been tested include credit rating, minimum paid-up capital, track record and fund solvency.
MAS is now looking to launch a different sandbox model to speed up the approval process.
"We are looking at a different kind of sandbox. It's pre-defined, so the parameters have already been set," said Mr Menon. "If the fintechs want to come in through this sandbox, they just have to notify us and they'll come in straightaway."
This comes amid work behind the scenes to quicken the existing approval process for the sandbox, with approval now taking as long as months.
Since the launch of the sandbox two years ago, MAS has provided guidance to more than 140 firms and individuals, it revealed in its latest annual report put out in July.
It has received more than 40 sandbox applications, covering services such as investment management, crowd funding, insurance and financial advisory.
Of the applications that MAS received, nearly half withdrew their applications for various reasons, which MAS then said showed "the fluidity of innovation and the natural volatility in the business of start-ups".
Mr Menon further told BT that certain fintech players require customisation with their sandbox model, and in some cases, also change their business models after early talks with MAS representatives.
About a third of the applicants did not see the need to be tested in the sandbox later in the process, which MAS said in its annual report was a "positive reflection of our existing regulations, which provide sufficient flexibility for innovative models while safeguarding against risks".
Only a small number have been rejected due to high risk or the difficulties in the proposed experiment, he said.