On 15 November, Singapore announced the signing of the Regional Comprehensive Economic Partnership (RCEP) at the 37th ASEAN Summit, making a commitment to facilitate regional trade flows alongside the ASEAN 10 member states as well as China, Australia, New Zealand, South Korea, and Japan.
The RCEP is the world’s largest trade agreement and comprises nearly 30% of global population and GDP, accounting for US$21 trillion. The pact complements Singapore’s existing free trade agreements by strengthening supply chain connectivity, offering flexibility in sourcing and procuring from a larger pool of suppliers in the region. The objective of the RCEP Agreement is to establish a modern, comprehensive, high-quality, and mutually beneficial economic partnership that will facilitate the expansion of regional trade and investment and contribute to global economic growth and development, ASEAN.org says.
A key achievement is tariff elimination of at least 92% of goods traded among RCEP countries. This will lower transaction time and costs for all exports, which is instrumental especially for Singapore’s open and export-oriented economy. A statement from the Ministry of Trade and Industry also notes that the RCEP will potentially provide further opportunities to Singapore’s trade with the 14 participating countries, which totalled 50.4% (S$515.2 billion) of our global trade in 2019.
3 ways that RCEP will uplift Fintech
(1) Drives the need for E-commerce and Digital Payments
According to a 2019 Bain research report, the region’s adoption of cashless transactions stands at 40% today, and is two times lower than the selected benchmark countries of the United States and United Kingdom who are at 84%. Although adoption is slow, ASEAN is extremely mobile, translating to a huge potential for mobile payments that can connect consumers with merchants. Many small businesses are conducted through digital marketplaces like Tokopedia, Shopee, and Lazada, a phenomenon fuelled by an increasing trend of consumers shopping online. Among the Southeast Asian countries, Indonesia emerges as the top e-commerce driver of the region and is alone expected to generate US$82 billion in online retail sales by 2025.
Against this backdrop, the RCEP’s new provisions to let small businesses buy and sell goods and services across borders using mobile devices benefits SMEs throughout the region greatly. The agreement mandates for electronic signatures and transactions to be increasingly accepted across all RCEP countries, which will offer a more conducive digital and cross-border trade environment. With many small enterprises already conducting their operations online without a physical storefront, the ratification of the RCEP will allow for a more systematic tracking of invoices while saving time and hassle on messy paperwork.
With a huge bulk of trade being conducted online, this also creates a huge market opportunity for the digital payments sector. Where cash phases out and transactions take place virtually, consumers and businesses alike will progressively require the services of Digital Payments FinTechs. Supportive and consistent regulations and government policies will be the biggest swing factor in the development of digital financial services throughout the region, Bain says.
(2) Increases demand for Digital lending which fills the credit gap
However with that said, many businesses will need working capital or bridging capital to drive these new business opportunities. Where smaller firms lack access to credit aid from traditional financial institutions (FIs), SME digital lenders can fill the gap. Across the SEA region, there is a US$300 billion SME funding gap driven by the lack of access to credit from FIs.
A 2017 survey by the Asian Development Bank (ADB) revealed that the share of the trade finance gap in developing Asia was 40% of the world’s total of US$1.5 trillion in 2016. Furthermore, micro small & medium enterprises (MSMEs) face the biggest challenge in accessing trade finance, representing 74% of total rejections in 2016, an increase from 57% the previous year. This high rate of rejection translates to missed trade opportunities, like those opened by the RCEP, which only impedes economic growth of the region.
As such, the increase in SMEs tapping on market potential drives the need for SME Digital lending. This form of lending is FinTech that at its core uses cutting edge technology to connect under-served borrowers with individual and institutional investors via a single digital platform. More importantly, unlike FIs whose credit underwriting approach is primarily based on financial data, track-record and quality of collateral, digital FinTech lenders determine the SMEs’ creditworthiness by the latter’s business data and cash flow. This means that businesses who have low to zero credit track record, which is largely the reason they are rejected by FIs, can now get easier access to capital so as to take advantage of the opportunities produced by greater economic integration.
(3) Boosts regional Financial Services through transparent regulations
With greater economic integration, not only product exporters but service providers will also get to benefit from the increase in cross-border transactions. Specifically, the RCEP comprises the Trade in Services provision. This mandates for at least 65% of the RCEP countries’ services sector to be fully open with greater transparency of regulations and measures across the region. Among the first sectors to benefit is the Financial Services industry.
For much of the FinTech sector, this is a boost to their growth plans. 2018’s announcement of the ASEAN Financial Innovation Network (AFIN) encourages the integration of the region’s FinTech ecosystem, but more needs to be done for financial startups to engage consumers directly rather than through FIs. The RCEP calls for obligations to provide market access to foreign service suppliers and to treat local and foreign suppliers equally, which translates to cost savings on technical and regulatory processes for cross-border market entry.
Although many policies around FinTech have to be molded and tailored as the sector continues to evolve and innovate, the RCEP allows FinTech service providers to more easily align with local regulations, streamlining their journey for regional expansion. Accordingly, this strengthens the ASEAN FinTech ecosystem as the bloc of countries work together to enable cross-border trade transactions which only regional players can fund.
The RCEP has yet to be ratified and economists expect a longer time to see the impact of the RCEP on Singapore, but the potential opportunities for the wider ASEAN FinTech scene effected by the Agreement cannot be ignored.
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