The wealthy city-state this month played host to the world’s largest fintech festival, underscoring its ambitions as a regional springboard for financial sector innovation.

Around 60,000 participants from 130 countries took part in the three-day Singapore FinTech Festival (SFF) x Singapore Week of Innovation and TeCHnology (SWITCH) event, according to organizers from the Monetary Authority of Singapore (MAS), the nation’s central bank which has played a key role in promoting domestic fintechs.

Ravi Menon, managing director of MAS, recently described the sector’s innovations as “the way of the future” in media interviews. “At a time when traditional trade relationships are under strain, I think the opportunity ahead is to look at new ways of connectivity through digital means…that is where the next stage of liberalization needs to take place,” he said.

Fintech broadly seeks to improve and automate the delivery and use of financial services such as payments, transfers, lending and insurance. The term also encompasses the development and use of digital currencies as well as blockchain, a decentralized record-keeping technology with the potential to be utilized across multiple sectors.

Confidence in Singapore’s fintech startups has remained strong despite trade tensions and global economic headwinds, exceeding expectations with investments crossing the S$1 billion (US$733.8 million) mark for the first nine months of this year, up nearly 70% from 2018, according to research by consulting firm Accenture.

While Singapore’s fundraising gains have been substantial, fintech deals in China, by comparison, amounted to US$2.5 billion in the first half of 2019, a figure that nonetheless represents a stark year-on-year decline for the Asian powerhouse, which secured a staggering US$16.3 billion in funding in the first half of 2018, according to professional services network KPMG.

Data from Accenture shows that global investment in fintech ventures sharply fell in the first half of 2019 due to fewer mega-deals, such as last year’s record-breaking US$14 billion fundraising by China’s Ant Financial Services Group, which has played a major role in shaping that country’s online payment and financial technology landscape.

The number of fintech deals in Singapore has likewise fallen by almost a third – from 133 to 94 – in the first nine months of this year compared to 2018, despite a sharp rise in financing from venture capital and private equity firms, hedge funds, corporations and government-backed funds, suggesting larger bets are being made on fewer startups.

“There are various sectors capturing the attention of startup founders and investors, such as artificial intelligence, cybersecurity, blockchain and so on,” said Eric Dadoun of Singapore-based investment firm Impiro, which provides early-stage funding to startups across Southeast Asia.

“But with startup valuations becoming increasingly high, quality deal flow is increasingly difficult to come by,” he told Asia Times. Alongside growing investment, the sheer number of fintech firms in Singapore has also risen dramatically, with more than 600 startups currently in the space compared with around 50 such companies just four years ago.

Dadoun said that while he feels that the fintech sector’s ambitious startups have “done a spectacular job, leading to a lot of great products,” the scene was becoming “somewhat saturated” as a result of too many young firms working on similar or identical problems or issues at once.

“That is going to lead to a lot of failed projects,” Dadoun opined, adding that the best startups will find gaps in the markets where they operate and localize their approach to meet domestic requirements. “There is risk in fintech as there is with any investment, but the upside potential is of course there if the right opportunity is found.”

Research shows that fintech investors see the most opportunity in digital payment startups, which accounted for 34% of Singapore’s fintech fundraising this year, according to Accenture. Investments in lending-related startups accounted for another 20%, while insurance-related tech firms took in 17% of new funding.

New players in digital payments would naturally set their sights beyond Singapore, focusing on the regional markets of Association of Southeast Asian Nations (ASEAN) member states, where basic financial services and traditional banking infrastructure such as ATMs and branches are not widespread in rural areas.

A report published in October by Singapore’s sovereign wealth fund Temasek, internet giant Google and management consultancy Bain & Company found that 198 million out of 400 million adults in ASEAN are “unbanked”, meaning without bank accounts, while 98 million other account holders are “underbanked” with limited access to credit, investment and insurance.

“The numbers are stratospheric in terms of the amount of the world’s population today that is simply not banked,” said Frank Troise, managing director of private investment firm and merchant bank SoHo Capital. He believes harnessing fintech to bring digital wallets, mobile payments and micro-lending to the region’s unbanked masses is the answer.

“These people don’t exist on the system today and the consequences of that are actually staggering. Getting them on the system solves an economic problem,” Troise said. “The question is who’s the ideal firm to actually go after the unbanked? Ironically, it’s the telcos (telephone companies) because they have market penetration.”

Around 90% of Southeast Asia’s 360 million internet users access the web primarily with mobile devices according to Temasek, Google and Bain & Company, whose report also projected digital financial services to generate US$38 billion in annual revenue within ASEAN’s six largest markets by 2025.

“People use Singapore as the beachhead to basically lily pad across the region. They’ll get their entity set up legally, they’ll get their intellectual property set up legally. But the reality is you need to be in Indonesia, Malaysia, Vietnam, the Philippines. You need to be in these key markets to truly economically achieve what you want to do,” Troise added.

In recognition of the growing demand for frictionless digital payments and the economic potential it would unlock, Singapore’s MAS intends to develop a real-time payments network with its ASEAN neighbors that would enable retail micro-payments using mobile numbers on smartphones, a potential boon for small businesses and migrant workers.

But greater financial inclusion through digital payments outside the formal banking system also poses an oversight challenge for regulators. Industry experts, however, believe the city-state’s regulatory approach aims to guard against threats such as cybercrime, money laundering and terrorism financing while also encouraging experimentation.

“Singapore has done a brilliant job of being the hub for all of this,” said Troise. “They’ve created a safe framework and an open environment with the regulator’s support, which is huge.”

The city-state’s approach to fintech governance, he said, has allowed for “an element of trust” as collaborations between financial institutions and fintech startups gather steam.

While regional fintech opportunities abound, MAS is encouraging new digital entrants to the domestic banking sector to cater to “under-served” segments of the Singapore market as part of its financial liberalization push. The regulator plans to issue up to five new digital bank licenses allowing fintech companies to become fully-fledged banks.

The city-state is following the lead of rival Asian financial hub Hong Kong, which earlier this year issued its initial batch of online-only banking licenses to eight companies, including Chinese e-commerce giant Alibaba, conglomerate Tencent, and smartphone maker Xiaomi. Digital-only banks are set to launch there in early 2020.

Fully digital banks would offer traditional financial services without physical infrastructure such as bank branches, allowing customers to control their finances entirely from their smartphones and computers. By the middle of 2020, MAS will award two licenses to digital full banks and up to three licenses for digital wholesale banks.

The former would be allowed to take deposits from retail customers, while wholesale banks will generally cater to small and medium-sized enterprises (SMEs) and other non-retail segments. According to research by Temasek, Google and Bain & Company, SMEs in Southeast Asia are currently underserved by existing banks.

Moreover, the market for digital lending in ASEAN is expected to more than quadruple to US$110 billion by 2025, say their projections. MAS chief Menon acknowledged in a recent interview with Singapore financial daily The Business Times that while traditional banks would be challenged by the move, that competition would bring advantages.

“We’re only doing this because of two deep-seated convictions. One, it will serve the customer better. [The] initiatives will help bring about a higher quality of customer service. Second, we’re confident that our banks, especially the local banks, will be able to withstand the competition and actually become even stronger and more innovative,” he said.

Impiro’s Dadoun believes that dynamic has been true in the broader fintech space.

“Ambitious young startups are arguably growing into more established incumbents while also pushing some of the more traditional players in the ecosystem to catch up via their own innovations,” he said. “It’s debatable how much of the latter is a direct result to protect against the former but the fact is the market as a whole has benefited from it.”