The State Bank of Vietnam has proposed implementing foreign ownership limits in the country’s fintech sector. This would inhibit growth in one of the nation’s most promising industries.
By Diesel C.
With the market tipped to reach a value of US$9 billion by the end of the year, foreign investors are showing no signs of slowing the constant inflow of cash into Vietnam’s fintech sector.
Vietnam accounted for 36% of Southeast Asia’s total fintech investment in 2019. The steady stream of foreign funds has driven up Vietnam’s share of foreign-funded fintech startups to 70%. This is despite the cloud of foreign ownership limitations hanging ominously over incubators and fintech parks.
With no current legal foreign ownership limits and no other defined foreign investment limits, fintech investors are doing their best to get as much money into companies as possible.
New draft legislation regulation put forward by the State Bank of Vietnam (SBV) seeks to limit the foreign ownership rate in the payment intermediary service sector of between 30% and 49%.
Many Vietnamese fintech firms are already well above the proposed foreign ownership limit. Some of Vietnam’s most dominant fintech players like VNPT EPay, Payoo, and 1Pay are majority foreign-owned.
Vietnamese fintech relies on foreign information, technology and capital
The government has hailed the limits as a mechanism to reduce manipulation from foreign investors and increase financial stability. However, in doing so the government risks inhibiting fintech development.
Foreign investors have been the driving force behind Vietnam’s emerging fintech sector. Firms like Payoo and VNPT EPay have enjoyed unfettered access to foreign capital, technology and information.
Without this access to foreign technology and know-how, Vietnam’s fledgeling fintech firms would have struggled to compete with their regional competitors and the sector would not have witnessed the rapid growth of recent years.
With 70% of the Vietnamese population still unbanked and fintech sectors like peer-to-peer (P2P) lending still in the nascent stages of development, the country’s fintech sector still has much to gain from high levels of foreign investment.
The proposed limits could violate international investment law
Under Vietnam’s commitments to the World Trade Organisation (WTO) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the government is required to protect investments made under bilateral and multilateral agreements.
If the proposed limits come to pass, the Vietnamese government could be vulnerable to legal proceedings stemming from the bill.
When China limited foreign ownership of domestic banking institutions to 25%, the WTO brought a case against Beijing. Eventually, the Chinese government backed down and abolished the restrictions.
Instead of limiting foreign ownership the government should work on improving regulatory clarity
Emerging fintech sectors in Vietnam still lack regulatory clarity. The nation’s P2P lending sector still suffers from a lack of regulation. P2P firms do not fall under the purview of any financial authority. Under Vietnamese law, these firms, which connect lenders to borrowers, are not classified as financial institutions. This lack of oversight leaves both borrowers and lenders without legal protections.
Instead of offering clarity and protection, the SBV has warned banks and financial institutions off partnering with P2P lending platforms.
Rather than steering domestic investors away from a valuable and underdeveloped avenue of fintech by eroding social and consumer trust in the industry, the government could offer a regulatory framework and legal protections to nurture and expand the nation’s emerging P2P sector.
Now is not the time for obstacles
Vietnam’s fintech industry is in the midst of an investment wave across structurally important industries. The proposed foreign investment limits would bring this wave crashing down if enforced, cutting emerging fintech players off from international talent, technology and data.
Most investors will agree, it is too early to be erecting barriers to fintech development at this stage. The State Bank of Vietnam would do a lot better to look at ways to maintain and integrate foreign entities and offer additional legal support to the nation’s fintech sector, rather than going down a similar road to China and cutting off access to foreign capital and technology.