A.

INTRODUCTION

‘FinTech’ is a portmanteau term consisting of the words – ‘financial’ and

‘technology’.1 It is an embodiment of the evolution of the field of financial services, wherein
technology is the key force of the changes. As described by Barberis et al, there are 3 ages of
FinTech:2

FinTech 1.0 (1866-1967): This era witnessed from the use of transatlantic cable to
the new invention of ATM. The transmission of financial information, transactions
and payments is increasingly efficient at this stage.

FinTech 2.0 (1967-2008): Due to the active use of FinTech, financial services
industry had invented ‘electronic payments and clearing systems, ATM Machines and
online banking.’

FinTech 3.0 (2008-present): Technology companies have begun to provide financial

products and services that were designed for an improved customer experience.

Perceiving from the aforementioned revolution, it is an undeniable fact that FinTech

duly provides benefits to the society. However, FinTech’s impact has begun to reverberate
across all sectors that include the financial services market that was predominantly controlled
by the conventional banks, and such impact is also gradually felt by customers.

This paper seeks to traverse the challenges and issues that FinTech may possibly
represent to the banks (“Division 1”) and customers (“Division 2”). Apart from that, the
writers are also concerned with TWO (2) questions, that could be distinguished as ‘Would
money laundering go undetected under FinTech?’ (“Division 3”) and ‘Would financial fraud
go undetected with the application of FinTech?’. (“Division 4”)

1
PricewaterhouseCoopers (PwC), ‘ Security Challenges in the evolving fintech landscape’ (2016) 1 <
https://www.pwc.in/assets/pdfs/consulting/cyber-security/banking/security-challenges-in-the-evolving-fintech-
landscape.pdf> accessed 26 April 2018
2
D. W. Arner, J. N. Barberis, R. P. Buckley. ‘The Evolution of FinTech: A New Post-Crisis Paradigm?’.
University of Hong Kong Faculty of Law Research Paper No. 2015/047; UNSW Law Research Paper No. 2016-
62. October, 2015

1
 B. ESSENCE OF THE PAPER

DIVISION 1:

CHALLENGES AND ISSUES THAT CONFRONT THE TRADITIONAL BANK

Tech tycoon Bill Gates had once prophesied in 1994 that: ‘banking businesses are
necessary, but banks are not’. Such provocative statement is now more true than ever, with
the coming of age of the digital ‘disruptive’ era. Proving that it is not merely a short-term
hype, FinTech startups all around the world are gaining traction with multi-billion
investments over the past years,3 making FinTech a force that traditional financial institutions
cannot afford to overlook.

The World FinTech Report 2017 has succinctly pointed out that technological
evolution is one of the main driving forces that propel FinTech. Thanks to smart gadgets and
devices, the modern day people are so associated to digital interfaces in their ordinary lives
that they are demanding the same level of experience when it comes to financial services4 and
that may be a huge challenge to banking firms, opening up opportunity to agile FinTechs
tapping on such change of consumer behavior to disrupt the conventional financial industries.
Take China’s leading FinTech for example, the Alipay, powered by Ant Financial, a
subsidiary of Alibaba (e-commerce conglomerate). Apart from its ordinary online payment
service, Alipay is central to almost half of the Chinese population’s lives by enabling its users
to transfer money among themselves, to pay utility bills, to check balance of a connected
bank account or to purchase items without cash, all in one single touch or QR code scanning.5

All of the above is just part of what Alipay offers. Cutting into other areas once
thought to be the forte of banking firms, Alipay’s Yu’e Bao allows users to earn high-yield
returns on their current accounts; Ant Fortune is an investment platform that constantly
provides wealth management and investment tips based on users’ transaction history; Zhima
(Sesame) Credit analyses creditworthiness of a user based on his financial profile; and Ant
Micro even offers loans to SMEs and individuals wishing to start a business. 6 Financial
services are being rendered but is there any physical bank involved during the process? No.
3
PricewaterhouseCoopers (PwC), ‘Redrawing the lines: FinTech’s growing influence on Financial Services’
(2017) Global FinTech Report, 3
4
Capgemini, Linkedin & Efma, ‘World FinTech Report 2017’ (2017), 11
5
Matthias Hendrichs, ‘Why Alipay is more than just the Chinese equivalent of PayPal’ (2015) TechinAsia
<https://www.techinasia.com/talk/online-payment-provider-alipay-chinese-equivalent-paypal> accessed 9 May
2018
6
ibid

2
Across the globe, similar FinTech startups and mobile applications are slowly churning into
market shares of conventional banking firms.

If we observe the modus operandi of FinTechs, perhaps with the exception of regional
giants such as Alipay, most of the startups are focusing on a core financial business, be it
money lending, fund transfer and payment services or investment and wealth management.
Such specialisation is another added advantage to FinTechs because in contrast to traditional
banks who provide a myriad of services under one institution, specialised FinTech ensures
that the services and products they offer are customer-centric, unrestraint by usual business
hours and free from bureaucratic procedures, which translates to efficiency and better
customer experience.

This could be alarming for traditional players because their customers are slowly
opting out from their market. The Global FinTech Report 2017 shows that globally in 2016,
half (50.2%) of the financial customers are using at least one non-traditional firm for
banking, insurance, payments or investment management. 7 According to PwC’s global
FinTech report 2017, 88% of conventional industry players share the sentiment that their
businesses are at risk due to such disruption8 and in Malaysia alone, PwC’s recent survey
revealed that 82% of conventional banks are feeling the heat of FinTechs9 and forecasted that
the disruption would engulf up to 22% of their revenues.10 As an entrenched industry that is
“too big to fail”, the collapse of banking industry is unimaginable and would have far-
reaching consequences. Bank branches are forced to shrink, smaller banks that are unable to
compete and innovate will be closed, and financial industry’s job security is at stake. We
have seen how the likes of Uber and Airbnb distorting their contemporary industries and it
would be no surprise that FinTechs, with their current momentum and expansion, would do
the same, at least partially, to traditional banking industries soon and that perhaps poses the
biggest threat to banks.

7
Capgemini, Linkedin & Efma, ‘World FinTech Report 2017’ (2017), 12
8
PricewaterhouseCoopers (PwC), ‘Redrawing the lines: FinTech’s growing influence on Financial Services’
(2017) Global FinTech Report, 5
9
PricewaterhouseCooper (PwC), ‘Catching the FinTech Wave: A Survey on FinTech in Malaysia’ (2016) Asian
Institute of Chartered Bankers, 8
10
ibid, 9

3
 DIVISION 2:

CHALLENGES AND ISSUES THAT FINTECH REPRESENTS TO CUSTOMERS

As aforementioned, some of the greatest value propositions offered by FinTechs that

are attractive to the modern customers include convenience, ease of usage and a more
personalised service suited to requests of users. As much as these value propositions increase
customers’ user experience, they could be a double-edged sword to the customer at the same
time. How so?

There is no doubt that mobile payment applications such as that of Alipay, Apple Pay,
Samsung Pay and many others are encouraging users to move towards a ‘cash-less’ society,
by offering seamless mobile payment that is instantaneous or ‘on-the-go’. However, many are
ignoring the potential risk associated with such payment method. What if their mobile phones
are stolen or lost? Despite the presence of security such as tokenization, host-card emulation
and biometrics authentication, there could still be a possibility that these mobile payment
applications could be hacked and any transactions wrongfully done by the hacker using the
owner’s phone to go undetected.11 According to a research done by the US Federal Reserve,
67% of the respondents cited ‘security of mobile payments’ as factor refraining them from
using such service and another 47% say that they ‘simply do not trust the technology’.12

Associating with the ideology of ‘cash-less’ society is the emergence of another

FinTech, that is cryptocurrency made famous through Bitcoin. Bitcoin, or its founding
technology the Blockchain system, envisages a future where transactions or payments do not
need to be authenticated by a central regulator. 13 As intriguing as it may sound, there are
reasons why virtual currencies are still not recognised all across the world. Investing or
transacting through cryptocurrency exposes the users to substantial risks because the users
themselves are hugely accountable for their losses as there is no centralised authority that
could correct any setbacks triggered by failure of the virtual currencies.14

11
S&P Global Market Intelligence, ‘An Introduction to FinTech: Key Sectors and Trends’ (2016)
Charlottesville, 7
12
Business Insider, ‘Data Breaches could cripple the growth of mobile wallets’ (2016) BI Intelligence
<http://www.businessinsider.com/data-breaches-could-cripple-the-growth-of-mobile-wallets-2016-8/?IR=T>
accessed 9 May 2018
13
A. Blundell-Wignall, ‘The Bitcoin Question: Currency versus Trust-less Transfer Technology’ (2014) OECD
Working Papers on Finance, Insurance and Private Pensions, 37
14
Izabella Kaminska, ‘DAO hacking and dispute resolution’ (2016) Financial Times, Alphaville
<https://ftalphaville.ft.com/2016/06/17/2166168/dao-hacking-and-dispute-resolution/> accessed 9 May 2018

4
 When FinTechs pride themselves with providing personalised and customised
services and products to their users, they are actually making such service possible through
powerful data mining analytics or Big Data.15 Distinct from traditional firms where personal
information of customers are collected through volunteered information by filing up forms or
submission of documents, tech-affluent FinTechs, in exploiting their users’ lack of awareness
and enforcement, could build far more accurate ‘customer-profiling’ by mining social-media
profiles, web-browsing, or even phone location tracker using analytical tools or algorithms.16
Through these methods, they could have got hold to detailed information such as our lifestyle
habits, consumer behavior or even our personalities. Such phenomenon of tech-driven
companies “knowing too much” is slowly shaping an Orwellian world around us and it is an
emerging global issue as users’ data privacy is at stake.

Not only it is inappropriate that FinTechs are getting too much information from their
users, it could work adversely against certain segments of users. According to Consumers
International’s report, due to Fintechs’ mastery of information surrounding our everyday lives,
it could actually lead to financial exclusion and extreme price discrimination.17 Some people
may be denied access to loan or insurance as a result of thorough ‘customer-profiling’ based
on information collected by the FinTechs and that cannot be good for those who are in
desperate need for such services. The huge volume of data collected also empowers FinTechs
to cherry-pick their customers by only entertaining those more profitable and sidelining the
rest from the market.

DIVISION 3:

WOULD MONEY-LAUNDERING GO UNDETECTED UNDER FINTECH?

Since FinTech companies are well-equipped with technologies, they are therefore in a
better position in tackling the issue of money-laundering than the conventional banks. Take
HSBC for example, even the world-wide reputable bank did engage a FinTech Company,
Quantexa, for a creation of software that particularly combats the crime of money-

15
Richard Bates, ‘Banking on The Future: An Exploration of FinTech and The Consumer Interest’ (2017)
Consumers International, 25
16
ibid
17
ibid, 26

5
laundering.18 Moreover, Fintech also emphasizes in promoting greater automation, reduced
cost of analytics and simplified operational processes.19

Despite the advantages that the Fintech may provide, the United Kingdom’s Financial
Conduct Authority (“FCA”) has expressly pointed out in its business plan that if FinTech is
not managed properly, it could, regardless of the good it offers, nevertheless introduce ‘pests’
into the financial system by paving a way for criminals to commit offence, and heightening
the par for detecting money-laundering activities.20 This setback may be resulted from the
fact that money used on the FinTech platform is seemed to change hands adroitly under the
shield of anonymity.21 It means money can be easily transferred from one unknown and/or
bogus person to another person before, or even without, being known, and discovered by the
Law Enforcement Agencies.

As the true identity of Money launderers is unlikely to be revealed, they therefore

prefer to commit money-laundering through Fintech, particularly Bitcoin. In this regard, we
may refer to a recent decision of Supreme Court of South Australia in R v Shaun Michael
Collopy; R v Cooley, 22 whereby the Appellants imported and distributed illicit drugs, by
using bitcoin, on the darknet with a false identity and/or anonymity. The Appellants traded
the drugs through the re-mailing centres where the packages of drugs were to be divided into
smaller packets for the prevention of detection. To note that, the Appellants in this case were
not arrested until the police were informed by the Australia Post of a number of parcels of
which contained drugs.

As concluded from the above information and the Australian case, money-laundering
activities may be detected, but the controller and host to such activities would not easily be
discovered due to the anonymity nature of FinTech. In this regard, it is also crucial to
acknowledge that in circumstances where the crime is committed in a simpler way like
transferring in-and-out the large amount of ill-gotten money via an ATM machine or online

18
Karl Flinders, 'HSBC Adopts Fintech To Fight Money Laundering' (ComputerWeekly.com, 2018)
<https://www.computerweekly.com/news/252438584/HSBC-adopts-fintech-to-fight-money-laundering>
accessed 20 April 2018.
19
Michael Barr, Karen Gifford and Aaron Klein, 'Enhancing Anti-Money Laundering And Financial Access:
Can New Technology Achieve Both?' (The Brookings Institution, 2018) <https://www.brookings.edu/wp-
content/uploads/2018/04/es_20180413_fintech_access.pdf> accessed 22 April 2018.
20
Financial Conduct Authorities, 'Business Plan 2017/2018' (Fca.org.uk, 2017) .
21
Daniel Alonso and Timothy Stone, 'Fintech: The Emerging Financial Crime Compliance Minefield'
(Exiger.com, 2016)
22
[2017] SASCFC 64

6
payment system, then the person committing such crime could therefore be easily brought to
justice for a fair trial.

DIVISION 4:

WOULD FINANCIAL FRAUD GO UNDETECTED WITH THE USE OF FINTECH?

Apart from the disruption that may be caused to the banks, there are greater concerns
on the legal issues in particular of breach of security and the lapse of privacy, in which they
are similar to online identity fraud cases.23

It is crucial to apprehend that one’s identity can be stolen and impersonated by

someone else to carry out some unauthorised transactions. Of note, fraudsters possibly
operate the unauthorised FinTech transactions through digital signature, and such digital
signature can be acquired by various ways, such as phishing, pharming and spywaring24

Be that as it may, financial fraud is said to be getting difficult to commit because of

the development of Blockchain technology that gradually forms part of the current FinTech.
Blockchain is an incorruptible digital ledger for the economic transaction 25 to be done
without the involvement of intermediaries and frictions throughout the transaction itself.26
Despite the simplicity of the Blockchain concept, it is in fact not easy to be tampered with.27

To tackle the question in hand, this writer is of the opinion that financial fraud is not
likely to be undetected. This is due to the function of Blockchain technology that most of the
FinTech adopted with. Such integration eventually causes difficulty to the fraudsters to
escape from liability. By using this technology, the data and transaction records contained in
the database are highly unlikely to be altered. Since the trail of record of the transactions
remain in the system, the Law Enforcement Agencies could thus detect and trace back to the
fraudulent transaction carried out by the fraudsters. In this regard, we should take note that
although the fraudulent transaction is traceable, the fraudsters, in cases of bitcoin, could

23
Roussey B, “5 Challenges Facing the Internet of Things” (TechGenixAugust 31, 2016)
24
Cyber Security Malaysia, ‘Keep Yourself Safe From Online Identity Theft’
<http://www.cybersecurity.my/data/content_files/11/763.pdf> accessed April 23, 2018
25
Rosic A, “What Is Blockchain Technology? A Step-by-Step Guide For Beginners” (Blockgeeks2016)
<https://blockgeeks.com/guides/what-is-blockchain-technology/> accessed April 23, 2018
26
Bonetti A, “The Relationship between Blockchain and FinTech” (The Market MogulFebruary 5, 2017)
<https://themarketmogul.com/relationship-blockchain-fintech/> accessed April 23, 2018
27
Mauri R, “Three Features of Blockchain That Help Prevent Fraud” (Blockchain Unleashed: IBM Blockchain
Blog, 2017) <https://www.ibm.com/blogs/blockchain/2017/09/three-features-of-blockchain-that-help-prevent-
fraud/> accessed April 24, 2018

7
however hide their identity with anonymity. It is nevertheless identifiable if the fraudster’s
bitcoin addresses and his transaction patterns have been correctly ascertained. The Law
Enforcement Authorities could thereby come out with a hypothesis by narrowing down the
area of searching for the fraudsters.28Adding to that, there have also been cases showing the
success in bringing the fraudsters to justice, such as the incident of $150 million Ponzi
Scheme.29 This shows that financial fraud can in fact be detected. What concerns us here the
most is the long duration of time taken for the detection process to be completed and the
difficulty in searching for the criminals hiding behind the delusion.

C. CONCLUSION

With the rise of technology, the potential disruption caused by emerging FinTechs is
inevitable. To avoid themselves being put into an awkward existential crisis, traditional
banking firms must not be complacent and should ‘up their game’ by embracing technology.
In fact, research and survey indicate that banks, with their entrenched customer base and
established brand (which comes with trust), are well positioned to collaborate with FinTechs
by either acquiring or partnering with those startups. 30 Financial industry should view
FinTechs as enablers who could inject into the industry a breath of efficiency and enhanced
customer experience. Fortunately in Malaysia, more banks are catching up with the trend and
the Bank Negara has even issued a regulatory sandbox framework for banks and FinTech
players to experiment with new solutions in live environment.31 Meanwhile on the front of
customer, FinTechs has undoubtedly eased their lives with ease, convenience and innovative
personalised financial products or services. However, with FinTechs holding so much
information about us through their data analytics and Big Data, customers’ data privacy is at
an unprecedented risk and in relation to that, regulators should respond fast by strengthening
data protection and the extent of FinTechs in tracking customers’ information. FinTechs
themselves should also constantly be vigilant by enhancing their cybersecurity to prevent
catastrophic effects should push comes to shove. As for the issues on money-laundering and
financial fraud, the writers are of the opinion that they could not easily go undetected with the
rapid development of FinTech.

28
Koshy P, Koshy D and Mcdaniel P, “An Analysis of Anonymity in Bitcoin Using P2P Network Traffic”
[2014] Financial Cryptography and Data Security Lecture Notes in Computer Science 469
29
Securities and Exchange Commission v Trendon T. Shavers and Bitcoin Savings and Trust 2014 U.S. Dist.
LEXIS 194382
30
Daniel Drummer, ‘FinTech - Challenges and Opportunities’ (2016) McKinsey & Company, 6
31
PricewaterhouseCooper (PwC), ‘Catching the FinTech Wave: A Survey on FinTech in Malaysia’ (2016)
Asian Institute of Chartered Bankers, 16

8
 BIBIOGRAPHY

Alonso D. and Stone T., Fintech: The Emerging Financial Crime Compliance Minefield (Exiger.com,
2016)

Arner D. W., Barberis J. N, Buckley R. P. The Evolution of FinTech: A New Post-Crisis Paradigm?
(University of Hong Kong Faculty of Law Research Paper No. 2015/047; UNSW Law Research
Paper No. 2016-62. October, 2015)

Barr M. Gifford K. and Klein A., Enhancing Anti-Money Laundering And Financial Access: Can
New Technology Achieve Both? (The Brookings Institution, 2018)

Blundell-Wignall A., ‘The Bitcoin Question: Currency versus Trust-less Transfer Technology’
(OECD Working Papers on Finance, Insurance and Private Pensions, 2014)

Bonetti A, The Relationship between Blockchain and FinTech (The Market MogulFebruary 5, 2017)

Business Insider, Data Breaches could cripple the growth of mobile wallets (BI Intelligence, 2016)

Capgemini, Linkedin & Efma, World FinTech Report (2017)

Cooper P. Catching the FinTech Wave: A Survey on FinTech in Malaysia (Asian Institute of
Chartered Bankers, 2016)

Coopers P., Redrawing the lines: FinTech’s growing influence on Financial Services (Global FinTech
Report 2017)

Coopers P., Security Challenges in the evolving fintech landscape (2016)

Drummer D., FinTech - Challenges and Opportunities (McKinsey & Company, 2016)

Financial Conduct Authorities, 'Business Plan 2017/2018' (Fca.org.uk, 2017)

Flinders K., 'HSBC Adopts Fintech To Fight Money Laundering' (ComputerWeekly.com, 2018)

Hendrichs M., Why Alipay is more than just the Chinese equivalent of PayPal (TechinAsia 2015)

Intelligence G.M, An Introduction to FinTech: Key Sectors and Trends (2016)

Kaminska I., DAO hacking and dispute resolution (Financial Times, Alphaville 2016)

Koshy P, Koshy D and Mcdaniel P, An Analysis of Anonymity in Bitcoin Using P2P Network Traffic
(Financial Cryptography and Data Security Lecture Notes in Computer Science, 2014)

Mauri R, Three Features of Blockchain That Help Prevent Fraud” (Blockchain Unleashed: IBM
Blockchain Blog, 2017)

Roussey B, 5 Challenges Facing the Internet of Things (TechGenixAugust 31, 2016)

Rosic A, What Is Blockchain Technology? A Step-by-Step Guide For Beginners (Blockgeeks2016)