Fitch Ratings, a global leader in credit ratings and research, has said that technology firms will play an increasingly important role in Asia-Pacific's financial services industry.

Financial technology companies, popularly known as “FinTech” companies, will particularly find significant growth opportunities in the region owing to large unbanked populations in countries such as India, and the emergence of tech-savvy middle classes in countries such as China, Indonesia and the Philippines.

However, Fitch noted that with limited experience of banks and regulators to manage new technologies, the disruption of the financial sector brought about by FinTech firms will come with risks. In the forthcoming years, a key challenge for the regulators will be to strike a balance between the implementation of new technologies to provide better services, while at the same time controlling new operational risks and preventing the aggressive growth of unregulated financial services.

The report further said that FinTech revolution could raise risks to traditional banks which fail to transform over the long term. Moreover, in the absence of appropriate improvements to banks’ systems and resources to manage new technologies, rapid adoption of disruptive technology could raise security and operational vulnerabilities for banks. New technologies could also alter banks' business and operating models in the long term by eroding a previously lucrative business line or reliable funding source, and thus indirectly affect credit profiles as well.

It further noted that India seems to be in favor of continued growth and development of the FinTech sector under a regulatory framework. However, it added that there are major challenges for new entrants in this space – lack of credit history for some new markets makes it difficult to assess creditworthiness to ensure appropriate credit-underwriting standards.

On the other hand, relatively high banking penetration suggests there is an opportunity for digital FinTech firms in China to tap into the increasing levels of wealth being generated by a substantial middle class. Fitch pointed out that China's large tech companies have already developed viable payment systems outside the banking sector that compete for deposits and transaction fees. These companies could leverage these systems to market loans and investments to retail customers.

Fitch emphasized that despite rapid growth in India and China, FinTech is still at a nascent stage, adding that peer-to-peer (P2P) lending, online payment systems and digital wallets focused on retail consumers and SMEs represent by far the largest markets.

“We expect regulation to play a key role in determining how the sector evolves. Clear and transparent policies will be important for successful development. There is likely to be a fine line between the development of regulation to ensure orderly growth and the establishment of significant barriers to entry to protect the incumbents”, Fitch said. “Fitch believes the barriers to entry for FinTech firms are greatest where banking markets are more concentrated. For emerging markets, financial systems with fragmented banking systems that have seen limited innovation will be the most exposed.”