Vietnamese firms like MoMo, Moca, and Payoo, and foreign firms like Grab and Gobear, are Fintech leaders in Vietnam. And the variety of services is startling: Digital Wallet providers, ride-hailing intermediaries, personal finance specialists, peer-to-peer lenders, and more. Customer loyalty programs have become very creative. Digital solutions for both business and non-business purposes are common. Vietnam’s drive toward Industry 4.0 status is real and intense.
The demographics are familiar: Vietnam’s young population of more than 95 million, 84% of mobile phone users own a smart phone, and 66% of the population has internet access. Add to this the growth and increasing affluence of its middle class. Vietnam is fertile ground for disruptive financial technology and its nimble start-ups are challenging incumbents across the spectrum: slow-moving and difficult to scale industries, such as traditional financial services, insurance, but also more nimble industries like marketing, distribution and more. Indeed, no industry is immune from the changes that digital transformation is bringing to Vietnam.
But with all its appeal Vietnam’s market comes with challenges. The challenges often revolve around It’s fluid and inadequate regulatory environment. But success begets success, and creative solutions abound. Spurred by the creativity in the market, we’ve prepared this brief Fintech FAQs.
I want to start a fintech company. What are the key legal issues?
Startup issues are technological, of course, but also regulatory, corporate, financial and more. Each component often has a legal overlay:
- Formation and registration – most investments include an entity formed abroad.
- Licensing and sublicensing – available licenses don’t always cover the intended activity. Some creativity is often necessary.
- Financial regulatory and compliance. Some fintech activities require a special license. For example, specific licenses are required for an Intermediary Payment Services (“IPS”) provider, or for a Non-Bank Credit Institution (“NBCI”). But in some cases, one may piggyback onto another’s license by contracting for the license holder’s services or one can partner with a digital wallet or NBCI license holder.
- Registration of appropriate business lines: In some cases, approval to conduct a particular business is itself a “license”, and no separate license is required. But some business lines, even those which do not require a license, may be subject to foreign ownership limitations, for example “data processing”.
- Special ownership arrangements: stock options, preferred shares, etc.
- Financing can include venture capital or private equity or angel investments, as well as more traditional loans and convertible loans.
- Employee stock options are important and are a form of financing.
- Broad intellectual property protection, including technology protection.
- Data protection, storage and privacy (special obligations are imposed on companies that handle personal customer data).
- Rules on cybersecurity may have an impact.
- Advertising, marketing arrangements are often important.
- Cooperation agreements, which define the rights and responsibilities of the companies that cooperate, include agreements on payment, confidentiality, intellectual property, warranties and indemnification, etc.
What about licenses. Is there a quick way to know what licenses I need and what the conditions are?
The short answer is, yes. What’s the product or service being offered? They will dictate the licensing requirements. In addition to an NBCI or an IPS mentioned above, there are other licenses. For example, an insurance brokerage business requires an operating license. Sometimes more than one license is required. Also, to emphasize, using another’s license at a fraction of the cost is a workable strategy as we discuss below. Licensing strategy is fundamental. It should be developed with the assistance of experienced local consultants.
If I need a license, should I get my own or should I team up with an entity that has a license?
The answer often depends on the license. The requirements to get a license may be large, there may be large capital requirements – minimum capital of a digital wallet is US$2.15 million. The government acts deliberately and so it may take time for the license to be issued. The variables are the skill and experience of the applicant, capital required, the backlog of applications, and the regulatory framework. The authorities will assess applications carefully. Having a complete and detailed application is important. Local authorities may request more information and they may ask a supervisory authority to review the application.
To repeat, one path is to form a strategic partnership or joint venture with an existing license holder. License holders are often seeking partners. Another popular option is to acquire a local firm with an existing license. Acquiring a company involves a different approach. Research of the market is important. Each of these options presents a manageable path to success.
Does Vietnam allow fintech companies to enter a Fintech regulatory sandbox?
“Sandbox” is understood in Vietnam as it is elsewhere. It provides regulatory exemptions for certain businesses and for a fixed period of time, to develop and test new products, services, and business models. It perfectly fits Vietnam’s current needs. The Prime Minister has put plans in motion to establish a Fintech regulatory Sandbox. Details are sketchy. We are optimistic that a Fintech Sandbox will be established in the coming months.
I would like to raise funds for my Fintech startup through an ICO/STO. Can I do so under the current legal and regulatory framework?
Initial Coin Offerings (“ICOs”) are not governed by either the Securities Law or the Civil Code, and cryptographic tokens have not been classified as assets or securities. Cryptocurrencies are banned as a form of payment, and therefore ICOs, Security Token Offerings (“STOs”), and cryptocurrency exchanges are prohibited in Vietnam. The Prime Minister has directed the Ministry of Justice and the State Bank of Vietnam to establish a legal framework to manage digital assets and cryptocurrencies. The expectation is that a legal framework will eventually be created. But, for now, traditional means of raising funds are the only path. That is, Venture Capital, Private Equity capital are available to start-ups. So are bank and individual loans and other traditional funding sources. For example, a number of established incubators invest in start-ups. Many offshore funds are active in Vietnam searching for opportunities. Families and friends, of course, are always a solid option.
I want my startup to enter the digital wallet space. What are the legal and regulatory considerations?
A Digital Wallet company is an intermediary payment service regulated by the State Bank of Vietnam. In order to obtain an Intermediary Payment Services License, a digital wallet company must: (1) have charter capital of at least 50 billion VND (~ US$ 2.15 million), (2) demonstrate certain human resource requirements; fulfill facilities and technical conditions, (3) once licensed, it must open and maintain a separate payment guarantee account in an amount not less than the total money received from customers, less money already spent by or refunded to customers. Vietnam did not commit to open the digital wallet market to foreign investment in its commitments under WTO. Nor did it do so under its recent trade agreements. Therefore, licensing for foreign investors is considered on a case-by-case basis.
While receiving an Intermediary Payment Services License can be slow, investors–foreign and Vietnamese–that meet conditions, can indeed, obtain a license. There are, for example, 31 active licenses for Intermediary Payment Services–five of them were issued in 2019.