There’s a new kid in town and he wants your money. He is offering you banking services without being a bank, loans without being a lender and financial settlements without going through a central bank.
Should you trust him?
That’s the US$50 billion question. That is the amount that venture capitalists, private equity firms and major corporate players have invested in global fintech (financial technology) start-ups. “More than US$50 billion has been invested in almost 2,500 companies since 2010 as these innovators redefine the way in which we store, save, borrow, invest, move, spend and protect money,” says an Accenture study. “While fintech is the poster child that continues to grab the headlines, there are signals that the market is reaching the next level of maturity and moving into the mainstream.”
Before we get to the details, let us first define what is fintech. A good definition comes from Investopedia, the education portal owned by Nasdaq-listed IAC/InterActiveCorp. Fintech is a portmanteau word derived from financial technology that describes an emerging financial services sector in the 21st century. Fintech now encompasses any technological innovation in the financial sector, including those in financial literacy and education, retail banking, investment and even cryptocurrencies like bitcoin.
Just as Uber and Grab have disrupted the transport sector, technology giants are getting into an arena traditionally owned by banks, brokerages, insurance firms and credit card companies. Accenture says the top five tech giants, collectively called GAFAA — Google, Apple, Facebook, Amazon and Alibaba — are redefining the customer experience and increasingly playing around the periphery of financial services.
Consumer focus Management consultancy
McKinsey estimates that almost 75% of fintechs focus on retail banking, lending, wealth management and payment systems for small and medium enterprises. In many of these areas, start-ups have sought to target the end-customer directly, bypassing traditional banks and deepening the impression that they are disrupting a sector ripe for innovation.
“The trend towards B2B [business-to-business] is most pronounced in CIB [corporate and investment banking], which accounts for 15% of all fintech activity across major markets,” reports a McKinsey study released in July last year. “As many as 66% of CIB fintechs are providing B2B products and services. Only 21% are seeking to disintermediate the client relationship, for example, by offering treasury services to corporate banking clients. And less than 12% are truly trying to disrupt existing business models with sophisticated systems based on blockchain technology.”
A blockchain is a digitised, decentralised, public ledger of all cryptocurrency transactions. The transactions are recorded and added in chronological order. This allows participants in the chain (or blockchain) to keep track of digital currency transactions without the need for centralised record keeping. Each computer node connected to the network gets a copy of the blockchain, which is downloaded automatically. This way, each participant has a carbon copy, if we may use an anachronistic term.
Technologies like these are highly disruptive, especially when it comes to traditional banking. “Disruption is already happening, both in terms of the front end (in the way customers transact or see their statements), and the back-end (the operational processes that happen in the background),” says Jay Moghe, Asia-Pacific director and head of Alternative Fund Services at Deutsche Bank, based in Singapore. “Technology is already improving speeds and presenting more choices for back offices. This will ultimately lead to more and better quality face time and interaction with clients as well as their ability to innovate.”
The innovation mantra may lie in collaboration. But that is not so easy. Many banks feel threatened by the newbies who want to grab a piece of the pie. But a few tech-savvy banks are adopting a more practical policy — if you can’t beat them, partner them.
“As banks face increased pressure to reduce costs and drive stickier, more profitable relationships with their customers, larger technology and platform players may offer a more attractive set of rails on which to deliver services to customers,” the Accenture study notes. “As such, incumbent banks are increasingly looking to fintech to enable them to continue operating a vertically integrated model, or find a specialist role as a platform service provider. Successful banks will rapidly make clear strategic decisions on the business model and use this vision to rally their talent around a more compelling journey, rather than the cost-cutting downward spiral in which many players are now falling,” says Moghe.
Global consultancy PricewaterhouseCoopers (PwC) is more bullish and notes that fintech is changing the banking and financial services industries (BFSI) from the outside in.
“We estimate within the next three to five years, cumulative investment in fintech globally could well exceed US$150 billion,” says the PwC Global FinTech Report, released in March last year. “Financial institutions and tech companies are stepping over one another for a chance to get into the game. The result is a new competitive landscape and playing field. As the lines between traditional finance, technology firms, e-commerce and telecoms companies are blurring, many innovative solutions are emerging and there is clearly no straightforward solution to navigate this fintech world.”
The good news is that fintech is serving millions of previously underserved consumers with redefined and innovative solutions. The bad news is that it disrupts the staid BFSI sector.
Singapore and Malaysia
In Singapore, 87% of traditional financial services companies ranked pressure on profit margins as the top fintech-related threat, followed by loss of market share at 66%, the PwC study notes.
“One of the key ways in which fintechs support the margin pressure point is through innovation, which produces a step change function improvement in operating costs,” the study reports. “For instance, the movement to cloud-based platforms not only decreases upfront costs, but also reduces ongoing infrastructure costs. While financial services organisations have previously acted as intermediaries in the financial system by providing an invaluable service to clients, their functions are being usurped by new technology-driven business models.”
How should the traditional BFSI players relate to the upstarts? By collaborating with them. In Singapore, a third of BFSI companies say they would opt for a joint partnership. This indicates that financial services firms are not ready to go all in and invest fully in fintech start-ups.
It is a different scenario in Malaysia. Last month, research house International Data Corp (IDC) unveiled a list of 10 fast-growing fintech firms in Malaysia. In alphabetical order, they are: AppPay, iMoney, Jirnexu, Katsana, Mobiversa, MOLPay, MyCash Online, Neuroware, Soft Space, and Tranglo.
“In Malaysia, the disruption is visible mostly in payments, followed by lending, wealth management, marketplace and crowdfunding,” says Michael Araneta, associate vice-president of IDC Financial Insights. “These fintech players are moving fast in their alliances and partnerships with financial services institutions. They are continuously innovating to make their products and solutions better. We also see successful fintechs in payments, including remittances and money transfers, expanding into m-commerce as a viable growth strategy.”
Malaysian banks and brokerages are more eager to partner — or even acquire — the fintech start-ups. This is a positive sign. “This is quite an improvement from how traditional industry players initially viewed fintechs as pure disruptors,” IDC notes. “Recent support from Bank Negara Malaysia, in the form of a
regulatory sandbox and MDEC’s (Malaysia Digital Economy Corporation) introduction of MDH (Malaysia Digital Hub) and the MTEP (Malaysia Tech Entrepreneur Programme), has been very encouraging for the fintech community.”
Sui-Jon Ho, a senior market analyst at IDC Financial Insights, says Malaysian banks are making great headway in monetising fintech solutions as lines-of-business become more empowered to make strategic technological decisions. The expedited innovation cycles resulting from this have had the market aligning itself very quickly to “choice technologies” such as biometrics and robotic process automation.
Bubble or bust?
Will fintech lead to the next big bubble or a bust? “As with the internet revolution, there will likely be successes that stay with us long term and some that will die away for various reasons,” Deutsche Bank’s Moghe says. “There will be clear and rapid growth in certain areas, as with online trading, for example. Most banks are beginning to invest significantly in the next wave of digital banking technology to meet the future needs of customers. The pace may be frenetic because technology is the great leveller and there will be some winners — and some losers.”
What about failures in the fintech world? “The fintech revolution will end badly for most start-ups,” The Wall Street Journal quoted the noted financial-services investor, J Christopher Flowers, as saying in an article published in February last year. “While a few new technology companies seeking to win business from established banks and financial services firms will be extremely successful, the majority won’t survive because of a fundamental strategic contradiction.” That contradiction comes from the hot-shot fintech world that seeks rapid return on investment, versus the slow, staid, risk-averse world of banking and finance.
The traditional BFSI sector is not just hugely powerful and influential but is averse to change. “Most don’t fear fintech companies looking to take their business because, frankly, not a single one poses a real threat at this time,” writes Chris Myers, CEO of BodeTree, a US-based fintech firm, in Forbes magazine. “Banking — and financial services in general — is highly regulated and, therefore, inherently conservative. It’s the one industry I can think of where a commitment to innovation and decisive action is detrimental to a career.”