SpirE-Journal 2016 Q4
Digitalization of finance: The Fintech boom
The Fintech or financial technology industry is booming. Banks, insurance companies, telecommunications carriers and financial corporates are being urged to embrace the digital wave. There has been a 60 per cent rise in global Fintech investment in 2015, valued at USD20 billion1. As financial services go digital, will cash become obsolete?
Fintech is, simply put, the use of technology to enhance financial services and make it more accessible as well as efficient. From asset management and lending services to ledgers and payments, Fintech is transforming the financial services realm rapidly. Fintech is providing all these services at a lower cost, threatening to disrupt large financial institutions.
Since 2008, the Global Financial Crisis (GFC) exposed loopholes in the financial system and was a wake-up call to service providers. Moreover, it opened an opportunity for better, innovative finance models and banking services.For instance, in April 2016 Singapore’s DBS Bank collaborated with Kasisto – a U.S. Fintech company – to create Digibank, India’s first mobile-only, branchless bank. What is driving the Fintech industry?
Fintech has transformed the way money is managed. Start-ups are coming up with innovative financial services processes whereas financial services firms are following suit with their own new products.
Some growth drivers in the Fintech industry include:Growth in mobile banking
Technology continues to impact every walk of life. For consumers, to have access to account information and transactions available on the go is why mobile applications are popular.
For instance, mobile banking in India surged 46 per cent in December 2015 (from previous month) valued at INR 49,029 crores.Inefficiency of banks
Banking is currently very costly and inefficient. Settlement of payment can still take hours or days. In the age of Information Technology, customers yearn to know, in real time, how their accounts have been settled and how their wealth is being employed.
As of 2016, 1.5 million U.K. adults and 10 million U.S households still do not have bank accounts. This underlines the potential value of a mobile and branchless banking model, given that bank branches (which have been around for over a century) have still failed to embrace everyone.New markets and innovations
Big data and the use of complex algorithms have replaced traditional advisors, offering a personalized and an efficient financial advisory process which is cost-effective too.
With the advent of crypto currencies, financial services companies are likely to invest more in platforms like Blockchain. Blockchain, launched in the year 2011, inspects the exchange of crypto currency and cryptographically secures financial assets. It further assists banks and credit card companies to create a safer, faster way of accounting by reducing risks and improving transaction security.Rising startups
Young people continue to drive growth. Fintech’s early adopters have been the millennials. In 2016, a mobile transaction was made at least once a week for one in four Americans. Moreover, startups receive huge venture capital funding – companies received USD21.6 billion in funding in 2015 alone.
Impact on bank sector services
To stay in the competition, traditional banks now need to offer personalized and multi-channel experiences to customers. Collaboration with Fintech companies is becoming beneficial to banks as they already have the infrastructure, regulatory expertise and scale in place. Moreover, Fintech companies have the flexibility to move up and introduce innovative products at pace.
Acquisition of Fintech organizations is a cost-effective yet competitive manner in which to deliver leading edge services11. Although many Fintech companies are so-called ‘disruptors’ who may compete with banks at first, most often end up aligning with banks through alliances, acquisitions as well as investments.
For instance, Spanish bank BBVA’s recent 29.5% stake acquisition (April 2016) in Atom – a mobile-only bank developed in London – was valued at USD226.6 million.
Asia emerges as a Fintech hub
Fintech investments in the Asia-Pacific region have grown rapidly since 2010, from USD103 million to about USD10.5 billion by September 2016.
A few key markets to watch for include:
Fintech ventures in Hong Kong and China have attracted USD9 billion in investments (in 2016) where established companies, rather than startups are leading the trend in the region.
For instance, e-commerce giant Alibaba Group Holding’s financialservices affiliate – Ant Financial Services Group – recently (April 2016) closed a USD4.5 billion fundraising round. It operates Alipay, China’s online payments platform.
A traditionally cash-driven Indian economy has responded well to opportunities in Fintech, triggered primarily by a surge in smartphone penetration and ecommerce.The transaction value for the Fintech sector is approximately USD33 billion in 2016, estimated to reach USD73 billion in 2020.The Indian government’s recent demonetization move is expected to increase the demand for e-payment, e-commerce and e-banking.
Hailed as Asia’s biggest hub for the Fintech revolution, the Singapore government’s recent push to develop this sector gives Singapore an advantage. The city-state is uniquely positioned due to its conducive business environment – it is ranked number 2 – for ease of doing business – apart from being one of Asia’s two leading financial centers.
In 2015, the Monetary Authority of Singapore (MAS) launched a ‘Smart Financial Center’ to augment the nation’s Smart Nation vision – to keep supporting the development of the Fintech sector. In 2016, MAS launched the Financial Sector Technology and Innovation Scheme with a commitment for the next five years to invest SGD225 million. The objective of this scheme is to encourage financial institutions to collaborate with Fintech start-ups.
With 318.5 million mobile connections as of November 201519, Indonesia’s potential as a Fintech market is promising due to its demographic make-up and population size.
For instance, in November 2016 private life insurer Asuransi Allianz Life Indonesia launched a micro insurance product to target low-income customers in Jakarta that allows payment of premiums via mobile phones using electronic money. Furthermore, Alliance Life is also piloting a Sharia-compliant mobile phone-based loan service called Trust Network Finance (TNF). As micro-enterprises receive funding, TNF receives a minority stake in the business.
Use of technology in finance is not new. Fintech products and services provide updates to customers on their accounts and transactions in real-time. However, technology-driven innovations bring a new set of risks to the financial system. Some of these risks includeAlternative lending
Consumers could face big losses from peer-to-peer (P2P) lenders, which let people lend money directly to businesses and people. This could be incurred directly by average investors who may have little knowledge of the product or associated risks. Central banks around Asia are struggling to develop regulatory frameworks for P2P lending.
The use of alternative trading platforms, dark pools and high-frequency trading remains an area of intense scrutiny. Despite regulatory action taken to ensure that capital markets follow appropriate testing and safety, question marks remains about the ability of these new developments to trigger massive market disruptions.
Data security and misconduct
With more reliance on technology and the continued consolidation of larger stores of data, it is crucial to safeguard information with robust systems. Moreover, it is important to keep an eye on illicit actions that may have evaded earlier detection such as predatory algorithmic trading activity.
The advent of more new methods to send money across borders may hamper the effectiveness of transmission mechanisms and monetary policy.Regulatory arbitrage
Challenges still remain in the existing regulatory framework for both private and public sectors. Moreover, the regulatory remit is often not defined or varies across countries. This at times allows businesses to fall through supervisory checks, reducing the portability of business models and in the end, stifling innovation.
Future outlook-all eyes to the regulators
In this golden era of technology, big established banks, telco carriers with Fintech ambitions and start-ups are all are striving to compete. In the years to come, we can expect to see ever more innovation, simplification and disintermediation in the sale of financial services products to consumers.The era where giant banks that are too big to fail monopolizing, the provision of financial services may be drawing to a close.
Both banks and Fintech companies have their strengths and weaknesses. Banks can guarantee rapid scaling with significant funding and access to demand. The same is true, to a lesser extent, of telco carriers with Fintech ambitions. But the Fintech start-up sector can offer the most innovative and disruptive solutions because they do not fear cannibalizing any legacy business of their own.
The huge challenge facing central bank regulators will be to introduce smart regulations that fall into the Goldilocks zone of being neither too onerous nor too lax, so as to level the playing field and allow the most competitive players to thrive.