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Friday, August 12, 2016, 14:27

Banks weigh collaboration or competition

By Low Shi Ping in Singapore
Banks weigh collaboration or competition
People queue in front of DBS Bank’s automated teller machines in Singapore on Jul 21. The bank plans to create a “fintech-like” workforce and has also launched a program to spot fintech talent in Singapore universities. (Photo provided to China Daily )

In March, a senior executive from the Monetary Authority of Singapore (MAS) said that financial technology, or fintech, firms should not be regarded as posing a threat to banks but as “enablers”.

Chief fintech officer Sopnendu Mohanty, who spoke at a two-day conference on building software applications, organized by MAS and the Association of Banks in Singapore, told the banks: “Fintech firms are not here to challenge you. They are here to partner you.”

His statement points toward a deeper underlying fear. Since the rise of the fintech sector, financial institutions have been warily eyeing these companies and trying to figure out what to make of them.

On the surface, they look to be direct competitors. In the past five years, their business models have largely revolved around online lending or retail payment services — think of brands such as PayPal and Alipay, and Lending Club (a peer-to-peer lending company).

There are also ones that offer so-called robo-advisory services. These work out savings solutions based on an individual’s risk appetite and financial goals, but without being geared toward any particular product on the market.

But it is the money that is being poured into the sector that is really proving that fintech is on the way up. According to a report published by Accenture earlier this year, the value of global fintech investment in 2015 grew 75 percent to US$22.3 billion.

In the first quarter of 2016 alone, US$5.3 billion was channelled into it. Of that, more than 50 percent went to fintechs in Asia Pacific, marking a 46 percent increase year-on-year.

It is not surprising that the banks are worried. Conservative, bureaucratic and often governed by strict regulations, they are less nimble than fintechs which are typically small and dynamic.

In addition, the banks’ bottom-line driven model is largely a risk-averse one. Even if they do want to embark on fintech-related projects, these are seen as having more disadvantages than gains.

Another plus that fintechs have over banks is their innovative edge, particularly when it comes to the “client experience” interface, according to a report published by Citi’s Global Perspectives & Solutions division in March 2016.

Lon Wong, CEO of Dragonfly Fintech, a blockchain financial solution technology firm, said: “All these factors added together give banks the view that fintech companies are a threat to them. To a certain extent, it is quite valid as the latter do attempt to disrupt and eat into the banks’ lunch.”

Offering a more middle-ground perspective is Shaiful Bahri, CEO of ZUU Southeast Asia, one of Japan’s largest and fastest growing financial education sites.

“Fintechs play an important role in the financial ecosystem by providing much-needed external stimuli to incumbent financial institutions to make a positive change to the status quo of financial services.”

But he is of the view that the likelihood of fintechs totally displacing banks is slim. For starters, the sheer amount of resources banks possess relative to fintechs gives them an advantage should they ever decide to offer the exact same services and at a similar level of quality of execution.

Unless fintechs achieve critical scale, much like what Alibaba did with its online payment provider Ant Financial, these firms will find it hard to compete with banks on a level playing field.

“Credibility is also another important hurdle for fintechs to overcome. People still tend to favor the safer option of banking with incumbents rather than somewhat unproven counterparts,” said Shaiful.

A third factor is regulatory overheads. Without proper guidelines, consumers are potentially exposed to bad practices. “This will require time and money — both of which are commodities that fintechs might not necessarily have in abundance.”

Ravi Menon, the managing director of MAS, echoed Shaiful’s views at a panel discussion during the Singapore Forum in April. “Unregulated fintech will challenge traditional financial institutions, disrupt and even displace some of them but will not replace them.

“Banks and insurance companies have something that unregulated entities do not have: Trust. Trust based on a track record of performance.”

The way forward, the consensus seems to suggest, is for financial institutions and fintechs to work together in a symbiotic fashion. And this is increasingly becoming a reality.

According to the Accenture report, the level of investment in fintechs wanting to collaborate with the banking industry increased 138 percent in 2015. This represents 44 percent of all fintech investment, up from 29 percent last year.

On the flip side, investment in fintech companies looking to compete only increased by 23 percent. “So, while there is still more investment going into competitive fintech companies, there is a clear and growing appetite — from both sides — to collaborate,” said the report.

UBS, the world’s largest private bank, is a good example. A spokesperson said: “We work closely with fintechs on many different levels, whether it’s collaborating or building innovative technologies together. We also sit and talk to many fintechs globally.

“Depending on the size and type of tech, they can be extremely agile in bringing their value proposition to the market.”

The bank revealed that its top management has made innovation and going digital key priorities, giving the respective business units the mandate to push forward with any collaboration that will benefit UBS.

Case in point is a fintech accelerator it launched in the first quarter of 2016 that has an international target audience. Together with Credit Suisse, UBS has partnered with Swisscom, Swiss Life and EY.

The program will support the most promising fintechs that are focused on wealth management, digital identity and blockchain.

In contrast, Singapore-headquartered DBS Bank, while acknowledging fintechs as “potential partners”, has unveiled a whole slew of measures to counter what it termed an “increasing threat”.

DBS announced in July that it is adopting Microsoft’s cloud-based productivity tool, Office 365, to create a “fintech-like” workforce. The first phase aims to make it accessible to 1,000 of its employees, with plans to roll it out to its 22,000-strong workforce across 18 markets.

The bank has also launched a program to spot fintech talent in Singaporean universities. Dubbed the DBS UNI.CORN Internship, it enlists students to suggest ideas to solve real-world consumer challenges using what they have learned in business, marketing, design and coding areas.

It is undeniable that fintechs are here to stay. But that is not to say the way forward will be smooth sailing. Dragonfly’s Wong said fintechs should expect to have a longer gestation period than other industries.

“Regulatory issues and compliance are the two main stumbling blocks for fintech companies to grow and become disruptive and pervasive,” he explained.

“Continued perseverance and staying power is the key.”

Due to these issues, Wong does not think that much will change in the short term but, in the longer term, he feels the outlook is “promising”.

“Once central bankers come to terms with their actual roles and not over-regulate to the extent that they stifle the growth of the financial industry, we shall start to see the fintech industry flourishing.”

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