The impact of fintech is starting to be felt around the world – and even though most of the development sits in the retail space, the corporate world is also benefiting. What should treasurers be doing to take advantage of the possibilities?
Treasury professionals have heard lots about the transformational impact of fintech. Everyone involved in financial services is keen to outline what they are doing, who they are working with and what’s included in their vision of the future. And all the talk is being backed up by significant investment: KPMG’s latest Pulse of Fintech Report notes that global fintech investment topped US$31bn in 2017. This has pushed total investment over the past three years to US$122bn, with banks, corporates and venture capitalists pouring money into start-ups. But has this talk and investment had much impact?
This is a tough question to answer because the global fintech marketing machine is running at full steam. Whilst this is raising awareness about fintech, it has also made it hard for casual observers to distinguish between hype and reality.
Take Bitcoin, for example. When the cryptocurrency first emerged, commentators couldn’t stop talking about its transformative power. One expert told Treasury Today in 2014 that Bitcoin would “become more integral to our lives than we can possibly imagine”, adding that it would “replace the backbone of finance, capital markets and commerce”.
For a while, this prediction looked like it might be correct. Bitcoin hype soon reached fever pitch and the value of the currency exploded. In late 2017, one Bitcoin was valued at US$17,000. Bitcoin hype (and value) has since trended negative, with confidence in the cryptocurrency rocked by severe volatility, scandals and adverse regulatory rulings. Few are now predicting that Bitcoin will become the world’s dominant global currency and have a dramatic impact on our lives.
This shouldn’t be a surprise. Bitcoin and several other fintech trends are closing following the course predicted by Gartner’s Hype Cycle. The Hype Cycle shows that after an initial explosion in excitement around a particular technology, interest wanes once it fails to deliver on the early promise. Then, as the time horizon expands, the technology quietly matures. Eventually, mainstream adoption occurs, growing in line with the widespread applicability of the product.
This isn’t to say that fintech has had no impact. In China, for example, technology firms Baidu, Alibaba and Tencent (BAT) have brought financial services to the masses. Individuals in China today can bank, invest and borrow using their mobile phone. Indeed, US$12.77trn was transacted on mobile platforms in the first ten months of 2017.
Businesses in China have responded accordingly. Many have partnered with BAT to accept payments from their platforms, and banks are now building aggregation services to streamline this. More recently, businesses outside of the C2B space have also begun to leverage these platforms. For example, a company that uses contractors to carry out maintenance has embraced WeChat Pay. This has removed the risk of contractors handling cash, while creating additional value through the automated and straight through reconciliation of payments.
Fintech is also shaking up developed economies, albeit in a less spectacular fashion. In the UK, for example, a range of challenger banks have emerged. These include Monzo, which launched in 2015 and captured the retail market’s attention with its simple onboarding process, intuitive app and innovative features. Monzo now has over 750,000 current account customers.
Development in commercial banking is less obvious. There has been a steady trickle of new solutions, built in collaboration with fintechs. One example is Bank of America Merrill Lynch’s Intelligent Receivables solution. This was built with fintech firm High Radius and uses AI, machine learning and optical character recognition to match incoming payments with disparate remittance data.
For the most part, however, the industry remains in a period of experimentation defined by small-scale pilots and proof of concepts, especially around transformative technologies, such as blockchain.
Focus on partnerships
It shouldn’t be a surprise that fundamental change is not happening overnight: commercial banking is an entrenched, complex industry, with high barriers to entry. Corporates are also rarely willing to make significant internal changes or take a gamble on technology with no track record.
Change is coming, however. PwC’s 2017 Global FinTech Report highlights this, showing the growing influence of fintech on financial services. Most notably, the report suggests there is a considerable awareness amongst banks that fintech poses a significant risk to profit margins: over 80% of respondents said that a part of their bank’s business is at risk from innovators.
To combat the risk of losing business, banks are investing heavily in technology to upgrade legacy infrastructure and develop new solutions. HSBC has announced it is investing US$17bn in new technology as it looks to return to “growth mode”. British lender, Lloyds Bank, also said it was investing over US$3bn in technology.
Meanwhile, traditional banks are increasingly working in partnership with fintech firms. The objective of these partnerships is to learn about the technology that such firms are using and to see where and how this could be applied by the bank. Additionally, banks are looking to replicate the culture and ways of working associated with fintechs in a bid to become nimbler and more innovative.
This also points to an interesting change in the approach of fintechs themselves, many of which marketed themselves as disrupters of the traditional financial system. Today, this thinking is no more. The aim of most fintechs is to partner with a bank, as this strategy is considered the best way to achieve the scale required to survive in the long term.
These trends are what Sam Hall, Managing Director at Rainmaking Singapore believes has led to the unbundling, and in some cases selective rebundling, of financial services. The term refers to the splitting of combined services at scale into component parts or modules, which can now feasibly be positioned selectively to deliver highly sophisticated value props for particular user segments – somewhat like being able to buy individual tracks on an album, rather than just the complete album.
Hall explains that the impact of emerging technology, access to customer data, cloud, regulatory changes, availability of capital and customer expectations have created a context whereby fintechs are able to create value in far more niche areas of the traditional financial services value stack than was previously possible. This means the banking landscape will collectively evolve to be everything to all people, although for individual banks the historic reality of operating at scale across capital, platform and application layers is long gone.
“The emergence of fintech has given the end-users of financial services more choice,” says Hall. “For example, if your bank provides a poor payment experience, you can now use one of the fintech payment providers. And regulation such as PSD2 and Open Banking – which give third-party providers access to customer data and the possibility of offering bespoke and segment-specific front-end financial services – will drive this trend, exposing banks to more competition.”
This will have a big impact on banks in the long term, as they will need to overhaul most aspects of their operating models, adds Hall. “Banks are burdened with significant legacy technology that is expensive to maintain. They are being outcompeted on cost of technology and must evolve their business models to focus on areas where they have capability and can seek to remain competitive.”
Hall says that this will see banks evolve differently. He expects some to take a platform-based approach, leveraging API layers to connect with best of breed fintech firms and offer retail and corporate customers a one-stop shop for all their banking needs. Others will become back-end infrastructure providers or utilities for other firms.
This is already happening, at least to a degree. J.P. Morgan, for example, has been bullish in its willingness to partner with fintechs. “There are instances where we are willing to partner with fintechs,” says Manoj Dugar, Head of Core Cash Products, Asia at J.P. Morgan. “The reason J.P. Morgan takes this approach is simple: it is about ensuring that we deliver cutting edge innovation to our clients.”
Dugar adds that J.P. Morgan also wants to assist its clients with their own digital transformation journeys. “In a recent survey of our clients, we found that the majority are going through a digital transformation,” he says. “We must be ready to help guide them through this journey, not just with products and solutions, but by sharing our own experiences to help them build a roadmap for the future.”
Raof Latiff, Group Head of Digital, Institutional Banking Group at DBS echoes this point. He explains that DBS is currently undergoing a technological and cultural transformation to become akin to a “24,000 people start-up”. Latiff adds that to achieve this, the bank is working with fintechs and bigtechs to digitise its internal technology stack. “We are moving all of our data and platforms into the cloud and reimagining our internal processes,” he says. “This will enable us to cut costs, be more agile in innovating, and deliver solutions to customers more rapidly.”
These back-end improvements will take time to complete. However, it will be worth the wait. Not only will corporates be able to enjoy a wide range of new products and services; banking costs may also fall. Indeed, a report by Bain & Company suggests that this investment, tied in with increased competition for business, will cause a structural decline in prices for services such as cross-border payments and trade finance.
Fintech isn’t only impacting banks behind the scenes – it’s also changing how they interact with clients. Most notably, banks are paying attention to how fintechs design their solutions and the user experience they create. “We are working hard to bring the experiences we have in our consumer lives to the corporate space,” says Jennifer Doherty, Head of Innovation, Asia at HSBC. “To achieve this, we are ensuring our products and propositions have intuitive user interfaces and are easy to use – which hasn’t always been the case with banking products.”
It goes beyond look and feel, however. Doherty explains that HSBC is redefining how treasurers interact with the bank. “Traditionally, if a treasurer had an issue or needed something, they would make a phone call or email,” she says. “Today, clients can initiate these questions through our chatbot, which can deal with many of these enquiries instantly. The idea is to remove the friction between bank and client.”
As well as changing how banks and corporates interact, fintech has also pushed banks to design solutions differently. In the past, banks followed a model of designing and building a solution in-house that would then be pushed out to the market. But today, banks are keen to have corporates involved in the design process.
“We look to solve business problems with our clients,” says Latiff. “Rarely do we talk about basic treasury solutions today as a starting point. Instead, we talk about digital solutions addressing business problems. For example, one of Asia’s largest leading general insurers, MSIG Insurance came to us because they were seeking a way to improve the speed and convenience of the claims process for customers, whilst streamlining internal processes and reducing costs. We worked together and solved this through a real-time payment solution, enabled by DBS’ API solution, IDEAL RAPID. This transformed both the efficiency with which insurance claims are processed, and the quality of the customer experience, setting a new precedent for the insurance industry and strengthening MSIG’s position as a market leader.”
Pricing models for solutions are also likely to change. Rather than banks charging corporates per service, it is likely many will package services together and charge a single fee. This is similar to the switch made by the telecoms industry several years ago.
Alternatively, product pricing may become more bespoke as technology gives banks new ways to track what their clients are doing. Commerzbank, for example, recently announced that it had struck a deal with machine tool manufacturer, EMAG, to create the world’s first data-based, pay-per-use loan. This innovative structure sees the repayment of the loan linked to the usage of capital equipment – data which is shared with the bank through tracking devices installed into the tools produced by EMAG. Elsewhere, Nordea has publicly said that the pricing of the loans offered to corporate clients will be directly influenced by their cyber-security awareness and readiness.
Royston Da Costa
Assistant Group Treasurer
Royston Da Costa, Assistant Group Treasurer at Ferguson, talks through why technology is so important to his treasury operation. He also reveals what emerging technology will have the greatest impact on treasury.
Why is technology vital to your treasury department?
Technology is very important to us. It provides enhanced visibility over our cash, accounts, loans, FX activity and payments. This is crucial because we are managing treasury for a decentralised business and need to know what is happening.
We also want the technology we invest in to have a good ROI. We are therefore keen that any technology we use should connect with the other systems used in our organisation. This then allows us to drive efficiency and cost savings through automation and straight through processing.
Finally, new technology, especially cloud-based offerings, such as our TMS, BELLIN, provide greater security, which is crucial for treasury.
Which emerging technologies are of interest?
AI and robotics will be game-changers. We are already seeing these impact shared service centres by automating manual processes. I am now investigating how these might benefit our treasury.
Harnessing Big Data is also of great interest. Everything we do relies on having access to reliable data. The challenge is that this data often sits in disparate systems across the organisation. A technology that brings all this data to a central location would be interesting and allow us to better support the business.
What about blockchain?
Blockchain is interesting as it can solve many issues we have, such as KYC. If blockchain can facilitate true-digital document exchange and matching, it will reduce the time and effort it takes to conduct KYC. This would be a huge benefit for both corporates and banks.
I would be open to using a blockchain solution if it solved this issue. The problem is that the technology is largely unproven.
What is most important for me as a treasurer is not the technology itself, but the value it can deliver. So whilst blockchain is very interesting, my real focus lies in not how it works but the business problems it might solve.
Has new technology had a positive impact on financial services more broadly?
Yes, without question. The focus on fintech has delivered new solutions to individuals and businesses. These provide greater speed, accuracy and reduce costs.
Beyond that, new technology has also enabled businesses to scale up and reach a wide array of new customers around the world. This is revolutionary.
How will the continued evolution of technology impact treasury in the years to come?
Some argue that increased technology usage and automation will make treasury teams redundant. I don’t believe this to be true. Technology is not replacing the role; it is replacing the process. And making the process more automated will mean that treasury has more time to focus on the data and act on it. So in five years I foresee treasury departments being slicker and driving greater value in how they support the business.
Views are of Royston Da Costa not Ferguson PLC
It’s an exciting time for treasury. The main advice is to be engaged with banking partners, technology providers and industry peers to understand what is happening and split hype from reality.
Those who want to benefit from new technology at the earliest opportunity must ensure they’re ready. HSBC’s Doherty notes that treasurers should look at their existing technology stack and see if it is ready to integrate with the new technology coming through. “Most importantly, it must be able to consume APIs as these are the future of bank/corporate connectivity,” she says. “I would also recommend that treasurers are involved in the company’s annual technology plan. This will ensure that the treasury function is not being overlooked when deciding what areas of the business receive attention and investment.”
The future is bright for corporate treasurers who will eventually benefit from all the investment in fintech. This will see them enjoy improved services, products and greater choice and flexibility. So, whilst the fintech revolution is yet to fully deliver on its potential to improve financial services, it’s just a matter of time.