Fintech has the promise to completely revolutionise finance. And whilst we are seeing plenty of examples of this in the retail space, in the corporate world, revolutionary change is less forthcoming. That doesn’t mean it’s not happening though. Here, we explore the impact fintech is having on banks, regulators and corporates and peer into the future to see what finance may look like in the years to come.
Twitter’s 140 character limit has not only changed how we communicate and consume information, it has also shown how complex, emotional and important matters can be communicated simply and succinctly, without losing any meaning or importance.
This is arguably the real impact that digitisation has had on our lives. It has brought efficiency and the ability for us to access information, communicate, and act in ways that we perhaps could never have done before. And it is this promise that has driven the rapid pace of technological development in the financial services industry, widely referred to as fintech.
New dynamics
It is important to note that fintech is not a new phenomenon, although it is often reported as such. Individuals and businesses have been able to leverage the technology offered by banks for decades – banks by their very nature are fintech. What is different about the current wave of fintech however, is the pace of change and the sources of innovation. Banks are no longer the only innovators in town.
“The internet and the proliferation of mobile devices has provided the tools for fintech start-ups – sometimes just one person and a laptop – to begin looking to fix some of the problems that exist in the financial services industry,” says Antony Eldridge, Financial Services Leader at PwC Singapore. And sometimes these nimble and focused companies can ignite quite dramatic change.
Take the consumer cross-border payments space, for example. This has been a particular area of focus for fintech and has received a substantial proportion of the $19bn invested into fintech start-ups around the world in 2015. As a result of this focus, there are now numerous companies that have developed tools that enable individuals to transfer money across borders, instantly and for little cost. Many of these solutions also utilise mobile wallets which has driven a more dramatic change, extending the reach of financial services to meet those who would normally fall out of the banks purview.
In doing so, not only have these solutions made finance more democratic, they have also disintermediated the banks in some areas. “Fintech companies big and small are picking off aspects of the banking business, typically the profitable areas,” says Eldridge. “And whilst the banks are not being completely disintermediated given the money often flows through them at some point, to the user of the solution it certainly seems like the banks are being bypassed entirely.”
Friend or foe?
No bank wants to be losing business of course, especially in profitable areas, so the growth of fintech outside of the bank poses an interesting question – are the current wave of fintech firms a friend or foe to the financial establishment?
“We generally see fintech as a friend,” says Morgan McKenney, Head of Core Cash Management for Asia Pacific and Singapore Innovation Lab at Citi. “Collaboration with fintech start-ups is an important strategy for the bank because these companies are able to bring different skills and way of thinking to the table. These companies are incredibly focused on the customer and their pain points and are building solutions to alleviate these, whilst banks in the past arguably have not approached solutioning in this way. We believe this new approach will help us build on our strengths as a bank and help enable us to deliver innovative solutions to our clients.”
To provide an example of this collaboration, Citi have recently announced a strategic investment in blockchain-as-a-service firm chain.com. “They are now a strategic partner of the bank and we feel that this company has the skills and expertise that don’t already exist within the bank to help us develop and commercialise the blockchain,” adds McKenney.
The focus on collaboration is a point echoed by Singapore-based lender DBS, and their Head of Global Transaction Banking, John Laurens. “At DBS, we have had extensive engagement with the fintech community, by both partnering and mentoring.” For Laurens, following this strategy will not only ensure the bank is able to utilise the solutions developed by these start-ups, but also continue to drive a change of culture within the bank itself. “Working with these firms is playing an important role in shaping how we think as a bank, how we design our products and the impact that these can have on our clients.”
This change in mind-set was also picked up by Citi’s McKenney, who identified the threat of disintermediation as being a key motivation behind the change. “The competition offered by fintech has proven to be very important from a leadership point of view and in driving more open-mindedness across the institution,” she explains. “Within transaction banking we have spent a lot of time embedding a more innovative culture into the organisation which is very different from the traditional structured bank thinking.”
Going it alone
Despite being classified as disruptors, to date many start-ups have had the objective of either being bought by, or partnering with, a bank, according to Steven Tong, Managing Director at Startupbootcamp Fintech Singapore. “The vast majority of fintechs are small start-ups that have little to no reputation and no customers,” he says. “This is why it is a myth that fintech is there solely to disintermediate established institutions. They want to partner with these to piggy-back off their reputation in the market and reach their customer base.”
Of course, the danger of this approach is that fintech may get lost in the monolithic structure and architecture of a bank and suffocate. And for PwC’s Eldridge, this is a real concern and one that may change the thinking of many fintech start-ups, pushing them to look away from banks and offer their solution to other market players – most notably the big technology firms.
At present, Eldridge believes that it is these companies, many of which have already made skirmishes into financial services, which pose the biggest threat to the financial establishment. “The question is not can they replace banks,” says Eldridge, “it is do they want to? These companies are very happy to be picking off the profitable areas of financial services but once you become a fully-fledged bank you step into a quagmire of regulation and compliance.”
There may need to be a change in approach therefore to ensure banks maintain their position. “Banks are often asking the question what can fintech do for us?” says Eldridge. “But I am increasingly of the belief that banks need to be asking what can we do for the fintechs.” In his view, the landscape is changing so quickly and these firms are developing highly sophisticated technology so readily that a situation could exist where banks end up as simply a utility service behind fintech, providing compliance and risk management.
However, it would be fair to say that corporate treasurers probably shouldn’t expect to be buying their next cash management solution from a well-known technology firm anytime soon. But looking further in the future, it is not a completely unrealistic scenario to imagine banks playing a diminished, yet important role in the background.
Digital regulators
Back in the present day, perhaps one of the most unique characteristics surrounding the current wave of fintech is its widespread regulatory support. In Asia especially, the regulators have been very vocal in outlining their support for the fintech industry. Hong Kong, for instance, has developed a Fintech Facilitation Office that looks to support the sustainable development of the fintech industry and to keep the public confidence in fintech services and the banking system.
Singapore is another country looking to lead the way with its Smart Financial Centre initiative, led by the Monetary Authority of Singapore (MAS). And this has given the mandate for banks in Singapore to begin ramping up their experimentation with new technology. “Regulatory involvement in the fintech space, particularly in supporting the development of cryptocurrencies and distributed ledger technologies, is critical,” says DBS’s Laurens. “The MAS has suggested to banks to ‘just do it’ when it comes to experimentation with new technologies, whilst introducing a ‘regulatory sandbox’ that offers controlled boundaries for banks to conduct experiments.”
In the view of Startupbootcamp’s Tong, this liberal regulatory approach is a must for the industry to thrive in the region. “The easiest way to sink the fintech industry is through over regulation,” he says. “So it is encouraging to see this liberal regulatory approach that many of the countries in Asia are taking. That being said, there are some regulators in the region’s less developed markets that are still feeling their way around the space and there will inevitably be some countries where fintech fails to take off because of over regulation.”
But Tong is also acutely aware that a paradox exists in respect to fintech also needing regulation to thrive. “One of the big challenges that fintech has is its perception,” he explains. “One way for companies to gain this reputation is to be regulated, this will put individuals and companies using the technology at ease. It is smart regulation that is needed from the regulators.”
And just as fintech may have the potential to revolutionise the financial services industry, it may also, in the view of some, revolutionise regulation. “Today, regulators regulate institutions,” says PwC’s Aldridge. “But fintech is about products, not institutions, so I believe that regulators need to start thinking about regulating products if they are to keep abreast of all these changes.”
In some cases this has already happened, but only after the hand of the regulators was forced. Aldridge offers the example of peer-to-peer (P2P) lending in China. “P2P lending as a product is now regulated in China, but this is only because the market expanded to such a scale where it could no longer be ignored as a product,” he says. “So it is about scale of the industry for regulators as well.” As a result of this, Aldridge believes the majority of fintech companies fall into a regulatory ‘grey zone’ and that this could pose a problem going forward.
This ‘grey zone’ only expands when one considers the cross-border nature of many fintech solutions. “Cooperation between regulators around the world will become increasingly important because of this trend,” says Aldridge. “But, this need comes at a time where there is an increasing balkanisation of regulators, so it remains to be seen how this will play out.”
How are you impacted?
It is undeniable that the current wave of fintech is impacting the financial industry. And as we have explored, banks, regulators, individuals and SMEs are all seeing some change. But are large corporations and their treasury departments?
At present, it would be fair to say that the impact has been limited when compared to some other areas of finance, a view supported by both anecdotal and quantitative evidence. Of course, corporates are now able to utilise numerous digital offerings from banks and sit in their impressive innovation labs while big data is sliced and analysed to show how trade flows can be better managed, for instance. But the brave new world promised by the explosion of fintech is not here yet for corporate treasury.
A recent study by PwC titled ‘Blurred Lines’ highlights this, showing that the digitisation of cash and treasury management, whilst being reasonably important for banks and something they are likely to act on, remains less important than other areas which have a more board focus for the banks. Interestingly, it seems that there are also fewer fintech players in the market focusing on treasury and cash management, relative to other areas such as P2P lending, for instance.
For PwC’s Eldridge, these results are consistent with his own view. “In transaction banking there has been little major change, apart from maybe in the payments space,” he says. “There is a lot of talk at present, especially around the blockchain and this will continue to gain momentum as banks look for cheaper and more efficient ways of doing things. I think blockchain will revolutionise transaction banking in the next ten years – but how remains to be seen.”
The fact that corporate treasurers are seeing little tangible change being driven by fintech has divided opinion in the treasury world. Some treasurers that Treasury Today Asia have talked to speak of a future where a technology company can provide fully automated solutions without the need for a bank. Others, meanwhile, dismiss the subject and simply want banks to deliver solutions today that fit their requirements.
“Corporate treasurers typically possess a healthy degree of scepticism when it comes to fintech,” says DBS’ Laurens. “They want to see practical, value-adding solutions that they can apply to their financial and commercial business processes. They expect banks to be close to and drive innovation in financial technology, and in the process deal with the complexities inherent therein, so they don’t need to spend an undue amount of time looking at what’s ‘under the hood’, beyond necessary due diligence.”
That being said, interest certainly exists – especially around the more innovative technological developments, like blockchain – and banks such as DBS and Citi are now seeing digital advisory blossom as a function of the bank in its own right. As Citi’s McKenney explains: “We are fielding numerous questions from corporates on a daily basis around emerging technologies, the future of payments, what can be done with data and, interestingly, how we as a bank innovate and how treasury can look to embed this into their corporate culture. There are also lots of questions around how businesses might evolve more broadly, because this of course can potentially have a fundamental impact on treasury in the future.”
Keep abreast of the change
For any cutting edge treasurer that wants to be at the front of the queue once this technology becomes widely available, it is important to keep abreast of the changes in the space and see what really can make an impact. But how can this be achieved?
For DBS’s Laurens, corporates should engage with fintech in the same way as banks do. “Mentoring fintech start-ups has been an enriching experience personally,” he says. “It’s a great way to contribute to and be part of driving change, whilst learning about new and alternative ways of thinking and approaches to business and proposition development. Involvement with the fintech community also provides opportunities to network and engage with like-minded companies and banks that possess the leadership and aptitude to invest time and money in pushing innovation forward.”
This point is echoed by PwC’s Eldridge, who recommends that corporate treasurers seek out their local fintech accelerator programmes and attend the demo days to see what is being developed and by whom and how this may be able to help with treasury operations.
But perhaps, for now at least, the best place for a corporate treasurer to look for new and innovative solutions remains their banks. Fintech certainly has lots of promise and its impact is already being felt in numerous areas. Nevertheless, in the corporate treasury space there remains a big question mark over how this story will unfold, both in Asia and globally. One thing is for certain however, change is and will continue to happen. The financial services landscape will look very different in the years to come.
