The new wave of financial technology – better known as fintech – is often portrayed as a disruptive force that threatens banks with new, agile and savvy competitors. Globally, fintech is transforming the way people and companies connect with their banks, and the way banks manage their back-office operations.
“Fintech complements rather than threatens banking institutions. Banking has always been about technology, so today’s financial-technology innovation boom represents evolution rather than revolution for traditional banking. It is supplementing and diversifying the existing financial system – not replacing or disrupting it,” said Mukhtar Hussain, Chief Executive Officer, HSBC Bank Malaysia.
Since the global financial crisis of 2007-2008, regulations have continued to evolve and become increasingly complex, which means more costly and time-consuming processes for banks. At the same time, a new challenge has emerged: Financial Technology.
Fintech innovators harness internet and mobile technologies and big data to offer a range of tools and services – from tech-enabled payments and crowd funding, to currency exchange, online lending and wealth management services. The goal is to make financial services more efficient, and improve the service that customers get from their banks.
The fintech market has attracted a gold rush of investment in recent years, particularly by venture capital firms that are eager to back start-ups in the sector. In the Asia Pacific region alone, investment in fintech players has risen from US$103 million in 2010 to US$4.3 billion in 2015, according to Accenture.
Furthermore, in the first seven months of 2016, investment in the region has reached $9.6 billion, doubling 2015’s figure.
Within the ASEAN region specifically, the internet economy is expected to grow to US$200 billion by 2025, and Internet users will almost double to 480 million by 2020.3 Fintechs will have a key role to play in spurring this growth so much so that ASEAN financial institutions must embrace the fintech wave or risk losing competitive edge.
However, to say that the fintech boom is cannibalising traditional banking would be an exaggeration.
If we look closely, fintech is currently only focussing on a mere fraction of the financial-services spectrum. To date, much of the focus of Fintechs has been on retail banking services – lending and financing along with payments-related products and services, where mobile and e-commerce has led to real demand from consumers.
Similarly, peer-to-peer lenders appear to be more focused on small businesses and higher-credit-risk borrowers than on mainstream banked clients.
We have seen major technological innovations in the past – credit cards, automated banking machines and online banking, to name just a few.
Those changes provided huge advances in convenience for consumers, but they did not revolutionise the financial landscape: financial institutions remained the dominant players and adapted to these changes.
Unlike fintech start-ups, banks have had decades to build extensive infrastructures, develop solutions for compliance and regulatory requirements – and most importantly – earn consumer trust.
Banks are investing heavily in new technologies. And spending is expected to continue to grow as banks seek to take advantage of new IT and digital solutions to make their operations more efficient, comply with regulators whilst simultaneously increasing interaction with customers in order to maintain competitiveness.
Cloud computing, big data, advanced analytics such as data storage technology that enables high-speed analysis of massive data sets, blockchains, artificial intelligence and quantum computing – to name just a few – offer significant opportunities for banks.
Another approach gaining traction with many major banks is the creation of innovation labs: semi-autonomous groups funded to accelerate innovation and incorporate new technologies and skill sets. These labs are creative think-tanks where the futures of traditional financial institutions are being nurtured.
But equally, with fintech gaining significant momentum, banks are now looking at how they can co-operate or co-innovate with start-ups, rather than compete directly.
“Big banks and fintech start-ups have a great deal to offer each other. Banks have a large customer base, stable infrastructure, assets and regulatory know-how. Start-ups provide out-of-the-box thinking, technical expertise, and agility to adapt quickly to change,” added Mukhtar.
“Together, they can be far more successful at improving the financial services and customer experience than if they compete against one another. And we'll witness far greater collaboration and integration in the coming years.”
ASEAN fintech is an early stage market. Funding for this segment was not available until recently. Additionally, most entrepreneurs have grown up with a sense that cash flows and profitability are necessary conditions for survival.
However, investment activity in fintechs is predicted to increase especially considering the multitude of opportunities available in the asset and wealth, credit, insurance, and blockchain arenas.
In Malaysia for example, the financial sector blueprint has considered fintech as a new initiative to achieve the objectives of the country’s ten-year plan as it will extend the provision of financial services beyond the traditional purview of banks.
The financial sector blueprint sets out a ten-year strategic plan to increase the resilience, efficiency and competitiveness of Malaysia’s financial sector.
In line with this, Bank Negara (BNM) has adopted an agile mindset to the fintech wave.
This has manifested itself in the form of the sandbox approach which has provided four fintechs with licenses to operate within its regulatory sandbox. The development of these fintechs will be observed over the span of a year allowing BNM to learn from these startups and by the time they are ready to launch, new regulations will be put into place to cater for their services.
In other parts of ASEAN such as Indonesia, the Otoritas Jasa Keuangan (OJK) has also implemented a regulatory sandbox, in which fintech firms can test any service they want to offer to consumers under the supervision of the authority before it issues further regulations.
The central bank of Thailand has also opened the regulatory sandbox for applicants early this year, and set up the Fintech Clinic, wherein fintech firms can consult with the central bank on topics such as regulations and the potentials of their business.
It is clear that retail banking, particularly, will look quite different in the coming year than it does today – with regulation, technology, demographics and changing customer expectations. In as much as financial technology is putting pressure on banks, it is a lot further away from a disruption. The established banks are likely to remain key players.