The impact of financial technology companies on the traditional banking sector will depend on the attitude of regulators, says Avinder Bindra.
Financial technology, both in Asia and in the west, promises to radically reshape how consumers and corporations save, spend and invest, either substituting or revolutionising many functions traditionally served by highly regulated banks.
‘Fintech’ itself is nothing new: the financial sector has always been heavily reliant on technological innovation. In the late 1980s, Citibank’s former Chairman John Reed was focused on leveraging internal data in order to cross-sell products to all customer segments under the bank’s “Five Is” mantra: Investment, Institutional and Individual banking, Insurance and Information. He was about three decades ahead of his time.
There are two broad types of fintech companies. First, you have the smaller, less regulated non-financial companies that are playing the role of market disrupters. Setting aside blockchain innovations, which are now being developed both by banks and startups, there are teams of individuals developing innovative technology to streamline a particular slice of financial services – see the rise of cash transfer apps, or consumer risk management models using social networking data, trading platforms and deal rooms used by banks for secure communication and exchange of data.
Second, and more importantly, the established technology firms are now beginning to leverage their consumer data records in order to also offer financial services, including asset management and insurance.
It is not long before Chinese ecommerce platforms securitise their receivables, provide credit enhancement and place them with their mutual fund customers. With their ability to transfer funds themselves, who needs banks?
Banks should not lose sleep over the first category, despite the amount of press dedicated to their innovations. These startups remain relatively small and mostly have technology that can be replicated or bought out. As they expand, they will also become subject to increased regulatory attention and cost, which may threaten their viability as standalone businesses.
However, it is the second category which should really worry established firms. Companies such as Amazon and Alibaba have a technologically savvy, young customer base and years of data on spending which can be applied to financial products. In this regard, Asian countries – particularly China and, to a lesser extent, India with their large population and increasing number of broadband users – are at the cutting edge. Chinese companies including Alibaba, Tencent, and Ant Financial have benefited from restrictions on foreign firms and an encouraging regulatory environment to develop innovative credit assessment platforms. With their vast customer base and their ability to generate receivables both from the buy side and sell side, it is not long before these ecommerce platforms securitise these receivables, provide credit enhancement and place them with their mutual fund customers. With their ability to transfer funds, provide credit to buyers and sellers and fund themselves, who needs banks?
Innovation in India has particularly focused on payments systems, with companies such as Flipkart developing new tools to support their online sales businesses, and on the impact of a vast government biometric tracking initiative. A more cautious regulatory environment, however, is also restricting development.
As they grow, Asian fintech companies will be forced to confront some of the same issues that have long bedevilled banks. Regulators in the US are now beginning to grapple with key questions – see the proposed fintech charter for banks, or the US commodities regulator’s new “fintech lab” for innovation – and it is only a matter of time before their Asian peers, particularly in China, impose some limitations on the sector’s unfettered growth. Key concerns relate to data security and misuse, together with the consideration of whether some Chinese conglomerates should have limits imposed between their financial and non-financial arms. Similarly, how do you regulate firms such as Amazon, which has a global footprint and a cross-country treasure trove of data? As banks have learned, conducting financial transactions is an inherently risky business.
Fintech startups may currently be the golden child of the financial world today, but it is a matter of time before a loss or technology snafu subjects them to additional scrutiny.
Avinder Bindra is founder and chief executive of ARX Analytics & Advisory, which develops software for financial institutions. He spent 26 years at Citibank and five years at HSBC, where he was head of Asian financing advisory until 2005.
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