Pundits who see fintechs as the epitome of digital revolution need to pause and consider a simple fact, they may well be transitory and more dramatic changes are yet to come
Clearly, there is a lot more to come and present-day fintech operations are mere exploratory missions from financial engineers and companies looking for not just better alternatives but also stronger shields to deal with the uncertainties that lie ahead.
For decades, bankers made rules and imposed them unilaterally on customers while paying lip service about customer care. The market for finance has gone through waves of changes but the essential aspect about banks dictating the borrowing-lending cycle and managing “market forces” has remained the same.
There are diverse reasons, three of which are: deep pockets of banks, their ability to influence stock markets and the regulator’s fear of rocking the boat and triggering instability.
The worm has now begun to turn and the era of customer-first might be around the corner. Fintech companies are the ones spearheading the new revolution.
“There have been a lot of innovations in fintech industry, breaking new ground. We want products that are simple, secure and fast,” said Ellis Odynn, executive director and chief artificial intelligence (AI) officer at the think tank, Digital Finance Institute.
Take the case of WeChat, owned by Tencent, which started out as a messaging platform and gradually added facilities for buying and selling a range of products and services including air, rail and movie tickets. It has money transfer options and connects you to e-commerce sites.
“WeChat is now not more about communication but for payments,” remarked Yang Jinzhong, executive director of business development at the Shanghai Stock Exchange.
In defence of banks
Why is it that state-owned and private banks in China with their strong resource base and customer linkages fell behind the aggressive Tencent?
Private sector companies in China know they have little chance to survive in the market, which is dominated by state-owned colossus unless they innovate, take risks and spring surprises on the better networked and entrenched players.
One must say this in favour of state-owned firms that they need to look back and obtain approval from government bosses and rigid regulators before moving in to make a kill in the market. Some say all state-owned banks look similar because they do the same thing.
“There is a need for proportionality. Where banks are subject to regulations like Banking Secrecy Act while financial technology firms are not,” said Boon-Hiong Chan, head of market advocacy for Asia Pacific at Deutsche Bank.
Banks are burdened by their own size and stiff regulations while fintech industry is allowed to run faster without the bounds of regulation, said Amol Bahuguna, head of payments and cash management at the Commercial Bank of Dubai. The two must meet and share each other’s strengths, he said.
In fact, banks in China have really done pretty well in the field of digitalizing the delivery system compared to other parts of the world, said Yao Huiya, head of fintech at the Tencent owned WeBank.
One may ask what is the most lucrative aspect of fintech business, and the answer in many cases would the availability of useful data, which pales the importance of making short-term profits. But data has a way of expanding and altering itself to the point when the original set of data may become redundant.
“We need data to feed these machines. Once the machines are set up, they will generate their own data and your data will become irrelevant,” Gordian Gaeta, international resource director of the Asian Banker said.
Data ownership is a minefield of controversies and quarrels because there is immense value in owing it. Solving data related issues has more to do with attitudes than business or technology, Alex Medana, CEO of FinFabrik, said.
“We need to change the thought process around this and create the ecosystem that facilitates a paradigm shift. Technologically we’re already there, but we need to mentally come around to the idea,” he said.
Pouring fulsome praise on fintech industry players would be ignoring the fact that it has not fully exploited its potential. New business lines can emerge if banks and fintech companies collaborate, experts said.
Deutsche Bank’s head of clearing products and cash management, Christian Westerhaus, believes there are some strong areas like know-your-customer and verification of data where banks and fintech companies can collaborate.
Darkness below the lamp
“The future of financial services is the flipside of today,” Emmanuel Daniel, chairman of Asian Banker said: “Today, I, as a customer, I have to comply with the rules of the bank. Tomorrow, the bank will have to comply with my rules as an individual customer”.
The change agent is the internet and the customer’s ability to operate not just from home but deal with a variety of financial services other than formal banks without the need to queue up at a bank branch.
“It’s been around for decades, but really AI is just getting going. We will start to see it in businesses soon for sure, in the next 5-10 years. It’s already there for healthcare and financial services. I think on an everyday basis, to see it as part of our daily lives, give it 20 years,” said Odynn.
China Guangfa Bank’s deputy general manager of global trade service, Chen Xingfei, thinks that blockchain and cloud computing service would be indispensible for banking services of the future.
New role of technolology
“Technology and new systems like blockchain have made it possible for financial services companies to overcome the bounds of their limited geographical space and operate in far off markets,” said Vladislav Solodkiy, managing partner at Life.Sreda.
Solodkiy, who has set out to obtain a banking license for his fintech firm, discussed his unique plan. “When we will receive our license, we want to apply for as many banking licences across other jurisdictions because we think that banking in 2018 belongs to a borderless approach,” he said.
“Many of us think of technology as something that reduces human intervention, increases automation and therefore increases productivity. The truth is that all aspects of the financial industry today have not been revolutionised,” Daniel said.
A good example is frequency trading, a system that allows a trader to book millions of trades and possibly move the stock market in a matter of seconds and minutes. The system looked like a huge cost saving operation for the initial players who found in it an opportunity to save on wages of hundreds of traders.
Very soon, an individual who downloaded the frequency software and data from the Internet was able to enter the nascent market and place flash trades. The new technology got “retailised” and the original bunch of players soon found many competitors across the globe.
“Frequency trading is not a cost proposition in the end. Robotics is not a productivity tool anymore,” Daniel added.
Are financial services providers considering futuristic scenarios that might overtake their existing business models unless they are agile enough to change their ways and colors?
The fact is that we are in that twilight zone before a new beginning. Fintechs may be the path to change but the real transformation is yet to come.
“A new war has begun. You need new weapons, and a whole new way to think about the next stage,” Daniel said.