Friday 29 Mar 2024
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DIGITAL technologies are changing the financial services landscape. The adoption of these technologies has not only seen more non-bank financial institutions enter the market but also seen them grab market share by offering a host of online and mobile payment solutions.

Known as financial technology (fintech) companies, these players use digitally-driven platforms to offer financial services that were once the domain of banks. Their target market, naturally, is the younger generation, who are more adept at technology.

Mohit Mehrotra, a partner at Deloitte Consulting Singapore, says the growing number of Gen Y, and even Gen Z, consumers of financial services is posing a challenge to the traditional structure of banks.

“This digitally savvy generations are demanding technological capabilities. [This has allowed] emerging alternative non-bank players — more commonly known as fintech companies — to join the financial fray,” he notes in his report, “Digital Transaction Banking: Opportunities and Challenges”. 

These fintech companies have grabbed market share from traditional banking players in the areas of online and mobile banking, payments, risk management and even data analytics. According to consulting firm Accenture and information services firm CB Insights, global investment in fintech ventures more than tripled between 2008 and 2013, from less than US$930 million (RM3.4 billion) in 2008 to more than US$2.97 billion in 2013. 

These fintech businesses operate in various parts of the financial services ecosystem, such as the distribution space, financial management and even the supply chain space. Digital technologies are transforming the financial services sector with offerings and solutions designed for this new landscape. 

“Fintech companies are taking advantage of the gap [that exists in financial intermediaries],” says Mehrotra in a telephone interview with Personal Wealth. The gap can be due to regulations, the distribution channels or a lack of focus, he adds.

According to Mehrotra, there are two types of fintech companies — enablers and disruptors. Fintech companies that support financial institutions by delivering digital solutions for their existing offerings are enablers. They focus on features enhancement using technology-driven software, platforms and infrastructure.

Disruptors, meanwhile, provide strong differentiation in their offerings or revolutionary business concepts. They focus on delivering specific products or solutions, which have the potential of disintermediating financial institutions in the process. 

Enablers help banks to design better value propositions, while disruptors create disruptions in a particular industry, Mehrotra elaborates. “Disruptors, the way they operate is usually a single product through a single distribution channel for the client, which means their clients are a lot more focused. They leverage technology to innovate the way they price and sell the products.”

Many of these fintech companies are based in San Francisco, London and Japan, but there is also a number of them in Southeast Asia. Malaysian fintech firms include Soft Space Sdn Bhd and Loanstreet Sdn Bhd. 

Soft Space’s core product is a mobile point-of-sale (mPOS) platform for card payments, while Loanstreet is a loan comparison website and also an independent provider of loan advisory services, which are offered free of charge.  

Loanstreet utilises a vertical search engine for its loan comparison service, which allows consumers to filter out and compare products based on key information such as price and features. 

While fintech is a new segment, it is growing, Mehrotra says. “[The growth of fintech companies] is slowly picking up pace in terms of their presence in the region. They are a combination of those that started [the businesses] and have franchises in the region and those that are coming into Southeast Asia to generate greater access into the market,” he adds.

Banks under threat?

The services provided by fintech companies will have an impact on the business of traditional banking players if they do not raise their game. According to Mehrotra, it is perceived that banks in the region have largely focused on improving existing solutions internally. 

“Due to this, they may be lacking in terms of addressing the end-clients’ demand for digital functionality and cost-efficiency,” he says.

“Because of that, many banks are not able to address the new trends and technologies that have been picked up by their clients. I think the fintech companies see this gap, and that is where they are coming in.” 

Mehrotra says the growth of the fintech industry is something to look out for. “Currently, the fintech [space in Malaysia] is much smaller than that of the banks, from a financial perspective. But as we have seen in the world of e-commerce, some of these things have become big over time.”

He warns financial institutions not to underestimate the power of the fintech companies, and encourages collaboration with these players so that they won’t become a bigger threat in the future.     

“If you look at the fintech revolution, it started slowly with different payment methods. Now, it is finding its way into the product market as well,” he points out. 

“I will say that the first wave was the payment methods, (which will be) followed by waves in the credit market.”

Closing the gap

Mehrotra believes there are several ways to close the gap between fintech companies and traditional banks, one of which is collaboration. By collaborating, fintech firms can grow and scale up faster, while banks can offer new propositions to a broader client segment.

He cites the example of Twitter. In October last year, French banking giant Groupe BPCE unveiled its new service that allows users to send money with a single tweet. “Who could have imagined Twitter collaborating with banks to offer payments using tweets?” he asks. 

On the local front, Loanstreet collaborates with various banks by providing their loan product listings on its portal. These banks include Maybank, OCBC Bank and Standard Chartered Bank, according to its website.

Once Loanstreet has generated a personalised case assessment for a consumer, it notifies the selected banks. Subsequently, the consumer can expect to deal directly with the bank.

Mehrotra observes that besides collaboration, banks around the world have done a few things to grow and improve their own fintech platforms. “Some have gone on to build their own platforms through which they created incubators for their own organisation.”

Incubators or accelerator programmes help start-ups to develop by providing activities such as networking, marketing assistance and links with strategic partners. Financial institutions establish these programmes to help them tap the digital talent pool.

Early last year, UK-based banking and financial services company Barclays launched an accelerator programme in London for fintech start-ups. The programme included the selection of companies that had worked on developing a new credit-scoring algorithm for consumers and creating an affordable alternative to payday loans. 

Other collaborations include working with venture capital firms that focus on fintech or acquiring fintech companies and bringing about innovation in those companies. Online banking start-up Simple, for instance, was bought by BBVA (a Madrid-based bank) for US$117 million. Simple differs itself from traditional banks by eschewing fees and offering customers a data-rich analysis of their transactions.

Still, there are many opportunities for both banks and non-bank financial institutions to grow the fintech industry together. In his report, Mehrotra looked at social media in Malaysia as a case study, pointing out that Malaysians had been identified as one of the world’s most digitally engaged crowds.

“Given the country’s high inclination towards social activation, many Malaysian businesses have continued to invest in social technologies and e-commerce. Transaction banks, which are looking to enhance B2B collaborations, product development and relationship-building with customers and employees, should also invest in social media for greater engagement and activation,” he says in the report.

Ultimately, the competition and/or collaboration between fintech companies and banks bode well for consumers. “At the end of the day, they allows better propositions to be delivered to the consumer. 

“Consumers or clients (SMEs and large corporations) will be a lot more informed on the choices they have to address their financial needs in a more efficient and effective manner. It is also great for the economy,” says Mehrotra.

 

This article first appeared in Personal Wealth, a section of The Edge Malaysia, on March 2 - 8, 2015.

 

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