This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 23 - 29, 2016.

Financial technology, or fintech, start-ups are disrupting the finance and banking industry the world over, causing banks to re-examine and reinvent themselves in order to stay ahead. While banks have the advantage of clients and scale, fintech has the innovation edge, especially in customer experience interface and providing niche services to segments that are underserved by banks.

In recent years, some fintech companies have used technology to provide financial services in areas that were previously dominated by banks, ranging from financing and mobile payment solutions to investments. The tipping point of disruption has been reached in some parts of the world, like China. According to a March report by Citi’s global perspectives and solutions division, in terms of transaction volume, China’s fintech companies, such as Tencent and Alipay, now have as many clients as the country’s top banks. Alipay, for example, has a total payment volume of US$931 billion, which is 3.3 times that of its American counterpart, PayPal (US$282 billion).

The report says China’s fintech companies have grown rapidly due to a combination of factors — internet and mobile penetration, a large e-commerce system with domestic internet companies focused on payments, relatively unsophisticated incumbent consumer banking and accommodative regulations.

A report by Singapore-based fintech venture capital firm Life.SREDA in collaboration with INSEAD, called “Money for the Future”, says 

fintech companies in Asia saw a significant rise in funding last year. Venture capital investments rose from US$350 million to US$1.1 billion in 2014 and quadrupled to US$4.6 billion last year.

While fintech companies and banks will continue to compete, particularly in customer relationship, Citi’s global head of digital strategy, Greg Baxter, says in the report that he believes collaboration will be a dominant trend.

“The reason is that each participant needs what the other has but has found it extremely hard to replicate. The ‘Industrialists’ need innovation and the ‘Innovators’ need industrialisation. In finance, industrialisation means customer base, capital, liquidity, distribution, regulatory expertise, risk management, reputation for safety and banking licences. Innovation means agility, speed, creativity, focus, technology skills and an entrepreneurial culture. The two capability sets are almost asymmetrical,” he says.

Collaboration is just what banks are seeking, opines Serguei Netessine, the Timken chaired professor of global technology and innovation and research director of the INSEAD-Wharton Alliance. By collaborating, he says, banks and fintech start-ups are able to leverage each other to provide better financing services.

“Banks and fintech start-ups are very different. They live in different worlds, go to different conferences, hire different people and think differently. Banks have credibility, branding, client base and money while start-ups don’t have that. What they have is an innovative image, innovative culture and speed of innovation, which is what banks don’t have. This is where they can complement each other and collaborate,” explains Netessine, who is a contributor to the “Money for the Future” report, in a telephone interview with Personal Wealth.

How some banks are working with fintech firms

Some banks, for example HSBC and Citi, have set up fully fledged venture capital-like units to channel millions of dollars into fintech start-ups, says Netessine. Others, including DBS in Singapore, run their own start-up mentoring programmes for employees and provide seed grants and training.

“The CEO of DBS acknowledges that the industry is going to face cataclysmic disruption. Due to this, DBS has been incredibly active in collaborating with start-ups. It started a fintech accelerator in Hong Kong to target Greater China and even launched the PayLah! application (a mobile wallet that allows its users to perform funds transfer with just the recipient’s mobile number).

“DBS has ventured into debt financing to fund start-ups in various ways and has even started the DBS Business Class [a unity of start-up members and advisers] to help them succeed. There are many, many things you can do to collaborate with start-ups and you certainly don’t see Malaysian banks doing enough of this,” Netessine points out.

Also in Singapore, United Overseas Bank (UOB) has set up FinLab, a fintech initiative in collaboration with the subsidiary of the Infocomm Development Authority of Singapore, Infocomm Investments Pte Ltd (IIPL). It is providing each fintech start-up with S$30,000 in seed money in return for a 6% stake.

In an email interview, Janet Young, UOB’s head of group channels and digitalisation, says that in a changing economic and business landscape, constant innovation is the key to remaining relevant to customers.

“Today more than ever, banks realise the importance of innovation but often lack the engagement with the brightest disrupters. On the other hand, start-ups often lack the resources and capital to endure the typical two to three-year sales cycle for selling solutions to financial institutions. This [FinLab] programme helps to close the gap between the banking industry and budding entrepreneurs,” she explains.

She adds that apart from encouraging the development of the fintech ecosystem in the region, UOB’s FinLab programme is also one of the bank’s initiatives to promote enterprising thinking and digital skill sets within the organisation. In this respect, UOB has held a series of internal workshops and hackathons since the fourth quarter of last year.

Meanwhile, CIMB Bank Bhd, in partnership with the Multimedia Development Corporation (now known as the Malaysia Digital Economy Corporation), launched an incubation programme called the InnoChallenge. In last year’s InnoChallenge, the grand prize went to a wealth management platform developer while the consolation prizes were awarded to developers under the categories of SoLoMo (Social, Local and Mobile), social marketplace and bill payment solutions.

While technological innovation is seen as a threat to banks, as it eats into their resources, CIMB group chief information and operations officer, Datuk Iswaraan Suppiah, says this is not necessarily so if banks embrace it as a way forward to improve their products and services.

“At CIMB, we are seeking fintech firms with which we can have true synergy to ensure that our fintech investment is not only strategic but also enhances our customer experience while conforming to the complex regulatory requirements of the industry. These are challenges that we hope to overcome in partnering emerging fintechs,” says Iswaraan.

He adds that CIMB is deeply interested in the inclusiveness and democratisation that technology is enabling in banking and finance. Micro-lending, digital payments, online remittance and savings offerings to segments that have been a challenge to reach in the bricks-and-mortar banking model are either already among the bank’s offerings or in its short and medium-term plans.

However, notes Iswaraan, as much as CIMB strives to embrace fintech as an option to reach out to underserved customers, he does not believe that supporting fintech start-ups is the only way to reach them. “For example, in Indonesia, we have a partnership with Go-jek, an Uber-like service by two-wheeler vehicles offering rides and concierge services. Go-jek’s business model entails high volume daily payments to two-wheeler drivers who register to provide their services via Go-jek.

“Expecting the registrants to have or provide a traditional bank account as a prerequisite would have curtailed Go-jek’s ability to scale up. Our mobile wallet with its instant ‘account-opening’ capability is the payment mechanism between this company and its community of riders,” he says.

INSEAD’s Netessine says the accelerator programmes and collaborations with fintech companies initiated by the banks should be sustainable and not for the sake of profit. What they should highlight is to learn how fintech start-ups operate and understand what is going to disrupt them in the years to come.

“Banks cannot just launch an accelerator and declare that they are working with fintech start-ups. When they gain insights from the fintech companies, they should think about what they plan to do with these, whether they should invest and bet on the product or technology or acquire the company and keep the technology to themselves. So, they need a bit of a plan and say at some point, ‘we already got this knowledge from start-ups, now what’?”

As technological evolution takes place at an overwhelming pace, Iswaraan says it is unsustainable for them “to have a finger in every pie”, which is why it is essential to focus when working with fintech start-ups. To ensure that it gets a favourable outcome from a fintech start-up initiative, it looks at two key points.

“Firstly, resisting the temptation to chase every latest hyped technology is a challenge because a genuinely big opportunity could be overlooked if we are too rigid. To maintain a balance, we compartmentalise a distinct team to keep abreast of the multitude of technological developments and fintech start-ups. These pass through a filtration and prioritisation process to decide in what we will actually invest our resources,” explains Iswaraan.

Second is the ability to move fast and fail fast. He says some new ideas are bound to fail and for large corporations, it is a challenge to adopt a mindset that accepts failure as natural to being innovative, especially banks with robust risk management policies. According to Iswaraan, the right way to fail is to think like a start-up and start small.

“So, we rely on validation mechanisms, such as proof-of-concept prototypes and testing ideas in closed focus groups. We have learnt to go to market with a minimum viable product and then evolving it based on market uptake and customer feedback. As each initiative passes through successive gates of iteration, better decisions can be made on which ones deserve sustained investments.”

The future of fintech and banking collaboration

Banks are also exploring other areas of fintech to expand or enhance the range of their services. In further collaboration with fintech start-ups to provide better financial services, Iswaraan says CIMB is impressed with development areas, such as robo-advisory, blockchain applications for trade finance and fund transfers, biometrics for online know-your-customer, mobile point of sale and payments innovation, that are able to reduce the time and cost to acquire merchants while also improving customer experience.

With fintech gradually becoming a part of the DNA of the financial services industry, UOB’s Young says in the next decade, banks would have evolved in how they reach out to, interact with and service their customers. “While fintech can disrupt and potentially diminish the role and relevance of today’s banks, it can, at the same time, help them create better, cheaper and more efficient services to deliver greater valued solutions. Financial institutions can harness their strengths by factoring in the future value of proven innovation in addition to protecting the core franchise.”

Netessine argues that while it is very difficult for banks to change their business models and suddenly become innovative — because banking is one of the most regulated traditional industries — they should definitely disrupt themselves to avoid being disrupted by somebody else in the future.

“If you look at the landscape of fintech innovation, you see companies like PayPal, Apple with Apple Pay, Google with Google Wallet and Tencent offering all kinds of payments and services to WeChat.

“Looking at this landscape, you realise that none of those companies is a bank. All fintech innovation is coming from companies that nobody even thought would be playing in this industry. Could anyone have predicted that Apple would play in the fintech industry? I don’t think so,” says Netessine.

He adds that banks that succeed in the future are those that try to reinvent themselves and pay serious attention to innovation. “Instead of just having a separate department for innovation, they need to base their entire strategy on innovation and digital technologies,” stresses Netessine.

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