Time for shakeout as start-ups plant new flags

• New players are entering the financial services sector
• The task of the regulators across Asia involves categorising, licensing and managing the new players. However, they are still struggling to determine what kind of slot would fit the new players best
• Banks and finance companies can hardly plan for the long term because technology has a way of making a part of itself absolute and replacing it with a new one

New players are entering the financial services sector, whether fintech companies, e-commerce platforms, blockchain firms or other financial innovators, they can be in many places and markets at the same time.

They take money from and lend to consumers without necessarily having a conventional banking licence. In the recent few years, they have begun to do a lot more than what banks have accomplished in the last 100 years.

Emmanuel Daniel, chairman of the Asian Banker said at a CEO dialogue during the Future of Finance Summit 2018 that web-based finance companies have learnt a simple secret that eluded banks for more than 100 years. Their strength lies in their ability to complement each other and respond to market changes in real time instead of the traditional banking practice of head on rivalry and expensive branch expansion.

The so-called banker had become a bureaucrat repeating himself without governments and regulators noticing. Many banks have begun to change their ways using the web to deliver services but they are still a lot less flexible than the upstarts.

No one is ringing the death knell of the traditional banking system. Many expect a big shakeout scattering weak and rigid banking companies by the way side as new players rush in as the Mongolian hordes once did in the theatre of war.

“We have a range of players who now need to relate to each other. Baidu and JD say they are partners for banks,” he said. “Are they going to replace banks in the loans business? Maybe, maybe not”.

Baidu and JD.Com, Chinese giants with a global reach, have already positioned themselves as partners of banks, Daniel pointed out. “Alipay and Wechat, also from China, handle five times the transaction compared to Visa and Mastercard,” he said.

Many players in the financial world chose not to notice the irony of the new situation. A big part of financial innovation is driven by the simple fact that traditional banks have failed to fully meet the needs of customers at different levels.

They include small loan seekers unable to satisfy the bank’s obsession with box-ticking and paperwork as well the sophisticated business clients. The second category demand flexibility and a level of sophistication that would meet their complex requirements. And, all these in real time.

This is just the right scenario for the opportunity seeker armed with advanced communications technology to reach out to a large population that was underserved by the banking industry.

The cost calculation is simple. The fintech player would invest in technology while saving huge sums on office space rent and a lot of staff which are normal expenditure for traditional banks.

The new phenomenon has grown more rapidly and strongly in large parts of Asia, which is often seen as the developing world, than in the developed western countries. The most significant growth has happened and will continue to happen in China.

“China as ground zero of financial services transformation,” Daniel said. People do not often cash in China relying instead on a range of payment systems. Everyday life is wholly transformed with the financial services.

This change has happened mostly because private sector players have managed to take away a huge chunk of business out of the grip of state-owned banks.

“Cat and Mouse” game

It is easy to lay the blame at the regulator’s door. The regulator would, in turn, argue that ensuring controls and due diligence are necessary tools for checking fraud and large-scale default which are more important tasks than facilitating number growth in the financial industry.

Regulators across Asia are still struggling to determine what kind of slot would fit the new players best. The task involves categorising, licensing and managing the new players.

Managing the new creatures would require technological sophistication and an ability to play “cat and mouse” as the game has turned faster, more aggressive and unpredictable. At the same time, the regulator has little time on his hand because the upstarts are getting stronger by the day.

If delayed for too long, the regulator may find it difficult to justify its role. It does not matter what kind of political dispensation exists in a regulator’s country because the Internet is all-pervading.

Is the fintech industry at risk of a major scandal and subsequent fall from the high cliff it has climbed in a short period?

The industry is already having an impact on socio-cultural behaviour across Asia particularly in China. The Chinese tradition of saving more than 30% of family income, even in families servicing housing loans, is suddenly under threat.

With its ability to offer small consumption loans without asking too many questions had found millions of ardent youth who love its service-on-demand characteristic. The older and middle-aged Chinese still stick to high savings pattern but the younger generation has fallen in love the combination of credit card and fintech facilities.

The result in extremely high levels of indebtedness among a section of the youth. Already there are calls that the regulator should step in with measures that control the haywire growth of credit among the young people.

US regulators have already stepped up pay-day lending by financial service firms after coming across large-scale indebtedness.

The other challenge is the mushrooming growth of fintechs or web-based finance companies, who are relaxed in their dealings and waive a lot of requirements that the established companies demand. It is the established players who fear losing out to the upstarts and want the regulators to establish controls and check-in points.

New challenges

Banks and finance companies can hardly plan for the long term because technology has a way of making a part of itself absolute and replacing it with a new one.

One would argue that web-based companies like Amazon, AliPay and Apple Pay have little to worry because they are high up in the technology chain. That would be like investing in the assumption that tomorrow would be similar to today. These companies have invested in today’s technologies and nothing to do with the ones that are yet to be born.

“For every layer of technology that is invented, a new layer comes up on the top,” remarked Tim Berners-Lee, inventor of the World Wide Web and founder of Open Data Institute. He also charted the Internet’s fascinating journey since 1969 when he gave it the “www” dimension and subsequently changed the way human beings think and act.

Artificial intelligence (AI) is still at its infancy. Anything can happen if AI combines will different technologies and devices.

The big question is whether AI would empower the financial industry or force it to shed its present influence. AI can turn an individual into a bank, some kind of a modern version of the old-time money-lender who operated alone using no institutional infrastructure.

A new wave of technology can upturn more than a single applecart and force finance companies to invest in an unexpected direction.

It is felt that the marriage of data and technology can deliver endless varieties of goods and services. There is no reason why this expertise should remain in the domain of financial industry.

Amazon and Alibaba were initially seen as e-commerce firms until people realized that logistics was another strong point that drove their business. Many people now seem them as data companies working their way into myriad business segments. Some even suspect that they are banking platforms in e-commerce clothing.

What if hospitals start lending money by way of services with or without collateral and combine it with the provision of health insurance? A portion of the personal loan and insurance business would leave the financial industry.

Add to this is the wide-ranging effect of the Facebook scandal. Almost suddenly, questions are being raised about the ability and willingness of other services like WeChat and WhatsApp to ensure protection for personal data.

“People are not happy with the status quo. There is a huge amount of resentment and suspicion,” Berners-Lee said.

The distrust and concern that the Facebook scandal has generated is expected to weigh on the reputation for reliability on the financial services industry.

Banks and financial industry experts also want regulators to establish bands and limits about creditworthiness of customers to stop aggressive players from reckless lending as if there is no tomorrow.

Two years back, finance companies regarded customers using more than five finance related apps on mobile phones as high-risk ones. It showed that the customer was knocking on many doors at the same time. Money providers have become more generous now, and agree to lend money to those who have less than 30 finance related apps. The point of risk has shifted from five to 30 phone apps. 

“One would argue that web-based companies like Amazon, AliPay and Apple Pay have little to worry because they are high up in the technology chain”