Super Apps shaping the future of finance

THE traditional boundaries of the financial services industry are gradually becoming indistinguishable. With virtually every area of consumer finance - from payments and transfers to lending and custodian functions - intermediated by tech companies cleverly operating around the fringes of the banking system, the value chain formerly dominated by the old guards of banking and finance is now unbound.

The surge of tech platforms upending the retail banking sector began when the former found themselves taking on the role of demand aggregators for an outsized customer base far exceeding what the banks had access to.

In Oliver Wyman's State of the Financial Services 2017 Report, the consultancy went as far as to predict a transition that will see banks taking the role of "component suppliers" that manage compliance-heavy financial services such as mortgages or high value payment transfers, while effectively ceding control of valuable customer relationships to tech "platform providers" that retain access to a wide user base across various consumer sectors through an integrated payments infrastructure.

Take the Chinese market for example. Back in 2016 alone, Ant Financial added 100 million new clients to a client base in excess of 500 million, practically 10 times that of the world's biggest banks. There is a simple explanation for this phenomenon: digital inclusion has now outpaced and effectively substituted financial inclusion. In 2018, Ant Financial is now considered one of the largest financial services companies in the world.

With troves of consumer data at their disposal, tech platforms now have the capability to evaluate the credit risk of small borrowers with no credit or collateral history through mobile behavioural data. Tencent, Alibaba and Baidu have all ventured into digital lending, with the respective launches of WeBank (China's first online-only bank), MYBank and Baixin Bank.

RISE OF THE SUPER APPS

Clearly, there is a blurring of lines across multiple facets of a modern consumer's lifestyle. Our consumption of social, retail and financial services is now seamlessly merged into several leading tech platforms providing what is now deemed "digital utilities" - from messaging and social networks to transportation and e-commerce.

In Asia, platform providers such as Alibaba Group, Ant Financial, Tencent, WeChat and Grab are now driving the inclusive usage of digital utilities through the development of tech platforms that power "super apps".

A super app combines communication, search, navigation, commerce and payment into a single platform. Consumers have begun to embrace these "one-stop-shop" apps because they offer a seamless, integrated, contextualised and efficient experience.

South-east Asian ride-sharing app Grab recently raised US$2 billion from SoftBank and China's Didi Chuxing to become a digital payments company through the launch of its GrabPay service for third-party merchants last November. The main gamechanger it is introducing to the payments landscape to ensure wide adoption is a zero merchant discount rate (MDR). Most mobile point-of-sale terminals currently require an MDR charge, a transaction fee paid to the payments processor from the total amount received, that has deterred small merchants. In a region where cash remains king, a regional payments system made accessible through a Super App like Grab that offers an essential service such as transportation, holds great promise to transform the regional payments landscape into a cashless region.

Ultimately, to enable the wide adoption of these tech platforms, mobile connectivity and Internet access are essential - and Asia has displayed a huge appetite for mobile finance with the rapid growth of their mobile and Internet penetration. As such, there is a massive digital opportunity for Asia to become the epicentre of disruption for fintech with the greater cause of financial inclusion as an impetus to speed up adoption of digital finance and mobile payment platforms.

BANKING AS A PLATFORM... ?

In this new tech-infused rapidly evolving landscape, the industry is presented with a billion-dollar question: what is the right model for banks to stay relevant in the future?

The incumbent institutional financial players under threat would need to overcome existing legacy infrastructure before the emerging tech platforms develop a strong enough financial services proposition to move into banking. The infiltration of tech players into the banking ecosystem driven by artificial intelligence, blockchain, data analytics and other emerging technologies will alter the face of banking as we know it. These platforms powering said "Super Apps" may enjoy operational efficiency with a digital-first approach from the outset; however, they are set to face escalating costs of compliance if they seek to scale up and grab a share of the market held by the incumbent financial institutions.

As market competition continues to act as a catalyst to fuel innovation and transform the playing field, a possible marriage of convenience for both sets of players could be a partnership that leverages the respective strengths of the incumbent and the challenger. Banking as a platform is a concept that could future-proof the financial services industry, but its success would depend on the agility of the players to collaborate and, perhaps, divide and conquer based on their competitive advantages.

Platform providers of the Super Apps that are dipping their toes in the realm of payments, transfers and e-wallets rely on the existing banking infrastructure to some extent and could benefit from the superior risk management, security and compliance capabilities of the incumbent banking institutions.

Several banks are also welcoming tech platforms to plug into their ecosystem by building large-scale API (application programming interface) developer platforms. DBS Bank, for instance, recently announced its launch of the world's biggest banking API developer platform, allowing the collaboration of various companies, fintech players and software developers to access a breadth of services, including funds transfers and peer-to-peer payment service PayLah!.

Whilst there is no question that consolidation in the industry remains on the horizon for many banks in the face of digital disruption, financial institutions could stand to gain a stronger foothold by investing in or partnering with tech platforms that could extend their bank-as-a-platform proposition in terms of customer distribution and experience.

For instance, Ant Financial has recently inked a partnership with Standard Chartered Bank to combine its banking expertise across the region's emerging markets with the tech company's fintech capabilities, to increase access to financial services for clients based in markets along the "Belt & Road Initiative" route.

Of course, blockchain technology has also emerged as the trump card that financial and technology companies alike are holding on to, with the promise that the technology could radically lower the operational costs of running financial processes to negligible volumes.

Various financial institutions and tech titans in China - the Bank of China with Tencent; Agriculture Bank of China with Baidu, the Industrial and Commercial Bank of China with JD.com and China Construction Bank with Alibaba - are also pairing up to experiment with blockchain technology, artificial intelligence and other technology in fintech applications.

ASIA SET TO LEAD THE WAY

With the rise of world-renowned tech juggernauts Alibaba, Tencent, Baidu and JD.com, Asia is certainly a force to be reckoned with in the development of Super Apps that diffuse the lines between a consumer's social, retail and financial facets of life.

As more people hold mobile phones than bank accounts in Asia, the full digital ecosystem of services from e-commerce to digital lending is set to form the basis for an economic power equaliser between the region's underserved population and the rest of the developed world.

Much like how Uber's disruptive model fundamentally transformed the transport sector and introduced the concept of embedding digital payments into an everyday life experience, we see the trend continuing for payments and financial services to be intricately linked to our daily consumption of digital utilities.

This new landscape will spur players in the financial services and tech space to redefine their business models to move in sync with the reordered marketplace where Super Apps reign supreme and the winner takes all.