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Banks and technology: a cordial mix for 2016
BANKS will enter 2016 with a fresh urgency in tackling threats and opportunities brought on by technology.
Beyond boosting their digital spending - a move that reports suggest is overdue for lenders - banks must decide how they should work with fintechs, as collaboration becomes an increasingly likely scenario for the traditional financial institutions.
To be clear, fintech accounts for less than 2 per cent of the global trillion-dollar banking sector, an Economist Intelligence Unit (EIU) report showed this year. But it is, today, the top target for venture funding, with more than US$25 billion invested in such startups over the last five years.
And this is gaining pace. Separate data from Accenture showed that in 2014, the total amount invested in the global financial technology sector tripled to US$12 billion from the previous year.
There are no absolute signs that significant market share is being snatched from banks - despite the grave warnings from fintechs and consultancies alike - but what is clear is that alternative lending such as peer-to-peer funding for small-and-medium- sized enterprises (SMEs) is growing at a fast clip, and that means more funding access for smaller firms.
BNY Mellon's report on fintech showed crowdfunding for business lending has grown more than three times between 2012 and 2014 in the UK. And the world's most valuable fintech resides in China - with Lufax, a Chinese peer-to-peer lender and broker, alone wielding a current valuation of about US$18 billion.
Some banks have responded by establishing funds, targeted mainly at picking up new ideas from fintechs. Others have created innovation labs. Looking at the global banks, HSBC, for example, has created a US$200 million fund targeted at the fintech sector.
Citigroup's venture-capital arm has also set up a partnership with an accelerator - a programme that hothouses startups and links them with mentors for them to refine ideas to be pitched to potential investors in three months' time typically - with these startups running in US and Singapore, among others.
At home, UOB has set up an innovation lab jointly with the investment arm of the Infocomm Development Authority of Singapore (IDA), and is exploring ways to develop crowdfunding platforms. DBS in December also announced an investment of S$10 million in programmes targeted at nascent startups out of Singapore.
DBS, in looking at very-early- stage companies founded in Singapore, wants to lock its target on an untapped market, which in part speaks to how much money has already been pumped into startups. "There's loads of that," said Neal Cross, chief innovation officer at DBS, when asked if DBS would launch a venture capital fund soon. The latest programme from DBS is structured to appeal to corporate staff who are not confident enough to give up their day job and take the plunge into entrepreneurship.
"What we've noticed with the Singapore culture is that people are paid quite well. There's a good social security net, everything works. People sit in nice, comfy jobs, but they aspire to be a startup. But they are a bit scared," Mr Cross told The Business Times.
And in navigating the fintech space, banks have their own fears to chew on. For one thing, they must decide if going into the peer-to-peer lending business will prove beneficial, if it means lowering margins - a self-fulfilling prophesy brought along by the onslaught of fintechs.
"Fintech presents the challenge of product cannibalisation to banks. A bank considering a peer-to-peer lending business must accept that it will transfer share directly from its long-established, deeply ingrained consumer lending operation," said the EIU report. "And it will do so on a lower fee basis and at lower margins."
There are also rules to effectively ensure no room for regulatory loopholes when a bank here acquires a fintech that provides lending and funding to smaller firms, regulatory and banking sources told BT earlier.
To be sure, banks are far from hapless institutions, and will stand their ground against tech disrupters where the hit on business is clear. In Australia, which has the world's highest rate of contactless payment, lenders are refusing to budge against Apple Pay, over a reported 15 basis points in interchange fees - the fee that a merchant's bank pays a customer's bank.
Apple Pay has tied up with Amex, which has a far smaller share of the card market, as banks mainly issue cards that use the payment network of Visa and MasterCard. As a clear snub, Australian banks will support Android Pay, which can channel payments from MasterCard and Visa credit cards. Android Pay is reportedly seeking no such fees.
But there is room for more IT spending by banks, as they ramp up digital services to meet higher demand from consumers today. BNY Mellon noted that while the financial services industry already has one of the highest ratios of IT spend as a proportion of revenue - expected at US$197 billion in 2015 - at least three- quarters of this has been doled out for maintenance rather than new services. Spending is also likely to rise amid rising fears over cybersecurity that, according to a PwC global survey, is among the top risks for banks.
Banks have already been engaging with traditional tech giants. IBM's global banking leader in cognitive business solutions Allan Harper told BT that IBM is in talks with 50-70 banks over the use of Watson - its cognitive computing system - and hopes to double that in about six months. He is doubtful that fintechs can drive down prices in this area, even as many of them are working through big data to establish more unorthodox credit ratings.
Mr Harper said: "You hold a mortgage for 25 years. I don't know how long Google has been around, but it's not 25 years. There's also security and scaleability. These engines must be robust and resilient. If a fintech can do that, then I think it's a worthy competitor."
Banks will still have to battle regulatory concerns in handling technological change. Connie Leung, senior financial services industry director at Microsoft Asia, told BT that as more regulators have begun understanding how cloud services can meet compliance standards, banking customers out of Australia, Korea and Singapore have moved into cloud services. She noted that the Hong Kong Monetary Authority (HKMA) announced guidance on the use of cloud services last year. And the Monetary Authority of Singapore (MAS) also clarified recently that it did not object to the use of cloud services.
The next big wave, to be watched by regulators, will come with the use of blockchain technology, which many global banks are toying with. In December, Standard Chartered, DBS and IDA said they had successfully completed a proof of concept to deliver the world's first application of distributed ledger technology to boost security of trade finance invoicing.
What this does is to have banks put physical copies of invoices into a digital and distributed ledger that all participating banks can access, while preserving client and commercial confidentiality. This is meant, in part, to prevent duplicate financing of the same invoice by different banks - a nagging problem with trade finance that played out in the Qingdao fraud case in 2014.
"Clearly, security is an important aspect but it's too early to comment on security concerns because we do not know what the end-state blockchain stack will look like," Saket Sharma, chief information officer of treasury services at BNY Mellon, told BT. "Regulators are key stakeholders, and they need to be part of the conversation as we continue to evolve, understand and experiment with blockchain."
For more of BT's year-in-review stories, visit bt.sg/review_15