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Re-imagining financial services
- Mohit Mehrotra - Strategy Consulting Co-Leader, Deloitte Asia Pacific
- Sopnendu Mohanty - Chief Fintech Officer, Monetary Authority of Singapore
- Joddy Hernady - Senior Vice-President of Media and Digital Business, TELKOM Indonesia
- Navin Suri - Chief Executive Officer, Percipient Partners Pte Ltd
- Moderator - Amit Roy Choudhury
THE recently-concluded fintech festival in Singapore, which was the world's largest, generated considerable international buzz with the steps being taken by the Monetary Authority of Singapore (MAS) to promote the use of new technology being monitored closely by other nations. In order to understand the issues better, The Business Times brought together a panel of experts for a roundtable discussion on the subject.
Excerpts from the discussion:
Amit Roy Choudhury: Technology disruption is changing the financial services industry at a rapid pace. Change and disruption have become the new normal. where do you see the financial services industry in, say, five years' time both in terms of business model as well as the kind of services that they will offer to customers?
Mohit Mehrotra: The financial services ecosystem will continue to be re-imagined and re-engineered. The ability to attract client attention and to help them to achieve their purpose and generate greater value is key to winning in a digitally enabled world.
In five years, a great number of jobs will be displaced, the sharing economy will scale up, the ageing economy will continue to accelerate, and the ecosystem formulators or integrators will increase their play in financial services. Many of the financial services providers of today will transform to be part of multiple ecosystems, evolve to become ecosystem integrators, develop as ecosystem formulators and/or reinvent to become providers of niche services.
Sopnendu Mohanty: Five years from now, the financial industry will be very different - both in terms of the way financial services are being delivered, as well as the types of services and products being offered.
The internet and the prevalence of smartphones have provided the connectivity for people to consume financial services anytime and anywhere. Banks have also gone digital; you can set up a bank account, check your balance, make payments, transfer funds, remit money and invest without stepping into a bank branch.
We have also launched PayNow in Singapore this year, which makes transfer of funds even more seamless and simplified. You only need to know the person's phone number or NRIC number in order to transfer funds to him or her. The same will happen for cross-border payments as we connect domestic networks.
Joddy Hernady: I think similar to the disruption witnessed in the other industries, the financial services sector will also see new and advanced user experiences driven by fintechs. As a telco, we see an opportunity for us to participate in this change. We plan to enter this space in a strategic partnership with a fintech player who shares our vision.
We have both agreed that financial services will become "smart fintech" solutions in the future. What we mean by that is that financial services will merge all types of information, transaction and ID presentment needs of the customers.
For customer interface, it will use phones and wearables, among other equipment. Boundaries between fintech, digital ID, entertainment, edutainment, infotainment and others will blur and individual services will be replaced by open and modular platforms providing a unified and advanced user experience to the customers.
Navin Suri: Banks as we know them are facing their Kodak moment, a slow but inevitable demise. As banking services remain expensive, bank processes and decision-making slow and customer experience unfriendly, it is no surprise that technology giants like Amazon, Google, Facebook, and Apple, each with a gargantuan and sticky client base, are hovering, and showing increased interest in engaging with financial services regulators.
If you then add to the mix the stringent risk and capital controls on the one hand, and new data sharing regulations on the other, what you get are perfect conditions for a major disruption to the industry. It is no surprise that many of the challengers are targeting low hanging fruits such as payments. This banking service, known for its high customer friction and a seductively large profit pool offers a perfect opportunity entry point. An Accenture study suggests that by 2020, regulatory changes in the payments industry will cause UK banks to lose up to 43 per cent of their current payments based revenues.
Amit: Disruption to the financial services ecosystem may be relatively new but this is something that a lot of other industries have faced, such as retail, telco and ICT (Infocomm Technology). What can companies in financial services learn from these examples?
Mohit: Having a digital mindset and agility are crucial to developing a winning play. Teams need to review the spaces where they can compete either by themselves or with the support of partners.
The key learnings are largely around the development of partnerships that can accelerate the build-out of capabilities, and the pace of development of the talent ecosystem which is critical in developing a digital mindset. It is vital for these financial services companies to acknowledge the types of competition - they are not necessarily businesses that look like them but businesses that have client attention and the desire to disrupt profit pools shielded by the current regulatory regimes.
Sopnendu: The next phase of financial transformation and innovation is likely to be propelled by collaboration, not just competition. As the financial industry is built on trust, customer acquisition is not as scalable (that is cheap) as other digital services.
Many fintechs are discovering this, that it is difficult to acquire customer in a cost-effective manner. This opens up an interesting space for collaboration between incumbents and disruptors.
While fintechs may have developed useful applications that create improved customer experiences, incumbent banks and insurers have a large customer base, and their customers would find these services as useful additions or new interfaces. They also have the trust and reputation advantages. In fact, many financial institutions are also embracing innovation and have acknowledged the potential synergies through collaboration.
Joddy: The most successful fintech providers of the new era will not necessarily need to have banking clients and need not offer traditional financial services. They do not have to run ledgers anymore (due to blockchain) and may exclusively use third party rails to provide perfect services to its clients. Hence, if the signal of disruption is already strong to financial services companies, then they need to start disrupting themselves; otherwise other companies will disrupt them.
Navin: The last decade of corporate history is littered with examples of technology-led destruction, and not just disruption of traditional businesses and business models.
While banks now operate under the illusion of control and sustainability, there are indeed a few pointers that financial services businesses can learn from other industries. Some of the key learnings are:
Data is now the product: Despite having amongst the richest customer data of any industry, banks still think in product terms. And for that reason, banks have not harnessed their data in a way that it actually improves the lives of their customers. For example, an address change at a bank is just that, whereas at UberEats, an address change may trigger a series of curated messages to the customer with new eat-out/home-delivery suggestions derived from the customer's eating patterns.
"Real-time first" is the new mobile-first: While financial services firms may be pursuing "mobile-first", the digital world has moved to "real-time first". Tracking an Uber car on its way to pick you up is now par for the course. Yet international wire transfers across banks, whether online or on mobile still takes days, without any updates where the money is. Is it any wonder that the UK-based fintech, TransferWise, which is not only faster but also 80 per cent cheaper than a high street bank, claims to now have eight per cent of the country's money transfer market?
The biggest risks may be from inside: Leadership teams including those at financial companies could be inadvertently driving their companies aground. Insiders who are traditional thinkers will likely produce only incremental improvements rather than innovation, leave alone disruption.
Detach, hatch, & snatch: New thinking at large organisations needs unsullied environments, ones that are detached from the legacy organisation. DBS Bank's Digibank launch in India seems to have done the same.
Amit: One interesting aspect is that financial services are being more custom-built for local consumption in keeping with local conditions and laws, such as data privacy. This in effect is a roll-back from the financial globalisation that was the norm a few years ago. Do you see this trend continuing?
Mohit: Clearly governments are exploring ways to generate greater benefits from the scale out of the digital world. A lot of policies are geared towards exploring ways in which issues around income inequality, inclusion and development - all of which can be addressed with digitally enabled plays. The key question that is driving many of the policies in the region is how can governments leverage digital literacy to build out financial literacy?
A voice and vision enabled world that uses core, exponential technologies and policies should be able to help generate greater value from hyper local opportunities. It is important that the regulatory regime supports players and ecosystems that are geared towards building the financial infrastructure around digital literacy.
Sopnendu: We envision that financial institutions would move towards an open API-driven architecture, allowing external collaborators to connect to their existing core financial platforms in a seamless and secure manner. This could unbundle existing financial services and spur the development of new services to the delight of customers.
DBS has recently launched their API platform. More than 50 companies such as AIG, McDonald's, PropertyGuru and FoodPanda will be using their platform to develop solutions to bring more convenience and value to their customers.
Joddy: Payment services have the biggest financial services market share in Indonesia. We see that it is currently also being "glocalised". This means that local regulation, customs, legacy customer behaviour and cultural patterns have given rise to local/regional solutions, which may connect into a wider (probably global) ecosystem. Speed is the key and I believe the player who can penetrate the market aggressively first will become the winner. Payment services by fintech will be a "the winner takes all" game.
Navin: While data is now widely acknowledged as the lifeblood of the modern economy, an unwarranted barrier to global digital trade is the rising wave of data localisation and privacy regulations. In contradiction to the borderless spirit of the internet, cyberspace is witnessing creation of sovereign borders. The ITIF (Information Technology and Innovation Foundation) believes this reduces economic growth and undercuts social value, estimating such barriers to have a 0.1-0.36 per cent impact on US GDP (gross domestic product) and a 0.7-1.7 per cent impact on the GDP of several Asian economies.
It is interesting that in a world of free trade agreements, greater localisation of data has become politically appealing and enjoys the support of local business communities. Regrettably, challenges to the globalisation of data looks likely to continue for the foreseeable 8-10 years, putting undesirable cost and regulatory constraints on the delivery of a borderless view to clients.
Amit: Fintechs are at centre of much of the disruption that is happening in the financial services industry. China and now increasingly other countries in Asia such as India and Indonesia are seeing more innovative fintechs coming up. Do you see a clear difference in the way fintechs are evolving in the East when compared to their evolution in the West?
Mohit: The narrative is different between the developed parts of the Western world and the emerging markets in the East. On the back of the growth agenda, the narrative of the emerging markets in the East is geared more towards the build-out of efficient financial infrastructure and ecosystems that address the growth opportunity. This is reflected in the policy stance and the nature of experiments many of the regulators are encouraging to help domestic markets make better use of financial technology to transform. Comparatively, in the developed parts of the West, it is more around driving efficiency.
Sopnendu: The current demographic in Asia is perfect for fintech to be used as a key driver for financial inclusion. There is a large proportion of unbanked and under-banked, but mobile penetration rate is very high. This segment of the population can now access financial services through their phones.
The regulatory landscape must also evolve to support the new technologies. Harmonisation of policies across borders is also important, given that fintech is borderless. MAS will soon be facilitating an industry sandbox on the cloud for fintechs to host their solutions on this cloud platform. Banks in the region can tap on the platform to test out and use these solutions to digitise and complement their existing offerings. Most importantly, regulators can make use of this platform to facilitate discussions on cross-border data privacy and sharing policies, as well as common standards on KYC/AML (know your customer/anti-money laundering), regulatory reporting, and security.
Joddy: In the West, fintech companies are aimed at servicing or disrupting established financial ecosystems and bringing new levels of UX convenience, efficiency and cost-consciousness into play for the different services. In the East, fintech is more often a substitute to the traditional financial services; therefore financial inclusion plays a dominant role. There is a huge unbanked population in the East. Hence, fintech will give a leap-frog solution and can reach economic scale quickly.
Navin: The un(der)banked are often tagged as a fintech's largest opportunity. The World Bank estimates there are two billion adults or 42 per cent of the global adult population absent from the formal financial system.
Over half of these are in China and India, and the next big bloc is in Sub-Saharan Africa and the Middle East. In the US market alone, a PWC study estimates that the un(der)banked are worth over US$360 billion in unmet banking deposit demand, and over US$20 billion in uncaptured premiums. Regardless of the region, mobile is the enabler and money services tend to be the entry point for the un(der)banked. This explains the high-level similarities across fintechs in both the East and the West. The primary product/service drivers in both regions are mobile-based money services, lending, savings, and insurance.