Global banks bet­ter buckle up with mod­ern tech­niques

The Pak Banker - - COMPANIES/BOSS -

The bank­ing in­dus­try across the world has no choice but to adapt their busi­ness mod­els to the dis­rup­tion caused by the fi­nan­cial tech­nol­ogy (fin­tech) rev­o­lu­tion that could see the in­cum­bent banks los­ing mar­ket shares to tech­nol­ogy in­no­va­tors, at least in some seg­ments of busi­ness, Ronit Ghose, man­ag­ing di­rec­tor of Global Banks Citi Re­search, said in an in­ter­view.

"The pace of dis­rup­tion in the fi­nan­cial in­dus­try could ac­cel­er­ate as the mar­ket share of fin­tech com­pa­nies reaches crit­i­cal mass. Banks need to get in­no­va­tion be­fore fin­tech com­pa­nies get dis­tri­bu­tion. Oth­er­wise, con­sid­er­able share shift is ahead," he said

Rel­a­tive to other in­dus­tries such as the me­dia, mu­sic and travel where dig­i­tal new en­trants gained sig­nif­i­cant mar­ket share of up to about 45 per cent over a decade, the bank­ing in­dus­try is still at an early stage for dig­i­tal dis­rup­tion. An es­ti­mated 1 per cent of the US con­sumer bank­ing in­dus­try has been dis­rupted by fin­tech to­day but this could rise to 15-20 per cent by 2020.

The global bank­ing in­dus­try cur­rently spends $500 bil­lion (Dh1.83 tril­lion) on tech­nol­ogy. Most of the bank's tech­nol­ogy spend­ing is fo­cused on a busi­ness as usual ap­proach such as up­dat­ing legacy sys­tems and back of­fice so­lu­tions. The fin­tech dis­rup­tion is chang­ing the way banks are spend­ing money on tech­nol­ogy to trans­form the way they do busi­ness.

"One of the rea­sons for this is that there are huge in­vest­ments hap­pen­ing in fin­tech, funded through ven­ture cap­i­tal­ists (VC) and pri­vate equity. Last year alone, $20 bil­lion was in­vested in fin­tech com­pa­nies through VC funds. The new gen­er­a­tion fin­tech com­pa­nies are clearly look­ing at tak­ing busi­ness away from banks," said Ghose.

Con­ven­tional bank­ing's value chain es­sen­tially in­volves func­tions such as tak­ing sav­ings, pro­vid­ing loans and fa­cil­i­tat­ing pay­ments. In this value chain, at the most risk of dis­rup­tion is the pay­ments busi­ness model be­cause it is the least cap­i­tal in­ten­sive and most tech in­ten­sive.

While sav­ings and lend­ing in­volve the bal­ance sheet and regulation, in the case of pay­ments, busi­ness is bal­ance sheet-light and reg­u­la­tions are rel­a­tively lower, at­tract­ing most in­no­va­tors to this seg­ment.

Fin­tech has al­ready be­come a ma­jor player in the pay­ments in­dus­try in China. There, all on­line pay­ment com­pa­nies and fin­tech com­pa­nies have all the ad­van­tages of in­cum­bent com­pa­nies in the West. For ex­am­ple Ali­pay in China has done three times more trans­ac­tions than PayPal be­cause Alibaba has more on­line trans- ac­tions. It clearly shows that once that ecosys­tem takes off, it is very easy for fin­tech to grow.

Al­though a dis­rup­tion is hap­pen­ing in most of the mar­kets around the world in the pay­ment in­dus­try, the ex­tent of dis­rup­tion is much less than what is hap­pen­ing in China. In lend­ing and sav­ings, the im­pact of dis­rup­tion has been slower com­pared to pay­ments. Al­though peer-to-peer lend­ing is al­ready catch­ing up, mar­ket share is min­i­mum and there are still ques­tions on the model's sus­tain­abil­ity when it faces the ex­tremes of credit cy­cles.

"The value add [ons] of fin­tech com­pa­nies are ef­fi­ciency, sim­plic­ity and trans­parency. Equally, fin­tech grows as it of­ten tar­gets a client base un­der- or un­served by banks, such as pay­ment ser­vices for sole traders or mi­croen­ter­prises. How­ever, the re­cent de­cline in P2P len­der share prices high­lights cau­tion over new en­trants' credit and rate cy­cle re­silience," Ghose said.

Banks are likely to re­main rel­e­vant as most of the fin­tech com­pa­nies still rely on ex­ist­ing bank­ing in­fra­struc­ture. But banks are at risk of be­ing dis­in­ter­me­di­ated from some cus­tomers and be­com­ing com­modi­tised in­fra­struc­ture providers. Dig­i­tal bank­ing works well in so­ci­eties where there is very high level of digi­ti­sa­tion. The UAE in gen­eral is very ur­banised with el­e­vated high-tech pen­e­tra­tion.

"With a high pro­por­tion of tran­sient pop­u­la­tion, there is a lot of money mov­ing in and out of the coun­try in terms of re­mit­tances and pay­ments. This gives huge op­por­tu­ni­ties for banks to grow and re­tain busi­ness. Ad­di­tion­ally, there are seg­ments of mar­ket which are not cost ef­fi­cient to ser­vice through branch net­works. In such sce­nar­ios fin­tech so­lu­tions are ideal," Ghose said.

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