BANKS INVEST IN FINTECH TO OFFSET DISRUPTORS
▶ Citigroup executive says start-ups who aim to ‘kill the banks’ have failed
Global banks are increasingly investing in banking technology as they seek to dominate the fintech space through collaborations to offset the disruption from start-ups, the Citigroup global head of research said.
“Citi is among the top banks along with Santander and Goldman Sachs investing” in fintech companies, Ronit Ghose, the bank’s global head of research told the Citi annual media summit in London on Monday.
“The businesses-to-business space is not done by venture capital [firms], it’s done inhouse by banks. Often through partnerships, often through incubators in-house.”
Citigroup, with about 200 million customer accounts across the world, is among top global banks to invest in fintech firms. Financial institutions focus on businesses-to-business solutions while venture capital (VC) firms continue to invest in payments and e-commerce startups, Mr Ghose said.
Investment by financial institutions in fintech is on the rise to counter start-ups with disruptive solutions who aim to “kill the banks”, but failed, said Mr Ghose. Lenders globally have realised “there are a lot of interesting things happening, so we will collaborate”.
The revolution of fintech startups in the emerging markets has been a watershed moment for the developed markets, he said. Emerging markets reimagined finance, while developed markets have been focused on re-engineering the financial spectrum in existence. Companies supported by VC funding were mostly focused on developing solutions in the business-to-customer space, especially in the payment solution segment of the market. About 93 per cent of VC investments went into retail and e-commerce, he said.
“VC understands consumers. From the VC perspective, fintech is about businesses-to-customer because the mobile devices and the smartphone in the last 10 years have changed our relationship about how we interact with financial products.”
While China has led the way with fintech evolution, the growth of the industry has been subdued in the Middle East.
The global fintech sector has attracted more than US$50 billion in investment since 2010, according to Accenture, but the Middle East and North Africa region (Mena) has received about 1 per cent of this figure.
Most of the attention financial technology has received in the Middle East has been from onshore financial hubs in the UAE with both Dubai International Financial Centre and the Abu Dhabi Global Market running accelerator programmes.
Fintech has also grabbed attention from investors like billionaire Mohammed Alabbar, who plans to invest in the emerging technology firms from the broader Mena region and Turkey through Middle East Venture Partners. The firm has already launched a $250 million fund to invest in the technology companies.
The VC investments in Mena were less than 0.03 per cent of the GDP in 2016, significantly lower than 0.2 per cent in India and 0.4 per cent in the United States. Billions of dollars in annual investments are required in the VC space to bring the Mena region, where there has been a significant rise in demand for technology products and services over the past few years, in line with other parts of the world.
Still, with all the investor attention and push by financial hubs, the Middle East is far behind the global leader China, where Tencent, one of the biggest investment corporations and one of the largest internet companies, has amassed more than 600 million active customers.
“No one gets close to that,” Mr Ghose said. “Hyper-scalability, the speed at which these companies have on-boarded clients is something we haven’t seen. It took us [Citi] about 200 years to get 100 million clients,” he said. Other emerging markets companies, such as Alipay, has 400 million users, while, the Kakao Bank in Korea, had 1 million clients signed up in a week, he added.
“China is the Galapagos of fintech,” he said.
The country created a middle class, its e-commerce sector took a start from a standing position to become the world’s biggest market and mobile penetrator, which rivals markets like the UK, contributing to its success in the last decade.
“Really unique things happened in China which is why it won’t be replicated one-for-one example in India or the UK,” Mr Ghose said.
The success in emerging markets has caused a few problems for banks in the developed world who are facing the pressure on margins and may face the risk of losing some of their clients.
Global financial institutions such as Citigroup are investing more in banking technology