Disruption driven by a legion of new businesses operating in the field of financial technology – or “FinTech” – is taking place right now in a bank near you.
In those parts of the world where high street or “retail” banking has been long established, several factors are coming together to drive dramatic change.
On the one hand increased regulation and intervention is opening up the market to new competition. On the other hand, a torrent of investment in new technologies is changing the way consumers deal with their finances, leaving traditional banking processes (and their underlying legacy IT systems) far behind.
In the UK, for example, the recent “Open Banking” initiative was rolled out at the Government’s insistence as a means of increasing competition. While the public may not be well aware of what it is and how it works, it is spurring what the Financial Times has termed a “quiet digital revolution”.
It is an initiative allowing consumers to securely share their own banking transaction data with other banks and third parties. Consumers, who have to consent to their data being shared, stand to benefit from a range of better priced or more relevant financial deals. New entrants to the market, meanwhile, have an opportunity to enter a formerly difficult sector and grow their share.
And a range of “challenger banks” including new brands Monzo, Revolut and Starling Bank, suggest that competition – whatever the cause – is indeed increasing.
Existing retail banks, meanwhile, are battling hard to slash overheads, upgrade existing IT infrastructure and encourage clients to transact in cheaper ways.
Existing banking giants: pressure on costs
The pressure on costs is seen in the fact that two-thirds of the UK’s bank branches have been closed over the last 30 years. While high street banks face loud opposition to these closures, and often political censure, their new FinTech rivals can swoop in without the costly overheads of bricks and mortar and offer highly competitive banking services via digital distribution channels, typically mobile.
The biggest disruptive forces in support of FinTech
Source: Capgemini / Statista 2019; DBS Asian insights 2019
As consumers become aware of the price benefits, the trend accelerates. One area where digital services are booming is in foreign exchange. Analysts at DBS Bank note that a digital money transfer provider charges approximately one tenth of the charges levied by established banking providers on certain sterling-dollar transactions, for example.
Emerging markets are key
Arguably, the greatest opportunity for FinTech firms lies in developing countries, where an enormous unbanked and underbanked population has yet to be reached. Not only is there a large opportunity to offer financial services to these populations, but many are already highly digitally connected and comfortable with transacting online.
Who’s making most use of FinTech?
FinTech adoption rates by country
Figures show FinTech users as a percentage of the digitally active population. Source: EY
According to a 2017 survey undertaken by Ernst & Young, more than half of adult consumers active online in China and India said that they regularly use FinTech services. With the two most populous countries in the world already showing an appetite for FinTech services, it is clear that the opportunity is vast. Robin Parbrook, a fund manager at Schroders specialising in Asia, notes that the growth of Asian FinTechs is likely to be linked to some extent to local regulation but he believes that some “young, internet-savvy populations in emerging Asia may skip banks altogether”.
Companies already operating with great success in this arena include Alibaba and Tencent in China, and HDFC Bank in India. In China, given the lack of penetration of traditional card payments, the use of mobile payments is pervasive. It is driving the trend toward a cashless payment system. Alibaba and Tencent have managed to seamlessly blend social media, ecommerce, payment and other finance functions into user-friendly mobile apps. QR code transactions for shopping, food, travel and medical services through Alipay, owned by Alibaba, and WeChat Pay, owned by Tencent, are also rapidly becoming the norm.
Bloomberg has reported estimates of the value of mobile transactions as forecast to rise from 120 trillion yuan ($17.4 billion) in 2017 to 354 trillion yuan ($51.3 billion) in 2020.
It is a similar story in India. In November 2016, Prime Minister Narendra Modi removed 86% of India’s cash from circulation, resulting in a significant shock, given 90% of all transactions in India were at the time handled through cash. This however gave an instant stimulus to UPI – the Indian government’s payments system – allowing for the real time transfer of funds directly between users’ bank accounts.
While we have long favoured Facebook for its growing global social media networks, Facebook-owned WhatsApp has emerged as India’s mobile payment app of choice. More than 80% of small businesses in India say they already use WhatsApp for business. With a rapidly growing user base of two hundred million people, WhatsApp is at the epicentre of what Credit Suisse predict will be a $1 trillion digital payment market by 2023. Facebook’s development of a new currency, Libra, could add momentum to this trend.
Mainstream banks in India have also been quick to evolve their digital capabilities. As consumer loan demand increases, driven by a growth in the middle classes and urbanisation, HDFC bank has placed digital consumer finance at its heart. HDFC Bank is the first Indian bank to fully automate the entire process of loan approval and disbursement with its “10-Second Loan”. Scale and an efficient tech infrastructure are key, and the bank claims to be in constant dialogue with 70-80 startups at any point of time in order to explore new solutions including blockchain and artificial intelligence.