WHO dominates the phone dominates the Internet. The whole world of information is
now available in your hand, replacing your own mind as a memory base for instant
decision-making.
The reason why traditional bank shares are dropping like a stone is that mobile
phone companies and financial technology (FinTech) platforms “get it”. Banks and
conventional financial institutions are stuck with so much legacy hardware (branches
and outdated mainframes) and complex regulation that their CEOs feel beseiged by
bad news – cyberattacks, privacy leakages (like the recent Panama leak), capital
requirements and huge fines.
No wonder top bank talent is leaving the industry. In Silicon Valley they get fat
bonuses to become “cool” without regulations. Regulated bank CEOs are held
personally responsible for everything that goes on in their bank, having to deal with
soul-destroying staff and expenditure cuts, on top of their own pay cuts.
I was at the Singapore Forum this month moderating a panel on FinTech when the
Alibaba strategist mentioned that the current battle for market share is all about
“mindset and handset”. The mindset of the Internet age is that you do not need to
own any assets – you simply share or rent them from those who have excess
capacity. The mobile handset is where most of the world’s population is moving
towards doing business, from dating to buying a house, phone, using your fingerprint
and retina as digital signature.
Finance today is an information business and FinTech can deliver payment services
at 1-2 cents per transaction compared with US$10-US$12 per paper-based payment.
Increasingly, we spend more on apps and software than on the actual hardware.
Did you know that the fastest adopters of technology in the world are porn, gambling
and politics, in that order?
The financial consultants Oliver Wyman have come up with a major report on
“Modular Finance”, which argues that technology has transformed finance into
modular parts – modular supply (provision of financial services by specialists);
modular demand (buying new services from such specialists).
Oliver Wyman’s report begins with a cartoon about a customer buying a house,
arranging a mortgage and insurance, selling stocks and wealth products for the
downpayment and paying for all fees through a single mobile phone. Equipped with
the latest encryption, digital signatures and right apps, the mobile phone has
empowered the customer to everything what used to take several visits and weeks to
the bank, the lawyer, real estate agent and even land registry to complete the
transaction.
In short, the game of finance is being fought by one super-bank to rule them all
(Goldmans?) or one phone to rule them all.
The global supermarket model (one brand to rule them all) is having a serious re-
think about being labelled G-SIFIs (global systemically important financial
institutions), requiring special regulatory attention and additional capital and liquidity
requirements. Increasingly, these universal banks do not need to own and supply all
services in-house – they simply outsource the back-office or even key services to
trusted specialists.
On the other hand, FinTech aims to change our lifestyles through different types of
technology. First, frictionless and seamless inter-operability integrates businesses
like logistics with payments, such as Alibaba, making it easier to buy, pay and deliver
in one pass.
Second, Big Data analytics, which Amazon uses suggest to you what to buy next and
understand how customers are changing. Third, Blockchain and Distributed Ledger
technology, which makes systems more secure. Fourth, artificial intelligence, such as
robo-advisers on investments.
Fifth, data secrecy and unique identity codes that ensures privacy and confidentiality.
FinTech platforms have less staff, less legacy assets, less regulation and more
flexible mindsets. These barbarians at the gate are only stopped by regulations that
currently protect the banking franchise. This is not to say that they don’t have
defects, such as lack of attention to anti-money laundering, terrorist funding and
cyberattacks. When they reach super-scale, they are also Too Big to Fail.
The rapid evolution of FinTech means that Asia now has the money and the
technology to transform our antiquated financial systems into the 21st century.
The Asian population is young, tech-savvy, mobile and willing to experiment with new
services and equipment, which we are creating in Asia. The good news is that if our
young startups get it right, the world is their market. The bad news is that if our
regulatory and government support services don’t allow our startups to compete, our
markets and jobs will be someone else’s lunch.
What is holding back this transformation to FinTech Asia is still mindsets. Look at
how Jakarta taxi drivers are protesting against Uber. Regional banks are expanding
their footprints by buying the franchises of retreating European and American banks
in investment and private banking. But they and their regulators have not thought
through how to use FinTech to cut back their legacy systems, many of which are
obsolete and operating under-scale, because many regulators still insist on each
bank owning and running their own hardware and branches. To be fair, not all
regulators think that way.
Barriers to FinTech are sometimes regulatory mindsets. Asian regulators are more
willing to accept the entry of financial institutions from outside the region than from
their neighbours. Without regulatory concurrence, many banks and financial
institutions do not dare to experiment with new technology.
We now have Asian customers moving to global service providers like Apple, Google
and Amazon, if Asian financial service providers do not get their act together. Compe-
tition is good – look at how Sri Lanka is negotiating with Google to provide balloon-
suspended cheap high-speed wifi coverage.
Asian bankers and regulators need to think hard about what Asian customers really
want to achieve global scale in terms of efficiency, stability and trust.
FinTech and mobile handsets are not the solution to all our problems, but they will
change how the problems are resolved. The real problem is our mindset. Less than
20% of the iPhone comprises hardware and labour costs. The real profit is in
software, which is all about knowledge and mindsets.
That belongs to the realm of politics and education, which is another story.
Andrew Sheng writes on global issues from an Asian perspective.
A version of this article appeared in The Star Online, 16 April 2016
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