Kicking off day two of the Singapore Fintech Festival, Deloitte Chairman David Cruikshank said that fintech is significant for three reasons. First, customer expectations of services are higher than ever. Second, barriers to entry are lower than before. And finally, financial institutions (FIs) face a threat of what a competitor might do.
Fintech was not a threat and not on the radar in 2014, Cruikshank said. This subsequently evolved to “fintech will change everything in 2015, to incumbents and fintechs experimenting together in 2016, before becoming the new normal for financial services in 2017.
By now, fintechs have seized the initiative to change the pace of innovation as standalone businesses or as alliance partners and they have changed customer expectations by setting higher bars.
That said, financial services executives still hold scepticism about fintech. A Deloitte survey in March showed that even now, 47% of FI executives in every part of the world said they don’t expect to see significant change in the next five years.
What banks actually need to do, Cruikshank opined, is to focus on five key questions: how front-end AI and digital identity will impact FIs; how to monetise data flows; how to resolve the technology and governance gap; systemic transparency; and how to recruit the right people and change the people currently in the organisation.
India today: Insights from minister of finance and minister of corporate affairs Arun Jaitley
Addressing participants in the day two keynote, Minister Jaitley said that the Indian economy is doing well. The last three years saw a growth rate consistently above 7%, macroeconomic parameters broadly under control, fiscal deficits gradually declining, current account deficits coming down, inflation below 4% and a stable currency. India has also been the recipient of the largest foreign direct investment anywhere in the world.
Digitisation of the Indian economy has gathered pace in the last two years, Jaitley said, due to three important structural changes
The first is the creation of the Aadhaar, the national ID. More than 99% of adults now have an Aadhar number, and the government now uses it to transfer benefits or subsidies to the weaker sections of society. The impact is coupled with the largest financial inclusion program, Jan Dhan, which started in 2014 and connected every Indian to a bank account. The result was that pensions, scholarships, state support systems by the federal and state government, and dozens of schemes now go via transfer into the bank accounts. Fraud has been reduced and economic activity has increased related to anticipation of social benefits through this platform.
The second was the demonetisation of high value currency in November 2016. An economy dominated by a high denomination had all the negative impacts, Jaitley said – large transactions would take place in cash, many businesses maintained two sets of books, and tax evasion was normal. The result has been felt in several areas. Usage of high denomination currency decreased by about 30% and the number of taxpayers increased. These initiatives brought digitisation to centre stage, and the number of digital transactions increased by almost 100%. “The norm has begun to alter.”
The final step has been the introduction of the national Goods and Services Tax (GST), replacing an obsolete system which could see goods subject to 17 taxes and 23 assessments. “This also led to evasion because the tax system was inefficient.” As of 1 July, there is one tax applicable for the country. Every transaction is now recorded online, which will make usage of cash more difficult. “This has enabled the economy to get formalised.”
The result, Jaitley proclaimed is that India has become an extremely attractive place to do business.
The future of banking
Looking at the future for FIs, Orogen Group CEO and former Citi CEO Vikram Pandit discussed the investment climate globally and then joined a panel that focused specifically on the future of banking.
While financial services has always been a fertile ground for disruption, Pandit said, this environment is different. Even in the 1990s, there were disruptions from automation, access to the internet, new media companies and the launch of the iPhone.
What makes the current environment different, Pandit said, is that disruption is driven by all factors at once and the pace of change is happening faster outside than inside incumbents. It’s easier and cheaper to set up a new business, the same process of disruption that affected manufacturing is making its way to the service sector, and we are in a prolonged cycle of cheap capital “New market entrants don’t have to go just at the low end. They can go at the same markets (as big banks) and capture customers with a better proposition – cheaper, faster, more convenient.”
The panel of experts, including Pandit, then focused specifically on the future of banking.
To bring finance to the larger public, Prudential Corporation Asia Chairman Kai Nargolwala said, FIs have to find a way to lower the price point. Doing all the customer checks at the same time during onboarding at Prudential, for instance, creates a better experience and reduces the price point.
There are two types of changes ahead, Pandit said. One revolves around transactional finance and strategic finance. For a corporation, for example, strategic finance asks, “who would I buy.” For an individual, it is how to plan for their children. Transactional finance, on the other hand, focuses on activities such as buying food or a car. “The shift in the US is that transactional finance is getting unbundled and going to whoever has a need.” The other change involves shallow work and deep work. “The pace is fast. The line between strategic and traditional finance, deep work and shallow work, is happening.”
To prepare for the future, Nargolwala said, boardrooms are focused on digital, treating customers better, and lowering price points. Rather than having an army of people reviewing 15,000-20000 fraud alerts a day, for instance, banks can use machine learning to find the 5% that need to be sent to the regulator. “It’s taking those tasks and getting those people to do higher value stuff. There’s a lot to be done.”
Pandit said banks also need to realise that they can’t have a 21st century front end and a 20th century back end. “Redo your supply chain. And, redo competition. Every institution has to modernise.”
Digital banking: the Standard Chartered bank story
One bank that has done a lot to become digital is Standard Chartered bank.
The bank decided has put $3bn aside for digitisation, said Michael Gorriz Chief CIO at Standard Chartered. “We are striving to be the digital bank with the human touch. Throwing money at it is not solving the problem immediately.”
The bank has a number of programs to make that change. It set up an accelerator as an innovation lab in 2016 and is extending it to Hong Kong and other countries. The IT department installed agile technology and embarked on the cloud journey, with infrastructure as a service or software as a service. The bank has also embraced the API journey, and all new services have to be API-ready. And finally, the bank is collecting data and putting it into one central data lake for data science.
Another area where banking is going, he said, is the internet of things. As one example, for auto dealer financing, the bank put sensors in a car. “We measure the location of the car. When the car enters the “fence” of a dealer, we finance the car. If the car exits the fence, the dealer must pay for it. The signal to pay comes from the thing. It is fully automated.”
Innovation at ANZ Bank
While ANZ group executive for digital banking, Malie Carnegie, joined ANZ only recently, after 25 years working in consumer-focused innovation spaces, her remit is massive. She has the objective of helping ANZ transform itself so that the bank can take advantage of existing and emerging technology to provide a better experience for customers and employees.
“I don’t see any organisation winning going forward unless they’re excellent at partnerships,” she said. “Consumers increasingly demanding. I don’t think there are sole organisations that can deliver on their need. The only way we’re going to get great partnerships is if we are a great partner.”
Her one piece of advice to start-ups, she said, is not to shy away from the obvious space. “Going where the herd has gone, and how you differentiate – I encourage people to go into a busy space.
Interestingly, what keeps her awake at night is not competition from other banks or fintechs. “Fintechs I see as potential partners. What keeps me awake is the tech giants. They are setting the bar in customer experience. Security is good. They have a route to market. They want to get into financial services. In the short term, it’s the tech giants.”
Open architecture: from mindset to skillset
Open architecture for banks is growing, led by PSD2 in Europe, and banks around the world are looking to learn from the changes there.
Open banking is a regulatory mandate which exists in the UK and to some degree in Europe, Ernst & Young AP Fintech Leader James Lloyd explained. Banks must standardise and open APIs, and customers have ownership over their data.
Given that open architecture is legislatively mandated in Europe under PSD2, Deloitte Lead Michael Tang said, banks are looking at strategies and focuses. They may, for example, create premium APIs. “Open APIs and banking is going to be a game-changer.”
The huge complexity, said Fidor Bank CEO Matthias Kroner, is the mindset. “How do we create a user journey.” Bankers need to look at the technical infrastructure, integrate third parties and open their APIs. Lloyd agreed, saying that this is a competition-driven change that is conceptually and technically straightforward.
To layer an API effort on top of traditional banks is, however, not trivial. That said, and even though some of the heads of some banks in the UK are opposed to opening up data, a lot of the technical engineers are very excited about it and it opens up a new environment.
APIs are going to be a catalyst to transfer the business model, Tang said, from being great as a product champion or competing by being the owner of a market segment to having choices on volume scale and pricing. “Open API will drive the business models.”
If there’s a problem with a service, though, banks still need to provide a response, at any time of the day or night. “There’s still an owner,” Hyperledger Executive Director Brian Behlendorf said. “With open source software, you have the power as the aggregator, presenting the front end.” As an example of the problem that can occur, though, Lloyd said that customers asked for their funds back from Ant Financial when their investments lost money. “The difficulty is, if there’s risk, who do you call. Do expect people to call his bank, or a third party.”
To succeed, Kroner said, bankers need to get an understanding of the data model. “All of us need to understand more of the tech side.”
And while change might sound straightforward, Tang said “there’s a shortage of talent. Organisation don’t always employ the best. It goes to assembling the right talent. “I think the tide’s going to shift again.” Banks will employ more cyber, risk and customer staff to handle issues when they’re working with third parties.
Making blockchain real: harnessing the power of the ledger
There is tremendous interest in blockchain, and a panel of experts provided insights on how to use it to maximum advantage.
When R3 started, said R3 Lab CEO David Rutter, blockchain was about informing, education, instructing banks, and getting them away from the fear of Bitcoin. “Through 2014 and 2015, it was all about education and research. Today, we’ve moved from education to proof of concept.” Indeed, he said, banks are focused on getting into production. “In the second half of 2018, there’ll be a significant amount of production done.”
Consensys Founder Joseph Lubin believes the real excitement will be moving towards a decentralised world wide web, where individuals operate from their “self-sovereign identity.” “Instead of having our identity on servers,” he explained, “we expect self-sovereign identity will be the concept. We’re interested in better consumer protection. We need to help everybody understand the technology.” To use it effectively, though, “regulators are going to have to get more technical, and write specifications, not rules.”
Broadridge Financial Solutons MD V. Laxmikanth observed that there were 26,000 blockchain projects last year. “Even if 10% gain steam, it’s impressive.” However, there are two key issues to fix: interoperability and standardisation. Despite the need, Rutter said the three big platforms globally – Ethereum, IBM and R23 – are doing nothing on interoperability.
As one example of the pace of change, BitFury Head of Asia Greg Li said that in Europe, his firm has put Georgia’s entire land title system on blockchain. “They have a unique digital signature. We’re working with smart digital contracts. Linking that to the public, to financial institutions, is the goal.” His firm has also signed an agreement with Ukraine to put the entire government on blockchain.
A key advantage to blockchain, Lubin said, is that it is reduces costs. “Instead of building siloed systems, you can build non-redundant infrastructure. There will be huge savings. We’ll squeeze the friction out of transactions. That’s going to drive growth.” Li disagreed, however, saying “it’s not about cost reduction. We focus on value creation, efficiency, the velocity to trade assets, automated on the back end, which reduces the need for people.” Another key benefit, Laxmikanth said, is that blockchain settlement is “T+Now.”
Estimations of cost savings are in the tens of billions, Rutter said. “The economics are about value we’re creating. We see the benefits spilling down to consumers. We think we can make banking the unbanked affordable.”
One key use case for blockchain is in payments.
Blockchain enables two parties to transact without a central counterparty, Ripple CEO Brad Garlinghouse explained. It changes the nature of how transactions can happen.
Transferwise CEO Taavet Hinrikus observed, however, that the biggest trouble with blockchain is that people are putting blockchain on everything. That said, “for us, it doesn’t matter. Whatever enables us to move money cheaper, faster, we’ll use it.”
There is a huge opportunity to use blockchain to reduce friction, Garlinghouse said. “There are huge segments of the world that don’t have access to the financial system. Banks can’t serve them profitably. That comes back to friction and the cost to serve.” To help resolve the dilemma, he said, Ripple is working with the Gates Foundation on Mojaloop to provide interoperability between networks at scale.
To get regulators to move forward, Garlinghouse said, Ripple is proactively engaging regulators. Several weeks ago, he said, “Ripple brought together 30 central banks from around the world, a private meeting. 20% was talking about what Ripple is doing, 80% was letting central banks talk to each other. They want to know what other central banks are thinking. Regulators provide a critical piece to stability, mitigating fraud, they matter.”
Hinrikus agreed, saying “I strongly believe that regulation is necessary, to ensure the safety of the ecosystem. At the same time, regulators can do more to think about how they can be enablers of innovation. Regulators need to focus on taking down the barriers and enabling newcomers to enter the space, to make it an equal playing field.”
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