Collaboration between fintech startups and traditional banks is surging: Mario Aquino, McKinsey Ventures

Mario Aquino Managing Partner, McKinsey Ventures

Fintech startups in Southeast Asia have a huge opportunity with a target audience that’s several times larger than the entire population of Europe and US put together. More than 50 per cent of unbanked people in the world live in Asia Pacific.

Startups that continue to innovate and have strong value propositions are likely to scale up fast and can capitalize on market opportunities for the affluent as well as for the unbanked. At the same time, fintech players born to disrupt traditional banking are now more open to partnering with the same banks to benefit from complementary assets, says Mario Aquino, Managing Partner, McKinsey Ventures Asia Pacific.

Aquino was one of the speakers at the Asia PE-VC Summit in Singapore, organized by DEALSTREETASIA and Mint Asia. He spoke to DEALSTREETASIA before the event.

For the talk about fintech, it seems that a lot of startups are doing similar work. Is the opportunity overhyped, and will there be room for several players in SEA, given that it’s a fast-growing market and countries such as Singapore have world class infrastructure?
We see still large untapped opportunities for Fintech innovation in Asia. On the demand side, Asia is by far THE largest digital financial services market with already 700 million people accessing banking services primarily via digital devices – that number is expected to growt to 1.7 billion by 2020, that’s several times larger than the entire population of Europe and US put together. In addition, Asia and SEA have still significant parts of the population that have no access to basic financial services – in Indonesia alone, only 36 per cent of the population has a bank account and the unbanked are over 100 million people, providing significant white space.

On the supply side, Fintech start-ups have largely concentrated within the retail payments and crowdfunding space. We see still significant untapped potential in wholesale banking where the opportunity is at least as big as in retail banking. In conclusion, while it is to be expected that there will be crowding out of fintechs that do not have strong value propositions, there is still significant space for innovation and a greater emphasis should be placed on thinking how to scale up in SEA and beyond.

Fintech started with the goal of disrupting traditional banking and other financial intermediaries. Do you see fintech making life easier for consumers? 
The fintech industry started off as a way to disrupt traditional banking but has evolved much more towards a relationship based on cooperation and partnerships with banks. Start-ups and traditional players can bring complementary assets: start-ups are agile, they are unencumbered by legacy assets and have pioneered novel technologies and business models; traditional banks, on the other hand, have significant resources and established customer bases. If through collaboration, we are able to deploy start-ups’ innovation across traditional banks’ large customer bases, there is the potential to truly create significant value at scale.

Of course, while traditional financial institutions have been more open to adopting external innovation and collaborations with start-ups are at an all-time high, the journey is not easy and working together is not so intuitive. At McKinsey and McKinsey Ventures, we focus on making these partnerships work – and try to unlock the potential of fintech at scale.

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Some fintech players have said that traditional big players like multinational banks, are not a threat because there are ways to work together. Do you agree with that? How often do you see such collaborations happening? 

In the last 12-18 months, we have seen a surge in collaborations with traditional players – like DBS – setting up accelerators, hackathons, open APIs, and corporate VCs to actively play in the external innovation ecosystem. Even regulators have come in to facilitate innovation and collaboration by setting regulatory sandboxes and committing significant financial resources to develop innovation ecosystems drawing in traditional financial institutions, tech companies and start-ups, like the Monetary Authority has done here in Singapore. If executed correctly, we believe there is a huge value creation opportunity from these collaborations.

What are your plans for McKinsey Ventures in SEA? 
McKinsey Ventures is McKinsey innovation and corporate VC platform focused on B2B digital & advanced analytics innovation. We position ourselves as a critical bridge, on one side, to help traditional players capture true economic benefits from collaborating with the external innovation ecosystem and, on the other, supporting distinctive start-ups scale up to become regional and global players. We have great plans to scale our presence in Fintech where we are already quite active and have significant expertise. That’s all for the moment, but stay tuned for more exciting news in the near future!

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Developing nations have inadequate presence of banking channels, which has meant that hundreds of millions in rural areas have to rely on moneylenders. How can fintech help bridge that gap and remove middlemen?

More than 50 per cent of adults who do not have a formal relationship with banks live in Asia Pacific – that’s many hundreds of millions of people, thus the opportunity for the unbanked is significant. There is an interesting phenomenon happening here where industry boundaries are blurring and retail, telecommunication and other non-fig companies are starting providing basic financial services such as eWallets, or small credit lending. For the unbanked, non-fig players especially those in the telecommunication industry (given the rate of mobile penetration), will provide a critical infrastructure and could have a significant advantage. Fintechs can help provide the much-needed financial expertise that these non-fig players require in order to capture this significant opportunity.

Which countries of SEA look the most promising for fintech in your opinion? I’m using it as a broad term here for financial innovation driven by startups. 

We see substantial market opportunities across all major SEA countries, whether it is serving the rising mass-affluent consumers or providing basic financial services to the unbanked. It is clear though that to foster a thriving and sustainable innovation ecosystem demand is not enough. There are other critical factors such as the availability of talent (both tech-savvy as well as entrepreneurs), smart capital, and degree of technology adoption. More broadly, a culture and mindset that fosters fast cycles of test & learn. Regulators and incumbents also play a critical role.

What should fintech players do to unlock significant value creation potential of fintech?
Besides successfully collaborating with traditional players, scaling fast across multiple clients and geographies is critical for fintechs to be able to unlock significant value creation. Our research on over 3,000 start-ups shows that high-growth rates players (defined as those with >50 per cent CAGR) achieve 4-5 times greater returns than others and have 10x higher likelihood of becoming Unicorns.

Do you think that fintech startups have managed to develop unique capabilities and been able to pass that on to consumers yet?
While we have seen a number of Fintechs being able to generate positive impact for consumers – from making it is easier and lower cost to remit money to/from remote areas to better customer experience, we believe that the largest impact potential is yet to come. We should also acknowledge that indirectly Fintechs have been a huge wake up call to mobilize many traditional players to start offering better service and lower costs. With ever increasing customer expectations, we believe this is a phenomenon that will continue.

We still don’t see examples of fintech companies scaling up in SEA, at a regional or international level. What will it take to make that happen?

Our research on Unicorns has found there are 6 markers that distinguish successful start-ups that are able to scale from others. There are three in particular that I deem key for fintechs to unlock significant value creation and scale. Successful start-ups:

1) focus on delivering clear and tangible “impact” – their solutions either deliver better customer experience, lower cost-to-serve or generate new revenues streams (or a combination of the above).

2) are paranoid about growth and client service — they are quite deliberate in using inorganic partnerships and acquisitions as a way to grow aggressively.

3) are able to professionalize management practices, successfully transitioning from a “small team in a garage” to a “well-oiled organization”, without losing the agility and entrepreneurship typical of smaller companies.

How do you think will fintech evolve? Which technologies will drive faster adoption of fintech?

We are seeing an important shift from B2C to B2B, and within that areas like cybersecurity, artificial intelligence will certainly play an increasingly critical role.

Also read: 

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.