Way back in 1990, Bill Gates had said that “banking is necessary, banks are not.” That statement indicated that Gates, thinking ahead of his time, could visualize a world with virtual banks, or fintech as they are now referred to.
Gates was right but banks that were set up during the heydays of the dot com boom of 1999-2000 arrived too early, before customers were ready. There are several examples such as Security First Bank, The Co-operative Bank, First Internet Bank, ING Direct, Ally Bank and Tangerine, that had to shut shop after the dotcom bust brought IT startups crashing down.
Gupta talked about the reasons for their failure. The first was that they did not offer a clear value proposition as to why customers should move from traditional banks to internet banks. Second, scalability became a major issue – the organizations found it difficult to scale up, resulting in poor service. And finally, regulatory barriers proved too high for these early startups.
Traditional banks became complacent as the early startups faded, thinking that their businesses were secure. But the post-2008 financial crisis world was changing fast.
The introduction of the iPhone in 2007 was a watershed year, when smartphones exploded in popularity and gave rise to the app economy. The phones have since become far more powerful and newer startups have designed apps that appeal to younger consumers. Through big data, companies now have deep insights into consumer behavior on desktop and mobile, and are better at predicting what you are like. Artificial intelligence programs are able to get better with more usage as they learn from consumer behavior. The cloud ensures that you can access your accounts from anywhere, and are part of the ‘connected economy’.
That apart, countries have made it easier for new entrants to set up shop. India’s Reserve Bank gave out payment bank and small bank licenses last year. The government launched a Unified Payments Interface, which has simplified and streamlined cashless payments processes. That’s significant step forward in a country where most payments are still made in cash.
In other parts of Southeast Asia, branchless banking licenses have been given out, and online banking has been de-regulated with new financial services now available on digital platforms. In China, non-banking players like Baidu, Tencent and Alibaba have got licenses to operate as banks.
These steps have created an environment for fintech to flourish. Players like Alibaba, Paytm, Fastacash, SeedInvest, WeCash, MoneyLover, Jitta and so on have come up across India, China and Southeast Asia. They are disrupting businesses such as payments, remittances, crowdfunding, loans, brokerage, personal finance, investment and insurance.
The rapid spread might indicate success, but the reality is that only a few have made it. There are three main reasons. One, their solutions are unproven. Second, customer acquisition has remained a challenge – traditional banks are still seen as safer than online banks. And banks themselves have woken up to the threat of fintech and are busy rolling out online services for customers who might otherwise have moved to newer, nimbler players.
But the threat is real. Gupta gave the example of Alibaba, which has recorded $160 billion in mobile transactions, with 153 million transactions happening in a day. Its wealth management platform has 152 million users with AUM of RMB760 billion. Its insurance offerings have 380 million users, and it does more than 60 million in credit line transactions in a single day. Within a few years, Alibaba has become what took banks like DBS more than 50 years to build.
In India, 135 million people use the Paytm mobile wallet to pay for a mobile recharge, a cab ride or buy groceries online. It has more than 75 million transactions monthly, and has got the license to open a payments bank.
In the US, Apple Pay is now working in 11 million stores, and has 12 million active users, with over a million new signups every week. It is now taking on Alibaba and Tencent in China.
Traditional banks like DBS are leveraging the best of both words, Gupta said. That’s the way incumbents can still win. For instance, banks still have existing advantages such as safety and trust, deep expertise in banking products, managing risks, processing capabilities and data pools. Fintech companies have brought technology-driven platforms, including big data and analytics, open architecture, are customer centric, nimble and agile, and are always innovating and experimenting. Banks that can marry the two, such as BBVA, Citi and ING, are showing the way forward.
For instance, China’s Pingan has rolled out online finance through its YiZhangTong integrated platform and app which provides single access to the whole ecosystem – from insurance and banking to housing and entertainment. ICBC, the third biggest e-commerce player after Alibaba and JD, with RMB800 billion in total sales last year, has made it easy to buy its products online.
Others have forged strategic partnerships with fintechs instead of viewing them only as rivals. China’s CITIC Bank and Baidu have formed a first of its kind internet bank. Spain’s BBVA partnered with Atom, UK’s first digital-only lender, to gain a foothold in a new market. JP Morgan Chase tied up with OnDeck, a fintech platform for loans. India’s largest bank SBI has collaborated with PayPal, an instance of partnering payments platforms. DBS has partnered with Singapore’s crowdfunding platforms.
Such partnerships are the only way for traditional banks to survive, Gupta said. Because as Alibaba has shown, fintechs are growing big really fast, and will soon pose a major threat.