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Fintech in Asia: A Curtain-Raiser to a Blockbuster Show?
By Darren Thayre, Partner, Digital, Technology and Analytics Practice for Asia-Pacific at Oliver Wyman
Meanwhile, banks in Asia have started creating their ecosystems with in-house teams or through partnerships with the most innovative fintech firms, typically to secure a competitive advantage (revenue uplift) or to drive efficiency (cost reduction) in existing operations. Banks have also gotten familiar with API technology, both building their own and leveraging fintech APIs, to connect into their services. For years banks have struggled with flexibility and agility because their core banking solutions were monolithic, complex to manage, and extremely expensive to purchase and maintain. Banks would select a well-established player and build their business around that core, often for decades. They would be locked in, at the mercy of those vendors in terms of the pace of innovation and the need to continually upgrade. Licensing under this model was extremely expensive too. This has begun changing, and fintechs could be a crucial part of the puzzle. One challenge, however, for fintechs is part of what makes them so innovative in the first place. Their talent model and culture allows them to move fast and develop disruptive products, but ironically, this isn’t what banks always look for when they assess teams – they are often looking for strong implementation track records and readymade financial services compliance. This indicates there is often a gap between banks’ expectations and what fintechs provide. The Scenario Today Fast forward to today, and are seeing a range of neo core banking solutions emerge in Asia. They are born in the cloud, are microservices-based, operate at a fraction of the legacy costs, and constantly innovate for the end customers. We are even seeing more and more incumbent banks in Asia adopting these solutions. And then there are the digital-only banks, that are setting the trend globally for activity in this space.Asia has started witnessing a lot of activity in this area too.In responding to challenges that incumbent banks with legacy systems and cultures are faced with, new players are leveraging fintech services to provide core banking services through asset-light models. This is something even regulators are watching with interest. The Hong Kong Monetary Authority has issued eight new licenses for digital-only banks.In Singapore, the Monetary Authority of Singapore has stated its intention to add five new virtual banks to its current banking system. Numerous fintech firms in Singapore are either looking to apply individually or to be part of consortia that file applications, as was the case in Hong Kong.Similarly, Bank Negara in Malaysia is also working on a virtual banking license framework. What Does This Mean for the Future of Financial Services in Asia? Thus far, we have mainly seen a focus on retail solutions. Consumers will benefit from increased competition, there will be new product offerings, potentially increased interest rates offered, and enhancement of customer experience. Going forward, we expect to see a greater focus on SME banking over the next 12-18 months. In almost all Asian markets SMEs funding needs are unmet. Many of them are still unbanked, and the opportunity to transform this segment of the financial services industry ishuge. We expect to see products designed around unsecured lending, cash flow financing, and payments. We also believe there will be an increasing number of digital wealth solutions arriving in the market in 2020. Savvy customers are seeking digital-only solutions, which they can self-administer. Chinese digital banking firms such as WeBank or Ant Financial are success stories that others will look to emulate. These firms have built vastly superior technology to existing banks, and they have learned how to leverage social data in order to make credit decisions. They enjoy the scale of China of course, and that scale enables them to maintain accounts at a fraction of the typical cost. They are profitable, with return on equity results that incumbents can only dream of. Finally, we expect investment in fintech to continue.Some larger players will rise to prominence across the region in 2020, and there will also be some consolidation as the industry finds its feet, either driven through partnerships or M&A activity. Given the region’s macroeconomic fundamentals, the large share of unbanked, and the vast number of businesses in the informal sector, it is our view that Asia will be home to some of the significant developments in fintech in the years to come.