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Fintech in Asia: A Curtain-Raiser to a Blockbuster Show?

Darren Thayre, Partner, Digital, Technology and Analytics Practice for Asia-Pacific at Oliver Wyman

Darren Thayre, Partner, Digital, Technology and Analytics Practice for Asia-Pacific at Oliver Wyman

Fintech has taken the financial services industry by storm. There's a myriad of definitions for fintech, depending on whom you ask or where you look. I like to define it as “companies leveraging technology to support the financial services sector.”

When fintech was only taking baby steps—in around 2010—people in the industry already feared that fintech firms would provide stiff competition to existing banks, and you would often hear the Bill Gates’ quote “Banking is necessary, banks are not” doing the rounds. There was talk that fintech firms would not necessarily take banks head-on, but instead focus on very specific and narrow solutions – those which they could deliver more innovatively than the banks. And if enough of such solutions were brought to market, perhaps we would see some incumbent banks fade away.

To some degree, this has happened. If you look at the most innovative anti-money laundering or know your customer (KYC) solutions, for example, it is hard to argue that solutions of legacy banks are technically superior. At the same time, legacy banks have a very different economic model to consider, given that fintechs have built solutions to run at a fraction of the legacy technology costs.

Rather than disrupting banks’ businesses, what we are seeing, in reality, is that fintechs are evolving their business models and solutions to support and partner with the banks. While there are some digital banks that would still consider themselves as fintechs and play in the same space, the primary target customer for most fintechs is the banks themselves.

Successful fintechs can clearly articulate their value proposition compared to traditional bank technology. They can rapidly demonstrate the benefits and provide easy connectivity via APIs.For the banks, however, it is difficult to differentiate between a firm that is going to take the industry by storm and be sustainable (therefore an attractive) partner versus one that will never make it beyond early series funding and fade out.

A Fine Balance

In Asia, each market is unique in terms of regulation, culture, and sometimes language. Each has its own set of hurdles, with different levels of technology adoption and skills availability. This drives the need for country-specific solutions – this is a double-edged sword.On the one hand, it enables fintechs to cater to local market needs; on the other,it increases their operational overheads and limits scaling. It is also prudent to bear in mind that many fintechs aren’t mature enough to offer multi-market customizations, thus inhibiting their prospects in Asia.

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.