Financial technology: First mover or smart follower?

SUITS THE C-SUITE By Vicky Lee-Salas

Business World (10/05/2015 – p.S1/4)

All over the world, people and industries are seeing the dramatic effect of technology. As new innovations are developed, new industries, services and business models are also created. One such area is in financial technology, or FinTech, which was the theme of the keynote address at a recent EY Banking and Capital Markets Symposium held in Singapore. The focus of the speaker was on the evolution of banks in the FinTech space and the view that up to 20% of traditional bank revenue is at peril due to FinTech.

The effect of FinTech can be readily seen here in the Philippines. For example, a father or a mother can remit his child’s allowance and tuition fees using a cash remittance service linked to his or her mobile phone, for a minimal charge of P30 for every P1,000 remitted. This service fee is significantly lower than normal bank charges, and also allows for greater convenience since the recipient can quickly receive the money without having to go to the bank. Or, a wealthy retiree may be considering investing in an Internet financing company which links lenders directly to would-be borrowers. She is thinking of this to create some upside in her investments in exchange for moderate financial risk.

There are also facilities now that allow borrowers to get loans quickly without having to line up in banks or loan centers. Entrepreneurs, even those in the provinces, are now able to get working capital from alternative fund providers. One such provider has developed a solution that can instantly accept a loan application, do a credit score check, and distribute loan proceeds to borrowers.

Other countries have also seen the rise of direct banks, which are banks without any branch network and which offer services remotely via online and telephone banking, and which provide access to cash via automated teller machines. Not only can customers access service 24/7, 365 days a year, they may also enjoy higher interest rates or lower charges since the direct banks save on the costs associated with operating bank branches.

Given these emerging consumer behaviors and innovations in technology, industry players should anticipate the potential impact on banks and their customers. Looking at the latest corporate filings, there is an increase in the number of new entrants in the FinTech sector. Without need for the legacy infrastructure of traditional banks, these nimble and lean FinTech start-ups are using technology to provide faster and cheaper solutions for customers. Such innovations have the potential to threaten traditional players with disruption and disintermediation as they target multiple parts of the current banking value chain. According to EY’s latest report on Banking in the Asia-Pacific, APAC is already seeing new types of banking competitors offering digital banking, mobile banking to address financial inclusion issues, and peer-to-peer (P2P) lending and crowdfunding for customers who may not have access to or qualify for traditional bank financing.

P2P lenders are of particular interest. Although they currently account for only a very small share of the lending market, these lenders could potentially make inroads into the banking industry’s personal and business lending market. In fact, there are already Internet finance companies in China which offer money market funds with higher returns than traditional banks, intensifying competition for deposits.

Given this significantly different and more competitive environment, mainstream banks have begun to look at ways to catch up with market trends. Already, some banks are looking to either partner with new entrants, or establish FinTech hubs and accelerator programs that incorporate collaboration with start-ups.

Banking is a scale business. There is a case for banks in the Philippines to harness technology-driven innovation to scale up quickly and operate their business more efficiently. One of the panel speakers in the recent EY Banking and Capital Markets Symposium argued that the role of technology is so significant that the lines between technology companies and banks are beginning to blur. Investment in technology-driven models offers the potential to reduce the cost of banking services in the Philippines and increase penetration rates. This will also aid in achieving a breakthrough in financial inclusion given that, currently, the country’s banking penetration rate stands at 31.3%.

Economically, things are still promising. Having favorable macroeconomic and demographic factors provide growth opportunities for banks. A growing middle class and rising household consumption will drive credit growth and consumer lending. Banking institutions should also consider that the large unbanked population with rising personal income presents further opportunities in retail banking. The potential may be particularly significant in the area of mobile banking as, according to an industry player, about 95% of the municipalities in the Philippines are within reach of mobile phone signals, something which could aid progress and stimulate financial inclusion.

The challenge for industry players and market leaders is to decide whether to be a smart follower or a first mover, considering the risks and associated costs with incorporating FinTech into traditional banking models. As a respected banker once said, the problem with technology is that it is hard to conclude whether a trend is here to stay or whether you face the risk of obsolescence months or years after you invest in it. Given, however, the rapid and recent changes we have seen in the banking industry, the question will be whether the risks are worth taking.

Vicky Lee-Salas is the Philippine Financial Services Office Leader of SGV & Co.