MyFintech Week 2019: Fintechs address ‘broken’ banking model

• Fintechs specialise in doing one thing well
• Banks' advantage is balance sheet size

“BANKS do one thing that we all need which is to be trusted that they won’t lose our money. That trust is not in the bank [itself]. It is in the regulation of the bank,” said Chris Skinner the chief executive officer (CEO) of The Finanser.

At Malaysia Fintech Week 2019 in Sasana Kijang, Skinner delivered an introductory speech prior to the fireside chat with Tobias Adrian, financial counsellor at the International Monetary Fund (IMF) and Abdul Farid Alias, the group president and CEO of Maybank.

“Regulation in the bank leads to the belief that they won’t lose our money, and if they do, guarantees we will get it back,” he said, adding that banks are subject to five times more regulation than the average tech company.

But Skinner firmly believes that “the banking business model is completely broken” because it was built for the last century and based on the physical distribution of paper. “Everything about traditional banking is about paper. It’s about bills of lading, letters of credit, cash, cheques and banking passbooks.”

For the longest time, adding technology to banking only “cemented” these traditional processes into place. Fintech today is addressing this disjoint by “rebuilding the business model of finance with technology from the ground up.”

Around the world, there are 12,000 fintechs leveraging on technology to improve financial services. “Each one of these companies is specialised in doing one thing brilliantly well whereas banks were built to do everything,” shared Skinner.

The David and Goliath scenario

Highlighting online payment company, Stripe, and the multinational investment bank, JP Morgan Chase, he provided a comparative glimpse into the companies’ performance. In October 2016, Stripe was valued at US$9.2 billion (RM38.33 billion) with 400 employees.

Meanwhile, JP Morgan Chase generated US$245 billion (RM1 trillion) with 235,000 employees.

[US$1 = RM4.1665]

“So while Stripe was generating US$22 million dollars per employee, a 220 year old bank was generating far less money at less than a million dollars per employee.”

Nonetheless, banks are far from idle and unaware. “Banks are changing to a new business model. They are transforming rapidly due to digitalisation and as a result are becoming more efficient.”

Two years later in 2018, when Stripe’s valuation touched US$20 billion and grew to 1,000 people, JP Morgan had shed one-third of its employees to 165,000 people and almost doubled its earnings at US$365 billion.

To further put things into perspective, Skinner talked about the leading techfin company, Alibaba with Ant Financial. By exporting its marketplace and platform to local partners all over the world, the company is set to achieve “two billion users making a million transactions a second.”

Furthermore, Ant Financial also refreshes its systems from scratch every three to four years. “When was the last time your bank refreshed their core systems?” Skinner questions, highlighting how the company is set up for immediacy and scale.

Shaping policy in the age of innovation

Opening the fireside chat, Adrian called attention to five areas of concern in fintech where action is needed: cyber-risk, regulatory standards, interoperability of systems, crypto and digital currencies, and data privacy issues.

“For all five areas, what policy choices central banks and lawmakers are making is going to shape the future of the financial services industry just as much as technology,” commented Adrian.

Leading the chat, Farid also said that entering the unknown in terms of transforming digitally was a challenge.

“In the banks typically when we do something, we plan for success. We want the outcome to be as predictable as possible,” he admits.

Farid asked the speakers what is needed of banks to stay ahead. Adrian said that the advantage banks hold is its balance sheet size. “Fintechs have the use of technology but often times, that technology is readily available for everybody.”

While digital progress in the payments landscape has been particularly impressive, Adrian says the lending space is still lagging behind.

“Nobody has figured out, for the moment, how to do lending on a large scale with new technologies. There are peer-to-peer lending platforms but relative to the speed of development in payments, it is not as quick.”

Part of the answer to this, he believes, is that balance sheet size matters. Therefore, banks should position themselves to ask: “How can I use this technology that every fintech is using, but combine is with balance sheet capacity?”

The conversation then shifted to the readiness of regulators to accept using technology and user data for credit scoring and lending.

Adrian believes the regulatory environment has yet to reach that stage. “These are new technologies and they haven’t gone through a single credit cycle. So we don’t know how credit scoring for instance will fare in a major economic downturn.”

As for Skinner, he weighs in with an example of China’s P2P lending market which was left unregulated for years.

“Finally, they decided to regulate it and lots of people lost huge amounts of money. So, the regulator really has to move at the right time and not allow the market to grow to incredible mass.”