Banks vs startups

Banks fight back against fintech startups

Banks are suiting up with new software. Battle tactics include partnering with the enemy, buying proven technologies, and giving every banker an innovation grade.

Bankers played table football and stuck multi-coloured Post-it notes on a wall during one of the hackathons conducted by Singaporean bank DBS last year.

It is part of a growing trend as bankers around the world are prised out of their day jobs into such software workshops, to be lectured by Silicon Valley entrepreneurs and told the way they work will radically alter as their platforms go digital.

DBS is shifting faster than most of its peers and will score every one of its 22,000 staff red, amber, or green according to how they’ve helped to turn the bank into a financial technology, or fintech, player. 

“We’ll get them out of the bank into our innovation learning facility, get the ties off them, get them in shorts maybe, and change the way they think about starting projects,” Neal Cross, DBS’s chief innovation officer, told FinanceAsia

Banks such as DBS are urgently overhauling their culture and antiquated core systems before clients are lured away by more tech-savvy rivals such as venture capital-backed start-ups and e-commerce giants like Alibaba.

These digital disrupters are using technology such as robo-advisers and blockchain databases to make financial transactions – including making a payment, taking out a loan, buying stocks – faster and more efficient.

“Banks are here to stay but individual banks that do not react will fail,” said Thomas DeLuca, the chief executive officer of fintech startup AMP Credit Technologies.

Bank battle tactics in the face of the fintech threat include cultivating innovation internally, teaming up with the very fintech firms that are seeking to usurp them, or hoovering up proven technologies. 

“We’ve realised we can’t do this by ourselves. All these ideas are already out there,” said Michael Zink, Citigroup’s outgoing head of Asean, told FinanceAsia.

Postal Savings Bank of China appears to have arrived at a similar conclusion. Keen to update its network, the world’s biggest bank in terms of branches wants Tencent and Alibaba affiliate Ant Financial to be among its 10 strategic investors ahead of its planned initial public offering later this year.

PSBC also invested in Ant Financial during its private fundraising round last year, further illustrating the growing crossover between established and emerging banking interests.

A FinanceAsia online survey found our readers expect financial services to be the most active sector in terms of mergers and acquisitions over the coming year. 

“Previously banks invested into fintech venture capital funding, but this year we expect banks to make more alliances and acquisitions,” said Charlie Alexander, EY’s partner responsible for financial services transactions across Asia Pacific.

If banks don’t act then they stand to lose one third of their revenues to new rivals, consultancy Accenture has calculated, based on a study of the rate of revenue attrition at European banks.

The stakes seem high then, very high. But for banks it is not just about taking out the competition: emerging technologies such as Big Data and cloud computing could also combat soaring compliance costs to prevent money laundering and provide a defence against the swelling ranks of hackers.

“As an industry we are discussing ways to use financial technology to help us catch the bad guys, by setting new standards in anti-money-laundering and cybersecurity,” said Citi’s Zink. Banks are sharing notes across the board, within industry associations, with regulators such as the Monetary Authority of Singapore, bilaterally among themselves.

Tide turning 

To an extent, the bargaining power of banks is improving.

After an exhilarating 2015 for fintech startups, which expanded their platforms rapidly throughout the year and raised billions of dollars in fresh equity, the investment climate more recently seems to have cooled as regulations have tightened and economic growth in China has slowed.

Without ample cheap funding, these insurgents are consequently now finding that building a distribution network is a costly business.

“Smaller fintech players are likely to face more challenges on the capital raising front in the current environment than they did last year; now that raising equity is harder, those without established backers – a Ping An, an Alibaba – may be more open to alliances or M&A with the larger traditional financial institutions,” said Marie-Soazic Geffroy Dernoncourt, head of the Asia financial institutions group at Morgan Stanley.

As a result, bankruptcies have picked up among smaller players. In January there were 1,425 problematic P2P platforms, up from 1,031 in September according to industry website  Wangdaizhijia.

The China Banking Regulatory Commission said that 1,000 or 30% of all peer-to-peer lenders in the country where ailing and should be shut down, such as Ezubao, which the CSRC found to be a Ponzi scheme.

In contrast, the incumbent banks have a clear competitive advantage: the means to connect with clients already in place.

“Banks still possess a competitive advantage because our branches allow face-to-face meetings with clients,” Joseph Huang, president of Taiwan’s E.Sun Financial, told FinanceAsia.

Banks also enjoy a long-standing relationship with regulators, not to mention deposit insurance.
“The quasi-public contract banks enjoy and their scale compared to start-ups means fintech firms must work in partnership with banks,” said AMP’s DeLuca.

Hong Kong-headquartered AMP said in January that it would offer small businesses unsecured working capital loans over DBS’s network. DBS will use its technology to electronically verify cash flows, such as card payments, to assess each applicant.

Some banks are partnering with what many of them regard as the biggest threat of all: China’s e-commerce giants.

E.Sun Commercial Bank, part of the E.Sun Financial, launched a cross-border payment service last year with China’s Alipay, the world’s largest mobile payment service provider. The service is intended for Chinese tourists accustomed to using the app on their smartphones.

Elsewhere, in Australia, Commonwealth Bank of Australia and fintech startup OnDeck will refer clients to each other that don’t meet their own lending criteria. Westpac has a similar arrangement with Prospa.

Citi, meanwhile, plans to have a unit called Citi FinTech up and running by the end of this year to develop mobile apps for consumers. The New York-headquartered bank also sifted through more than 2,000 fintech proposals from developers across Asia last year for ideas it could buy and plug in to its platform.

Culture clash
The jury is still out on whether banks will successfully replicate the entrepreneurial culture and inventiveness of start-ups. Even if they absorb the newcomers or co-opt their ideas, they have to see change take root.

So far some bankers and analysts are sceptical.

“They’re doing it wrong – they create accelerators and talk to start-ups but their bank culture has not changed. They still have a hierarchy and low-risk appetite,” said DBS’s Cross. 

Many of the banks in Asia have core systems that are decades old. Reprogramming or ripping them out would be costly.

To undertake such a gargantuan task the shift in mind-set has to start with the chief executive.

“Tech incubators and hackathons are ways of exposing our people to a completely new way of thinking,” Piyush Gupta, CEO of Singapore’s biggest bank DBS, told FinanceAsia. Gupta briefly dropped out of banking himself in 2001 to set up a tech start-up but returned to the industry when it folded. 

Asia is far behind the US in recruiting tech talent at CEO and boardroom level, according to research from Accenture [see chart].

Chinese banks in particular are poorly represented, it found, although there are exceptions. Chief among them is Jin Panshi, who has been general manager of the IT management department at China Construction Bank since 2010 and sits on its board of supervisors.

The CEO also has to back up vision with investment dollars. In 2014 DBS said it planned to invest a further S$200 million (US$141.86 million) spread over three years on new digital technologies. That’s on top of the S$600 million it already spends every year on technology.

Bankers also have to want to embrace change.

“Innovation should be a pull not a push. When I joined the bank I almost had to force people to think about innovation – now they are banging on my door,” Cross said.



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