Q&A: Ping An chief innovation officer on fintech innovation

Where is momentum coming from in the fintech sector? Ping An's chief innovation officer talks about how he balances external investment with the internal R&D process.

Chinese financial services company Ping An Group is being careful how it transforms itself into a tech-savvy company. A plan by its associate company OneConnect to list in the US is its latest approach.

“Ping An is looking for scalable technologies,” Jonathan Larsen, chief innovation officer of Ping An Group, and chairman and chief executive of the Ping An Global Voyager Fund, told FinanceAsia in an interview at Hong Kong Fintech Week.

While Ping An is venturing into potential venture capital investments through its Global Voyager Fund, the group is also adapting its investment strategy in other areas. Ping An’s allocation to non-standard debt has slipped significantly, highlighting the growing challenges faced by China's insurers as they look to improve returns and lengthen duration amid a dearth of suitable assets.

Larsen explains how he balances external investment with the internal R&D process. Aligning with Ping An’s core business is always the key, he says.

Innovation is more likely to come from smaller companies these days, Larsen adds. He is aware that valuations can get overheated and that people end up paying a premium for the future, which to some extent is understandable. “But it is our job to keep a sceptical eye and not be seduced,” he says.

The following conversation with Jonathan Larsen has been edited for clarity and brevity.

Q How do you view Ping An fintech’s potential market?

A Ping An is one of the key players in fintech in Asia. We are a $230 billion market cap company and almost all of that comes from China. Now is a very interesting time for Ping An as we start to take steps to internationalise the business.

Hong Kong itself is quite a small market, but nevertheless an attractive one. We're pretty excited about the opportunities there. But these are, of course, small compared to Ping An’s business. Compared to anything we do in the Chinese mainland, anything we do elsewhere is going to look quite small, but it doesn't matter. All of this is about learning how to operate in a different environment, learning how to adapt our products and services to a different context, competitors, regulators and consumers.

Q When do you expect a big step up in Ping An’s fintech development?

A Ping An is overwhelmingly a China-based company. We're interested in expanding internationally, with partners and also directly. There's a lot to learn when you go from being a single market-focused company, particularly in a country like China, to being a multinational company. Ping An has the luxury of being able to take its time and to do that at its own pace. We generate strong returns in China, and we are generating very good growth. China still has 6% economic growth to go before it reaches the US today, so there's a lot of growth left. We're in a situation where our strength is across all of the business lines. We don't have an imperative to go anywhere else, but we do have the opportunity. That means that we can take our time and we can learn to do it the right way.

Q Is Ping An looking at any particular sector at the moment? 

A We are focused on the field of AI. We're continuing to make good progress across a bunch of different fronts, whether it's medical imaging, or conversational AI, by which we mean advanced chatbot capabilities for both text and voice. And we're even making really interesting progress in areas like music composition and art, and using computers actually to generate content. 

Q What kind of technology that Ping An wants to develop?

A We have the benefit of scale in our base businesses, as to build use cases, to obtain training data and then to apply that to many algorithms. And when we build technologies, those technologies are highly scalable across different verticals or different contexts. To give an example in image technology, the first thing that emerged was facial recognition. What we found was that, at that time, the technology wasn't sufficiently well-developed for enterprise-grade security for a bank. Ping An said: "Let's just build it ourselves instead." And it acquired the talent to do so.

Q How do you view competition between Ping An and other tech startups?

A Competition is good because it stimulates the development of customer solutions and constant improvement. Ping An has always been very comfortable operating in a competitive landscape. Second, we certainly don't need to have a 100% market share in what we do. Of course, we expect to be in a competitive landscape and we expect that there is going to be attention on competitors that do well, in technology and in other areas. But in finance, the progress of B2C competitors around the world has really been limited to just a few areas.

Q Where are the opportunities in the sub-sectors of fintech?

A I'd say payments principally. Companies like PayPal have done really well. They're taking a slice of the value, but they're not really taking core financial relationships away from traditional financial institutions.

Two other areas have shown progress but not definitive progress. One is personal lending. We've seen a raft of online lending players begin to take share from traditional lenders. And then the third one is in wealth management. In that area, probably the jury's still out.

Q How does Ping An balance internal R&D and external investment in tech?

A We make no assumption that we have to build everything ourselves. We're trying to focus on things that can be complementary to Ping An’s internal business development and r&d efforts.

About 20 years ago, most of the innovation was driven by a few large financial institutions like Citi Bank and American Express. There were large, significant barriers to entry to being an innovator.

What we've seen in the last decades is an almost complete inversion of that paradigm, where very few large institutions are innovating in a meaningful way. Increasingly, legacy financial institutions look like institutions of the past, as opposed to institutions of the future. And the innovation is largely coming from much more agile, more fleet-footed, smaller firms.

If I asked you how many new businesses have been created in the last 15 years, what is the answer? The answer is almost none. There are businesses like Marcus by Goldman Sachs, a personal lending and deposit business started in the US that has made quite good progress. But it is still pretty small in the grand scheme of things. Beyond that single example, it's very hard for me to think of an example of a traditional financial institution that has built a new business in the last 15 years.

The reason why Ping An set up the Voyager fund is that we want to be plugged into that new world of innovation. We want to be able to participate where it makes sense, where there are people who are further down the road than we are. It's more expedient for us to be able to latch on to those developments as opposed to reinventing the wheel ourselves.

Q How difficult is it to bring in external innovation? What obstacles are there? 

A It's important to have an alignment with the business. And if you're dealing with something that's new, that might be outside of the current frame of thinking, that's sometimes a challenge. It's not because those business leaders don't want to embrace change but because they don't necessarily appreciate the relevance of that change right now. A large part of our job is to think ahead of the curve, to think about the next iteration of the business model.

Q Where do you see hype in the market? 

A Everywhere is overheating. In some sectors, there are companies that we see with valuations that we don't understand. Maybe there'll be some rebalancing in the current environment. People are probably becoming a little more realistic.

We're early in the phase of the fintech innovation cycle. It's quite normal in this type of innovation cycle for expectations to get ahead of reality. And that clearly gets reflected in valuations. Part of our job is to cast a sceptical eye over everything that we look at and not get seduced, We have definitely found companies we really like with a valuation that just doesn't make sense.

We’ve probably covered 90% of probable outcomes with current valuations. If something really extraordinary happens, these guys might scale to a completely different level again. But for the most part, the value is priced in, and that just means it doesn't make sense as an investment. When that happens, it's disappointing, but that's just reality.

Q What are your thoughts on the current investment cycle?

A There's a lot of venture money about. And increasingly we're seeing a convergence between private equity and venture capital in this early growth stage where PE firms are reaching down a little bit, and venture funds are reaching up a little bit. There's a very large supply of capital looking for good opportunities.

Q Some insurtech startups have said that they want to apply their technology everywhere. What's your take on this?

A Technology is transforming everything we do and how we live our lives. I do believe that one day we will all sit in driverless cars and AI will replace the driver. It's probably going to take longer in the short term, but once you know that the transition is going to happen in many of these technologies, it'll be pretty fast. I don't have the slightest doubt that we're on the cusp of a fundamental change in how we live our lives because of technology. Whether some insurance startup is going to do that, I would be more doubtful.

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