Why fintech barbarians aren't at investment bank gates (yet)

Unicorns are already taking down retail banking. The investment side will be tougher to crack, but start-ups are looking for weak spots – with retail IPO distribution in their sights.

“We are not disrupting your world ... yet."

That's the message fintech players sent to investment bankers in a discussion in Hong Kong on Monday that brought the two worlds together.

Financial technology is already having a stark impact on the retail and commercial banking segments with the rise of mobile payments, internet-based finance and trade digitalisation. Banks could lose up to 60% of retail profits to nimble fintech firms by 2025, according to consultancy McKinsey & Co.

The question of how and when fintech will turn its attention to the investment side – defined in this instance as capital markets activities – came under the spotlight in a discussion between banking veterans and fintech players at the 2nd Annual AMTD-Lendlt Global Fintech Investment Summit.

From the fintech side came Dennis Wu of Future Securities International, an online brokerage backed by internet giant Tencent that has already built up a customer based of more than 3.5 million and clinched 'unicorn' status with a valuation of more than $1 billion.

Wu, CEO of the brokerage, said so far start-ups had focused on the business-to-consumer sector, rather than the business-to-business space investment banks inhabit.

Wu divides the works of investment bankers into three main elements: finding deals, working on the deal paperwork, and distribution to markets. It's the latter in which Wu sees potential.

“Distribution is the most viable entrance” for firms like Futu because they can leverage their huge customer base, Wu said. “Millions of customers and trillions of cash deposit [from the accounts] should be attractive to any listing firms.”

His comments reflect the views one senior investment banker in Asia earlier shared with FinanceAsia. On hearing that a company planned to raise equity via crowdfunding on mobile app WeChat, the banker said: “That’s scary, it’s going to put us all out of a job.”

As a Hail Mary pass, he argued investment banks could still use their judgement to place shares with long-term investors.

However he concluded: “One day the flow of money will cost next to nothing.”

Speaking at the conference, Brendan Tu, managing director of corporate client solutions Asia at UBS, also pointed to the great emphasis investment banks placed on “building relationship and trusts with clients, exercising pre-judgment, and placing supervision in terms of accountability.” And given these benefits, Tu believes it would take a “very long” time for the investment banking business unit to be disrupted.

That said, Tu acknowledged that in the areas of distribution, trade and research, for example, “we are facing great impact from robust fintech”.

Breakthroughs and hurdles

The public listing of Chinese smartphone manufacturer Meitu is a case in point.

According to Wu, some 17% of the retail subscription for the IPO came via Futu Securities – which allows users to subscribe to new listings on its trading app as well as trading in secondary markets.

Panelists agreed that online distribution also improves access and transparency. With an e-commerce boom in Asia, especially in China, and a growing  workforce occupied by people born in  the 80s and 90s who are typically comfortable with online purchase and mobile payment, platform operators are well-placed to leverage their customer base to reach out to affluent mass investors.

Another example is Alibaba’s flagship e-commerce website Taobao, which is already placing distressed assets in China by allowing customers to bid for bad assets like this one, offered by banks and asset managers.

That, however, may not be attractive or suitable for institutional investors – at least yet; as Tu pointed out, such investors value face-to-face advisory and customised services.

But another – perhaps bigger – obstacle is regulation.

The likes of Facebook and Google in the Western world are still on the fringe of banking as they don’t want to be heavily regulated as financial institutions. In Asia, although tech giants like Alibaba and Tencent are already operating in areas like payment and personal and small business lending, they are subject to perspective licenses and regulations.

Disruption from within

So far, investment in capital market fintech is relatively tiny. Of the roughly $96 billion in venture capital funding that has gone to Fintech since 2000, only about $4 billion – approximately 4% – went to start-ups concentrating on capital market activities, according to Boston Consulting Group in November.

But that doesn't mean fintech isn't already having an impact on investment banking in the region. Indeed, argued David Chin, ex- head of Asia investment banking at UBS and now a director at Postal Savings Bank of China, investment banks are having to turn to technology to cut costs.

Today, “10 years after the global financial crisis, you are still seeing very [little] revenue recovery; operating cost is high, regulatory costs very high, and capital costs very high,” Chin told the same panel.

Chin says distributed ledger technology (DLT) such as blockchain will be the game changer for investment banks' operations, making communication and deal execution more efficient, and transaction costs lower.

Eight of the world’s 10 biggest investment banks are exploring DLT in the hope of cutting 30% – or up to $12 billion per year – of costs, consultancies Accenture and McLagan said at the World Economic Forum in Davos in January.

Emily Shi, head of capital markets and advisory at AMTD, a Hong Kong-based boutique investment bank, added that the costs of operation, compliance and capital would drive banks to use big data analysis and artificial intelligence technologies to allocate their resources.

For example, if “AI can answer questions like which companies would be the next top IPO issuers”, then banks, especially boutique institutions like AMTD, can refer to that information and better allocate resources, Shi said.

It was a point on which Futu's Wu found agreement with the bankers: those banks that don't adapt and change will be pushed out of the game by their peers, never mind fintechs.

In fact, both sides may end up meeting in the middle.

As Tu put it: “Maybe we will start to see some of the fintech players needing to take the path towards financial institutions, while at the same time we see traditional players like investment banks trying to move towards fintech; I think we are going to converge.”

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