Digital economy pushing banks to do better

Traditionally considered the only source of finance for companies and corporations, banks are currently facing an imminent threat. New technologies are paving the way for alternative sources of finance, among them crowdfunding and supply chain finance, which are beginning to threaten the very existence of traditional financial institutions.

No industry is immune to disruptions. A prime example in Singapore: The taxi industry is currently experiencing an invasion from ride-sharing apps like Uber and GrabCar. These third-party vendors have drastically lower operating costs and more personalised services, severely threatening the dominance of traditional service providers.

A leading reason for the rise of alternative forms of finance is that a large percentage of businesses are currently "under-served" or not served well by banks. Procedures for obtaining bank loans appear straightforward but may be complicated in practice, with many small and medium-sized enterprises (SMEs) lacking the ability to secure loans against a borrower's physical assets.

A recent Visa and Deloitte Digital SME Banking Study found that 40 per cent of SMEs in Singapore are unable to receive funding from banks - posing a cause for concern as SMEs make up 99 per cent of all businesses in Singapore.

Moving beyond the under-served to international trade, issuing and confirming banks now prefer to finance cross-border transactions in favour of the Bank Payment Obligation, instead of issuing letters of credit.


Dalian Wanda's Wanda Plaza in Shanghai. The Chinese property firm recently used its Internet finance platform and mobile app to raise five billion yuan (S$1.1 billion) from individual and institutional investors. -PHOTO: REUTERS

This supply chain finance method is championed by the Society for Worldwide Interbank Financial Telecommunication (Swift) and the International Chamber of Commerce Banking Commission. Businesses today are moving towards open-account trading and it is estimated that about 85 per cent of world trade is now undertaken on open- account terms.

Banks have for centuries built a reputation on being reliable sources of finance, as compared with crowdfunding, which provides little to no guarantee.

So, why do businesses consider crowdfunding options like Kickstarter or Indiegogo?

As discussed in a series of recently held roundtables organised by ACCA's Global Forum for SMEs, in conjunction with specialists in strategy and scenario planning, the inability of banks to finance certain business models is in part being addressed by the rise of innovative funding methods such as crowdfunding and other online digital platforms. So, can banks continue to dominate the finance industry?

Loss in time equates to a loss in revenue and opportunities and banks' approval turnover rates are not cutting it any more. Alternative sources satisfy the need for speed by approving funding requests in as little as a single day.

And with 72 per cent of Singapore SMEs requiring more funds to alleviate cash flow problems - according to a 2014 Singapore Business Federation National Business Survey - it is not surprising that alternative sources of finance have stepped in, in a bid to fill this gap.

A spectacular example would be that of Chinese property firm Dalian Wanda, which recently used its Internet finance platform and mobile app to raise five billion yuan (S$1.1 billion) from individual and institutional investors.

Through alternative financing, businesses can tap funds that have a significantly reduced level of obligation to the lender - with greater discretion over how funds can be used, as opposed to being dictated by traditional sources - alleviating cash flow problems that SMEs face.

Moreover, with the multitudes of repayment models available, businesses have the option to repay their loans when they have customers making transactions. Would banks ever be able to operate on these models of operation?

Considering all these benefits of alternative financing, does this paint a doomsday scenario for the future of banks within the next decade? Well, not necessarily so.

It won't be long before the relevant authorities step in to regulate these alternative sources of financing. How alternative finance will evolve with a more stringent regulatory framework over them will be interesting to watch. However, it is likely that there will always be a significant time lag between the launch of innovative financing platforms and the relevant regulatory mechanisms that address them.

Traditional financial institutions cannot rest on their laurels; they must seize the opportunity to transform now.

The digital economy is growing exponentially and banks can strategically position themselves at the forefront of this revolution. Traditional financial institutions have to find ways to best focus their digital resources and keep all their channels running smoothly to guarantee the performance and availability of services to customers.

As customers and businesses in other sectors become increasingly digitally active, the demand for interaction with banks, around the clock and across multiple channels, will be unparalleled. With the digital customer, there is zero tolerance for error.

Banks are typically too big to fail, plus, they act as well-respected authorities on financing. Furthermore, the banking industry's unparalleled capability to handle sensitive data and its long-term experience in security and risk management can keep customers loyal to their services.

But that isn't quite enough to keep customers happy - the banking industry needs to recognise this by adapting and reinventing quickly. At this year's Swift International Banking Operations Seminar, finance industry leaders concurred that these new technologies will act as enablers for banks to transform.

In fact, the shift towards the application of technology to solve actual problems has already started in earnest.

For instance, in the face of increasing bitcoin ownership, Citibank is developing its own cryptocurrency. On top of that, developers are capitalising on blockchain, the underlying technology on which bitcoin operates. This peer-to-peer technology uses its distributed ledger and encryption capability to guarantee the source of every transaction.

However, as promising as the rate of innovation and reinvention is happening, is it fast enough? Relative to the new entrants, the banking industry is currently lagging behind in the technology race and will need to accelerate this digital transformation to give itself a chance of survival.

With banks being kept hot on their heels to constantly improve, the only direction that they can head is up. Now, the only question left is - how long till the banks outsmart these alternative forms of finance?


•The writer is the head of policy and technical, ACCA Singapore.

A version of this article appeared in the print edition of The Straits Times on November 14, 2015, with the headline 'Digital economy pushing banks to do better'. Print Edition | Subscribe