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The Straits Times says

Risks of banking on tech alone

In its 2016 list of America's 10 most profitable companies, Fortune magazine noted that while tech is booming, the banks are back - "for now, anyway". There is cause for doubt. Banks have both thrived and faced crises over the past 200 years, sometimes in waves of failures. Asian banks are no less vulnerable, even though they occupy the top five spots in S&P's ranking of global banks. Indeed, many could be on a "burning platform", said DBS chief Piyush Gupta recently. The threat is said to come from "platform" companies, like Chinese tech giant Alibaba, more than from small fintech firms which are snapping at the heels of banks by providing netizens credit, insurance and wealth management services at the click of a button.

Singapore firms from all sectors would find it instructive to watch how this plays out as they contemplate business disruptions in their field and study jointly how industry transformation can be mapped to restructure the economy.

First, new business models must be capable of riding out the down cycles of the market and not be based on assumptions that actions are beyond scrutiny or that the party will never end. In the case of banks, the partying led to fast and loose behaviour as exemplified of late by Germany's largest lender, Deutsche Bank. Once among the world's 10 biggest banks, it is now the riskiest financial institution in the world, said the International Monetary Fund, in terms of the potential shock its failure could inflict on the financial system. In its pursuit of higher margins, the bank had tried to manipulate the price of gold and silver and the London Interbank Offered Rate. It has since paid billions of dollars in fines and is facing more over its sale of toxic mortgage bonds.

Second, new economy ventures must be supported by adequate capital buffers. Indeed, the infamous Bear Stearns and Lehman Brothers "would probably still be in business" now, avers former United States Federal Reserve chairman Alan Greenspan, had they been more capital-conscious before the 2008 crisis broke. Capital rules have since been tightened and these serve local banks well - they have "sufficiently strong loss-absorption buffers to withstand rising, cyclical global risks", as Fitch Ratings analysts noted.

Lastly, while established firms might find it necessary to take on tech companies at their own game, Mr Gupta is right to point out that banks would at times do better to work with smaller fintech firms rather than go it alone. Collaboration is key as geeks can only do so much. Ultimately, product or service quality, an extensive customer network, and a sound ecosystem built up over years might prove critical as these are not easily replicated by potential disruptors. Innovation does not start and end with technology. Like banks, other firms must learn to find the right place for technology within their operations.

A version of this article appeared in the print edition of The Straits Times on October 06, 2016, with the headline 'Risks of banking on tech alone'. Print Edition | Subscribe