Fast Forward: Disruption and the Singapore Economy

Banks and the barbarians at their gates

Fintech start-ups spur big change as bank profits and jobs come under siege


You've just bought a designer bag using a credit card. An hour later, you receive a text message on your smartphone from the bank that issued the card: "We've found you a pair of shoes and a dress that match that bag you just bought. Together, they would make the perfect outfit for the Bentley event you noted on Facebook which has a black-and-gold theme. If you buy the shoes and dress with the same credit card in the next seven days, you'll get 10 per cent off."

Sounds futuristic - and maybe a tad invasive - but the technology to do all this is already available today.

As soon as businesses and banks decide to collaborate and tap mobility, big data, social media and cloud computing, this scenario will become reality.


Financial institutions (FIs) all over the world, from banks to insurers, are now testing out cutting-edge technology that will enable them to interact with customers more intimately and provide more efficient and intuitive services. They are harnessing big data to learn more about customers, using artificial intelligence to analyse consumer behaviour and investing in technology to make their back-end operations smarter, faster and cheaper.

Here's another scenario: You walk into a bank branch to open a new account. Looking through your records, the relationship manager notices that you have a lot of cash in your deposit account and tries to sell you an investment plan.

What you do not realise is that the camera on the officer's desk is not only capturing your every move and facial expression, but is sending the data to an artificial intelligence (AI) system. The system prompts the relationship manager: "She's still sceptical. Try a different tack." And later: "She's close to saying yes. Keep going."

This is not another glimpse into the future. This is happening today. According to Accenture's senior managing director for financial services, Mr Jon Allaway, a bank in Hong Kong last year teamed up with Australian start-up Moroku to run just such an experiment at the Accenture FinTech Lab, with a view to implementing it in real life.

"They brought in a sample group of customers of varying ages, ethnicities and backgrounds. The relationship managers with the prompting from the AI system were twice as likely to close the deal," he says.

Now, more than ever, it is important for FIs to conduct experiments like these, which make use of digital solutions, robotics and AI, to raise their game because the barbarians are at the gate, Mr Allaway warns.

"Banks that are not investing in innovation stand to lose 32 per cent of their revenue to disruptors in the next two to three years. And it's not just the magnitude of revenue loss they should be concerned about but the type too - the loss will come from their future customers, the millennials."

The Citi Innovation Lab in Singapore. Financial institutions all over the world, from banks to insurers, are
now testing out cutting-edge technology that will enable them to interact with customers more intimately or
provide more efficient and intuitive services. PHOTO: CITI SINGAPORE

These "disruptors" are fintech start-ups - small, agile players that make good use of cutting-edge technology and social networks to deliver innovative products and services traditionally offered by FIs.

According to consultancy McKinsey & Company, there were some 12,000 fintech start-ups globally in August last year. The number has undoubtedly risen by hundreds more today, and these "digital attackers" pose a real threat, McKinsey adds, particularly in retail and consumer banking.

"We estimate that in… consumer finance, mortgages, small and medium-sized enterprise (SME) lending, retail payments and wealth management, 10 to 40 per cent of revenues will be at risk by 2025, and between 20 and 60 per cent of profits," it said in its Global Banking Annual Review last year.

Attackers will likely capture only a small portion of these businesses, McKinsey notes. Most of the banks' losses will come from having to drive prices lower just to compete.

More than just a threat to the bottom line, DBS chief executive Piyush Gupta believes technology is challenging the very role of banks in society. Mobile technology has made banking "invisible", allowing consumers to obtain loans, buy insurance or transfer funds on the go using devices such as smartphones.

In fact, anyone can be a banker today by disbursing loans or capital on a peer-to-peer lending or crowdfunding platform. Peer-to-peer leaders are fintech start-ups that allow individuals to borrow not from banks but from investors and other consumers.


And then there's the mammoth in the room known as blockchain technology. It is the technology that underpins the virtual currency bitcoin, but it can actually be applied across any industry. At heart, it is simply a "distributed" database of information, which also tracks changes made to that information. It is "distributed", because it is not centralised in one location - say, a bank - but can be accessed by everyone in a particular network who has rights to the information in the database.

So imagine a future in which you could trust any investment or savings platform because it was backed by blockchain technology and you could easily verify transactions yourself. You might no longer need to rely on a bank to store your money.

"As an individual investor you might not know who you want to take a risk on. So you give the money to the bank because the bank is safe, and the bank makes the choices of where to invest the money," Mr Gupta notes.

"But if there's a mechanism which offers you complete transparency on who you're taking risk on, and you get to a stage where you're willing to trust that mechanism, then the trust role of the bank disappears."

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Accenture's Mr Allaway says blockchain has the potential to cut transaction costs for companies by as much as 80 per cent, as it will eliminate many layers of documentation and checks.

Not only is this something to look forward to, it is something that Singapore's FIs should be working actively to make a reality, he says.

"It will take a consortium of banks to unite and do it together, instead of them trying to build all their cash management and trade processing platforms themselves. And if this was funded in part by the Government as well, to get the seed money going, then I think we're on to something special," he says. "If we don't do it first, imagine what would happen if Hong Kong does."

Citi notes in a recent report that the fintech disruption is still at the periphery in Europe and the US. China is the exception, it says.

"Internet giants have moved into financial services and gained considerable market share in e-commerce and third-party payments. These new entrants were faster than the banks to offer convenient, reliable, fast and cost-efficient alternatives to traditional bank payments."

China's fintech companies often have as many, if not more, clients than the top banks.

Elsewhere, "there is limited revenue loss in developed market banks' core business from fintech", Citi says. In the US, peer-to-peer lenders account for only a tiny share of total loans, while assets under management by robo-advisers are only scratching the surface of the wealth industry.

The picture is much the same in Singapore. There are a few crowdfunding platforms that target a small market. They have platforms on which investors of all stripes can get together to offer loans to small and medium-sized enterprises that would likely be turned away by banks. In return, these lenders stand to earn a high interest. Some go for an even more niche market, allowing only accredited investors to use their platform to buy equity in very small companies and start-ups.

But by and large, when it comes to their financial needs, from savings to loans, most companies and consumers here still look to banks first.

Robo-advisers, which are online wealth management services that provide automated, algorithm- based portfolio management advice without the use of human financial planners, have yet to make headway here. Nor have fintech players in services such as insurance or fund transfers made inroads into the Singapore market.

Still, that is not to say that nothing much is happening in the fintech scene. In fact, the Government has been taking steps to ensure Singapore stays ahead of the curve by becoming a fintech hub.

Deputy Prime Minister Tharman Shanmugaratnam even said last month that regulation should not be so onerous that it suppresses companies' ability to experiment in fintech. Singapore will not regulate fintech firms like it does banks until they reach a "meaningful scale" that can cause broader risks to the system, he said.

The Monetary Authority of Singapore (MAS) has also made a strong push to develop the fintech ecosystem here. It set up an in-house unit to promote the sector last year and has committed to invest $225 million over five years in fintech. Earlier this month, MAS signed an agreement with its British counterparts to set up a "FinTech Bridge", which aims to help fintech firms and investors from each country gain access to and expand in each other's market.

Regulators from the two markets will also put fintech firms in touch with their counterparts overseas and share and use information on financial services innovation in their individual markets.

Singapore's banks are not sitting idly by as these developments unfold. They are facing the oncoming threat of fintech disruption by investing millions of dollars in setting up their own innovation labs and experimenting with the latest technologies to see how they can stay ahead. Many have also started their own fintech incubator or accelerator programmes, through which they identify promising start-ups, groom them and help them build better business models and eventually collaborate with the best ones on innovative products and services.

These efforts have borne fruit. Early this year DBS Bank teamed up with a Hong Kong-based fintech start-up, AMP Credit Technologies, to assess the credit risk of small businesses so they can obtain short-tenor unsecured loans from DBS. DBS has also partnered two Singapore-based crowdfunding platforms, Funding Societies and MoolahSense, and will refer to them some of the smaller businesses the bank is unable to lend to.

United Overseas Bank has tied up with Israeli fintech OurCrowd to allow its SME clients to obtain funds through OurCrowd's equity crowdfunding platform.

OCBC Bank has gone a step further - earlier this week, it launched its open application programming interfaces (API) platform. APIs are sets of requirements - routines and protocols - issued by a business or institution that determine how one application communicates with another.

For example, the Uber API allows other developers to embed Uber- related services in their app. In the United States, for example, the Starbucks app taps the Uber API, allowing users to call for an Uber ride to their nearest coffee shop.

The APIs are free for use by software developers, who can now tap them to create apps embedding, for example, OCBC's foreign exchange rates or information about OCBC bank branches.

With things progressing as quickly as they are, it is not a stretch to say that Singapore's finance industry could look vastly different in the next 10 years, with a proliferation of new products and services that do not yet exist today.

Indeed, Singapore's ultimate goal is to change the way its financial system operates, DPM Tharman said last month. "Our aim is not to see if we can be above other financial centres, but to push the envelope and transform finance, to encourage players to find new ways of doing the business, and in a way that makes more sense to the customer... Transforming finance to be more tailored to their needs, something that's, if possible, cheaper or more convenient and accessible to the customer."

As long as things progress the way they are, the future is likely to be a win-win for Singapore's consumers and its finance industry.

A version of this article appeared in the print edition of The Straits Times on May 21, 2016, with the headline 'Banks and the barbarians at their gates'. Subscribe