Embracing the fintech revolution

Technology will be a boon to consumer and bank, saving both time and money

If you have picked up a copy of any newspaper or business journal recently, chances are you would have come across the term "fintech", which is short for financial technology.

You might also have read commentary to the effect that the transformation fintech is triggering in the banking sector may mean the end of banking as we know it.

Not that many of us would particularly mind its demise.

Most of the time, we make our way to the bank not because we like to, but because we have to, in order to settle matters pertaining to our money, investments or mortgages.

But we are sometimes put off by the long queues and the enormous amount of time spent on paperwork for even simple transactions like placing a term deposit.

Now, if fintech takes root in a big way, as it surely will, the technologies deployed may enable a bank to take away much of the repetitive paperwork while allowing a customer to do more of his activities online without the need to visit a bank branch.

If fintech takes root in a big way, it may enable a bank to do away with much of the repetitive paperwork while allowing a customer to do more of his activities online without the need to visit a bank branch.ST PHOTO: JAMIE KOH

As it is, the Financial Times has reported that in the United States, big lenders such as Bank of America are already experimenting with completely unmanned branches while providing customers with enough technology to do a lot of the simpler tasks themselves.

Customers seeking a more complex service - like getting a new loan to start a small business - are steered to a side room where they can video-conference with specialists seated somewhere else in a call centre.

Seen in this light, fintech will indeed be a boon to the consumer and the bank, as it can result in significant savings in time and costs for both parties.

But here is the rub: Many bank branches - and their staff - may be made redundant as a result of such a transformation. According to one recent estimate by Citigroup, this revolution may cause European and US banks to cut as many as 1.7 million jobs in the next 10 years.

Fears of such massive job losses have led to scare-mongering stories in the Western financial press about fintech replacing human workers in the finance sector, in very much the same way that robots have been taking the place of factory workers.

Is this justified? This is a fear which cannot be dismissed out of hand, especially in Singapore, a major banking centre where the financial sector makes up more than 12 per cent of the economy and employs almost 200,000 workers.

Fear aside, there is no ignoring fintech's rise. As Mr Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), noted in a speech last November, parties gaining a competitive edge - whether they are countries, businesses or people - are those alert to technological trends, which understand their implications and harness their potential.

To this end, MAS is supporting the fintech journey by providing regulations conducive to innovation while fostering safety and security, as well as facilitating the infrastructure for an innovative financial culture and adoption of new technologies.

It has launched a regulatory "sandbox" for financial institutions. This involves relaxing some regulatory requirements to allow for small-scale experiments to let firms test ideas in Singapore's low-risk market before exporting them to bigger markets.

For banks dogged by low margins, technology represents a good chance to boost profitability even though, in the long run, it poses a threat to the banks' old way of doing business.

The levels of computing power now available will allow them to crunch huge amounts of data to make much faster lending decisions, as well as provide far better advice to customers on their investment portfolios.

The banks can also look to harness technologies like block-chain - the shared database system that underpins the bitcoin crypto currency - to cut costs in settling interbank payments as well as other transactions such as verifying trade finance invoices and executing contracts. Such technologies also deter money laundering.

However, the worry is that even while these big lumbering traditional banks are trying to transform themselves, snazzier start-up rivals may try to seize the profitable bits of their operations which generate a fee - like arranging a loan or giving investment advice. A recent PwC survey shows that 80 per cent of financial institutions in Singapore are worried about losing revenues to standalone fintech companies.

And it is here that lessons seen in China - where the fintech revolution has gone the farthest - are instructive. Far from toppling the banks as linchpins of the economy, fintech firms play quite a different role, serving customers previously ignored by banks.

The Economist noted that because China is a late starter in consumer banking - it had stayed overwhelming cash-based until 10 years ago - its burgeoning middle class skipped credit and debit cards and leapt straight to digital payments with smartphones.

One thing led to another. For instance, e-commerce giants started to extend loan services to their customers after using their transactions and personal information to create credit scores.

The e-commerce firms then launched funds as a way for people to earn interest on the cash in their e-commerce account at rates much higher than those offered by Chinese banks.

What is more, as digital banking becomes part of everyday life, online lending in the form of peer-to-peer credit has exploded, with fintechs reaching out to small-time borrowers who, with no access to banks, can now get loans at much lower interest rates than the usurious levels which pawnshops would have charged them.

One positive spinoff is that some of these fintechs, such as Lufax, have become fresh sources of employment because they have to establish shops - over 500 in Lufax's case - to vet loan applicants who have to turn up in person to borrow because they lack a consumer credit-rating record.

The competition has, in turn, prodded the incumbent banks to raise their game, improving on their customer service and making their online banking portals much easier to use.

What The Economist also noted is that while banks may not offer apps like those of their fintech rivals, customers feel far safer with their reassuring thousands of physical branches and solid reputations.

What about the bank employees? As fintech transforms the banking landscape, the jobs which they will perform will be very different from what they do now. Automated processes will probably end a lot of the current tedious work practices.

Of course, there is a question of retraining here, but if higher-value careers can be created as a result of this change, so much the better.

One example would be the very different role played by, say, a bank relationship manager. Rather than search for suitable products to sell to her clients, she may find herself offering better personalised and value-added financial advice using the analysis that can be gained from understanding a customer's behaviour and preferences.

Banking will never be quite the same again.

A version of this article appeared in the print edition of The Straits Times on April 10, 2017, with the headline 'Embracing the fintech revolution'. Print Edition | Subscribe