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Which FinTech Future Should We Bank On?

Which FinTech Future Should We Bank On?

It seems clear FinTech will continue to drive radical change in the market for banking services. But one unanswered question is: will the application of these advances in digital technology open up a myriad of new opportunities for the established giants, or will it fundamentally disrupt the business model that has made traditional banks so profitable in the past?

Two men who see fundamentally different futures for the banking sector are Mr Benjamin Hung, Standard Chartered’s CEO for Greater China and North Asia, and member of the HKUST Business School Advisory Council - and someone with decades of experience in the industry - Mr Paul Schulte, founder of Schulte Research and author of The Advent of Financial Technology.

The power of game-changing technology

“The genesis of what’s happening today lies in the ideas that were around in the 1980s and 90s, when the technology just wasn’t present to realize them,” says Mr Schulte. “Now, the things you can do are breathtaking - and what is huge for entrepreneurs is that, today, you can do phenomenally more with phenomenally less.”

He cites the smartphone as the big game-changing technology. With the collapse in the price of technology over the last decade, there are now billions of smartphones in the world and sensor technology is becoming ubiquitous.

“So the things we can count are virtually infinite and the data we have is virtually infinite,” Mr Schulte suggests. “Some of the new possibilities in the world of finance include: a new way to do credit ratings; a new way to allocate capital; new replacements for commercial banks; new forms of currency; a new way to regulate publicly-listed companies; and, a new way to measure sentiment.”

Mr Hung believes the ways in which Standard Chartered is already leveraging the latest cutting-edge technologies to improve its clients’ banking experience, demonstrates the bank’s commitment to FinTech and to its development in the region.

“We have recently completed a proof of concept using Distributed Ledger Technology (DLT) in trade finance, with participation from the local regulator, financial advisory firms and other major banks,” Mr Hung explains. “We digitized the paper-intensive trade finance processes and enabled real time information sharing among banks, importers, exporters, and other players in the trade ecosystem.”

He also points to the fact that the bank has been an inaugural partner of the SuperCharger FinTech Accelerator program since 2015. This program supports international growth-stage FinTech companies as they expand in Hong Kong and Asia.

“We have recently initiated proof of concept projects with two of these companies to provide better services to our clients,” he adds.

Even so, when it comes to the elements that make up FinTech, Mr Schulte wonders whether the technology tail will end up wagging the finance dog.

The future of banking

“Ten years ago the total market caps of the banks were 50% larger than that of the technology companies, but now the banks’ market caps are 60% less,” he notes, quoting Bloomberg figures.

He views organizations such as Alibaba as huge challengers to the supremacy of traditional banks in the world of finance.

“What is happening to finance is what happened to retail several years ago. The biggest bank in the world in six years’ time will be Alibaba, without a shadow of a doubt.”

Having started out as an e-commerce platform, Mr Schulte says Alibaba now has the largest money market fund in the world according to the FT and, having been around for 17 years, has become a household name.

Alibaba representatives have told Mr Schulte that, in 2012, the company realized the smartphone was going to take away their business. “Their first focus became: get the business on the smartphone - and there was no two, three, four or five on their list.”

Now, Mr Schulte says, Alibaba has created an ecosystem on the smartphone for “car registration, marriage, death, birth, sickness, hospital visits, and everything you buy”.

He points to the literature and research that describes how difficult it can be for large, long-established businesses to upset the apple cart of a previously tremendously profitable model in the face of disruptive innovation. However, while he does see the major banks shrinking, Mr Schulte admits he has seen a shift in the attitude of these institutions of late, as well as a greater willingness to seek partnerships with young tech companies.

Mr Hung echoes this assessment of the current trend of collaboration. He acknowledges that many FinTech companies provide great products and a superb user experience, and foresees more opportunities for collaboration than competition in the relationship between Standard Chartered and these businesses.

“FinTech companies are quick at adopting modern technologies to develop innovative products but very often these young companies may have limited financial strength and access to clients’ transaction history,” Mr Hung says. Meanwhile banks, he adds, have a large client base and are more experienced in managing risks. “By marrying the strengths of FinTech companies and banks, we believe we could provide safer, better, and more efficient ways of banking which ultimately benefit the community.”

He believes Standard Chartered always puts a great focus on innovation and the deployment of technology, something he says was highlighted by the bank’s 2015 decision to invest up to US$3 billion over three years in technology and systems.

What next for FinTech?

To ensure a bright digital future for Hong Kong’s economy, including its financial sector, Mr Schulte urges a much more intense and well-resourced collaborative effort between the government, the universities and the private sector.

“Hong Kong has to support entrepreneurialism, support R&D, support the commercialization of technology, give grants and offer research facilities,” he says. “To think that the private sector can do this by itself is naive.”

He lists Singapore, the United States and the UK as being among the countries that “get” this.

Education is going to be key to a prosperous future for Hong Kong, Mr Schulte says.

Engineering programs have to be integrated with business programs, and “HKUST has a critical role to play in making this happen”.

An understanding of coding, and the possibilities of big data and artificial intelligence (AI) should all become significant elements of MBA programs, he says. “We have to tear down the silos within universities, as they don’t work.”

As a member of the Financial Services Development Council, Mr Hung is heavily involved in advising the sector on the changes that are coming. He cites three major FinTech developments he thinks may reshape the banking industry.

“DLT is a series of database networks which enable multiple parties to create and access a secure, transparent and immutable record of exchange, without the need for a central coordinating party,” he says. This technology should facilitate collaboration and help reduce risk, improve efficiency and lower costs.

Second he sees AI having a positive impact on, potentially, every process in a financial institution. “For instance, an AI robot can understand and respond to client inquiries instantly. It can provide customized investment recommendations based on a client’s risk appetite and investment history, help financial institutions improve analytics and fraud prevention capabilities.”

Finally, biometrics technology, via fingerprint, voice or other forms of biometrical identification, should enhance security around access to bank balances, credit cards and investment accounts. “With the continuous advancement in biometrics technologies, banks can deliver more advanced services over mobile devices in the future.”