Software rules: Less than 20 of the iPhone comprises hardware and labour costs. The real profit is in software, which is all about knowledge and mindsets. – Bloomberg
WHO dominates the phone dominates the Internet. The whole world of information is now available in your hand, replacing your own mind as a memory base for instant decision-making.
The reason why traditional bank shares are dropping like a stone is that mobile phone companies and financial technology (FinTech) platforms “get it”. Banks and conventional financial institutions are stuck with so much legacy hardware (branches and outdated mainframes) and complex regulation that their CEOs feel beseiged by bad news – cyberattacks, privacy leakages (like the recent Panama leak), capital requirements and huge fines.
No wonder top bank talent is leaving the industry. In Silicon Valley they get fat bonuses to become “cool” without regulations. Regulated bank CEOs are held personally responsible for everything that goes on in their bank, having to deal with soul-destroying staff and expenditure cuts, on top of their own pay cuts.
I was at the Singapore Forum this month moderating a panel on FinTech when the Alibaba strategist mentioned that the current battle for market share is all about “mindset and handset”. The mindset of the Internet age is that you do not need to own any assets – you simply share or rent them from those who have excess capacity. The mobile handset is where most of the world’s population is moving towards doing business, from dating to buying a house, phone, using your fingerprint and retina as digital signature.
Finance today is an information business and FinTech (see below) can deliver payment services at 1-2 cents per transaction compared with US$10-US$12 per paper-based payment. Increasingly, we spend more on apps and software than on the actual hardware.
Did you know that the fastest adopters of technology in the world are porn, gambling and politics, in that order?
The financial consultants Oliver Wyman have come up with a major report on “Modular Finance”, which argues that technology has transformed finance into modular parts – modular supply (provision of financial services by specialists); modular demand (buying new services from such specialists).
Oliver Wyman’s report begins with a cartoon about a customer buying a house, arranging a mortgage and insurance, selling stocks and wealth products for the downpayment and paying for all fees through a single mobile phone. Equipped with the latest encryption, digital signatures and right apps, the mobile phone has empowered the customer to everything what used to take several visits and weeks to the bank, the lawyer, real estate agent and even land registry to complete the transaction.
In short, the game of finance is being fought by one super-bank to rule them all (Goldmans?) or one phone to rule them all.
The global supermarket model (one brand to rule them all) is having a serious re-think about being labelled G-SIFIs (global systemically important financial regulations), requiring special regulatory attention and additional capital and liquidity requirements. Increasingly, these universal banks do not need to own and supply all services in-house – they simply outsource the back-office or even key services to trusted specialists.
On the other hand, FinTech aims to change our lifestyles through different types of technology.
First, frictionless and seamless inter-operability integrates businesses like logistics with payments, such as Alibaba, making it easier to buy, pay and deliver in one pass.
Second, Big Data analytics, which Amazon uses suggest to you what to buy next and understand how customers are changing.
Third, Blockchain and Distributed Ledger technology, which makes systems more secure.
Fourth, artificial intelligence, such as robo-advisers on investments.
Fifth, data secrecy and unique identity codes that ensures privacy and confidentiality.
FinTech platforms have less staff, less legacy assets, less regulation and more flexible mindsets. These barbarians at the gate are only stopped by regulations that currently protect the banking franchise. This is not to say that they don’t have defects, such as lack of attention to anti-money laundering, terrorist funding and cyberattacks. When they reach super-scale, they are also Too Big to Fail.
The rapid evolution of FinTech means that Asia now has the money and the technology to transform our antiquated financial systems into the 21st century.
The Asian population is young, tech-savvy, mobile and willing to experiment with new services and equipment, which we are creating in Asia. The good news is that if our young startups get it right, the world is their market. The bad news is that if our regulatory and government support services don’t allow our startups to compete, our markets and jobs will be someone else’s lunch.
What is holding back this transformation to FinTech Asia is still mindsets. Look at how Jakarta taxi drivers are protesting against Uber. Regional banks are expanding their footprints by buying the franchises of retreating European and American banks in investment and private banking. But they and their regulators have not thought through how to use FinTech to cut back their legacy systems, many of which are obsolete and operating under-scale, because many regulators still insist on each bank owning and running their own hardware and branches. To be fair, not all regulators think that way.
Barriers to FinTech are sometimes regulatory mindsets. Asian regulators are more willing to accept the entry of financial institutions from outside the region than from their neighbours. Without regulatory concurrence, many banks and financial institutions do not dare to experiment with new technology.
We now have Asian customers moving to global service providers like Apple, Google and Amazon, if Asian financial service providers do not get their act together. Compe-tition is good – look at how Sri Lanka is negotiating with Google to provide balloon-suspended cheap high-speed wifi coverage.
Asian bankers and regulators need to think hard about what Asian customers really want to achieve global scale in terms of efficiency, stability and trust.
FinTech and mobile handsets are not the solution to all our problems, but they will change how the problems are resolved. The real problem is our mindset. Less than 20% of the iPhone comprises hardware and labour costs. The real profit is in software, which is all about knowledge and mindsets.
That belongs to the realm of politics and education, which is another story.
Andrew Sheng writes on global issues from an Asian perspective.
Fintech, the healthy disruptors of forex
SINCE the global financial crisis of 2008-2009, investment banks have spent much of their time and energy on regulatory compliance, leaving them “on the back foot” innovation wise.
Faced with growing regulatory demands in recent years, investment in new technology has had to take a back seat. This does not come as a surprise given the lack of deals and flows as well as the broad-based decline in commodity prices. That little space innovation wise has been quickly filled by fintech firms.
There are traditional fintech firms that act as ‘facilitators’ (larger incumbent technology firms supporting the financial services sector) and there is emergent fintech firms who are “disruptors” (small, innovative firms disintermediating incumbent financial services firms with new technology).
The fintech space can be further broken down to four major sectors – payments, software, data and analytics and platforms.
In the foreign exchange market environment, a typical trading would include sourcing for the best price either via electronically or via the voice broker.
In Malaysia’s financial market landscape of foreign exchange trading, the wholesale price or in other words interbank market is dominated by investment banks facilitated by money brokers who source the best available price to match foreign exchange trades.
With the wholesale market dominated by firms with deep pockets and ample liquidity, customers are subject to a spread cost, whereby prices they receive naturally takes into account a spread from the screens and a spread from the interbank price as well as a spread that is subject to the credit profile of the customer.
Global fintech firms however are altering this process or at least are gradually making inroads.
These firms provide a platform that offers a comprehensive foreign exchange solutions, including live mid-market exchange rates updated in real-time, customised foreign exchange rate alerts, a fully automated transaction information dashboard, multi-user and multi-subsidiary control panel as well as on-demand forex reports.
The best part is, these firms charge a flat fee of which is detailed before each currency trade with absolutely no additional or hidden fees.
Until recently, SMEs have had little choice in terms of where to go, other than to the banks, but now it seems a different foreign exchange model is emerging in the fintech sector, giving banks a run for their money.
The crux of these business models by fintech firms in the foreign exchange business is service via the use of technology.
The automation of the process, eliminates the middlemen and therefore reducing cost, fintech has enabled companies to be more transparent with their pricing.
In the case of Malaysia, SME’s play a vital role in Malaysia’s economy, with foreign exchange risks increasingly being a volatile variable in their cost structure.
These form of fintech solutions are likely to witness exponential growth, but the cost would be, a gradual erosion of SMEs foreign exchange business that are currently held by our local investment banks.
Fintech firms’ foreign exchange model broadly encompasses four major steps, namely, the SME firm carries out their foreign exchange transaction by selecting the currency, the amount, delivery date and beneficiary account and confirm the exchange rate.
Once this is done, the next step is, the SME firm sends the fund to the fintech firm whereby the fund is segregated and held in a local bank.
Bear in mind these funds don’t form the part of the assets of the fintech firm and are held separately to ensure full client fund security at all times.
The third step is, the fintech firm’s matching engine will proceed to the exchange, matching the SME firm’s fund with another company or through the wholesale foreign exchange market.
Throughout the process, the SME firm is provided full transparency on prices, giving the SME firm the liberty to be fully in control.
Once the trade is matched, the funds are sent to the chosen beneficiary account of the SME firm, either its own, a subsidiary or directly to its supplier.
A four-step approach that uses the middle rate of the foreign exchange, removes the so called spread cost that is usually charged by banks to these SME firms and finally gives full transparency on the whole process itself.
With the clout and importance of these fintech firms, the Monetary Authority of Singapore recently announced the formation of a new FinTech & Innovation Group (FTIG) within its organisation structure.
FTIG will be responsible for regulatory policies and development strategies to facilitate the use of technology and innovation to better manage risks, enhance efficiency, and strengthen competitiveness in the financial sector. The upcoming Singapore FinTech Festival, to be held in Singapore from Nov 14 to Nov 18 will be an event to watch.
Organised in partnership with the Association of Banks in Singapore, the week-long event, which is the first of its kind in Asia will bring together a series of distinct, back-to-back fintech events.
Bottom-line, Malaysia’s financial sector, in particular its foreign exchange market needs vibrancy and fintech firms are likely to add spice to the local foreign exchange market, aside from creating value added business processes and technology intensive jobs, it would provide a healthy competition to the local investment banking scene.
Suresh Ramanathan believes gone are the days when foreign exchange trading was noisy, loud and unruly. It’s more about savvy technology driven trading. He can be contacted at firstname.lastname@example.org
By Suresh Ramanathan Currency Insights.
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