Fintechs – friends or foes?
Visa employees have a saying that “cash is our biggest competitor.” Mightier threats, however, are looming.
In India and China, for example, consumers are transitioning directly from cash to mobile wallets, bypassing credit cards. From 2012 to 2016, combined Alipay and WeChat digital payments grew 20-fold by value, reaching $2.9 trillion. Beyond payments, technology is impacting many financial services domains, and this is forcing stalwart institutions into doing deals.
Speaking at the Start Fintech conference in Hong Kong, Paul Jung, head of products North East Asia at Visa, said, “start-ups will be the disruptors if we don’t do anything. So instead of just trying to compete with them, we’re also trying to find opportunities to partner with them”.
Alex Campbell, managing director at Xero, an accounting software company with customers across more than 180 countries, values bank partnerships to “connect and integrate together so we can make life easier for those customers”. He feels “there’s a natural value to be created”.
According to conference speakers, banks bring resources, reputable brands, customer bases, and logistical expertise, but don’t appropriately understand customers. Start-ups can help incumbents improve marketing, on-boarding, transaction processing, account monitoring, relationship management, credit decisions, and regulatory compliance. Fintech also makes it feasible to address demographics at “the bottom of the pyramid”, uneconomical for banks.
Institutions are ramping up anti money laundering (AML) and know your customer (KYC) technologies. Henri Arslanian, fintech and regtech lead at PwC, says this is creating cross-border regetch opportunities. The greatest demand is in Asia, says Arslanian, “there’s no doubt about it.” However, most proven regtech start-ups are based in the US.
Arslanian does have reservations. Citing defunct Bitcoin exchanges, he worries that a bank-start-up deal could go wrong, setting back the industry years.
Collaborating requires both startups and institutions to adapt. Strengths, weaknesses, needs, mindsets, operating procedures, and risk acceptance levels differ. Banks, with cumbersome legal agreements and prolonged procurement cycles, don’t appreciate the urgency necessitated at cash-strapped start-ups, particularly in high-cost-of-living markets like Hong Kong and Singapore.
David Rosa, co-founder and CEO of Neat, a Hong Kong start-up with a payment app, says it’s unnatural for salaried corporate employees to understand founders, who can’t spare time for coffee or drinks. “We need to validate opportunities extremely fast,” he says. “Entrepreneurs are often abrupt and straight to the point because there is a fundamental need for that. Time is very much money.”
When approaching banks about distribution deals, Kelvin Teo, co-founder of Funding Societies and Modalku, business lending platforms, takes a speed dating approach. “We knocked on every single door and saw how enthusiastic their responses were.”
With roll-outs taking as long as 18 months, Visa’s Jung acknowledges that large organisations must shorten decision and implementation cycles. Financial institutions are trying to streamline processes. “There’s been some learning experience for us. We’ll improve as we go,” he says. Visa has slashed the number of approvers for some projects by two-thirds and is hiring talent better suited to work with start-ups.
Jung said discussions go more smoothly when start-ups appreciate corporate perspectives. “If you don’t understand the industry, the business before approaching that partner, do your homework,” he advises. “The start-ups that are really attractive to us are the ones that already understand the pain points.”
Start-ups also need to identify an internal advocate who can provide support long after initial partnership agreements are signed. “Get them to buy in,” Teo says.
For many start-ups, regional banks are ideal partners. Xero’s Campbell says early-stage companies are better off introducing a working solution with a smaller institution, than a proof of concept with a conglomerate, which are “ten times the size, ten times the complexity, and perhaps ten times the regulation”.
Campbell said banks are gradually moving toward open systems, creating “incredible opportunities for fintech companies to collaborate”.
Visa is reviewing blockchain technologies, both for payments and loyalty initiatives – miles, rebates, and points programs. In partnership with Chain, a blockchain start-up, it is rolling out Visa B2B Connect, an international payments platform. Artificial intelligence (AI) and internet of things (IoT) are other focus areas. “We are very active in the fintech and start-up community,” Visa’s Jung says. “We’ll be investing a lot.”
Visa is not alone. China’s five largest banks all partnered with internet firms: Agricultural Bank of China partnered with Baidu; Bank of China with Tencent Holdings; Bank of Communications with Suning Finance; China Construction Bank with Alibaba Group; and Industrial and Commercial Bank of China with JD.com.
“This is the most exciting time to be in a banking role because what’s happening in the fintech and regtech space,” PwC’s Arslanian states.
By Joshua Bateman, CFA
Bateman is based in Greater China and be reached @joshdbateman