Digital disruptions in finance
Transcript of Digital disruptions in finance
By Dr. Ernie G.S. Teo
Sim Kee Boon Institute for Financial Economics
Singapore Management University
7th October, Citibank
What is Fintech?
• Financial services or products built
upon technology
• Fintech should be:
• Highly innovative
• Pioneering
• Disruptive
• Customer-focused
Financial Technologies
and Disruption
• Financial Technologies will play a major role in
redefining finance
• Business costs (capital adequacy
requirements and compliance) are rising for
traditional financial institutions
• With financial technology, business costs can
be lowered and the unbanked and
underbanked can be reached for financial
inclusion
Financial Technologies
and Disruption
• Lower margin businesses like micro-finance
and micro-insurance will become viable
• Consumers will be attracted by the low costs
and convenience these new technologies will
bring
• Traditional financial institutions with heavy
assets and large fixed costs will be unable to
respond to these disruptions
Unbundling the bank
with Fintech
• Why is unbundling the trend?
• Millennials demand personal control and
transparency of their financial interactions from
banking to insurance
• Less than half of Millennials (46%) see themselves
staying with their current financial services
companies over the next few years
• 76% of affluent millennials would seek information
about personal investing on a social network, as
opposed to just 18% of the affluent Gen Xers
What are the types of
Fintech?
• Money Transfer / Remittance
• Equity Funding / Crowdfunding
• P2P / Marketplace Lending
• Mobile Payments / eWallets
• Trading Platforms
• Others
• Financial Advise
• Data Analytics
• Credit Scoring
• Insurance
Why use Fintech?
Why do consumers choose these institutions instead
of trusted banks?
• Lower fees, better rates
• Lower thresholds for investments
• Lower thresholds for loans
• Ease of use, convenience
How does Fintech do it?
• Lower costs with technology
• Lower margins
• Minimum physical/fixed assets
• Highly scalable
• Innovative use of technology
• Social networks
• Crowd knowledge/wisdom
• Big data: market analysis, credit scoring
Rebundling the Bank
• Some Fintech companies expand into other
financial services after initial success
• Next, we look at some examples of how this
rebundling occurs
• MPESA
• Fidor Bank
• Alibaba and Alipay
M-PESA
• Launched in 2007, M-PESA (pesa meaning money
in Swahili) is a mobile money transfer service
introduced by Safaricom (a telecommunications
provider in Kenya)
• It drives financial inclusion by providing money
transfer services, local payments and international
remittance services
M-PESA
• Mobile penetration rates are increasing all over the
world
• In developing countries where internet services and
smart devices are not widespread, simple mobile
technology such as SMS can be used as a means
to transfer money
• M-PESA from Kenya is one such successful
example
M-PESA
• As of 2014, M-PESA has
• 81,025 agents
• 122,000 registered merchants (24,137 active),
• 19.3 mil registered customers (12.2 mil active)
• It accounts for 18% of Safaricom revenue and has
penetrated 90% of Safaricom’s customers
Mobile money subscribers in Kenya, April 2014
December 2013 December 2012
Total mobile subscribers 31.31 million 30.43 million
Mobile money subscribers 26.02 million 21.41 million
Number of Agents 93,689 62,300 Source: © Communications Commission of Kenya (CCK), April 2014). Via © mobiThinking
M-PESA
Figure 5. Percentage of Safaricom customers registered on M-PESA
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
0
5
10
15
20
25
FY08 FY09 FY10 FY11 FY12 FY13 FY14
M-PESA: Percentage of Safaricom Users
M-PESA Users (mil) Safaricom Users (mil)
Penetration Rate for M-PESA
M-PESA
• Customers are only charged for “doing something”
• Transaction fees are kept low and stable
• Agents are attracted to join, a store can earn US$
5.70 per day (with 60 transactions), double the
prevailing wage for a clerk in Kenya
M-PESA
• Agent system works well and does not require
infrastructure investment
• With an established consumer, merchant and agent
network, it can start expanding to more than
payments
M-PESA
• M-PESA has since expanded to Tanzania,
Afghanistan, South Africa, India and Eastern
Europe
• It has also expanded into more products:
• M-Shwari, a paperless banking platform with loan
services
• Lipa Na M-PESA, payment for goods and services
• Lipa Kodi, rental payments to landlords
• Pay bills, public transport, insurance premiums
• Receive pension or social welfare payments
Fidor Bank
• Fidor Bank was established in Germany in 2007
• It is the world’s first online-only bank that operates
only through the internet and using social media
• In 2014, Fidor has more than 300,000 people
registered and 250,000 community members
• €200m worth of deposits, and its lending totals
about €160m
• Only 34 staff and no branches
• Cost of only €20.00 to set up a customer with full
banking, the overheads are low compared with
traditional banks
Fidor Bank
• Fidor Bank is a leader in innovative banking
processes with several awards including:
• Most Innovative Bank for Social Media- Germany
(2013, Global Banking and Finance Review Award)
• Most Innovative Bank- Germany (2013,
International Finance Magazine)
• Bank Innovation Award (2013, Bankinnovation.net)
Fidor Bank
• Ways they engage customers through internet community
• Rate Products, Rate Bank Advisors
Fidor Bank
• Fidor’s strategy is based upon two distinguishing
concepts, both centered on openness:
• Community banking – Members can share advice
on forums and collaborate on product development.
• “App store” banking – The bank operates an
open platform that hosts independent services from
third parties.
Fidor Tecs
• fidorOS is an open middleware software on top of
local core banking systems and provides next
generation community, payment, and banking
service solutions
• fidorOS is also a middleware written specifically for
modern banking which enables:
• Send money instantly to friends via Twitter, Email or
mobile number
• Lend money to friends
• Social trading, Social lending
• Crowdfinance: Funding & Investing
Fidor TECS
• Using public APIs, Fidor seeks B2B clients to do for
banking what Apple did for mobile applications with
iTunes
• A completely new technology that is not tied to any
legacy code
• Flexible enough to be used on nearly any core
banking system and powerful enough to be used by
banks as white label
• Full white label: look and feel can be customized
• Content of In-Account App-Store can be defined by
white label partner
Alibaba and Alipay
• Amazon Lending was started in the last quarter of
2012
• The company provided loans to online merchants.
Amazon provided loans to small sized merchants,
enabling them to purchase inventory
• Loans took only 4 days for approval and interest rates
were lower than small-business credit cards
• This increased revenue for Amazon as merchants were
able to expand their inventory and make more sales.
• However, Three years before Amazon Lending,
Alibaba has already started offering financial
services in China!
Alibaba and Alipay
• The Alibaba Group is a Chinese e-commerce
company started in 1999 by Jack Ma
• It provides c2c, b2c and b2b sales services via the
internet
Alibaba and Alipay
• In 2004, Alipay was established as a payment
platform and provide an escrow service
• It quickly expanded to include movie, plane and lottery
tickets, ordering of takeaways, insurance, payment of
utility bills
• Soon, it went offline and is used as a POS system by
small businesses
• However, the payment platform was just the
beginning
Alibaba and Alipay
• In April 2010, Alibaba Microfinance started lending
to merchants dealing with Taobao and Tmall
• As of end June 2013, it had extended a cumulative
total of over RMB 100 billion to more than 320,000
microenterprises and individuals
• The default rate on its microloans, of which lending
amount never exceeds RMB 1 million, is only
0.87% of its total portfolio
• The loan terms are usually short and ranging from
a few days to several months
Alibaba and Alipay
• Using big data analysis on SMEs to assess their
credit worthiness, Alibaba grow their loan books to
USD 16 billion in three years
• It also raised USD 87 billion to be the largest fund
manager in China by offering 15 times higher than
the standard saving rates
• It captured 20% of all new RMB deposit only nine
months after launch.
Alibaba and Alipay
• Alibaba launched a new financial product Yu’E Bao
in June 2013
• It is a money market fund and allows Alipay’s
account holders to invest their excess cash in the
fund
• Accounts holders are allowed to redeem the fund at
any time to pay for their online purchase on Alibaba
• Account holders can handle all transactions online
through personal computers and via Alipay Wallet-
enabled smartphones
Alibaba and Alipay
• Yu’e bao accounts can be used to shop, pay utility
bills, buy lottery and train tickets, book holidays,
and pay off credit cards, among other services.
• Other financial services which Alibaba subsidiaries
has branched into include retail and SME peer to
peer (P2P) lending, crowdfunding, micro-insurance
and a whole range of other funds such as gold
ETFs
Digital Money
• Fundamental to most Fintech products is the need
for there to be a trusted way to digitize money and
hold it electronically
• Money held in M-PESA and Alipay are all forms of
digital money
• These systems relies on a central authority which
can be subjected to malicious attacks
• Cryptocurrencies is a decentralized way to account
for digital money
Cryptocurrencies
• Cryptocurrencies are a type of programmable
digital money that
• relies on cryptography to ensure secure transfer
for tokens
• make records of all transactions on a
decentralized digital register
• Cryptography is used to ensure the token spent is
recorded on the register and is never spent twice
• Bitcoin is the best known Cryptocurrency
Bitcoin
• Created in 2008 in a whitepaper by Satoshi
Nakamoto
• Bitcoin is a cryptocurrency that gives incentives to
those who are willing to participate in solving a
cryptography quiz
• Mining
• Through the mining process, transactions are
stored in a decentralized digital ledger called the
blockchain
Bitcoin
• Instead of a centralized authority maintaining the
records, everyone who is part of the network holds
a copy
• A majority of the network need to agree in order to
change any record or ass new transactions to the
ledger
• Its decentralized nature means that it is hard for
any single entity to control it
Bitcoin
• Cryptocurrencies can open the door to a whole new
economy of sharing and financial inclusion
• It can allow the monetization of a person’s social
network (http://getgems.org/);
• distribute music (Bitshares Music Foundation);
• allow for crowdfunding (Swarm, Counterparty, Colored
Coins);
• decentralize data storage (Maidsafe, Storj)
• and also the issue of shares through cryptoequity
(Hyperledger)
• Blockchain: The technology behind Bitcoin is also
of interest
Banks looking at Bitcoin
Technology
• Standard Chartered Bank:
• Anju Patwardhan, chief innovation officer, shared her opinion on the bitcoin blockchain, noting how it could help reduce credit card, money transfers and remittance costs
• DBS:
• Ran a blockchain hackathon in May 2015, looking at solutions for the banking industry
• Citibank:
• Citi Innovation Labs: have been looking at blockchain for several years
• Sopnendu Mohanty, Chief FinTech Officer of MAS’s FinTech and Innovation group was the Global Head of Consumer Innovation Lab Networks & Programmes at Citi
Blockchain:
Decentralization
• Blockchain has been the buzzword going around in
the banking and financial industry
• Why do banks care about blockchain?
• Is it just FOMO (Fear Of Missing Out)?
Blockchain:
Decentralization
• There may be pressure from consumers who got a
taste of freedom from banks via alternative FinTech
services
• Blockchain-enabled solutions will take that freedom bar
even higher via decentralization, peer-to-peer behaviors
• Blockchain startups may be chiseling at the banks’
business
• Banks risk becoming islands if they don’t catch up
Blockchain:
Decentralization
• Possibilities for efficiency and security
improvements in areas like payments and
securities handling through the use of the
blockchain
• The auditability of the blockchain is also appealing
• Any edits are embedded in the blockchain are forever
• Such an electronic audit trail could replace paper trails
and manual audits.
Blockchain:
Decentralization
• Any process that requires extensive recordkeeping
• For example, Property records and title transfers are
possible examples
• Title can be theoretically be transferred to another
person on the blockchain without the need for title
insurance
• Alot of work is still needed
• Inter-banking co-operation over new networks will not
be easy
R3CEV
• R3 is an innovation firm focused on building and
empowering the next generation of global financial
services technology
• With the intelligent application of cryptographic
technology and distributed ledger-based protocols
within global financial markets
R3CEV
Banks that have joined R3’s distributed ledger initiative
• 15th Sept: Barclays, BBVA, Commonwealth Bank of
Australia, Credit Suisse, Goldman Sachs, JP Morgan,
Royal Bank of Scotland, State Street and UBS
• 29th Sept: Bank of America, BNY Mellon, Citi,
Commerzbank, Deutsche Bank, HSBC, Mitsubishi
UFJ Financial Group, Morgan Stanley, National
Australia Bank, Royal Bank of Canada, SEB, Societe
Generale and Toronto-Dominion Bank
LASIC Principles
• L: Low Margins, attract and build critical mass
• A: Asset light, ride on existing infrastructure such
as E-commerce, Telecom companies
• S: Scalable, able to expand without exponential
increase in costs, technology has to allow for large
change in scale
• I: Innovative, innovative use of technology such as
social media to find untapped markets
• C:Compliance easy, work in areas where the
government is likely to support
Lee, David K.C. and Teo, Ernie G. S., Emergence of Fintech and the Lasic
Principles (September 30, 2015). Available at SSRN:
http://ssrn.com/abstract=2668049
The Economics of
Financial Inclusion
• The global emergence of mobile
technology will play a large goal in
enabling financial inclusion
• Through mobile and other smart devices
• Many unbanked and unbanked segments of
the world will be able to gain access to
financial services.
The Economics of
Financial Inclusion
Figure 3. Active mobile phone subscriptions per 100 inhabitants
The Economics of
Financial Inclusion
• The problem of financial exclusion does not just
exist in undeveloped countries
• 7.7% of US households are unbanked and 20% are
underbanked
• The underserved in the world turn to non-traditional
forms of alternative financial services such as those
provided by cheque cashers, loan sharks and
pawnbrokers
• For example, illegal workers in the US who cash
cheques via agents such as cheque cashing depots
or convenience stores
The Economics of
Financial Inclusion
• The global picture of the unbanked and
underbanked is even more skewed
• Only 50% of adults in the world have an individual
or joint account at a formal financial institution
(Demirguc-Kunt and Klapper , 2012)
• There are 2.5 billion adults in the world with no
formal bank accounts, most of them in developing
economies
The future of banking
and finance
• Financial inclusion is not just a worthy cause but
also opens a large pool of untapped demand for
potential financial institutions.
• The world of financial services is fast changing;
consumers want more personalized services that
increase convenience and yet retain security
• Through the use of internet and mobile technology,
this can be made possible
Mobile banking customers at the top 12 global banks
Forbes
rank Bank HQ location
Mobile
banking
customers
annual
mobile
growth
Online
banking
customers
Total
customers
Mobile
percentage
of
customers
1
Industrial and
Commercial Bank
of China
China 100 million + 49.5% 390 million 432 million 23.2%
2 China
Construction Bank China 117 million 38.9% 150 million 291 million 40.2%
3 Agricultural Bank
of China China 83.0 million N/A 110.9 million 320 million 25.9%
4 JPMorgan Chase USA 16.4 million 24% 35.0 million N/A N/A
8 Wells Fargo &
Company USA 12.5 million 23% 23.8 million 70 million 17.9%
9 Bank of China China 52.1 million 24.6% 101.1 million N/A N/A
13 Bank of America USA 14.4 million 19.8% 30.0 million 50 million 28.8%
14 HSBC Holdings UK 2.5 million N/A N/A 60 million 4.2%
16 Citigroup USA N/A N/A N/A 100 million N/A
24 BNP Paribas France 1 million N/A N/A N/A N/A
37 Mitsubishi UFJ
Financial Japan N/A N/A N/A N/A N/A
43 Banco Santander Spain 2.6 million N/A 11.6 million 106.6 million 2.4%
Source: Banks 2013 annual reports
Except JPM and WFC: Q1 2014 report. Via © mobiThinking
What can banks do?
• Act open
• Engage with external technology solutions early
• Open own IP to generate new ideas
• Collaborate
• Co-innovate
• Within industry: SWIFT, Mastercard
• Engage with startups: Fintech Innovation Lab
• Challenge: Organizational Culture
• Invest
• Venture investing in startups
Accenture (2015), “The Future of Fintech and Banking: Digitally disrupted or reimagined?”,
http://www.fintechinnovationlablondon.net/media/730274/Accenture-The-Future-of-Fintech-and-Banking-
digitallydisrupted-or-reima-.pdf