THE Perdana Leadership Foundation’s CEO Forum 2019 was held on April 4 with the theme: “Accelerating the Fourth Industrial Revolution in Malaysia.”
In his keynote address, Prime Minister Tun Dr Mahathir Mohamad emphasised the importance of effective implementation of real public-private sector initiatives. I moderated the session on: Innovating Financial Services, with experts including from Bank Negara and the Fintech Association. Basically, the discourse centered on how digitalisation has begun to change the way we live and do business, and to improve our way of life.
The broad brush
The discussion focused essentially on Fintech: the innovative industry straddling the world of finance and technology. Its products and services range from mobile cheque deposits to robo advisers; from banking digitalisation to electronic data management; from cryptocurrencies to their underlining blockchain technology. Fintech is often the solution looking for a problem: i.e. financial exclusion!
The industry faces many challenges despite growing into a global force that attracted US$71bil in investment between 2015 and 2016. Indeed, Fintech has become the dominant force behind big advances in finance, especially in promoting Financial Inclusion (FI). Leaving aside the relentless advance of the mobile-phone and mobile-Internet, this is made possible through cheap biometric systems as well as cloud computing and artificial intelligence (AI) analytics.
Hence, Ant Financial’s 3-1-0 model: three seconds to reach a credit decision; one second to transfer the money; and zero human intervention. Today, Big Tech’s move into finance is threatening to disrupt global finance. Europe’s 2018 “open banking” regulation has left bankers worried – that tech groups will cherry-pick the best part of their businesses.
Banks are at a disadvantage as they face intensifying competition in the face of uneven regulations. Amazon is providing payments services and loans on its platform; Facebook is securing electronic money licences.
Alibaba and Tencent are dominant in China’s US$5.5 trillion payment industries. Indeed, as I see it, the cashless society has already arrived in China. Even gone so far where beggars display the WeChat code to electronically receive handouts.
Alipay and WeChat have now gone cross-border, cooperating with Paytm India, True Money Thailand and bKash Bangladesh. They reach out to the world’s unbanked and unbankable.
China is today at the forefront of the global fintech innovation. To its credit, China’s activities are market driven. It now engages in global cooperation for mutual learning.
Chinese fintech’s mature technologies help many nations develop digital payments systems that fit local cultures, technology and policies. In the process, they can often offer regulators their experience in balancing innovation and risk. In terms of financial regulation: Singapore offers an overall plan for Fintech development; and the Regulatory Sandbox initiative in the United Kingdom, Thailand and Malaysia allows for experiment with innovative financial products and services.
China is taking the global lead in digital FI through implementation of the Belt and Road Initiative to promote global sustainable development. It has enabled small and medium-sized banks to reach a wider range of small and micro businesses and farmers through the exploration of technologies, including big data, AI, and blockchain.
The essence of FI is to comprehensively enhance the ability of small and weak businesses and individuals to survive, develop and even foster innovation. In my view, the digital world requires government to be at its best by just being there to assist, and not to lead. So far, fintech’s success in raising interconnectivity is based on business sustainability. The government can safeguard the healthy development of fintech firms by helping them regulate their own business models, and in turn, improve the regulatory framework.
In addition, fintech start-ups are racing to become the top global app for global money transfers, e.g. WorldRemit and TransferWise, both succeeding in disrupting the transfer industry. Furthermore, their global e-wallets today greatly facilitate payments of individuals and small businesses.
Using blockchain technology, the real-time cross-border e-payment service provided by AlipayHK has opened up a new possibility in financial interconnectivity. If e-wallets in different countries can be linked together, it will greatly facilitate the cross-border payments of individuals and small and micro businesses. It also promises to elevate inclusive finance to a higher level and supplements the SWIFT cross-border payment service for banks.
In the United States, fintech firms now can apply for special purposes charters to compete directly with banks in lending, in the face of the success of Stripe, Social Finance and LendingClub. Chinese fintech has since expanded to disrupt the last frontier, on-demand insurance.
There is widespread perception among corporates and consumers that Malaysian banks have lagged behind.
Why so? According to PWC, 82% of Malaysia-based financial institutions in 2018 see fintech as a threat to their business; and 22% reckon that they could lose more than 20% of their revenues to fintech firms. Hence, the push-back.
Yet, regulators (including Bank Negara) are actively advocating for fintech to be an integral part of the national initiative to drive digitalisation to remain competitive. Indeed, so far, mobile payments are leading the way. Consumer readiness? smartphone penetration in 2018: 88%; preference to use cards over cash: up 16%; fall in cheque use: down 18%; debit card penetration: 144%.
Bank Negara data shows electronic payments are continuing to record double-digit growth – increased usage of mobile banking: 44%; of Internet banking: 50%.
Nevertheless, the central bank views digital innovation as an important enabler to promote greater access and responsible usage of financial services. To this end, the Fintech Regulatory Sandbox (sandbox) continues to ensure that regulation remains responsive to innovation. In 2018, the bank introduced specialised thematic tracks to the sandbox to allow for a more targeted and efficient testing approach for high-impact innovations.
Further progress was also made in facilitating Open Application Program Interface (OAPI) adoption to encourage healthy competition and improve quality and efficiency. While the focus to date has mainly been on facilitating access through OAPIs, much work remains to be done on secure methods in allowing third-party access to a broader scope of financial data, as well as on safeguards to protect consumers.
To further promote an inclusive financial system, the central bank also partnered the United Nations Capital Development Fund (UNCDF) and Malaysia Digital Economy Corp to launch the Digital Innovation Hub (Innovation Hub) and the inclusive Fintech Accelerator Program (Accelerator Program). The Innovation Hub is largely aimed at meeting the needs of the low-income, with a focus on enabling service providers (including fintech start-ups) to use technology to promote inclusive finance.
The Innovation Hub seeks to build a community of innovative developers. Participating service providers are expected to benefit from the cross-fertilisation of ideas and market research generated via the Innovation Hub, particularly to better tailor their products and services to meet the needs of the underbanked. The Accelerator Program aims to address specific FI pain points within Malaysia, with four key focus areas: spending, saving, borrowing and financial planning. The first of a series of the program was jointly organised by the Bank and UNCDF in December 2018.
To bridge the disconnect gap, Fintech Association of Malaysia president Mohammad Ridzuan Abdul Aziz is determined to re-double efforts with financial institutions to fully meet consumers’ expectations, and to “explore new business opportunities to create new revenue streams in collaboration with fintech firms”.
To top it all, some fintechs are reported to have started to rebrand as regtech (regulatory technology) in a bid to convince banks that their products and services are indispensable, by pointing to legislation that fintech can resolve. Still, most consumers point out that the impact of seamlessness and convenience in retail banking has yet to be fully and widely felt: old ways do die hard.
Cash usage remains prevalent, with cash to GDP ratio at 6.6% in 2018 (6.1% in 2014). Yet, Bank Negara assures that access to financial services remains high, with access points available in even sub-districts across the nation, providing accessibility to almost full financial services. Indicators of FI do show an improved take-up of financial products and greater usage of digital channels to conduct financial transactions.
These developments further contribute to greater FI which is concerned not only with access, but also the responsible use of financial services to improve social well-being.
Fintech start-ups have begun to focus on insurance, claiming that from binding a policy to making a claim, consumers need not have to speak to anyone. Indeed, to insure personal property, insuretech firms offer a novel type of coverage that can be turned on and off with the swipe of the smartphone.
Also, this industry has become known for offbeat products, e.g. overtime work and traffic jam, even mid-autumn moon-insurance, offering compensation if clouds block off the moon (when a glimpse of it offers much good luck). Other insuretech products include policies covering parking tickets and even, love.
What then are we to do
Financial inclusion (FI) has become the major beneficiary of fintech. Almost inadvertently, the spread of mobile telephony and mobile-Internet services has brought hundreds of millions of people into the formal system.
“Mobile money” (transfer of cash by phone) has become a global phenomenon. “Findex” (financial-inclusion index) measures the scale of FI and track efforts to tackle it. It now appears that the ranks of the financially excluded are thinning fast, and the process will accelerate further.
One reason is the growth in mobile-phone and internet penetration, making finance accessible even to those living a long way from physical banks or ATMs.
According to findex, 78% of the world’s unbanked adults receiving wages in cash have a mobile phone. Moreover, the unbanked are now regarded as an increasingly attractive commercial market. Firms as diverse as Ant Financial and PayPal make much of their role in expanding FI “to democratise financial services”.
However, on the commercial side, tensions have since arisen between the different businesses engaged in this market: (a) banks are jealous of their traditional quasi-monopoly on formal finance, and yet wary of further risky adventures in “subprime” markets; (b) mobile-network operators now provide the infrastructure for payment, the most basic of financially inclusive service; (c) “fintech’s” aggressive financial-technology start-ups now fizz with bright ideas and sometimes even greed; and (d) increasingly, the “platforms” big Internet firms have a lock on how people spend their time online.
I believe the winner from all this competition will be the consumers, “especially those relatively excluded”. Furthermore, automation and usage of facial recognition technology also increase easy access and reduce the cost of providing finance, and make it profitable to deal in smaller amounts of money.
Instead of being a bad banking risk, the poor has become a business opportunity at the bottom of the pyramid. And new sorts of data, along with more sophisticated ways of using them, can compensate for the lack of a credit history and give the unbanked and unbankable access to finance for the first time.
About one-quarter of the world’s population remains financially underprivileged. Fintech and mobile phones will help change all that – and fast.
Former banker, Harvard educated economist and British Chartered Scientist, Tan Sri Lin See-Yan is the author of The Global Economy in Turbulent Times (Wiley, 2015) & Turbulence in Trying Times (Pearson, 2017). Feedback is most welcome.