New Gang of Four to rule banking

BANKING is going to be ruled by a gang of four – banks, retailers, telecommunications and tech companies, says Rajashekara  Maiya, Associate Vice President and Head of Product Strategy of Infosys Finnacle. But rather than fearing the newcomers, be believes banks should be partnering and creating co-operation with fintech. Banks will retain their core competence in the manufacturing of products and risk management . . .

THE once-conservative world of banking is increasingly under siege — the culprits, technology companies and start-ups.
Many global banks no longer see other banks as their competitors. Rather, they name technology giants, like Google, Apple, Amazon and Alibaba as their most serious competitors.
    Yet, it will be technology that helps secure their future. Some of Asia’s largest banks are now looking to new technologies, such as ‘gamification’, ‘blockchain’ and ‘IoT’ to attract and retain young customers.
Fintech is no longer seen as an irritating offshoot of the technological revolution. Rather, it is accepted as an integral part of banking strategy to preserve business share in the years to come.
These are some of the conclusions of a study conducted by Infosys Finacle, part of the Infosys Group, the large Indian software company, on behalf of EFMA, a not-for-profit Paris-based global organisation promoting innovation in
retail finance.
Rajashekara Maiya, a co-author of the report, Innovation in Retail Banking 2015, and Associate Vice-President and Head of Product Strategy and Pre-sales at Infosys Finacle, says the mindset of banks has undergone a complete turnaround from denial to acceptance of new technologies. Banks are starting to embrace
innovation.
The stand-out finding this year, he says, is the jump in the percentage of respondents talking about investment in technology.
Explaining the basis of the study, he says: “This is a partnership where we engage with more than 100 banks & their Senior Management globally in more than 60 countries to get to know them and to identify their main challenges, concerns for the future, and opportunities in their industry.
“In 2009, when we started on this journey, barely 15 per cent of the banks mentioned that they were investing in innovation. In the latest report, we are talking about almost 84 per cent of the banks telling us that they are investing in innovation.”
The report cites as an example the National Australia Bank, which has invested AUD50 million in a Fintech Fund launched in July 2015 under a programme known as NAB Ventures. The fund is part of NAB Labs, a dedicated innovation capability which aims to build a culture of innovation and customer-led design at NAB, says the report.
Says Maiya: “In fact, when we ask Senior Managers rank the threats they are facing in the banking industry, more than 41 per cent of them see fintech companies as their competition.  And 45 per cent of respondents say competition is not coming from other banks but from search engines and Internet companies like Google, Amazon and Facebook.”
Maiya says banking activities are being
unbundled at a rapid pace through a range of companies involved in peer-to-peer lending, money transfer services and so on.
For example, he says, the US P2P lender, Lending Club, has grown to be an entity with more than US$6 billion in portfolio assets.  The EFMA report found that 40 per cent of respondents believe P2P will have a “high or very high” impact on the banking industry. Most, however, expect only a modest impact.
The report notes that P2P is a global trend. In China alone, it has been estimated that there are 1,575 P2P lenders, and, by the end of 2014, these lenders had a cumulative total loan book of US$10 billion.
There are other major lenders, too, like the
giant e-commerce company Alibaba, which
operates Alipay, Apple with Applepay, and Paypal with its own lending arm.
Maiya says: “Amazon is now one of the largest lenders to SMEs.  And Alipay has become the third-largest mutual fund in the world today after Fidelity and Vanguard — within six months of its launch.”
Individually, all of these developments may not add up to much, but collectively, their impact is rapidly being felt.
Consider this. Maiya says that, globally, on average every 60 minutes, 5000 transactions are processed using bitcoin, there are more than 9000 P2P transfers using Venmo, US$37,000 is lent to SMEs by Paypal credit, US$757,000 lent by Lending Club, US$787000 is transferred by Xoom, 3.3 million People use alipay for transfers, US$4.2 million is processed by Square, and US$28.43 million is processed by Paypal.
P2P money transfer is the other big development that is undercutting what used to be
traditional banking services. TransferWise, a London-based start-up launched just four years ago, now employs more than 450 people handling billions of dollars in transactions. It has a business now valued at US$1 billion.
Others, like Venmo, which describes itself as “a free digital wallet” that lets you make and share payments with friends, processes more than 9,000 transactions per hour. Xoom, a PayPal service which describes itself as a leading digital money transfer or remittance provider that allows consumers to send money, pay bills and to reload mobile phones from the United States, also handles tens of thousands of transactions every hour.
These companies are providing new channels of financial services which were once
exclusively the preserve of banks.
“These kinds of companies do not have obligations in terms of Federal reserve requirements. They are not required to hold cash or any prudential reserves. So they are continuing to create these kinds of platform and eating into the banks’ revenue streams,” says Maiya.
Now, he adds, the banking transaction process is being disintegrated.  “An increasing number of players in each line of their business are looking to eat into traditional banking areas,” he says. “The banks have to watch these fintech or start up companies for what they can do to their business.”
While Maiya does not believe the banking industry will be undone by technology start-ups, he stresses the need for banks to change their ways of doing business. Rather than fearing the newcomers, or trying to defend their business, he says banks should be partnering and creating co-operation with fintech.
They should also not overlook other industries, like telcos and retail companies.
“As we see it,” he says, “banking is going to be ruled by a gang of four – banks, retailers, telecommunications and tech companies. They will each have a role in banking. Retailers can do the sales and after-sales services, telecommunications can process large volumes of data transactions for the banks, including infrastructure management, and the tech companies can provide the innovations.
“In our assessment, banks will retain their core competence, which is the manufacturing of the products and risk management. This is their real strength.”
Maiya believes banks should look out for partners they can team with to promote their services. He sees synergies with retailers, for example, saying that when it comes to product selling, aligning with retailers who are good in sales and after-sales service is the approach for the future.
The banks can use the retailers as their point of sale to banking services. This, he says, is
already taking shape in some countries.
The large British supermarket chain, Tesco, and US giant, WalMart, have both launched
financing services. In 2014, Tesco obtained a banking licence to launch current accounts which built on an existing range of financial services, according to the EFMA report.  WalMart entered into an exclusive agreement in 2014 with Green Dot to distribute the
Gobank online and mobile banking service through WalMart stores.
Maiya notes that these retailers are trying to change and broaden their services. So they are selling financial products. “At the same time, banks also have to look at how they can improve their distribution channels.”
He says banks should look to form partnerships with telecommunications companies to improve their infrastructure. “Telcos are good at large data management and processing billions of transactions. Their infrastructure suits banks.
“The other players they should look at are the tech companies — for innovation and for technology backbone,” he adds.
Innovation is the key agenda in most banks, Maiya says. “When we asked banks if they were ready to work with start-up companies, 69 per cent said they believe that start-up companies are high on innovation, and that partnering with them is a way to address these kind of challenges.”
In 2009, only 15 per cent of banks said they were investing in innovation, compared to almost 84 per cent of in 2015. These respondents plan to increase investment in innovation in 2015.
“In the last 4-5 years, we have found that most of the innovation and investment in technology has been taking place in Asian banks – led by banks in India, Korea, Hong Kong and Singapore,” Maiya says.
He names Singapore’s OCBC and DBS, along with South Korea’s Hana Bank, as examples of banks at the leading edge of technological change.
“As an innovation, some Asian banks are using gamification technology to try to attract customers,” he says.
For example, CIMB Bank in Malaysia and OCBC are working on a gamification portal to attract new customers. They use the technology to create awareness and education around financial products.
“In the portal itself there are games available which intertwine education with financial products. “It is part entertainment, part education,” he says. “You can win credit points in these games. Whatever points and credits they earn from playing the games they are encouraged to give to charity so that they come to know what it means to give.”
Maiya says some banks are taking gamification seriously. Through its BBVA Ventures, based in Silicon Valley, the Spanish bank BBVA has allocated US$100 million for investment in innovation. Among its recent investments are two start-ups – Saveup and Ribbit Capital.
“The bank has implemented these innovations in Spain, attracting thousands of new customers.  It is proven that gamification is an effective way to attract younger customers and bring them to banking transactions.”
So, he adds, instead of competing with technology companies, it is best to work with them.
Infosys Finacle began its research into innovation and banking soon after the 2008-09 global financial crisis. “While people attributed excessive innovation to the financial crisis, we believe innovation is necessary for growth and sustenance of the banking industry, Maiya told ATI. Since then, Infosys Finacle has each year gone on to refresh the work, now in its seventh year.
The report says this year’s innovation study shows a continuation of trends seen in recent years — an increasing focus on innovation, increasing investment in innovation and some signs of improving innovation performance.
“The combination of disruptive technologies and disruptive business models, together with increasing venture capital investment in fintech start-ups, is raising the perceived level of threat to established retail banks,” the report says.
“The competitive impact of all this is limited so far to certain product areas and geographies, but the sense is that we are at the beginning of a period of significant change”.