I gave fintech something of a mauling in this column a year ago, or at least in its application to the bond markets. I wrote that it was unlikely to supplant the old fashioned face-to-face or voice-to-voice modus operandi which continues to prevail in the primary markets and a large swathe of the secondary market.
I’m still somewhat of that opinion, although, a year on, fintech has come on in leaps and bounds and remains the hottest topic in bankers’ drinking dens - marginally ahead of green finance.
Yes, there have been schemes and scams and business failures. Investors in China fell prey to a peer-to-peer fintech scam of close to US$10bn last year, when a firm using a sales pitch promising double-digit returns collapsed. No doubt there will be more, just as there are in the fast-growing environmental finance sector, but that’s an unavoidable feature of market booms.
I had a chat last week with Mark Whitcroft, a former stalwart of bond syndicate at HSBC in Hong Kong and Deutsche Bank in Singapore who quit that game a few years back to join Illuminate Financial, a private equity firm which invests in fintech.
This time, rather than regaling me with how a new deal had priced through the issuer’s implied yield curve, he ran me through fintech, giving me something of an idiot’s guide to the subject – very handy for an unreconstructed Luddite such as myself.
So there are disruptors and enablers. The former aim to take business away from traditional financial industry incumbents while the latter look at existing workflows and processes and aim to provide an environment of change in which there is room for collaboration.
And, in the midst of this, the incumbents – mainly banks – are caught in the “buy it or build it” dilemma, which is self explanatory. In all this, they need to work out precisely what it is they want to get from fintech. And it’s very easy for a bank’s foray into fintech to end up as something of a reductio ad absurdum in which the main end-result is a press release which aims to show the market just how innovative they are or aim to be.
WHITCROFT IDENTIFIED THREE underlying trends which underpin fintech’s current momentum: industry deleveraging, multi-jurisdictional regulation and zero-tolerance compliance. I wondered how that applied to Asia.
Perhaps the deleveraging part is less relevant given that Asian banks by and large followed a much more conservative strategy going in to the global financial crisis, thanks in part to the lessons they learnt from their home-grown financial crisis 10 years prior.
Their balance sheets are healthier, by and large, than those of their Western counterparts and they are smaller (China is a notable exception), less complex and less hierarchical in terms of decision making.
That backdrop makes Asian banks naturally “early adopters” of technological innovation. Indeed, in Hong Kong and Singapore, the financial authorities have been massively supportive of fintech and keen to provide a regulatory environment which will nurture the emerging industry. Their governments provide funding to fintech accelerators and incubators, which dole out funding, office space and access to networks of mentors, investors and corporates.
You can see where they are coming from. There is a plan to create a single market in Asia in banking and financial services by 2020 – even though the concept of multilateralism would seem to be going almost terminally out of fashion, at least if Brexit and its ramifications are anything to go by.
That, of course, will mean a multi-jurisdictional approach to financial regulation in Asia. And it will bring a natural momentum for sweeping consolidation in Asia’s banking and financial services landscape.
The signs are everywhere, from the recent acquisition by Singapore’s OCBC of National Australia Bank’s private banking business to the swift emergence of so-called neo or challenger banks, which exist on the internet and smartphones rather than on the high street.
ONE THING WHICH big incumbent banks and financial service providers have to guard against is so-called “fintech tourism” in which CEOs and other senior staff go on fintech shopping sprees without having a clear underlying strategy as to how the technology might be deployed. As Whitcroft says, “it’s always about the product, not the technology”.
The biggest issue in all this is cybersecurity. When everything is underpinned by big data, then managing that data and ensuring there is no data leakage becomes paramount. As industry shifts en masse to utilising the cloud for data storage, security moves to the top of the list of priorities.
Supposedly, artificial intelligence will supplant human intelligence in skill capacity in 2019. I’m not sure quite how that supplanting will demonstrate itself, but I doubt the machines will be able to explain whether a new bond has priced inside its implied yield curve any time soon. When it comes to making capital market deals, direct human agency will not be going out of fashion just yet.
