Tag: Fintech

Brokers not immune to fintech disruption

From Australian Broker.

A new index tracking the rate of change within financial services industry has revealed that emerging fintech companies are rapidly changing the face of financial services – and brokers are not immune.

The Disruption Index, a joint initiative from online SME lender Moula and research firm Digital Finance Analytics (DFA), tracks important leading indicators, such as smart device penetration and use, online loan applications and service expectations in the SME sector. Between May and July 2015, the Index stood at 33.02. Between August and October 2015, the Index rose to 33.94. The higher the Index score, the greater the disruption of the industry.

Speaking to Australian Broker, Martin North, principal of DFA, said the SME sector has driven disruption in the financial services space.

“There are three things that have happened relatively recently which have fundamentally changed the game. The first thing is the Treasurer gave a 100% capital write-off to small businesses and they have gone out in their droves and bought smart devices. We have seen a very significant rise in the penetration of smart devices as the main device businesses are using for their interactions with their customers, suppliers and the banks.

“The second thing is this means that [businesses] now have a much higher expectation in terms of immediacy of access to information, products and services than they did before. This has created a big gap between where the banks currently are in terms of servicing small business customers and where small businesses want to be.

“The third thing is there are lots of new players coming in and essentially offering a different proposition… People are responding to the opportunity created by the disruptive environment.”

According to North, 2016 is likely to see more fintech businesses enter the market, however the major trend will be existing fintech businesses starting to gain serious momentum.

“I think we are going to see more momentum. I think the peer-to-peer players are going to very interesting and I think we will probably see some new players beginning to think about the wealth creation sector because I think that is an area which is ripe for fintech penetration and development,” North told Australian Broker.

Brokers are also likely to face significant disruption through more effective use of technology and data insights, say North.

“I think there is an opportunity particularly in the broker segment for a different way of handling the consumer and a different way of providing advice. This means we are likely to see some different types of broker models.

“In other words, we will see [brokers] using technology in a more thoroughbred way to perhaps provide better advice rather than the cheapest loan. Essentially, they will provide a more tailored proposition. I wouldn’t be surprised if we started to see some more intelligence coming through the broker sector.

“Let’s be honest, a lot of the conversations are price-led to find the cheapest loan but there are a whole bunch of other conversations which could be had if they had access to better data and better insights.”

 

 

SME’s, Digital, And The Fintech Revolution

Within the DFA Small and Medium Business Surveys, we capture significant information about how these businesses use digital, and their attitudes towards the fast-emerging and potentially disruptive “fintech” sector. Since our last full survey released in mid 2014, and still available on request, much has changed. Today we discuss some of the interesting findings on fintech, in the context of SME’s.

First, looking at how business owners are using digital, (which includes use of smart devices, social media and cloud services) and their preferred channels; the revolution is well underway. We separate business owners into digital luddites (really have not engaged with digital at all), digital migrants (moving to embrace digital, and up the learning curve) and natives (always been digitally at home).

More than half of SME business owners are now migrants, and over 30% natives. This leaves a runt of 12% who are not digitally aware. So, most organisations are well on the way towards digital transformation.

SME-TechngraphicsIn terms of channel preferences (that’s how they would LIKE to interact, not necessarily how they currently do) the shift to apps and online is stunning. This is not surprising though given the penetration of smart devices, and the fact that many business owners are time-poor. We foreshadowed this in the 2014 report.

SME-Preferred-ChannelWe next ask about their awareness of fintech. Of those who were aware, (a small but growing band), we then ask about their attitude towards fintech, and especially whether they might consider accessing funding or other services from new, non-traditional players. The results are again quite sensational, with many digital natives now past awareness, and considering applying or already have applied. Migrants have more mixed attitudes, but many are now beyond awareness. Luddites are not engaged at all.

SME-Fintech So the results highlight the digital transformation underway, and underscores the potential for fintechs to disrupt the market – there are ready customers out there, and as awareness grows, many will seek to embrace.  It also begs the question as to how incumbents will respond.

Our next full and updated SME report will be published later so stay tuned.

 

Let’s not regulate away the competition fintech can bring

From The Conversation.

Fintech firms are infiltrating all areas of financial services, from payments platforms, lending, capital raising, investment, advice, insurance to capital markets.

Fintech firms, which are essentially disruptive digital finance models, can help lower barriers to entry in financial services. They are also reducing transaction costs, addressing issues of information asymmetry, empowering consumers and facilitating international linkages. All these contribute to the regulatory goals of efficiency and fairness.

Around the world governments have responded positively to the new models, recognising the benefits of driving competition, and increasing access to markets, especially in areas such as small business finance. Models such as peer-to-peer lending and Crowd Sourced Equity Funding (CSEF) have been welcomed in the US, Europe and the UK.

Governments in the UK, Canada and New Zealand have either implemented or are finalising the implementation of regulatory regimes to support CSEF. In the US, the enactment of the Jumpstart our Business Start ups (JOBS) Act, which referenced the importance of online funding for start-ups and other companies to raise capital, was pivotal for CSEF globally.

But facilitating the practical move to market of new digital finance companies is a challenge for both the fintech firms and regulators.

Compliance challenge

Young fintech companies with limited resources face a significant hurdle navigating the maze of regulatory licensing and compliance requirements. Much of this has been developed for far more mature and larger organisations.

On the other hand, regulators struggle to balance openness to innovation and disruptive technologies with protecting the interests of consumers, investors and the privacy of individuals.

The United Kingdom has led the way in many respects. The Financial Conduct Authority has established a network called Project Innovate which supports industry innovation to improve consumer outcomes. The UK fintech industry also has its own industry body, Innovate Finance, to support technology-led financial services innovators.

In Australia, it’s the Australian Securities and Investments Commission that’s tasked with licensing and monitoring fintechs. This needs to be done with a keen eye also on the need to enhance competition in the system and build confidence in the new models to ensure participation by both investors and consumers.

To assist in this process ASIC has developed an “innovation hub”. This is a single point of entry to the system for innovators seeking to gain regulatory approval and thereby make it easier for them to navigate the regulatory system.

Collaborative approach

The innovation hub can be linked to a growing realisation that collaboration is required between financial sector innovators, consumer groups, academics, relevant government agencies and regulators to deal with complexity and examine opportunities from a system-wide perspective.

Accordingly ASIC has also announced the establishment of a Digital Finance Advisory Committee, with representation from the fintech community, consumers and academics. The focus is on streamlining ASIC’s approach to facilitating new business models with common application processes, including applying for or varying a licence and in granting waivers from the law.

These initiatives represent a significant departure for Australian regulators for two key reasons. First, our regulatory agencies have tended to retain a low-risk, conservative approach to regulation. On an international basis, this stood us in good stead throughout the global financial crisis, when our regulatory agencies were recognised internationally for their prudent approach. But this had increasingly become a barrier to innovation.

Second, this is a highly collaborative approach, something that is generally not a hallmark of Australian business. The lack of collaboration has been a weakness of our system in generating interaction between researchers, innovators, corporates and regulators and we have been amongst the least collaborative of all OECD countries, to our cost. Bringing together these parties through the Digital Finance Advisory Committee, and fintech hubs such as Stone and Chalk, could lay a foundation for more sustainable financial services innovation.

Opening the way to greater financial innovation is especially important in an economy with such a highly concentrated financial sector.

Ultimately the ability of key agencies to adapt and adjust risk levels to accommodate disruptive technologies will impact on both the domestic and international competitiveness of Australian finance sector, to the benefit of Australian consumers and businesses.

Author: Deborah Ralston, Professor of Finance and Director at Monash University

The Rise of FinTech

The Keynote address by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the Global Technology Law Conference 2015, Singapore, 29 June 2015 provides an great summary of the rise of FinTech.

Technology is changing the way we live, work, and play. A sector where I believe technology is going to be fundamentally transformative is financial services. In fact, there is a new buzzword: “FinTech” – financial technologies or the integration of finance and technology. Two things are happening.

First, non-financial players are using technology to offer innovative solutions that mirror the services traditionally offered by financial institutions (“FIs”).

  • Payments – Apple, Google, Paypal, Amazon, and Alibaba have payment solutions that replace physical wallets and credit cards.
  • Lending – Zopa, Lending Club, and Funding Circle offer peer-to-peer lending solutions that match lenders and borrowers on their online platforms.
  • Investment – “robo-advisers” like WealthFront use data analytics to dispense online personal financial advice and investment management services.

Indeed, these non-financial firms look set to disrupt the financial industry.

  •  As a senior banker in the US puts it: “People need banking, not banks”.

The second thing that is happening is that FIs are fighting back.

  •  As disintermediation threatens FIs, they are being pushed into a rethink of their business models.
  •  Rising costs, shrinking margins, and the weight of new regulatory requirements are pressing FIs to look into more cost-efficient ways of running their businesses.
  •  They are increasingly turning towards innovation and technology for solutions.
  •  In an ironic way, the FinTech insurgency is forcing change among the incumbent FIs.

Leveraging on their size and networks, FIs are using technology much more intensely to enhance their product offerings and service delivery.

  •  Example: US insurance companies, Progressive and Allstate, are using telematics to develop usage-based motor insurance, also known as Pay-As-You-Drive (or Pay-How-You-Drive).
  •  Instead of rewarding past good driving behaviour, these insurers are able to price premiums contemporaneously with current driving habits.

What does all this mean? As a powerpoint slide used by a FinTech company in Silicon Valley rather immodestly proclaims: “the geeks shall inherit the earth!”. It is no doubt an exaggeration. But the message is clear:

  •  In the years ahead, countries, businesses, and people who know how to use technology and innovate will have a keen competitive advantage.

Why this time is different

Now, have we not heard this story before – that technology will transform banking and then nothing changed fundamentally? Indeed there have been false starts in the past.

  •  In the 1990s, we thought that electronic money would replace cash and cheques. That has not happened.

– In most parts of the world, including the US, Japan, Europe, and Singapore, notes and coins in circulation outside banks has been increasing steadily every year.

  •  In 2000, some of us were quite sure that Internet-only banks would eventually replace brick-and-mortar branches. This too has not happened.

The most obvious evidence that both beliefs were manifestly wrong occurs year after year, when lines of Singaporeans form at bank branches to obtain new notes for “angpows”, to be given out during the Chinese New Year celebrations.

  •  But this year, however, we saw “e-angpows” being given out for the first time.
  •  Could this be a sign of things to come?

Technology takes time to proliferate. More importantly, it is the interaction among related technologies that often creates transformation – and that takes time.

There is reason to believe that this time is different: that technology will indeed transform financial services in a way that has not happened before. It has much to do with the concept of mobility.

First, mobility of technology.

  •  Mobile devices, such as smartphones and tablets, have become common-place.
  •  People do not just connect and surf from their home computers anymore – they also do so from their mobile devices, while on the go. This has profound implications for how financial services are offered and consumed.

Second, mobility of ideas.

  •  Today, online platforms provide a variety of social networking and peer-to-peer services. And people are increasingly comfortable using these services.
  •  These services have compressed time and space: interaction is real-time and information exchange transcends physical boundaries.
  •  They allow information, knowledge and ideas to be shared widely across communities and geographies.

Third, mobility of payments.

  •  In the past, it used to take several days and cost quite a bit to pay someone in another country or currency.
  •  Today, online payment services have made it possible for people and businesses to transfer funds safely at very low cost.
  •  This has not only allowed e-commerce to flourish, but also enabled faster and more efficient cross-border financial services, like lending and borrowing.

We are looking at a financial services industry that will be increasingly driven and powered by technology.

The big trends in technology affecting finance

What are the big trends in technology affecting the financial industry? Let me cite six technologies that appear potentially transformative:

  •  digital and mobile payments
  •  authentication and biometrics
  •  block chains and distributed ledgers
  •  cloud computing
  •  big data
  •  learning machines

First, mobile and digital payments.

Payment services are increasingly being enabled by mobile applications and near-field communications (NFC).

  •  Gone are the days of the clunky cash register.
  •  Today, accepting payments can be as simple as attaching a small dongle, no bigger than a matchbox, to a tablet or smartphone.

This is only the beginning.

  •  Payments at stores and restaurants may increasingly not even require physical touch points, and could take place entirely over the Internet, using the customer’s smart device to effect payments.
  •  Further out, we can look to a future of seamless payments, where technology automatically recognises the customer, checks out the goods, and charges to the customer’s account as he walks out of the store.

Second, authentication and biometrics.

Authenticating one’s identity is critical to gaining access to a variety of financial services and performing many financial transactions. As authentication technology progresses, we can look forward to more secure and efficient solutions to authenticate identity.

Biometric authentication is making good advances.

  •  In the future, we may not have to remember complex passwords or worry about password compromise.
  •  Fingerprint, iris, facial and voice recognition, and even palm vein and heartbeat recognition systems are being explored for authentication purposes.
  •  Biometric ATMs have been deployed in several parts of the world, including the UK, Japan, China, Brazil, and Poland.
  •  Banks in Singapore have launched mobile applications that utilise the TouchID function of the iPhone for fingerprint authentication.
  •  Some have also been exploring the use of voice biometrics in their phone banking and call centre services.

For users who are concerned about their privacy or have physical challenges, token-based authentication offers an alternative means of security:

  •  Tokens embedded within mobile devices, or perhaps on wearable technology, are viable options.
  •  And where stronger security is required, these could be used together with biometrics to provide multi-factor authentication.

Third, block chains and distributed ledgers.

Digital currencies – like Bitcoins – have attracted much interest.

  •  Payments using Bitcoins are much faster and potentially cheaper than conventional bank transfers and, its advocates argue, just as safe.
  •  Whether digital currencies will take off in a big way remains to be seen.
  •  But it is a phenomenon that many central banks are watching closely, including MAS.
  •  And if they do take off, one cannot rule out central banks themselves issuing digital currencies some day!

But the bigger impact on financial services, and the broader economy, is likely to come from the technology behind Bitcoins – namely the block-chain or, more generally, the distributed ledger system.

  •  A block chain is essentially a decentralised ownership record.
  •  It allows a document or asset to be codified into a digital record that is irrevocable once it has been committed into the system.
  •  The digital record can be accessed and verified by other parties in the system without going through a central authority.
  •  The potential benefits of such a distributed ledger system include:

– faster and more efficient processing;

– lower cost of operation; and

– greater resilience against system failure.

There are many potential applications of distributed ledger systems in the financial sector:

  •  Ripple in the US offers a solution, based on distributed ledgers, for real-time gross settlement, currency exchange, and remittance.
  •  The same solution could potentially allow regulators to plug into the network to conduct surveillance of risks and to track transactions to detect money laundering or terrorist financing.

In fact – and this would be of interest to the lawyers gathered here – distributed ledger systems could potentially be applied in any area which involves contracts or transactions that currently rely on trusted third parties for verification.

  •  Honduras is developing a land title registry system based on distributed ledgers
  •  Other potential applications talked about include registry of intellectual property rights, supply chain management, electronic voting systems, medical records, etc.

Fourth, cloud computing.

Cloud computing is an innovative service and delivery model that enables on-demand access to a shared pool of computing resources. It provides economies of scale, potential cost-savings, as well as the flexibility to scale up or down computing resources as requirements change.

There is a view among some quarters that “MAS does not like the cloud”. This is an urban myth, not true.

  •  Well, MAS did have concerns about cloud computing previously.
  •  This was because cloud services were at the time not sufficiently secure to safeguard the sensitive information that FIs held.
  •  But cloud technology has evolved considerably and there are now solutions available to address these concerns.

– For example, FIs can now implement strong authentication and data encryption to protect their data in the cloud.

– MAS has been in dialogue with both FIs and cloud service providers

– Providers have now become more aware of our security considerations while we have gained a deeper understanding of the safeguards they have put in place.

  •  I am pleased to say that several FIs in Singapore have successfully rolled out cloud solutions in the past two years.

Fifth, big data.

The world is exploding with information.

  •  Data generated by online social networking and sensor networks, and data collected by governments and businesses amount to a universe of digital information that is growing at about 60% each year.
  •  There is also a global trend – including in Singapore – towards “open data” in which data are freely shared beyond their originating organisations
  •  At the same time, the cost of storing and processing data has been falling dramatically.
  •  These trends have created the opportunity to use data to understand the world around us with a clarity and depth that was not possible before.

Some FIs are investing in and using this big data to derive useful and actionable insights.

  •  JP Morgan Chase and MasterCard, to cite two examples, are using big data techniques to derive insights from consumer spending patterns.
  •  Visa is using big data techniques to detect fraud in financial transactions.

Sixth, learning machines.

This might well be the most impactful technological change of the future – computers that can think.

  •  Traditional computing machines and algorithms are programmed to carry out specific tasks in response to defined circumstances according to the software programme that is written into them.
  •  We are now moving into the age of cognitive machines which are designed to learn from the data that they hold and be able to, in a sense, programme themselves to perform new tasks.
  •  They continuously adapt to new data as well as feedback and inputs gathered from their experiences, including interactions with humans.

We are already beginning to see examples in the financial industry:

  •  In equity, commodity, and FX markets, some traders are using self-learning algorithms

– they not only analyse historical data, predict price movements and make trading decisions, but continually upgrade and adjust their trading strategies in the light of new evidence and market reactions.

  •  In lending, learning machines have been used to construct models for consumer credit risk and improve the prediction of loan defaults.

The legal minds assembled here might want to reflect on where the legal liabilities arising from the actions – or inactions – of such learning machines lie.

The six technologies that I have outlined have the potential to transform the financial industry globally. There could well be others that I have not mentioned.

The important thing for our FIs is to be alert to these and other technology trends, understand their possible implications, and seize the opportunity to apply relevant technologies safely and efficiently – to boost productivity, gain competitive advantage, and serve consumers better.

Smart nation needs a smart financial centre

At the national level, Singapore has set its sights on becoming a Smart Nation – one that embraces innovation and harnesses info-comm technology to increase productivity and improve the welfare of Singaporeans. The Smart Nation Programme under the Prime Minister’s Office has brought together stakeholders from the government and the industry to identify issues and develop solutions with this objective in mind.

Government agencies have been rolling out a steady pipeline of Smart Nation initiatives.

  •  The Housing Development Board has trialled a new system that utilises home sensors to monitor elderly folks who are staying alone and alert caregivers should an emergency arise.
  •  The Land Transport Authority is studying the use of autonomous vehicles that can self-drive with the help of environmental sensors and navigation systems.
  •  The Urban Redevelopment Authority has been utilising geospatial information and data analytics for urban design and land-use planning.

A Smart Nation needs a Smart Financial Centre. Indeed, the financial sector is well placed to play a leading role given that financial services offer fertile ground for innovation and the application of technology.

MAS will partner the industry to work towards the vision of a Smart Financial Centre, where innovation is pervasive and technology is used widely to:

  •  increase efficiency,
  •  create new opportunities,
  •  manage risks better, and
  •  improve people’s lives.

MAS will seek to achieve this vision together with the industry through two broad thrusts:

  •  a regulatory approach conducive to innovation while fostering safety and security; and
  •  development initiatives to create a vibrant ecosystem for innovation and the adoption of new technologies.

Smart regulation for a smart financial centre

First and foremost, a smart financial centre must be a safe financial centre. Technology can be a double-edged sword. If not managed well, it can potentially lead to a variety of risks in the financial industry:

  •  financial crime and illicit transactions;
  •  loss of data or compromise of confidentiality;
  •  glitches that damage reputation, disrupt business, or worse, cause systemic crisis.

The first priority on our journey towards a Smart Financial Centre is therefore to continually strengthen the industry’s cyber security.

As more financial services are delivered over the Internet, the frequency, scale, and complexity of cyber attacks on FIs have increased globally. Hackers and cyber criminals are constantly probing IT systems for weaknesses to exploit.

There are two reasons for concern:

  •  First, the connectedness among FIs mean that a serious cyber breach in one institution can potentially escalate into a more systemic problem.
  •  Second, repeated cyber breaches could diminish public confidence in online financial services and reduce people’s willingness to use FinTech in general.

MAS and the financial industry in Singapore take cyber security seriously.

  •  FIs are expected to:

– implement controls and measures to preserve the confidentiality of sensitive data

– maintain the integrity and availability of their systems

– conduct regular vulnerability assessments and penetration tests to evaluate the robustness of their cyber defences

  •  MAS conducts regular onsite inspections of key FIs’ technology risk management processes and controls to check that they meet these requirements.
  •  FIs have also established Cyber Security Operations Centres to enhance their cyber surveillance and gather cyber intelligence.

But cyber threats will not go away. Like a cat and mouse game, both hackers and cyber defenders have been enhancing their tools and techniques along with advances in technology as well as in response to one another.

  •  As part of this evolution, a new wave of next-generation cyber security solutions is emerging, in areas such as trusted computing, security analytics, threat intelligence, active breach detection, and intrusion deception.
  •  The financial industry needs to keep abreast of these developments.

While seeking to ensure cyber security, MAS’s regulatory approach towards fostering innovation and the adoption of new technologies will take three forms.

First, innovation owned by FIs.

In matters of innovation, time to market is critical. FIs are free to launch new ideas without first seeking MAS’ endorsement, as long as they are satisfied with their own due diligence.

  •  A recent case that went on this approach was a mobile banking application that utilised fingerprint authentication for balance enquiries.
  •  The bank went ahead, did not need MAS approval.

What does this approach entail?

  •  FIs’ board and management should take the responsibility to ensure that the risks of new innovative offerings are well identified and managed.
  •  The compliance people should ideally be involved early in the innovation process. However, they should avoid second-guessing MAS by taking an overly conservative stance that might nip innovation in the bud.
  •  If the FI encounters a specific issue on which it needs MAS’ guidance, we will be happy to help.
  •  But the FI must offer its own assessment of the risks in what it proposes to do and take ownership for its decisions.
  •  It cannot rely on MAS to do its due diligence.

Second, innovation in a “sandbox”.

Sometimes, it is less clear whether a particular innovation complies with regulatory requirements. In such cases, FIs could adopt a “sandbox” approach to launch their innovative products or services within controlled boundaries.

  •  The intention is to create a safe space for innovation, within which the consequences of failure can be contained.
  •  FIs can seek MAS’ guidance and concurrence on the boundary conditions – for example, the time period, customer protection requirements, etc.

Third, innovation through co-creation.

MAS has a long tradition of active consultation with industry on proposed new rules or initiatives. More recently, we have engaged industry players more directly to co-create rules and guidance – in other words, to jointly come up with proposals.

  •  An example is the Private Banking Industry Code – developed by industry practitioners but in close consultation with MAS.
  •  Such co-creation is particularly relevant for developing rules or guidance on new technologies whose benefits and risks are not fully known and where a more flexible approach may be desired.

A further possibility in co-creation might be MAS and the industry working together to develop common technology infrastructure that meets regulatory requirements. The aim is to clarify and address issues and uncertainties upfront during the course of development.

MAS is not seeking a zero-risk regime. And we understand that failure is part of the learning process.

  •  If things do go wrong with an innovative product or service, and there will no doubt be some failures, the FI will need to review its implementation and draw lessons.
  •  MAS will examine the facts to assess if there is any systemic or deeper issue that needs to be addressed, and determine if any action needs to be taken.

Development initiatives for a smart financial centre

Besides providing a conducive regulatory environment, MAS will work closely with the industry to chart strategies for a Smart Financial Centre. Let me sketch some of the initiatives we have embarked on:

  •  a Financial Sector Technology & Innovation scheme to provide financial support;
  •  a multi-agency effort to guide the development of efficient digital payments systems;
  •  a technology-enabled regulatory reporting system and smart surveillance;
  •  supporting a FinTech ecosystem; and
  •  building skills and competencies in technology.

First, the Financial Sector Technology & Innovation or “FSTI” scheme.

I am happy to announce that MAS will commit $225 million over the next five years under the “FSTI” scheme to provide support for the creation of a vibrant ecosystem for innovation.

FSTI funds can be used for three purposes:

  •  innovation centres: to attract FIs to set up their R&D and innovation labs in Singapore.
  •  institution-level projects: to catalyse the development by FIs of innovative solutions that have the potential to promote growth, efficiency, or competitiveness.
  •  industry-wide projects: to support the building of industry-wide technology infrastructure that is required for the delivery of new, integrated services.

Several FIs have already set up their innovation centres or labs in Singapore, some under the FSTI:

  •  DBS, Citibank, Credit Suisse, Metlife, UBS,
  •  as well as a couple of others that are in the pipeline.

Some examples of FSTI-supported institution-level projects that are ongoing include:

  •  a decentralised record-keeping system based on block chain technology to prevent duplicate invoicing in trade finance;
  •  a shared infrastructure for a know-your-client utility;
  •  a cyber risk test-bed; and
  •  a natural catastrophe data analytics exchange.

We look forward to see more such innovation projects coming on-board.

Second, digital payments.

Changes in the payments scene in Singapore have picked up pace in recent years:

  •  Our retail banks have released their own flavours of mobile wallets or mobile payment applications:

– DBS PayLah!, UOB Mobile Cash, OCBC Pay Anyone, StanChart Dash, Maybank Mobile Money

  •  With the launch of Fast And Secure Transfers or “FAST” in March 2014, we now have a ready infrastructure that allows customers of the participating banks to make domestic fund transfers to one another almost instantaneously from their computers or mobile devices.

But there is a lot more we need to do on the digital payments front.

First, payments at stores and restaurants.

  •  This is almost a Uniquely Singapore phenomenon

– Many of our stores and restaurants have multiple Points-of-Sale (“POS”) at their payment counters.

– This not only clutters valuable real estate but also makes life difficult for customers and merchants.

  •  As more stores and restaurants introduce self-checkout facilities to improve productivity, we need a unified POS – a single terminal, preferably mobile – that will:

– allow merchants to enhance efficiency by simplifying front-to-back integration; and

– enhance the shopping or dining experience of customers.

Second, reduce the use of cash and cheques.

  •  It costs as much as $1.50 to process each cheque.
  •  The cost of cash is less obvious but just as real: in transportation, collection, delivery and protection.
  •  We need to promote greater adoption of new payments technologies, including:

– electronic Direct Debit Authorisation; and

– fund transfers using mobile numbers or social networks

MAS and the Ministry of Finance have been co-leading a multi-agency effort to address these issues and guide the development of efficient digital and mobile payment systems.

  •  The aim is to make payments swift, simple and secure.
  •  The vision is less cash, less cheques, fewer cards.

Third, regulatory reporting and surveillance.

As the financial system becomes increasingly complex and inter-connected, MAS needs to sharpen its surveillance of the system with more timely, comprehensive and accurate information to identify and mitigate emerging risks.

The vision is an interactive, technology-enabled regulatory reporting framework which will:

  •  reduce ongoing reporting costs through the use of common data standards and automation;
  •  enable the dissemination of anonymised information to industry analysts and academics for deeper analysis of the financial system and its risks.

We are still in early days on this initiative and will work with the industry on how best to take this forward.

Fourth, supporting a FinTech ecosystem.

The effort to grow a Smart Financial Centre must go beyond the financial industry, to help nurture a wider FinTech ecosystem. We need a strong FinTech community that can:

  •  generate ideas and innovations that FIs could adapt and adopt; and
  •  provide a platform for collaborations with the industry to produce innovative solutions for defined problems and needs.

For those of you who are not aware, we have a pretty vibrant FinTech start-up community that is growing over at the “Launchpad” in Ayer Rajah Industrial Estate. MAS looks forward to engaging FinTech start-ups more actively – to better understand emerging innovations as well to help them design their solutions bearing in mind the regulations and risk considerations that apply to the financial industry.

Fifth, building skills and competencies in technology.

Technology will disintermediate and make obsolete many jobs in the financial sector, but it will also create new ones. Finance professionals will need new capabilities. And the industry will need skills and expertise from other disciplines traditionally not associated with finance.

MAS and the financial industry must work together to prepare for the changes ahead on the jobs and skills front. Building capabilities and opportunities in FinTech will be a key area of focus in the financial sector’s SkillsFuture drive.

  •  MAS will work with the financial industry, the Institute of Banking and Finance, training providers, and the universities and polytechnics to provide learning pathways relevant for a Smart Financial Centre.
  •  We will also provide FIs funding and other support for training opportunities, to help our people acquire specialist capabilities in the relevant areas of FinTech.

Conclusion

Let me conclude. I have said much about technology and FinTech. The larger picture is really about promoting a culture of innovation in our financial industry.

  •  Such innovation is not always about high-tech.

  •  It is about designing better work processes and creating new business models that will deliver higher growth, more enriching jobs, and better services for the consumer.

  •  Technology is very likely to be a key enabler for all this, and we must make a concerted effort to understand it and use it effectively.

Finance Through a Fintech is Fast, but Ask These Questions First

Interesting article in the BRW by Neil Slonim, of thebankdoctor.com that aligns with my earlier post on Online Lending for SMEs.

There has been considerable recent discussion about fintechs injecting much needed competition into the SME lending market. For those unfamiliar with this new word, fintech (financial technology) is a line of business using software for the purpose of disrupting incumbent players such as banks. ASIC Chairman Greg Medcraft recently said “the time is ripe for digital disruption and ASIC wants to make it easier for fintechs to navigate the regulatory system”. Notwithstanding these encouraging developments it is still early days and small business owners would be wise to resist the lure of quick and easy money from fintechs until they really understand how they work.

The attraction of fintechs is the expectation of a “quick yes” via a streamlined online approval process. Fintechs usually offer business loans between $5k and $300k and terms generally range from 7 days to 12 months. They make funds available in a matter of days and sometimes even hours. Rates vary from around 9 per cent to 30 per cent and often well beyond. Most loans are made without property security. Fintechs are generally not suited for businesses that have requirements for long-term debt and if you have property security you will get a better rate elsewhere.

Some business owners will try a fintech if the bank either rejects them or can’t make a decision in the time frame required. Others will by-pass the bank based on a preconceived belief that the banks wont help them.

For better or worse most SMEs know what to expect when dealing with banks. They know the big banks have been around forever and have large and strong balance sheets but this new breed of lender is an entirely different species.

Unlike the banking sector where four well known players and their offshoots control around 90 per cent of the market there are already many fintechs in the SME space with new entrants constantly popping up as entrepreneurs see the opportunity to disrupt the big four oligopoly. As more players enter this field, it will be interesting to see how they go about developing and conveying a distinctive customer value proposition.

Australian owned fintechs currently operating in the SME space include Moula, Prospa, getcapital, and ucapital. The US online lender Ondeck is establishing a local operation in conjunction with MYOB and some well-known local investors. The barriers to entry are relatively low and the level of regulation is not as stringent as for banks. Issues such as funding, liquidity and fraud will no doubt come to the fore when the first fintech fails. Liquidity events could lead to unscrupulous fintechs embarking on a Ponzi scheme but we can safely assume that no fintech will be the beneficiary of a ‘too big to fail’ government bailout. If you borrow from a fintech that gets into difficulty how would you refinance a loan that a bank wouldn’t touch?

Borrowing from fintechs is expensive due to relatively high funding costs plus high default rates. Ondeck US’s operation has a default rate of 6 to 7 per cent and when an unsecured loan falls into default, the lender’s recovery prospects plummet.

Potential borrowers need to be mindful of all these issues. So how does a business decide if fintech borrowing is right for them and if so which is the most suitable lender? Here are three tips for SMEs to consider:

1. DO YOUR DUE DILIGENCE

Do your DD as you would if you were looking for any new major supplier or stakeholder. Some of your queries will be able to be satisfied via the lender’s website but if you’re not sure about anything, call them. Ask questions like:

•Who are your shareholders and management?

•What qualifications and experience do you have?

•How much capital have you committed?

•Can I speak to some existing clients?

•How reliable is your funding source?

2. BE SURE YOU UNDERSTAND AND CAN AFFORD TO PAY THE FEES

Ensure you understand all the fees and charges. For instance, fintechs often quote an interest rate based on the term of the transaction so a 3 per cent rate which might look fair to you could in fact be 3 per cent on a loan of 30 days which represents an annualised rate of interest of 36 per cent.

Once you understand all the costs, re-visit your forecasts to ensure you can still make an acceptable profit. No point in working just for your financier!

3. CONSIDER WHAT WILL HAPPEN IF THINGS GO WRONG.

You probably have a good idea of what happens if you cant meet your obligations to a bank. How would this work with a fintech? How open would they be to extending the term of your financing arrangements if for instance a debtor is slow to pay? What dispute resolution procedures do they have?

HOW ARE THE BANKS RESPONDING?

The banks recognise they are burdened with legacy cost structures that place them at a disadvantage relative to disruptors who have lower cost and more scalable systems. They are acutely aware of the threat and are monitoring developments closely. Fintechs are not yet taking market share from the banks but clearly the potential exists for serious inroads once this business model becomes established.

In time banks will respond by acquiring the better structured and performing fintechs. Another bank strategy will be to take equity in start up fintechs backed by big name players with deep pockets as Westpac has done with the online personal lender Society One.

It’s still early days but over time fintechs will become a significant alternative funding source for SMEs. In the meantime SMEs contemplating borrowing from a fintech would be well advised to first ensure they understand exactly what they are getting themselves into.

Neil Slonim is a banking advisor and commentator and founder of theBankDoctor.com.au , a not for profit online source of independent banking advice for SMEs.

Mirrored with permission of the author.