This is part of a series of articles marking Asia Risk’s 25th anniversary

When China blocked the $34 billion initial public offering of tech giant Ant Group, which would have been the world’s largest ever IPO, it shone a bright light on a couple of home truths. First, on just how far Asian fintechs have come in a mere decade. And second, that the ascendent might of the fintechs and the mores of traditional finance make very uneasy bedfellows.

The IPO was blocked less than a month after Jack Ma, outspoken founder of Ant’s parent company Alibaba, strongly criticised bank regulation and traditional finance – both heavily monitored by the Chinese government – for trying to regulate tomorrow’s finance with yesterday’s solutions. Ma also slammed the Basel Committee for being “like an old persons’ club,” trying to “solve the problem of an aging financial system that has been operating for decades”.

The implication was clear. The old guard is just that. The world has moved on and fintechs – like the one he founded – are the future of finance.

But what’s old is new again – as the old song goes – and the new paradigm for consumer finance that companies like Ma’s have swept in, carries with it many of the same underlying considerations.

“It was a great business model, but the regulator was not going to have it at the scale that Ant was implementing it. The systemic risk was too high,” says Aaron Hallmark, chief executive officer of Singapore-based trade-reporting systems provider Catena Technologies, pointing out the flaw in this particular diamond.

“They were able to leverage consumer data and advanced analytics from their payments platform to provide consumer credit scoring, offer consumer loans, and sell those loans off to actual banks – who would bear the true credit risk,” he adds.

And of course, Ma’s critics were not sorry to see Ant’s ambitions ‘tamed’.

But while Ant may be the largest of Asia’s fintech disruptors, it certainly isn’t the only one making waves for traditional finance. Nearly half of the 100 firms on a list of top fintech innovators,  published at the start of the year by H2 Ventures and KPMG, are in Asia.

The top six positions are all Asia-based companies. Ant leads the field, followed by Singapore’s Grab, a mobile technology and ride-hailing company; then by digital services provider, China’s JD Digits; Indonesia’s Go Jek, a motorbike ride-hailing company; and India’s Paytm, a digital payments company. Almost all have a finance business of some description.

Some believe that, when it comes to technological innovation, Asia may have an advantage over more established – less versatile – markets.

It was a great business model, but the regulator was not going to have it at the scale that Ant was implementing it. The systemic risk was too high

Aaron Hallmark, Catena Technologies

“Many countries in the region, for instance China and India, encourage innovation,” says Wee Wei Min, global head of sales and structuring at Singapore-based OCBC Bank. “It is also home to the largest millennial population, who are probably the most willing to try new technology to meet their financial needs.”

One key question for the fintechs and the traditional banks alike is who gets to shape this brave new financial world. Alibaba’s Ma clearly thinks that, given the innovative power of the continent’s fintech companies, they – not the banks – should get to rule the region’s financial roost.

Regulators and old-world bankers need to figure out how best to respond to this changing market infrastructure.

Data with destiny

The online technology giants have clearly demonstrated the immense value that harvesting data – and knowing how to use that data – can have on consumer businesses. And Ant has shown how to translate this to the realm of finance. Five years ago, the tech giant – then known as Ant Financial – was reported to be valued at $45 billion. In November 2020, the failed IPO bid valued the group at $313 billion.

This staggering rise in valuation was made possible by one thing: customer data.

Over the years the firm has used its successful online payments platform Alipay to build up a large database of customers who are prime targets for its financial services.

This backstage pass into customer information has allowed Ant to slide inconspicuously into the lending and brokerage business.

It has also helped the fintech to develop one of the world’s largest money market funds. Ant’s internet investment fund, Yu’E Bao, meaning ‘leftover treasure’, is funded with money Ma found down the back of the proverbial sofa – with unspent cash from Alipay accounts.

“Such rising competitive intensity makes financial services more complete for customers and also leads to new ecosystems and partnerships,” says OCBC’s Wee, alluding to the potential for new types of collaboration between the new and the traditional.

But striking up meaningful partnerships with the very largest technology firms can be difficult. Both sides often want the same thing – which is to own the customers and their data.

And this is where banks must make the distinction, says John Lee, Singapore chief executive for Maybank, between smaller fintech companies, which help develop innovative solutions to problems the financial industry faces, and big-tech giants that want to leverage their general marketplace dominance to sell financial products.

“For us banks, our strongest point is our customers, says Lee. “Given that [we each] have a competing objective, it is often challenging to work together. We can collaborate on some very specific things, but if we have to have some agreement on who owns the customer, then that is where things can fall down.”

Piyush Gupta, chief executive officer of DBS, agrees. He says working with big tech is not impossible, but it does “need very careful crafting and requires a lot of thinking through the value exchange”.

He says that this is very different from partnering with smaller fintech companies, where the bank owns the customer relationship and the fintech helps create a capability or service.

One example of where Gupta says collaboration with big tech has worked well is the integration of Google Pay services into DBS’s own payment app PayLah!, which occurred last year. In this case, neither firm was competing for the other’s customer relationships.

The way banks have been responding is to look at how they can use technology to anticipate customer needs, especially within consumer banking and wealth management.

United Overseas Bank, for example, has developed a predictive analytics engine driven by artificial intelligence and machine learning that it has incorporated into its mobile banking app.

This “turns customer information into meaningful insights and provides guidance on the most suitable financial solution for each of our customers,” says Frankie Phua, head of group risk management at UOB in Singapore, adding that customer feedback is used to refine the engine and provide new and personalised insights.

“Data has enormous value, especially in understanding your client base,” says Peter Burgess, former head of XVA central desk at Commonwealth Bank of Australia. “Improving your customers’ experience or understanding their behavioural requirements is crucial to retaining and adding value, especially given the low barriers to entry for disruptors,” he says.

While this approach is proving effective with consumer banking and wealth management however, it is yet to make much of a splash in the investment banking world, says Catena’s Hallmark.

Behaviourally, humans are relatively homogeneous compared with financial institutions in the way they function, he adds: a global bank is different from an asset manager, a regional bank from a hedge fund and an asset manager from a broker-dealer.

Which makes aggregating data across institutions and identifying trends, patterns, or other useful information a complex problem that requires a more refined, consultative approach with more customisation, Hallmark adds.

Self-disruption

The threat from big tech means that Asia’s traditional financial institutions have had to look at how they can innovate to keep pace with change. Many see opportunities to be had in distributed ledger technology (DLT), such as blockchain. Traditional financial firms have made some strides along these lines in the past couple of years – and might even be ahead of technology companies when it comes to putting it to practical use.

Such technology is of particular interest in Asia, where multiple currencies and regulatory regimes often make seamless market connectivity difficult.

DLT has the potential to streamline the region’s markets by eliminating the need for all participants in a trade to duplicate trade information, says Guy Otayek, Asia-Pacific chief executive for technology vendor Murex. “Instead, there would be a single version of the data, which would relieve the need for reconciliation and reduce disputes and fraud,” he says.

Singapore bank DBS, for example, is exploring how blockchain could be used to bring liquidity to South-east Asia’s fragmented bond market, by allowing tokenised versions of bonds to be bought and sold. In December, the bank announced it would shortly be launching a digital exchange based on DLT.  

Others are getting in on the act. SGX made its first digital bond issuance in September 2020 – for S$400 million (US$297.3 million) at 5.5 years – in collaboration with HSBC and Singaporean investment company Temasek.

Australian Securities Exchange is also bullish on DLT and is currently replacing its Chess post-trade system with it. The new system should have been ready by April 2021, but Covid-19 has delayed it by a year.

Trade finance could also be ripe for this kind of technology, where it could ease the problem of a lack of trust between counterparties. China and Hong Kong, for example, each has its own DLT trade system. Last year the two signed an agreement to link their systems in the hope of bringing greater certainty and standardisation.

And trade finance is particularly important in Asia, where the number of trades is growing rapidly. Banks – the primary force behind trade finance – have been trying to digitise the paper-based documents and automate the process to reduce errors and risks of fraud.

These are the kinds of technologies that will shape the banks of the future. Regulatory caution may have slowed the advance of big-tech disruptors – for now – but the traditional banking sector will need to continue to harness data and invest in new ideas if it is to survive the incursion.

The reason that you have a banking licence is that you can publicly take money from people and offer them interest on that money. That is the area we need to protect

John Lee, Maybank

“Today the payment gateway is open for everyone. You have Alipay, Apple Pay and others,” says Maybank’s Lee. Similarly, giving credit can be done by anyone that has money, he adds and points out that the only function that is actually regulated is deposit-taking.

“The reason that you have a banking licence is that you can publicly take money from people and offer them interest on that money. That is the area we need to protect,” he says.

A recent report by the Financial Stability Board on global trends in non-bank financial intermediation says that because of their reliance on new digital processes, allowing near-instant credit risk assessment and personalised offerings. operational risk is a concern for fintechs. Leverage and credit risk transfer were also mentioned as potential financial stability risks the fintechs could pose, the FSB found.

Lee, for one, remains convinced that, despite all the rhetoric by the likes of Ma and other fintech disruptors, the rise of big tech is unlikely to threaten the core business of banking.

“Some might say we are responding to disruption, but I would like to think this is a natural progression. Even if these guys weren’t here, we would be responding to the needs in the market. It’s more that the pace of change has increased,” he says.

Editing by Louise Marshall