Goodbye banks. Hello fintech!
By Dr V. Sivapalan December 6, 2016
- Sector faces Kodak moment if it doesn’t do two things
- Peer to Peer lending to be biggest threat to banks in Malaysia
BANKS will cease to exist by 2025.
If anyone thinks otherwise then they truly don’t understand the power of technology to disrupt every industry in the world.
2016 is the year fintech became mainstream. Now we have fintech accelerators, hackatons, competitions, mentoring programs, etc. Banks are feeling the heat from fintech but do they really know how big a threat this is to their business. Many of them are getting involved in fintech but really, hosting hackatons and running accelerators are like trying to hold on to a raging bull elephant with raffia string. You can’t and none of these will help. You will be disrupted: resistance is futile.
Thanks to the internet and software, any business that can be digitised will be digitised. It’s already had a major impact on media and next in line are financial services. Banking is easily digitised. From lending to deposit taking to even online broking, no banking product is safe from digitisation. It’s not like medical services or agriculture where it’s more physical, treating a person and growing food for example. Banking, like media is all digital. Even investment advice and portfolio management is now being done by “robo advisors” using the internet and software algorithms.
So how badly can banks be affected? Maybank, Malaysia’s largest bank and a leading regional bank with operations in many ASEAN countries had revenue of US$4.7 billion (RM21 billion) in the financial year ending 31st Dec 2015. About 70% of their income was from lending operations (including Islamic banking). What if they lose half of their lending to fintech operators? Could this really happen and how would it impact Maybank if it did? Could it even cause Maybank to go bust?
The biggest and imminent threat to banks is peer to peer (P2P) lending. P2P providers essentially provide a platform to connect lenders (both individual and corporate) to borrowers (for business, personal or even mortgage loans). The concept is that a crowd of lenders will provide small sums of money each to lend to borrowers via the P2P platform. The pioneers of P2P in the UK are Zopa (started in 2005) and Prosper in the US (2006) and they have lent a cumulative sum of £1.4 billion and US$6 billion respectively. Zopa has 53,000 investors and 114,000 borrowers while Prosper has 2 million members (investors and borrowers).
The Business Model and Economics of P2P Lending study by the European Credit Research Institute shows that P2P now contributes 13% of loans to small enterprises (turnover of less than £1 million), 3% to personal loans and 3.6% to property loans. P2P business lending is growing at 200% p.a. while personal financing is growing at 100%. Compare that to conventional bank lending which grew at 2.6% (business) and 6.4% (personal). Clearly P2P lending is fast catching up with conventional banking and at this growth rate very soon banks are going to be impacted in a big way. Since business lending especially to SMEs is growing exponentially, banks that serve SMEs will be the first to be impacted.
The Wall Street Journal reported that there are more than 2,000 P2P operators in China and the amount of loans outstanding has been nothing short of explosive, growing from around 20 billion yuan in 2014 to a massive 621 billion yuan (US$90 billion) by mid 2016. As P2P has previously been unregulated in China there have been some problems although the majority of lending has been genuine.
In Malaysia, the Securities Commission has licensed 6 operators to provide P2P lending services and they expect to start operations by 2Q 2017. We already have Equity Crowd Funding (ECF) which has shown some success with companies raising anything between RM300,000 to RM3 million in equity funding on these platforms. I believe P2P will be an even bigger success in Malaysia. Within the next 3 years, expect P2P to be mainstream in Malaysia and Singapore and likely in some of the bigger ASEAN nations as well.
ECF and P2P are only the beginning of the wave. There are already disruptors in retail and institutional investments, remittances, payments and many more.
Digital currencies at the door
Then we have digital (or virtual) currencies like Bitcoin, which is gaining acceptance globally as a payment mode for online transactions. There are even Bitcoin debit cards and perhaps soon credit cards. As Bitcoin gains international acceptance, banks will lose money from international money transfers and credit card fees and interest.
That is not even the worst of the story for banks. The threat to a bank’s business has never been higher and it’s not just the small fintech companies they should be worried about. The biggest threat to banks are the giant technology companies like Facebook, Apple, Amazon, Google and Alibaba. Facebook is already licensed as a money service business in the US, Apple and Alibaba have Apple Pay and Alipay respectively and Amazon is already providing student loans via its Student Prime service albeit currently in partnership with Wells Fargo Bank. Alipay’s mobile transaction volume in 2015 exceeded US$500 billion.
All of these technology companies have huge amounts of data on their users and if they ever get into banking in a serious way they will be the ultimate threat to banks. Facebook could easily be a P2P operator with more than 1 billion users who are both potential investors and borrowers. They could also facilitate international money transfers and even incorporate virtual currencies for FB e-commerce transactions (FB$ anyone?). Alibaba already facilitates e-commerce transactions for its users and will likely do more as financial transactions could be a huge money spinner for them.
So banks today are facing their “Kodak Moment”. Kodak invented the digital camera in 1975. However, because they feared it would cannibalise their highly profitable camera film business they cold storaged the technology. But you cannot hold back the progress of technology and digital cameras came into mass production in the late 1990’s and by the 21st century with digital camera’s incorporated into mobile phones, film cameras and the film industry has been decimated and with it the Kodak company.
Similarly banks are facing their own Kodak Moment. If they don’t do anything they will be disrupted. But what can they do?
There are two things they have to do. First they have to become technology companies themselves and secondly they must be prepared to disrupt their own profitable business. This is called creative destruction where you sacrifice your existing business but build something that will be even better in future.
When I say become technology companies they must not just be adopters of technology or run hackatons but their entire way of operating must be fully technology oriented. They must also create the technology that is necessary to be a “Techbank” and if they cannot then they must acquire ventures with the technology and fully incorporate the technology into their operations and strategies.
Disrupting their own business is probably an even bigger challenge. But if they don’t then, like Kodak, it will be disrupted anyway and they will cease to exist.
And they have to do this before the tech giants get into banking in a big way. When that happens then it’s game over and it will truly be goodbye banks.
(Dr. Siva is President of the Malaysian Business Angel Network (MBAN) and Chief Evangelist of Proficeo Consultants a company specialising in coaching & mentoring Entrepreneurs. He is also the author of “Blue Sky Innovation” a book on business innovations that is available on Amazon’s Kindle store).