The banking industry is being disrupted by innovative fintech startups who are digitally driven, customer-centric and leveraging the cloud. With billions of dollars poured into fintech startups, traditional banks are realizing that they need to ramp up their innovation in technology in order to survive.
To discuss these and related issues, the Hong Kong Economic Journal met up with JP Nicols, managing director of FinTech Forge, an entity that helps bring bank and fintech firms together to promote innovation in the industry.
Excerpts from an interview conducted last month when Nicols visited Hong Kong to attend the 11th Asian Financial Forum:
HKEJ: From microloan lending to invoice financing, fintech innovators all over the world have been competing with traditional banks in recent years. Amid this situation, what has been the attitude of the traditional banks toward innovation?
A: Five years ago, when I was speaking at a conference like this, I was met with skepticism from the banking executives. Two or three years ago, the reaction from the banks was: “We need to stop these fintechs, we need the regulators to put more restrictions [on the firms] to protect us.”
In contrast, what I was hearing more from the bankers last year was the need to collaborate and partner. They know they need to do that, but most of them don’t know how to do it well.
We need to understand that banks and fintechs don’t speak the same language. For the people working in banks, getting promoted in banks, they are used to asking lots of risk management questions on what happens when this goes wrong, thinking upon layers over layers of risk management.
As they are rewarded for preventing things from going wrong, not for taking risks that can transform and grow into something new, innovation suffers. In contrast, what’s successful in fintech is taking risks. So it is just fundamentally different.
Q: You previously mentioned that many US entities are falling behind in banking innovation. Could you elaborate more on that?
A: What happens in some of the US banks is that the CEO delegates the issues related to technology innovation to his/her CTO (chief technology officer) or CIO (chief information officer).
But there are indeed some exceptions in America, like CapitalOne; they do really amazing things. If you look at JP Morgan, Bank of America, you may not think the things they are doing are groundbreaking, but they are unbelievably successful in terms of the digital consumers that they have seized; they are growing their market share.
In Asia, you can look at DBS, I think it’s been amazing. China’s ICBC is a little bit like Citibank in the US. They are not very innovative, but they are deploying digital tools at customers’ wants and needs, and they have got a very good market share.
I think the most innovative solutions come from where there is no status quo to protect, for example, Poland’s mBank. In contrast, one may encounter bigger challenges in countries which are more developed, as people there may have a status quo to protect.
As for Mainland China, it is not a developed market, it has nothing to protect, and people really are willing to build something completely new to solve the needs of consumers.
China is a somewhat unique story; the customers there bypassed the normal progression: from money, bank accounts, to credit cards, they went right away to mobile banking, mobile wallet, e-commerce. That is unique in a country with that much population.
Q: It is said that big banks in China are losing ground to fintech giants such as Alibaba’s Ant Financial and Tencent’s WeChat Pay in the country. What are your thoughts on the competition between Chinese banks and domestic fintech firms?
A: I think partnering [with tech companies] is the future of China’s banking industry. I do hear banks say ‘well, yes we do partner’, but I’d say “just because you have some technology vendors doesn’t mean you are partnering.”
And if you partner with somebody like Jack Ma [Alibaba chairman], you better accept somebody will do something really new. Look at PingAn and Lufax, there are many very interesting examples of partnership in Asia. The banks need to really rethink their role in the partnership.
But I must say that I am not good at predicting the China market. The leadership in China is kind of changing goals sometimes on what they want, and I think a lot of things depend on what Beijing wants. If [Beijing] wants the banks to take up a larger role, then they will, but so far the technology giants have had a very free lane.
And I know the leaders of Chinese tech giants do not see themselves just as giants in China, but want to be global leaders. We just saw the US had rejected Ant Financial’s proposal to acquire MoneyGram, and Beijing is understandably disappointed at that decision. But I think we are going to see [how it goes] in the future, how things evolve.
Beyond the massive Chinese market, what is Beijing thinking about its role in the global finance industry — this is something we should keep an eye on.
Q: How do you see banking innovation in Hong Kong?
A: Hong Kong, with its long ties to the West, has a very well-developed banking culture with traditional banks. I believe HSBC is trying [to raise its innovation capabilities], but they are still too tied to their legacy infrastructure.
However, things have begun to change. I know they’ve been spending a lot of money on mobile banking offerings over the last couple of years. But from my observance from afar, I don’t think they have invested at the same rate like what, for instance, ICBC had done. I think they need to be able to challenge their own business model more.
This is the first of a two-part series on a conversation with JP Nicols.
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