The rise of fintech companies (fintechs) and the regulatory push towards open banking over the last few years certainly proved a challenge to existing business models.
The volume of fintechs entering the financial services industry has been remarkable. Data from Accenture shows that 78 per cent of new entrants since 2005 have been fintechs and payment institutions.1
BigTech, big advantage
But now there is a new, possibly more serious threat. The rise of BigTech - companies like Amazon, Alibaba and Uber that use platform technology to deliver services - is forcing banks and their corporate clients to rethink their approach for everything from customer servicing to supply chain management.
Indeed, a report this year by the Financial Stability Board posited that BigTech may be a greater competitive threat to banks than fintech, given that these companies “typically have large, established customer networks and enjoy name recognition and trust.”2
It’s easy to understand why BigTech has been so successful at winning customers and vendors. BigTech has created ecosystems that effectively match buyers and sellers – a one-stop shop for products and services, while offering users a personalised experience and online access to services at any time, from any place.
In financial services, BigTech has already made a significant impact in a short period of time. This is in large part down to BigTech’s ability to harness data it has accumulated to revolutionise lending models – and lend on a huge scale. For example, Amazon lent USD1 billion to small and medium-sized enterprises (SMEs) in 2017, 3 while Ant Financial’s MYbank had RMB31.6 billion (USD5 billion) in outstanding loans at the end of 2017, primarily to SMEs.4 This is in contrast to banks, which struggle to make the most of the data they own, argued Martijn De Jong, Co–Head, CCIB Digital Channels and Data Analytics at Standard Chartered.
“The datasets banks have access to are phenomenal, however they are not able to extract the same value that a company like Amazon does from an e-commerce set. This is despite, you could argue, that bank datasets are superior because they would include details of those Amazon payments,” he explained.
Many banks are responding to the competition from BigTechs (and fintechs) by learning from and co-creating with them to strengthen their client propositions. They are also investing heavily to support new partnerships, acquisitions, and the development of in-house solutions. Upholding this, a recent Bloomberg report that ranked banks by technology spending so far in 2019 showed the top five had invested a combined USD44 billion.5
Corporates have also been responding to the ‘uberisation’ of commerce following BigTech’s move from online consumer models further into the B2B arena. As well as re-engineering their physical and financial supply chains, corporates are now also rethinking their relationships with transaction banks.
For example, as manufacturers try to replicate BigTech’s speed, they are considering decentralised production. Having multiple yet smaller assembly locations puts companies closer to the end-consumer. It also creates a more conducive environment to react to changing local demand and offer more customisation.
“The success of BigTech is that it has been able to connect digitisation to people’s daily lives. Whether it’s driving a car, buying goods or using banking services, companies that can make people’s lives easier will win the battle for customers,” said Alan Lin, Global Head of Cash, Transaction Banking at Standard Chartered.
Banks were initially on the backfoot when it came to digitalisation. That delay has come at a cost: 77 per cent of respondents to a 2018 global survey of retail banking executives agreed that by 2020, the majority of payments will flow outside traditional banking networks.6 But over the last few years, banks have started to catch up, and are increasingly leading innovation and co-creation in the digitalisation space.
For example, Standard Chartered is harnessing platform technology to deliver new client solutions. In March 2019, the Bank announced it will launch an open platform for SMEs in India, providing access to a range of solutions including business loans and invoice/supply chain financing. Launched under SC Ventures, Standard Chartered’s innovation, investment and ventures unit, the platform will provide a data-driven ‘digital only’ experience, supported by artificial intelligence and machine learning. 7
Despite the lag, banks still enjoy several inherent advantages over technology companies. One is the ‘economic moat’ of being regulated financial institutions. This means that financial services offered by technology companies still rely on banks to carry out traditional transactional roles.
But this natural advantage may not last. And importantly, it doesn’t protect banks from the biggest threat to their business model – losing client primacy. After all, while it’s true that the flow of money still needs to pass through the traditional system, fintechs and BigTech firms are increasingly providing the interface that clients engage with.
“As a bank our focus is on the convenience we deliver to our clients, and using data to provide that convenience by delivering differentiated solutions,” acknowledged De Jong.
The area where banks have arguably faced the biggest competition in maintaining this primacy is in payments – a fact borne out by the huge proliferation in payment options and providers in the past few years.
Treasurers have shown they are willing to switch away from banks for payment services. According to a 2019 survey of treasurers in Europe, the Middle East and Africa, only 24 per cent now exclusively use their bank for payments. And crucially, 70 per cent said they believe a shift from bank to non-bank services will take place over the next five years.8
One clear example of the criticality of the payments battleground is Facebook’s recently-announced Project Libra. When launched, it will introduce a digital currency - not backed by any single institution, regulator or government - that could be used by its almost three billion users to buy goods and services from merchants directly on the social media platform.9
The API pivot
The risk that this competition poses to banks is disintermediation - or even irrelevance. To remain an entrenched part of the financial services industry, banks need to provide connectivity between technology platforms and corporate treasurers, said De Jong.
“We want to be the bank that technology companies go to first to do business with. What does this mean? It means we need to have an attractive proposition, but we also need to be the easiest to deal with in terms of governance, in terms of commercial, in terms of legal. We need to offer a frictionless experience,” he explained.
Core to this approach are application programming interfaces (APIs) and open banking, which banks are harnessing to build platforms that match buyers and sellers of financial services. By June 2019, Standard Chartered had created more than 100 APIs. As one example, the Bank is working with an airline in Malaysia to improve transactions with ticketing agents. By using APIs and virtual accounts, the Bank helped the airline achieve greater efficiency by eliminating manual processes and improving reconciliation (from two days to almost-real time). Standard Chartered is also one of the pioneers offering corporates faster payments via API in Singapore and in India.
Open banking also provides a platform for banks to co-create solutions with technology providers. Standard Chartered’s collaborative approach was central to its work with Ant Financial. The two worked together to develop a blockchain cross-border remittance solution for fast and simple transfers from Hong Kong to the Philippines.10
“When open banking was first introduced, there was a concern that bank fees would decline, and that banks’ competitive advantage would decline. The reality is that open banking has enabled banks to become a more creative partner and deliver more creative solutions,” said Lisa Robins, Global Head of Transaction Banking at Standard Chartered.
Time to transform
This emerging competitive landscape is driving a convergence of expectations between retail and wholesale client segments. Specifically, corporate clients want more convenience and more autonomy — preferences that Standard Chartered is already incorporating, among others, into the solutions it designs, explained Robins.
BigTech has already captured the hearts and minds of consumers, is gaining ground among corporates, and is threatening banks. But while BigTech can be disruptive, it can also be an enabler - if banks collaborate with technology companies to deliver superior solutions. Far from becoming obsolete, banks can enhance their role in financial services if they are able to transform.
“Instead of supporting only certain parts of a value chain, banks will become the connector that brings together various players within a client’s ecosystem,” concluded Robins.
1 opens in a new windowhttps://www.accenture.com/_acnmedia/pdf-85/accenture-banking-beyond-north-star-gazing.pdf#zoom=50
2 opens in a new windowhttps://www.fsb.org/wp-content/uploads/P140219.pdf
4 opens in a new windowhttps://www.bis.org/publ/work779.pdf
6 https://perspectives.eiu.com/sites/default/files/Global per cent20Retail per cent20Banking per cent20 per cent282 per cent29.pdf
8 Finastra, Payments report: Digital disruption comes to the corporate treasury, July 2019