Navigating a Shifting Financial Landscape

By Wang Xinmin, Research Analyst, DBS Innovation

The financial services landscape is undergoing a shift in terms of the type of industry players involved, the way money is provided and used, and the role of finance in relation to the natural environment, which is increasingly being driven by changes in business models, technology, and environmental protection initiatives.

Traditional borders of financial services are blurring

Traditional distinctions between various forms of financial services are blurring, with non-banks embedding financial services within their businesses and with financial institutions plugging into other ecosystems.

Firms from other industries are entering the financial space. E-commerce firm Lazada has partnered with Citibank to launch a co-branded credit card, while Traveloka, Southeast Asia’s largest online travel startup, has issued a credit card linked to its booking services, in partnership with Bank Rakyat Indonesia Persero.

Big Tech has been expanding into financial services as well. They have done so, either by themselves (Facebook Pay, Uber Money), or in partnership with existing financial institutions. For example, Apple has partnered with Goldman Sachs to launch a new credit card.

Fintechs are also increasingly becoming more like banks and are inching into their territory. While fintechs initially offered specialised financial services targeting specific banking segments (payments, lending, etc.), they are increasingly expanding their offerings beyond their initial use cases. Indonesian e-wallet unicorn OVO plans to introduce investment products and more lending services on the OVO platform, while payment fintech Stripe has launched its lending service Stripe Capital.

Meanwhile, the banks have been embedding themselves into non-financial ecosystems. JP Morgan has developed an e-wallet that allows online marketplaces and gig economy players such as Amazon and Airbnb to offer their customers virtual bank accounts, while DBS has set up a travel marketplace that provides flight and hotel bookings with value-added free insurance.

These developments have resulted in a shift in who offers financial services, as well as where and how financial services are provided and consumed. Financial solutions are no longer offered as individual products, but are instead becoming increasingly integrated into consumers’ lives, providing seamless transaction experiences for consumers and enabling them to utilise financial services anytime, anywhere.

The era of digital banking and currencies

Regulators in Asia, including in Singapore, Hong Kong, Malaysia, and Taiwan, have either issued, or will issue, digital bank licences to introduce competition and innovation in the banking sector. In Singapore, the Monetary Authority of Singapore (MAS) has received 21 digital bank licence applications, with applicants from a range of industries including telcos, e-commerce firms, technology firms, and financial institutions. While these digital banks will likely look to use customer data to provide hyper-personalised solutions for customers and look after under-served SMEs, key challenges may include building customer trust and ensuring profitability over the long-term. Incumbents have in turn launched digital banks to expand into new markets, reach new customer segments, and compete against fintech startups. DBS launched its digibank in India and Indonesia to establish a foothold in those markets and has extensively developed the digibank app in Singapore to provide previously unseen services on mobile.

Digital currencies have also seen growing interest among tech firms, incumbent banks, and central banks. Facebook has launched its Libra cryptocurrency, while JP Morgan has launched the JP Morgan Coin. While digital currencies such as Facebook’s Libra, which aim to improve cross border remittance services for consumers, have met regulatory hurdles, they have spurred the exploration of digital currencies by central banks. A Bank of International Settlements (BIS) survey of 66 central banks in January 2020 found that 80% were researching digital currencies. The People’s Bank of China (PBOC) has designed a digital RMB, while Sweden’s Riksbank is testing an e-krona. However, while digital currencies have gained interest, the viability and value of such currencies remain to be seen, with the BIS noting the distinction between “reinventing money and improving its functioning in the financial system”.

Finance goes green

Central banks globally have recognised the implications of climate change risks for the financial sector, with the central banks of England and France cautioning about the potential damage to infrastructure, property, health and wealth of nations. In Singapore, the MAS has implemented a green finance action plan to strengthen green financing capabilities in Singapore, including launching a US$2 billion Green Investments Programme.

In capital markets, Environmental, Social and Governance (ESG) investment is going mainstream as global asset management firms are increasingly prioritising ESG investment, while global ratings firms are building their climate risk analysis capabilities.

BlackRock, the world’s largest asset management firm, has launched its first circular economy fund to drive investments into sustainable businesses, while ratings agencies Moody’s and S&P have acquired stakes in climate risk data providers Four Twenty Seven and RobecoSAM respectively. DBS offers sustainability-linked corporate loans that are based on ESG performance metrics of companies, and has also produced the 2018 Sustainability Report that highlights the bank’s initiatives as a contributing purpose-driven organisation for a sustainable future.

The shift towards the greening of finance is driven both by financial risk considerations and consumer demand. Financial institutions are factoring the risks of climate change into their financing decisions, while consumers are increasingly aware of the impact of their decisions on the environment and other social factors, and are expecting corporations to play their part by reflecting their concerns.

The entry of new players into the financial space, the arrival of digital banking, and the greening of finance together bring new opportunities and challenges for both incumbents and new players. Yet amid an ever-changing financial landscape, the purpose of finance remains constant — to serve the needs of consumers, businesses and society, while enabling people to improve their lives.