Asian Banker Summit in Beijing — May 2018 recap
This post has been long time coming — a promise not just to the gracious hosts at the Asian Banker that’ve organised a tier-1 spectacle of traditional and alternative FS innovation in Beijing. Only recently a number of reports in the traditional media noted on the prowess that Chinese major players in online transactions have achieved: and why this matters to the next wave of substantial financial services being offered to the world that lives by nano-second.
The role of Asian Banker as an market intelligence platform in these times cannot be more important: it is a first-line witness of transformation of how people perceive financial services in a new world of instant mobile communication, how this is supported by alternative transaction and intermediation mechanisms — and how the classic world of banking can evolve and adapt in a new environment. Where originally it has been assumed that banks would penetrate to the most distant areas of the world and educate the “financially illiterate” on how to use cheque-books and log-in to online banking with tokens or deposit money through ATMs, people in leapfrog environment do neither of these things: they bank with apps.
In a great book by Lisa Sevron called the “Unbanking of America” banks believe those people who are unbanked are illiterate. In reality, they are literate in a completely different way: they communicate in different parlance and interact using alternative mechanisms: shunning away overdraft fees and other notions of account-based world that does not talk back. Fintechs come into this realm and innovate by analogy: building on top of routines that new generations already have adopted.
XYZ generations assume behaviour proposed by the invisible infrastructure of online communication and more interfaces actually tap into them and mimic their inputs and outputs: Visa and MasterCard are pushing a single QR based format and invest more in tokenisation to allow a number of ways you can originate a transaction irrespective whether you are a bank or a fintech: as people in SE Asia don’t see that many retail banks — the concepts of tokens that came with banks are not embedded in their behavioural psyche — but other tokens are — and they trigger more natural responses in the world of likes, shares and instant cues of the web.
How would one comprehend that Alipay and Tencent today process more than Visa and MasterCard combined, with Alipay in 2017 having 2.5 times as many users as PayPal and more than 11 times as many as Apple Pay. Today Alipay has 622 million users and handle more than half of the country’s 15,5 trillion worth of payments. It basically supports the ecommerce drive of the world’s leading B2C manufacturer — and the one that makes global waves. Banks response should be proactive: where originally trade finance deals took up to 11–13 days, the surge of e-commerce and building of logistics hubs to cover global delivery spread the meagre and 20th century processes way too thin — and create a humongous backlog banks would only be able to narrow through tech.
They should not try and win by reinventing the wheel that’s well oiled: but propose spokes that would help the wheel to become all-terrain one. One is regulation as the mastery and the accumulated skillset is probably the single most important differentiating factor for incumbents vs. challengers. Yet it can be bought as the cost of access to the financial market went down substantially after the Great Recession: the liquidity glut changed the risk / reward equation of big groups now providing amble liquidity into new tech-driven FS providers. The world of B2B fintech is upon us too: touching the subjects of trillion dollar markets that have been for long out of touch because of how complex they are in terms of regulation and how old the technology underpinning them is.Now we have Goldman Sachs and other conglomerates creating multi-billion funds to rebuild the full-stack of banking, not just scratch the surface — multiples truly come when you combine the relationship (payments) with the product (asset finance) to utilise the liquidity.
The bridging of the divide of the classical and the frontier worlds is what was manifested in the Agenda of the Future of Finance Summit: talking about the hard bits of innovation, the occasional success and the need for greater collaboration between banks, fintechs and also regulators. New behaviour cannot be captured by the requirements framework of classic paper-based and physical-realm interaction: they are sometimes more nuanced and more fast-paced.
On the fintech side, again, much has been said about the power of the internet platform and the aptitude of Tencent and Alipay to contextualise finance through the drive of commerce and communication. This further proves the point that financial transaction is an auxiliary act to the already formed and trusted relationship. It also is powered by the low-cost and immense-scale of the internet platform. Not necessarily the power born in a semi-competitive market can win the first prise on the global stage: for example, AI models developed inside Mainland China suffer from various mistakes due to embedded misconceptions about generalised behaviour — and image recognition suffer due to Caucasian and other face-prints being recognised incorrectly: but, awashed with liquidity, Chinese fintech champions turn themselves into well-equipped M&A players. Fintech M&A game is only starting: funds expecting t-bonds inflection point pushes down the horizon and push fintechs to scale efficiently — or merge (we are already witnessing this in the world of payments processing in the EU and US).
What one could also pick-up from the event is how advanced is the payment game not in terms of utility of payment services offered (be that a in-app mobile or QR mobile payment), but how granular is the data captured and how it is analysed: the number of payments allow platforms to run credit checks, offer overdrafts in matter of seconds — and run B2B invoice discounting and trade finance services that give them much better margins: that is increasingly the case for major payment systems to seek value from elements that enable payment (either the stock of goods of a vendor or the reputation / identity component of a consumer).
The big question is what can be borrowed from rulebooks of payment and general fintech champions: some of their characteristics are made possible because of monopolistic tendencies and tight regulation control, lack of end-user privacy provisions on par with EU and US. The formed incongruity of drive toward opened data of European PSD2 and privacy mandated by GPDR makes it hard to emulate the platform effect that’s available in Chinese society: one should still watch and learn from the massive experiment.
Lessons
- Fintech in China will be put to a test on a global scale due to different competition, but will be a driving force in other leapfrog countries: China is effectively employing its stance as aspiring superpower with capital, military strength and soft power components of cheap goods and service infrastructure
- Banks in China provide a hint at how to cooperate with fintechs: more focus goes towards identity and AML / KYC and B2B fintech to enable B2C flexibility enabled by tencents and alipays. Banks need to see where the puck is going to be: trade finance, invoice discounting are especially of major importance as China goes abroad.
- Emerging regions are learning of Chinese consumer experiments and international development agencies like IFC are promoting regional financial literacy programs based on how people in China accept alternative financial services.
Books
I could not travel without property introducing myself to the world that remains still an enigma, less so with several good books about the transformation of China as seek through the eyes of Hank Paulson, the might of the Shenzhen hub and the Silk Road initiative (and why is it important).
