Banks and FIs should rethink new strategies and adapt innovations to improve their businesses

Financial technology (FinTech) is pressuring banks and financial institutions (FIs) in the Southeast Asian region to rethink on how to improve their business strategies in particular to enhance interaction with their customers.

The FinTech Association of Malaysia (FOAM)’s Chairman David Fong said one of the significant changes that will be seen is the reduction of branch banking as customers particularly the millennials shift to digital banking.

In fact, he said traditional FIs are finding it hard to attract this group of young people because FinTech has cheaper and efficient alternative ways to perform financial transactions and access financial services like remittances, wealth management and borrowing.

"Today, many financial transactions can be done from the comfort and convenience of one’s home, computer or smartphone compared to having to go to the branch. Technology has enabled a whole new banking experience for customers," he told The ASEAN Post.

Solutions offered by FinTech companies are premised on enhancing user experience through technology and innovation.

If FIs want to remain competitive, this will be an area where they have to invest in and compete, instead of just the size or brand alone.

According to a recent survey by PricewaterhouseCoopers (PwC), 82% of the Malaysian FIs interviewed were concerned about the impact of FinTech on their businesses while 22% felt they could lose more than 20% of their revenues.

"Last year, Bank Negara Malaysia warned that 10-40% of banking revenues could be at risk by 2025 due to FinTech innovation. This concern is not limited to Malaysia. In China, Accenture estimates competition from the likes of PayPal and Alipay, that could reduce traditional banking revenues by a third by 2020," he said.

"While there will be different views on how much of banking revenue will be impacted and when, I think FIs would be remiss not to take the threat of FinTech seriously," he added.

Malaysia has a small but growing FinTech community that is quite vibrant. Malaysia's share of FinTech transaction is currently still small, at US$7.207 million this year.

A few have managed to attract funding from regional venture capitalists and there are several payment companies that have expanded into the region such as Softspace, ipay88 and GHL Systems.

"We have had some success stories and the notable one is Grab, which has raised US$750 million at a valuation of US$3 billion at the end of 2016," he said.

CNBC reports that Grab is expected to raise about US$2.5 billion in fresh funds from China’s Didi Chuxing, Japan’s Softbank Group and others to bolster dominance in the region and grow its fledgling mobile payments business.

FinTech companies are small and nimble and operate with minimal costs while large FIs are burdened with legacy costs like branches, staffing, and information technology (IT) systems.

"In the past, we have seen a trend of bank mergers, perhaps with the belief that size is the way to compete. However, many FinTech players like Alipay and Tencent have become more successful than many banks in China without having the size or branch networks of traditional banks," said Fong.

"Regulation or regulatory uncertainty is a key challenge facing FinTech startups globally. How much is too much and how little is too little regulation? There is a constant challenge for regulators to find a balance between risks like protecting consumers and innovation. In many cases, regulators are also trying to understand technology that will impact the banking system," he further added.

The government needs to ensure that regulation of FinTech is done in such a way that it does not only promote innovation but also on managing related risks. Another important thrust is to continue to reform the financial sector to facilitate the emergence of FinTech solutions.

For example, the push for Malaysia to become a more cashless society is something that is already in progress through BNM's Financial Sector Blueprint 2011-2020 and the Payment Card Reform Framework launched in 2015.

Bank Negara Malaysia had recently introduced a FinTech regulatory sandbox, which allows FinTech platforms to experiment with their solutions in a controlled environment, subject to appropriate safeguarding mechanism and regulatory requirements.

HSBC Bank Malaysia’s CEO Mukhtar Hussain said FinTech is an opportunity, and not a threat to the Malaysian banking industry.

"FinTech complements rather than threatens banking institutions. Banking has always been about technology, so today's financial-technology innovation boom represents evolution rather than revolution for traditional banking. It is supplementing and diversifying the existing financial system, not replacing or disrupting it," he said.

"Big banks and FinTech startups have a great deal to offer each other. Banks have a large customer base, stable infrastructure, assets and regulatory know-how. Startups provide out-of-the-box thinking, technical expertise and agility to adapt quickly to chance," he added.

Hussain said FinTech will have a key role to play in spurring this growth that ASEAN financial institutions must embrace the FinTech wave or risk losing competitive edge.

"If we look closely, FinTech is currently only focusing on a mere fraction of the financial-services spectrum. To date, the focus of FinTech has been on retail banking services, lending and financing along with payment-related products and services, where mobile and e-commerce has led to real demand from consumers," he said.

Similarly, he said peer-to-peer lenders appears to be more focused on small businesses and higher credit risk borrowers than on mainstream banked clients.