Victor Alexiev remembers the moment the debate about the future of financial services switched track and banks started to wrest control of the discussion away from Silicon Valley, Shenzhen and Seattle.
“By 2015, the startup community had become somewhat of an industry and it viewed its methods like a religion. This was trickling into the financial industry. People would talk about incorporating ‘lean’ or ‘agile’ thinking into bank’s innovation processes, without understanding what it really meant.”
Fintechs, he felt, might have come to dominate the digital consumer banking debate, “but they had challenges scaling to wholesale banking. Over the next five years a number of banks… started talking about self-disruption.”
Slowly, traditional lenders stemmed the drift and rediscovered their sense of purpose.
In a former life, Alexiev, a Bulgarian national living in Singapore, was a serial entrepreneur, founder of technology firm Hacker.Works and a digital consultancy called Innovator. But in February 2018 Citi called and asked him to head up the Asia arm of D10X, its internal incubator. The US bank wanted to invent, pursue and integrate so-called ‘moonshot’ digital ideas that actually worked. Alexiev signed up.
This in itself is important. In recent years, lenders such as Citi – and Singapore’s DBS and Spain’s BBVA – have started to reassert control of the debate about digital disruption in banking.
“They got their mojo back,” says Alexiev. “They worked out how to absorb and co-opt the best talent, and how to manage the disruption they were facing, mitigate it and lobby to dictate the speed and nature of change.”
Alexiev is a prime example of poacher turning gamekeeper.
“I didn’t expect to end up in banking,” he admits. “But I’ve had a positive experience in Citi. Banks finally got around to asking themselves how startups could successfully launch a product at a fraction of the cost and time, and scale it rapidly to compete for market share. Their response was to hire the right staff – entrepreneurs, engineers and digital agency folks – incubate and innovate and start internally disrupting.”
Banks don’t have all the answers. At every level of scale and geography, you still find over-staffed institutions only dimly aware of the dangers of disruption. Even big lenders, warns Standard Chartered’s Singapore chief executive, Patrick Lee, face a permanent threat of disruption by one another, big tech and new tech.
Banks “are all operating off legacy platforms that are like mazes, like a bundle of things interacting with each other,” he says. “Disruption will come on the wholesale side when new financial providers come in with new technology stacks, new banking stacks, built from scratch.
“So, we have to invest. It’s very expensive, but we have to upgrade our existing technology.”
That’s what everyone is doing in a desperate race to stay ahead of peers and abreast of the rapidly changing needs of customers.
This reflects the relentless intrusion of digital into every aspect of banking. If the 2010s were all about retail and the emergence of fintech, neobanks and challenger banks, this decade will be a whirlwind of change impacting everything a financial institution does.
Singapore is a geographic and regulatory focal point of this change.
Lee says the city is the bank’s “global centre for technology and innovation”, a place where “strategy, thought leadership and ideas are [all] incubated”.
Last summer, the Monetary Authority of Singapore (MAS) announced plans to issue five new virtual banking licences by June 2020. Two are full-service digital licences; the other three will allow successful bidders to set up new digital wholesale banks to serve local companies.
Why MAS chose this approach is unclear. One informed Singapore banker says it was “stung by the Hong Kong Monetary Authority (HKMA) getting a jump on it.”
The HKMA disbursed its first batch of virtual licences in March 2019.
“They wanted to do something different and attention-grabbing, thus its move on wholesale.”
Because this is Singapore, the financial regulator has been careful to moderate the impact and speed of change.
“This approach is a balanced one that will drive some innovation and competition, but not so much that it sends the industry into hyper-competition,” says Dennis Khoo, regional head at TMRW Digital Group, Singapore lender UOB’s first fully digital bank.
The trio of winning wholesale providers will at first be encouraged to serve small and medium-sized enterprises.
SMEs make up 99% of local companies and account for 72% of all jobs. But many, particularly in technology and the creative industries, are ignored entirely by traditional lenders.
One banker describes the city state as a “sophisticated financial market with pockets of the underserved”.
What wider impact will the successful licensees have, each of which has stumped up S$100 million ($71 million) in paid-up capital? Probably very little at first. The winners won’t be announced until June 2020. They will then carefully roll out new services and products under the watchful eye of the regulator.
If the MAS likes what it sees, it will expand a licence-holder’s ambit. Over time, says Eugene Tarzimanov, Asia senior credit officer at Moody’s financial institutions group, the new providers will aim to start “hooking up SMEs to innovative products – cash management budgeting, supplier financing. If you create a one-stop-shop for an SME and you are good and reliable, they are never going to leave you.”
Any immediate pain is likely to be incurred by smaller foreign-owned banks with “modest domestic franchises”, says Tarzimanov.
He tips Malaysia’s Maybank and Industrial and Commercial Bank of China (ICBC) to feel the immediate squeeze as the new lenders grow in scale and confidence.
“[Some] banks will need to rethink how they operate in Singapore and how they fund themselves and price their products, as a new entrant will just jack up the deposit rates to get more funding in.”
The regulator, insiders say, will likely reward applicants that offer something new. That could mean digital excellence in combating money laundering and helping clients meet compliance demands. Or it might stem from the ability to crunch the numbers to reveal good and overlooked but unbanked enterprises.
Being able to ‘moneyball’ digital data better than one’s rivals will help new banks compete with much larger but locally peripheral lenders.
To that end, it is “perhaps no surprise”, notes StanChart’s Lee, that “a lot of the applicants for the new wholesale licences are from China, given their firms are able to use algorithmic technology to determine credit decisions. That is a clear area for disruption.”
‘Ripe for disruption’
So is a decision by a canny regulator keen to get a jump on other jurisdictions the tipping point, the moment that disruption begins to encompass all levels of non-retail banking?
|Tan Su Shan,
Yes and no. It’s hard to argue when Tan Su Shan, head of institutional banking at DBS, describes the entire wholesale banking space as “ripe for disruption”. Or when her colleague Han Kwee Juan, group head of strategy at the Singapore lender, adds that the “next phase of digital disruption will be everywhere.”
But when the book is written on digital disruption, this particular chapter won’t start with a bidding war instigated by Singapore’s financial regulator.
Wholesale banking, says Debopama Sen, Citi’s head of treasury and trade solutions for Singapore and Asean, has already “been changing for a number of years. It’s not always a noticeable process as it doesn’t impact thousands of consumers.”
What services, products, platforms and divisions face the greatest or gravest threats over the next few years?
The answer depends who you speak to.
DBS chief executive Piyush Gupta notes that in “some ways the large corporates have been disrupted. They all went electronic a long time ago, using algorithms on trading flows. Look at FX: two or three of the top five global players didn’t exist a few years ago.”
“Now, it’s all about high-frequency providers,” adds Joris Dierckx, head of southeast Asia at BNP Paribas. “FX was a big earner for banks. It isn’t any more. You have to do volume instead.”
That’s disruption at work. The complex and costly know-your-customer (KYC) process is slowly being mutualized, as banks and corporates recognize the value of outsourcing it to specialist industry bodies.
UOB’s Khoo reckons there is still a “huge opportunity” for banks looking to help large corporates to grow their business and to improve productivity.
“We are already doing so in areas such as digitizing cash management and operational processes, as well as offering them seamless connectivity and specialized expertise through our FDI [foreign direct investment] advisory and sector solutions group to help them expand across the region.
“Most banks – and UOB is no exception – are looking to help the CFO,” he adds. “That might mean better forecasting, hedging or supply chain management.”
In turn, Citi’s Alexiev points to the daily machinations of any well-staffed treasury team.
“Many of [a corporation’s] cash-management flows are predictable,” he says. “If a treasurer always pays salaries on the last Friday of each month, well, this is a process that can be automated and digitized. You don’t have to action everything. Disruption in wholesale should make banking less visible and intrusive [and] more naturally integrated in the business workflows. That is one of the key reasons you are seeing corporates outsourcing their treasury functions to banks.”
As is so often the case, DBS is ahead of the curve. Its 2018 annual report promises to make banking invisible, while executives already describe their employer as the ‘Disappearing Bank of Singapore’.
Alexiev neatly breaks down disruption into short, medium and more distant time horizons. As well as the treasury function, he points to lending, where change is “already visible”. He adds asset management to that list.
“There is so much interest in blockchain,” he says, “in what it can deliver to institutional investors and large-scale banks, in terms of separating income streams from assets and reaching small investors with smaller ticket sizes, resulting in a larger market with more liquidity.”
[Raof Latiff] came in and banged [a book] on the table. He said: ‘My father Ibrahim wrote this 30 years ago.’ So I read it cover to cover and, guess what, it’s still totally relevant today. Trade hasn’t changed
– Tan Su Shan, DBS
Lee points to payments, transaction banking and forex as “three areas that will see a lot of disruption”, allowing banks to “come in and automate and move very quick and offer better cost-efficient services for clients. We are already seeing it – FX margins have come down and blockchain technology will further bring down costs by aggregating large blocks of payments and flows.”
A little further ahead, Alexiev tips trade finance, once impervious to disruption due to the sheer weight of paperwork, to be next to face the winds of change. He points to the example of Geneva-based Komgo, a platform that uses blockchain to digitize letters of credit, speeding up KYC checks and streamlining trade and commodity finance. Its shareholders include Citi, MUFG and Société Générale.
“It reduces the quantity of paper that can be tampered with or forged,” Alexiev says. “Given the shaky nature of geopolitics these days and the changing nature of rules, more companies are treating supply chains as networks, which helps boost their resilience. For banks, the ability to visualize entire supply chains and networks is imperative, and Komgo lets us track every shipment and money flow. It’s the kind of friendly disruption that helps us and our clients to understand risk.”
Many banks are walking the same path. In January 2019, Standard Chartered completed its first blockchain-enabled cross-border trade in Singapore.
The transaction for local firm Agrocorp involved the purchase of agricultural goods from Australia’s GrainCorp, which were resold to a customer in Bangladesh. StanChart said it cut the transaction time to 24 hours from a typical five to seven days.
Trade is the venue where disruption is perhaps most greatly coveted by banks and the corporates they serve. When DBS’s Tan was promoted to run institutional banking in February 2019, after nine years overseeing consumer banking and wealth management, she was immediately handed a book by Raof Latiff, group head of digital and institutional banking.
“He came in and banged it on the table,” Tan remembers. “He said: ‘My father Ibrahim wrote this 30 years ago.’ So I read it cover to cover and, guess what, it’s still totally relevant today. Trade hasn’t changed.”
And yet it has, as she reveals when talk turns to the nature of shipping goods from source to completion, via any number of trucks, container vessels and aeroplanes, not to mention lawyers, bankers and inspectors.
Tan points to an open-source blockchain trade platform developed by, among others, DBS; commodities trader Trafigura; the IMDA, a Singapore government body that sits under the information ministry; and distributed-ledger developer Perlin.
Launched in November 2019, the ICC TradeFlow platform “allows every participant to talk to every other participant on a global mother-of-everything open-sourced platform, entirely powered by blockchain,” she says. “I can see where the tax is paid and where a shipment is at a given moment. It cuts costs, time and a lot of fraud, and gives everyone a common language and legal framework. It is a purely and positively disruptive experience.”
[Avatec.ai] is exclusive to us. If it’s successful, we could open it up. Who knows, if it is gets really big, it could be a unicorn
– Frederick Chin, UOB
When we speak in mid February 2020, the first shipment has just been completed: $20 million of iron ore, moved by Trafigura from Africa to China. It took 20 days door to door, cutting the average transit time by more than half.
That it is open source means that “everyone, including other banks, can opt in and use it”, says Tan. “We wanted to jump-start the industry and get our anchor clients onto the platform. We were guinea pigs, but we were willing guinea pigs.”
The same month, DBS completed its first trade-finance transaction on Singapore’s Networked Trade Platform (NTP), a two-year-old state-backed system that aims to make the city a global leader in trade finance. The transaction involved a $3.5 million letter of credit, issued for Audi Singapore and local firm Premium Automobiles.
Several global lenders, including HSBC, China’s ICBC and BNP Paribas, have signed up to CamelOne, which connects to NTP, and is described by Sofia Hammoucha, head of transaction banking southeast Asia at BNP Paribas as “Singapore’s first multi-bank trade finance portal”, designed with a “full range of customers in mind, from small and medium-sized companies to large corporates.”
Another of Singapore’s big three lenders, UOB, is busy “building a trade supply-chain platform that aims to capture business flowing across two corridors: intra-Asean and China-Asean, accounting for $1.3 trillion worth of annual trade,” notes group head of wholesale banking Frederick Chin.
Products available on the platform on its launch, he says, will include account opening, invoicing, factoring and trade finance.
UOB is also working to offer digital pre-shipment finance and has built a credit engine called Avatec.ai in partnership with Beijing-based software firm Pintec.
“[It] is exclusive to us,” says Chin. “If it’s successful, we could open it up. Who knows, if it is gets really big, it could be a unicorn.”
Disruption beyond retail is a moveable feast, with services and divisions more or less open to positive dislocation, depending on a bank and its customers’ ability and willingness to embrace change.
Citi’s Alexiev points to a few areas he deems more resistant to change. One is M&A advisory, while private banking, certainly at the higher end of the spectrum, is another.
“If you are talking about a personal fortune of billions of dollars, you are going to want to talk to a relationship manager, even if you are a millennial,” says a senior Singapore banker. “As a rule, disruption is easier when you have a larger market with similar needs or well-established with niches that are un-serviced or under-serviced.”
Bankers say disruption across wholesale is driven increasingly by the needs of the customer. Many see the present day as an inflexion point, a moment when corporates stop waiting for disruption to happen and start to demand it from financial providers.
Citi’s Sen points to the example of a treasurer processing personal transactions on her cell phone in the morning and then expecting corporate life to be just as helpfully and simply digitized.
“You are naturally going to expect the same level of digital service you get from your retail provider,” she notes.
At one level, that can mean helping clients to reach customers with greater speed and efficiency by giving them more payment options. But the whole treasury process – how a firm pays suppliers, manages liquidity and does cross-border payments – also needs to move in that direction.
Sen points to the example of a Chinese or Indian multinational keen to expand into southeast Asia: “They’ll be looking to access other markets in the region and will want to be digital on day one. They don’t want to be analogue.”
Typically, the first questions clients ask are also the most straightforward: how fast can they open in a new market, when can they start selling and how wide a net can be thrown over their customer base.
“They don’t want to approach each market separately – they want the same e-banking and mobile banking experience in each of them,” says Sen.
Not long ago, that was a sticking point.
“Banking has traditionally taken a long time to open accounts, several weeks,” Sen adds. “We made that process faster and more seamless. In the 10 markets in Asia where Citi has digital on-boarding, our clients don’t need paper documents or signatures to open an account. It can be done digitally in as little as two days.
“It doesn’t sound exciting, but it’s actually a huge change. It impacts how fast you can enter a market, how fast you can start doing business and how fast it can take to pay employees.”
Citi intends to introduce the same speedy on-boarding process wherever it operates across Asia, she adds.
“We are connected to instant payments schemes in 10 Asian markets, which offer domestic payments 24/7 online and in real time.
“Over time, our cross-border payments networks will plug into our domestic instant payment platforms wherever possible.”
While banks have wrested back control of the disruption debate, they still face three types of pressure.
One is the client’s expectation of better and more streamlined service.
The second is the need to convince talented graduates and seasoned professionals that joining a bank, or remaining on board, is the best way to a better future.
Number three is the challenge of adapting to a world where disruption will happen at an increasingly rapid pace and in ways no one can fully foresee.
This might involve, say, a sudden and widespread adoption of blockchain, or the positive threat of a bank building a ‘black-box’ of client, market and transactional data so valuable, it comes under pressure from investors to spin it off.
More immediately, banks will need to adapt as some products become so cheap to run they are provided for free, much as telecoms firms now bundle a landline into an internet package.
BNP Paribas’ Dierckx notes: “Revenues from payments will be zero at some point – it will be provided by payments banks who will offer that service but won’t ask clients to pay for it.
“Across wholesale banking – in corporate, investment and institutional banking – the revenue pool has been shrinking for five years. So for us to grow, we either have to take market share or cut costs, or both,” he adds. “Banks can make disruption work for them, but you have to be a top-10 global player by revenues for that to succeed.”
We are not at the start of disruption in wholesale banking, but it is fair to say we are probably at the end of the beginning. Only the best, biggest and most ambitious banks, capable of thinking pragmatically and creatively, will survive.