As more and more people look to digital solutions for their financial needs, the technology sector has been granted an opportunity to revolutionise the face of financial services.
The global movement towards cashless payments continues to accelerate. Across the world, we see that digital payments are upending the traditional value chain of financial services, and systematically changing the way consumers expect to pay.
Just as mPesa radically shifted the balance of power in Kenya, placing the ability to share and save money firmly in the hands of the people; the digitization of cash across the globe is shifting consumers’ expectations. The ubiquity, first of the mobile and now access to internet-enabled devices, has been the strongest driver in enabling the digitization of payment mechanisms, and, by extension, fiat currency.
In fact, we can see that in Asia, digital inclusion has now outpaced and effectively substituted financial inclusion. Back in 2016 alone, Ant Financial added 100 million new clients to a client base in excess of 500 million, practically 10 times that of the world’s biggest banks. In 2018, Ant Financial is now considered one of the largest financial services companies in the world.
But the comparisons do not end there. Many believe that Tencent’s QQ Coin was one of the first digital currencies. In regulatory battles, Tencent claimed the QQ Coin is a commodity as opposed to currency, which draws unmistakable parallels with bitcoin and its cohorts and the “currency vs commodity” debate that continues to dominate headlines in 2018. Could the Super Apps provide the use cases that legitimize digital currencies in closed loop systems, or will China’s stringent regulations drive the market to accelerate its classification of currencies which lie outside of fiat?
Through the global efforts to digitize cash, traditional boundaries of the financial services industry are gradually becoming indistinguishable. Virtually every area of consumer finance – from payments and transfers to lending and custodian functions – are being intermediated by tech companies who cleverly operate around the fringes of the banking system. The value chain formerly dominated by the old guards of banking and finance is now unbound.
As the journey to digitizing the lifecycle of consumer payments continues, the tech platforms are close to extending their reach to every corner of the market. Now that cashless payments are seen by many as ubiquitous, the platforms are capitalizing on consumer appetite for convenience and the desire for frictionless payments to provide ‘one stop shop’ services, serving consumers’ lifestyle needs with payments seamlessly embedded in the process.
Platforms now find themselves in the role of demand aggregators for an outsized customer base, one which far exceeds the reach of the banks.
Rise of the Super Apps
Clearly, there is a blurring of lines across multiple facets of a modern consumer’s lifestyle. Our consumption of social, retail and financial services is now seamlessly merged on several leading tech platforms providing what is now deemed as ‘digital utilities’ – from messaging and social networks to transportation and e-commerce. We expect the ease of security and flexibility in our payment instruments, and as increasingly tech-savvy consumers tire of convoluted customer journeys, convenience wins out.
In Asia, we see that platform providers such as Alibaba Group, Ant Financial, Tencent, WeChat and Grab now drive the inclusive usage of digital utilities through the development of tech platforms that power ‘super apps’, combining communication, search, navigation, commerce and payment into a single platform. These ‘one-stop-shop’ apps offer a seamless, integrated, contextualized and efficient experience which plays directly to the demands of a customer base whose appetite for convenience is mirrored in their uptake of digital payments.
Southeast-Asian ride-sharing app Grab recently raised $2 billion from SoftBank and China’s Didi Chuxing to become a digital payments company through the launch of its GrabPay service for third-party merchants last November. The main gamechanger it is introducing to the payments landscape to ensure wide adoption is a zero merchant discount rate (MDR). Most mobile point-of-sale terminals currently require a MDR charge, a transaction fee paid to the payments processor from the total amount received, that has deterred small merchants.
Even in regions where cash remains king, a regional payments system made accessible through a Super App like Grab, which offers an essential service such as transportation, holds great promise to transform the regional payments landscape into a cashless region.
Ultimately, to enable the wide adoption of these tech platforms, mobile connectivity and internet access are essential – and Asia has displayed a huge appetite for mobile finance with the rapid growth of their mobile and internet penetration. As such, there is a massive digital opportunity for Asia to become the epicenter of disruption for FinTech, with the greater cause of financial inclusion as an impetus to speed up adoption of digital finance and mobile payment platforms.
Banking as a platform…?
In this new tech-infused and rapidly evolving landscape, the industry is presented with a billion-dollar question: what is the right model for banks to stay relevant in the future?
The incumbent institutional financial players under threat would need to overcome existing legacy infrastructure before the emerging tech platforms develop a strong enough financial services proposition to move into banking. The infiltration of tech players into the banking ecosystem, driven by artificial intelligence, blockchain, data analytics and other emerging technologies, will alter the face of banking as we know it.
These platforms powering said ‘Super Apps’ may enjoy operational efficiency with a digital-first approach from the outset; however, they are set to face escalating costs of compliance if they seek to scale up and grab a share of the market held by the incumbent financial institutions.
As market competition continues to act as a catalyst to fuel innovation and transform the playing field, a possible marriage of convenience for both sets of players could be a partnership that leverages the respective strengths of the incumbent and the challenger.
Banking as a platform is a concept that could future-proof the financial services industry, but its success would depend on the agility of the players to collaborate and perhaps divide and conquer based on their respective competitive advantages.
Platform providers of the Super Apps that are dipping their toes in the realm of payments, transfers and e-wallets rely on the existing banking infrastructure to some extent and could benefit from the superior risk management, security and compliance capabilities of the incumbent banking institutions.
Several banks are also welcoming tech platforms to plug into their ecosystem by building large-scale API (application programming interface) developer platforms. DBS Bank, for instance, recently announced its launch of the world’s largest banking API developer platform, allowing the collaboration of various companies, FinTech players and software developers to access a breadth of services, including funds transfers and peer-to-peer payment service PayLah!
Whilst there is no question that consolidation in the industry remains on the horizon for many banks in the face of digital disruption, financial institutions could stand to gain a stronger foothold by investing in or partnering with tech platforms that could extend their bank-as-a-platform proposition in terms of customer distribution and experience.
For instance, Ant Financial has recently inked a partnership with Standard Chartered Bank to combine its banking expertise across the region’s emerging markets with the tech company’s FinTech capabilities, to increase access to financial services for clients based in markets along the “Belt & Road Initiative” route.
Of course, blockchain technology has also emerged as the trump card that financial and technology companies alike are holding on to, with the promise that the technology could radically lower the operational costs of running financial processes to negligible volumes.
Various financial institutions and tech titans in China – the Bank of China with Tencent; Agriculture Bank of China with Baidu, the Industrial and Commercial Bank of China with JD.com and China Construction Bank with Alibaba – are also pairing up to experiment with blockchain technology, artificial intelligence and other technology in FinTech applications.
Asia set to lead the way
As digital payments become the default norm, the way we interact with our money is changing. Much like how Uber’s disruptive model fundamentally transformed the transport sector and introduced the concept of embedding digital payments into an everyday life experience, we see the trend continuing for payments and financial services to be intricately linked to our daily consumption of digital utilities.
With the rise of world-renowned tech juggernauts, Alibaba, Tencent, Baidu and JD.com, Asia is certainly a force to be reckoned with in the development of Super Apps that diffuse the lines between a consumer’s social, retail and financial facets of life.
As more people hold mobile phones than bank accounts in Asia, the full digital ecosystem of services from e-commerce to digital lending is set to form the basis for an economic power equalizer between the region’s underserved population and the rest of the developed world.
This new landscape will spur players in the global financial services and tech space to redefine their business models to move in sync with the reordered marketplace where Super Apps reign supreme and the winner takes all.
Pat Patel is the director of Money 2020