Collaboration is the new innovation
Can financial companies and fintechs win together?
Conservative mindsets and culture clashes are hurdles to deeper collaboration between fintech and financial companies. One way to address the issue and boost engagement might be to start branding fintech as something other than a “disruption”.
This was an idea raised during one of the panel sessions at the recent The Asset Asia Bond Markets Summit in Singapore. “We hear the word disruption a lot. And disruption does not really sound like a good word, which means that people in the financial sector tend to be resistant to adopting new technology,” says Angie Lin, co-founder and president of FinEX Asia, a fintech company with US$200 million of assets under management. FinEX employs artificial intelligence (AI) in its portfolio construction.
The financial sector, she adds, is very good at creating standard operating procedures (SOP). “Once the SOP is set, we just follow the procedure to do whatever we need to do.” SOPs make it difficult for changes to take place, leaving little room for collaboration with fintech companies.
Fintechs, however, are moving swiftly into the financial world to introduce innovation. According to a report by UBS, the global revenue of fintech is set to reach US$265 billion by 2025. This is an opportunity that existing financial institutions are at risk of missing out unless they have a clear strategy to adopt technology including collaborating with fintech to serve clients better.
“If you look at investment in fintech as a benchmark for activity, a lot of money is going into what is called the personal or the SME space within banking. Globally, only 5% to 6% of all fintech investments in the last few years have gone into investment banking and capital market side of the business,” suggests Sanjay Garodia, founder and CEO at Covalent Capital, a cloud-based and algo fintech that is reorienting how bonds are issued in the primary market. “The rollout period of the products tends to be longer in the capital market space and the adoption cycle, unfortunately, tends to be very long, so people need to budget for that.”
The slow pace of change is mirrored in the asset management industry. “I find it frustrating. If you look at all the industries around us, a lot of changes have happened,” says Luc Froehlich, global head of investment directing, fixed income at Fidelity International. “From the point of view of the investment process, pretty much nothing has changed (over the past few years).”
Culture is one factor. “You have the small (fintech) companies which are very focused on specific client needs. They need to move fast,” explains Froehlich. “They don’t have a lot of working capital. They need to get a deal done.” For the large incumbent financial institutions, they tend to move much more cautiously, weighing every decision and therefore far more time-consuming.
“When they (small fintech companies) engage with large groups like ourselves, usually they need to go through quite a few hoops,” he adds, noting that sometimes they might need to wait months before they get approval. But these fintech companies do not always have the time to wait.
Another concern is understanding new technology. “One of the things that I find difficult to manage within my company and my circle of friends is not only culture but also the level of understanding,” relates Froehlich. “If you do not step up and have a basic understanding of, for instance, what machine learning is and how it can be implemented in an organization, your job is going to become very challenging.”
This resistance might also be due to job security. Fintech solutions tend to bring about increased efficiency with lower costs and less physical work. But Froehlich believes this concern is misplaced. Fintech is not here to take over all jobs but to be powerful tools for people. “We have run a series of conferences on ‘man vs machine’. Pretty much everybody has agreed that it is not ‘man vs machine’, but it is ‘man with machine’.”
Even governments recognize that technology is a positive force for change. “For Thailand, 10 to 15 years ago, we basically started from nothing in terms of the bond market. It grew very fast. But in the past six or seven years, we have been doing the same thing,” says Paroche Hutachareon, a senior expert on bond market development from the public debt management office of Thailand’s Ministry of Finance (MOF).
Now, the country is moving swiftly to embrace technology. Thailand has rolled out Smart Cities and Thailand 4.0 initiatives, aiming to solve the country’s economic challenges and transform the country into a regional fintech hub.
The Bank of Thailand (BOT) is actively incorporating technology in the bond market to increase efficiency, according to Hutachareon. “For BOT savings bonds, they take 15 days to clear. With new technology, this can be reduced to two days,” says Hutachareon, noting that interested parties including Thailand’s MOF, the Thai Bond Market Association and BOT are working on this pilot project which will be launched in 2019.
Among the initiatives Thailand launched recently include a national e-payment scheme. “We are seeing real things being done. The central bank is now working on a settlement with cryptocurrency, and the public debt office is doing collaboration regarding blockchain,” adds Hutachareon.
Fidelity International is incorporating new technology both internally and externally. “Internally, we integrated quantitative analysis in the investment process using AI and big data,” says Froehlich.
On the external side, he points out that Fidelity is working on a chatbot to serve clients. “One experience that has worked the best so far is collaborating with an accelerator, SuperCharger. We started three years ago with this fintech accelerator in Hong Kong and over the years we have onboarded quite a few tech applications from this company. For instance, we have integrated a chatbot, which we are now using to interact with some of our clients in the pension space,” says Froehlich.
Lin’s company is using AI to manage the risk. “When we talk about AI, most of the people would tend to think that we actually have several robots sitting in our office and they are the ones doing our risk management, which is completely not true,” she says, noting that FinEX Asia is incorporating the machine learning feature of AI as the core engine to conduct portfolio construction.
The company tracks existing data from certain asset classes and feed the data to the AI system. Through the machine learning feature, the AI system will be able to analyze the data. “You will know about how much money you are supposed to make when you truly understand the current risk and the future risk. AI helps us predict what a person is going to be like in the future,” says Lin.
But technology changes over time. There is a constant need to invest continually. What is more crucial is the concept of creating a “middle layer”, according to Garodia. “We think adoption of new products is the biggest challenge now with financial institutions. Whether it is a hundred dollar cheque or a million dollar cost, the banks unfortunately have to follow a similar process.” He notes that this process needs to be simplified to harness the role newly-developed fintech companies can play in bringing about efficiencies. “That is how we have designed something like OMAS (one stop solution for the primary new issue process), which is completely API based,” Garodia adds.
“In the coming four or five years, our view is that most of the large institutions will have a middle layer that connects to the external system. It will be like an app store where most of the new products can be plugged in without too much integration. That is the only sensible way forward,” Garodia believes.