Starting the first day of the Fintech Festival with a high-level view of the future of technology, MIT media labs director Joi Ito said in his opening keynote address that the earth is a complex self-adaptive system. If something happens, the system adapts and reengineers itself to be resilient.
One of the problems with cryptocurrencies, on the other hand, is that there are multiple currencies that don’t automatically trade with each other and don’t self-adapt. And while they do add a way to transfer value, they could become either become more intelligent in a good way or supercharged in another way. What’s important, he said, is to define a future where artificial intelligence (AI) and cryptocurrencies make us happier.
Drawing a parallel to the internet, he said there was an evolution from Ethernet being invented in 1974 to TCPIP in 1979 to HTML 1990 and to SSL 3.0 1996. Non-profits later designed systems to be able to talk to each other, with layers of non-profit protocols and subsequent for-profit companies.
Cryptocurrencies are going through a similar evolution. Using bitcoin as an example, he said, “bitcoin is the next layer. It’s going to end up being the standardised protocol.” However, “we have hundreds of blockchains. These layers of people who are trying to make it the best protocol, you need to organise it. We need one version before we scale. My concern is we’re investing like it’s 1999. We’re building on a stack that’s not firmed up.”
Just like how non-profits took a role in organising the internet, it is essential to understand that the collaborative non-profit layer is very important, so the next layer up does the scaling. “Think about how we make the system better, then give it to the entrepreneurs to build a system,” Ito suggested. Today, he concluded, “there’s too much exuberance in the money making and not enough in trying to create structure.”
The Singapore fintech agenda
The talk then turned specifically to the fintech ecosystem in Singapore.
Singapore must embrace fintech, maximise benefits and minimise risks, said Monetary Authority of Singapore (MAS) Managing Director Ravi Menon. And indeed, MAS has been working together with industry to foster a thriving fintech hub. This requires getting several pieces right: an ecosystem of diverse players; an open architecture economy that enables connectivity and innovation; a web of international links, to scale solutions; a talent pool; a conducive regulatory environment; and a safe cyber-environment.
MAS initiatives to support the ecosystem, Menon said, have included encouraging financial institutions to share APIs openly, signing 16 fintech agreements with central banks in other countries, working with the Bank of Thailand to establish cross-border usage of the PayNow and Prompt Pay real-time payment systems, and an R&D collaboration in fintech with MIT.
One of the most critical pieces Singapore must get right, Menon said, is regulation. “Make sure key players are sound, consumers are safeguarded.” It requires understanding emerging technologies and being alert to potential risks. As one example, rather than regulating the cryptocurrencies themselves, MAS regulates activities that surround virtual currencies such as requiring anti-money-laundering for transactions and making sure initial coin offerings that act like a bond security follow the Securities and Futures Act.
Fintech developments are forcing regulators to review the way regulation is done, Menon said, so MAS will have to take a risk- and activity-based approach by setting thresholds for when regulations kicks in, calibrating requirements to risk and applying these to activities rather than entities. MAS is also focusing on building cyber-defences, having remediation, and increasing cyber-intelligence and information sharing
Menon expects that a shared Know Your Customer utility will launch in Singapore by the end of 2018, shortening application timelines by 80%, and that a joint effort between MAS and the Hong Kong Monetary Authority to use blockchain for a global trade connectivity network will go live in early 2019. MAS is also partnering with the Bank of Canada to use distributed ledger technology to send payments seamlessly.
“We want to make a pervasive culture of innovation,” Menon concluded. “Fintechs must solve real-world problems. Together we can recreate finance with creativity and innovation.”
Data analytics drives revenue
Turning to a technology that drives financial services, panels of technology leaders talked about how they’re using data analytics.
Data analytics is the lifeblood of the business, OCBC Head Group Customer Analytics and Decision Donald McDonald said, and it has become more important because “we’re getting value out of data sources we previously couldn’t access.”
“Big data is more of a taxonomy question around unstructured data,” UOB Chief Data Officer Richard Lowe added, such as voice, files text, images and external data. “What started off as an infrastructure shift has come to a more real-time personalised experience.”
To use it well, said GIC Labs Head Kevin Lee, said, it’s imperative to work with start-ups. “There’s no way you can do all of this in-house. The Lab gives us a way to work with the most cutting-edge stuff.”
One example of the impact, McDonald said, is compliance. “If you look at money laundering, we use a rules-based approach. We have about 1,000 transactions to check on an average day. The team is tasked with going through them. 98 percent are false. They have to write reports, which take half an hour each, for 1000 per day. AI determines which are true and false, and writes the report – 800 reports in 30 seconds.” The efficiency is, obviously, tremendous.
At UOB, Lowe said, “we used an algorithm to build predictive sentiment analysis based on analysts’ reports to try to help investors understand analysts’ perceptions, which has helped our business customers and resulted in demonstrable uplift.
At DBS Bank, DBS Chief Data Transformation Officer Paul Cobban said, data analytics has been used by the audit team to determine which branch would have operational error and by HR to analyse unusual behaviour and intervene when someone is about to resign.
One of the biggest challenges to using the data, McDonald said, is legacy infrastructure. “I’m deploying data to channels every day. Getting the insight to the front line is the biggest challenges I face.”
The key to success, Lowe said, is to get data architecture and technology in one place. “Hadoop and SQL allow us to do that. We’ve gone on a massive journey in data warehousing.” What’s also essential, Cobban noted, is to start with a specific set of business problems you’re trying to solve. And remember, said Qlik Director Simon Kirby, to ask the right question about what you’re trying to achieve.
The benefit, McDonald said, is that, “we dump it into Hadoop at 5% of the cost of the data warehouse.”
What comes next, McDonald opined, is new uses. “We’re in the early stages. We’re using it for the low-hanging fruit – marketing, risk. The next wave is other areas that have started – HR, audit, procurement.”
Data analytics: a PayPal case study
What’s important to get insights from data analytics, PayPal Global head of Marketing Analytics Abhi Gupta explained, is to ask the right question. Two examples demonstrate the impact.
The first is segmentation. In the past, PayPal staff were incentivised based on revenue. “I was given the task to relook at segmentation, to figure out who are our most valuable customers. I said margin matters most.” Whereas PayPal used to force customers to use their PayPal balance for purchases if they had money in their account, the practice eliminated customer choice. “We found that it is negative in usage and loyalty.” Instead, he changed the paradigm so that customers can choose to use their PayPal balance or bank account or credit cards. The result was that top customers increased the value they created. The change in strategy, in how to market to customers, improved results by 30%.
Second, PayPal analysed who to target with a marketing message. “We send a lot of offers. Propensity modelling predicts the propensity of a customer to take an action,” he explained. “We built a model for the campaign. We found no lift. The question the marketing team asked was to build a model to give specific offers to specific customers. The right question was to ask which customers will buy a product they would not buy otherwise, when PayPal sends a marketing message. Gupta found a technique called “uplift marketing” that uses random tests and analyses the results, in a test-and-learn technique. Using the model, for the same campaign resulted in a 100-200 basis point lift, and 200% return on investment. The only change was targeting, using uplift modelling.
“The quantity of data is exploding, Gupta said in conclusion. “Big data alone is not useful. Ask the right business questions to extract actionable insights.”
Fintech in India
While payments fintechs have garnered a lot of attention in India, Axis Bank Board Director Rohit Bhagat said, there are three key opportunities ahead for fintechs in India. “Unsecured lending will see a huge boom for financial inclusion. A second is lending to the MSME space. And finally, there is a huge opportunity for targeted financial products – one example is small ticket insurance.”
SBI chief technology officer Shiv Bhasin said that although fintech posed challenges when the bank started transformation 3½ years back, “they helped us transform faster.
Additional chief secretary to the Government of West Bengal Shri Dehashis Sen believes that the recent implementation of a national GST is a “game-changer. You have to digitise payments. We have an opportunity from the fintech angle because the economy is 100% digital.” Moreover, Bhagat said, “the fact that it will be digitised brings efficiency. GST becomes a repository of transactional data. If we are to move to unsecured lending, then it’s important to be able to tap into a database that has integrity. GST will be that database.”
A key emerging opportunity for SBI, Bhasin said, is issuing personal loans from debit cards. “We tied up with Flipkart and Amazon. We are working with fintechs for SME lending. Fintechs are providing alternative predictive scoring. We have been able to give loans, where merchants are getting loans at a cheaper rate.”
Looking at the recently-licensed payment banks, Bhagat said he believes they are great and have spurred competition. Because they forced traditional banks to improve, however, the economic model is challenged and they’re moving to high volume, low value, low cost transactions. “Interoperability will only worsen the situation,” and their future does not appear bright.
Fintech in China
Fintech in China continues to grow rapidly, and fintechs are now expanding faster overseas. CreditEase CEO Tang Ning, Ant Financial president of international business Douglas Feagin and Dianrong co-founder Soul Htite provided insights into their companies’ practices and strategies.
While Ant Financial’s subsidiary Alipay was initially designed for Chinese tourists who want to use Alipay when it launched in Singapore, Feagin said, Alipay now has tens of thousands of merchants who accept Alipay all around Singapore, from taxis to large merchants to small merchants. “This can be done because we use a simple QR code for payment. Beyond targeting Chinese tourists, Feagin said, Singapore is a regional hub. “We see it as a talent base. In building our presence in Southeast Asia we established Singapore as a hub, investments are driven by a team here. We’re continuing to expand.
Htite said that Dianrong, which provides crowdlending services, looks at “how technology can change the finance industry. In China, we are able to create infrastructure that did not exist before. We are building technology that is part of the infrastructure, to extend a loan based on data, and incentives for people to pay back.”
In building his business into a full suite of financial services from payments and lending to robo-advisory services and insurance, Ning said “we never had this technology first point of view. We had this consumer need first point of view – unmet consumer and small business needs. Then we asked, is there new technology we can use, business model to fulfil that need. We asked what kind of technologies are there, and how can we use them to build new business models, to do better risk analysis, asset allocation, KYC. This has been our innovation thought process.” CreditEase has gone further, though, and now looks at peoples’ future needs. “People may not know what they really need. You have to see that, ask where we can find the technology, business model. Then it comes time to do market education.”
Feagin similarly said that Ant Financial starts with the customer. “We start with the customer, and how can we use technology to come up with a more innovative solution, and serve the computer in a better way.
Echoing their sentiments, Htite said that “technology is not a toolbox. If you just take what you need, you will never get what you expect. Blockchain has the potential of changing the way we do everything in finance. It did not start because somebody said how am I going to do this. It started from Bitcoin. We said it can solve risk management.”
Feagin said that there is a place in China for both banks and fintechs. “A lot of things banks do, fintechs will never be able to do. Insured deposits. In lending, banks are scaled to be able to do larger scale lending. Big corporate lending, banks do. They do have a scale to reach customers, in distribution. Fintech companies are serving customers in a different way, or a different customer segment.” Ant Financial’s mission of financial inclusion, for example, is serving a different customer segment that banks would not target.
“Banks are very good at getting low cost of capital,” Htite added. “Where they are weak is in running operations. Technology companies are very good at operations. If you combine these two, we will be able to extend cheap loans to SMEs, consumers and even corporates.” By way of example, he said Dianrong works with small size banks and helps them to improve service for their customers.
As it looks to expand overseas, Ning said that “for our global expansion strategy, we rely on the entrepreneur partners. Our fintech fund invests to do well in each market. In the US we’ve done close to 20 investments, in all fintech subsectors. We are going through the learning curve for Southeast Asia. We will work closely with entrepreneurs. The driver is the entrepreneur.”
For Anti Financial, Feagin said, “our focus has been to go to the core of the customers we serve best in China, low to middle-income consumers. That’s why we announced partners in Thailand, Indonesia, Malaysia Philippines. We take a minority stake and leave the right solution for the people in the market, to build the right product.”
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