The Fintech Files: Three Truths and Two Myths

Neal Cross is the chief innovation officer of DBS, Singapore’s largest bank. His role affords him a unique perspective on many issues in fintech. We had a fascinating conversation on the subject late last year. Below are some of the thoughts he shared with me. He’ll also be speaking from Hong Kong at our Beijing-Hong Kong Fintech Connect Summit on 25 March 2017.

Myth 1: Fintech start-ups are at war with banks.

Neal Cross: I think there is a general misunderstanding about what’s happening here. People are thinking this is very much fintech vs. banks. It’s absolutely not true.

For me, there are five types of fintech. The biggest and most successful fintech in the world is the bank.

The second type are those that traditionally sell technology to banks, such as FIIS, Fiserv, and SunGard. They will be the most squeezed as banks look to nontraditional providers.

The third type is competitive fintech. When this wave of fintech started, many of them were like, “We are going to kill the banks.” They gradually realized that customer acquisition costs are high and regulations are hard to comply with.

The fourth type is cooperative fintech, the ones that want to work with the banks.

The fifth type is the most important one and will have a lasting impact. I call them the 4B companies. They’ve got billions of dollars, [the] brightest minds, a billion customers [. . .] You know, the Amazons, Facebooks, and Googles of the world.

So there are these five players here, and everyone is maneuvering to try to get their share or retain their share of essentially a $5-trillion-a-year business.

And I think the phrase “fintech” will be gone soon. People in the future will talk about finance. I think in the long term, the effect of fintech will be to soften the regulators and, in many cases, scare the banks to be more innovative and agile, leaving the door open for the big dogs to come in and monetize the industry.

Myth 2: Blockchain was developed for finance applications and is now ready for the big time.

Blockchain has nothing to do with banking. It has nothing to do with finance. Blockchain is perfect when you want to connect discrete entities across geographic boundaries and don’t trust where the central server will be. Obvious use cases in finance would be cross-border payments and trade finance. I think the biggest impact is in public record data though.

Some major financial institutions are investing in pilots to prove the concept, but no one has gone live. We don’t get the concepts in white papers in advance either. Is that because it’s not given the perceived value or is that because someone will take your pie?

There’s also lots of interest [in blockchain] around trading, company registration, and corporate actions. Certainly the ownership piece of financial assets like bonds, etc. Completely reinventing a bank? Maybe. Just not really happening at this moment in time.

To actually replace the system of the bank: These are $10-billion to $50-billion projects. So if [blockchain solutions] are going to save me a little bit of money on servers and adviser costs, the numbers don’t add up.

I’m very much a supporter of blockchain. We are the first bank in Asia to do a blockchain hackathon. We do blockchain training. We accelerate blockchain start-ups. We’re just not seeing the killer application that we feel we need to put lots of money into this and start ripping systems out.

Truth 1: Fintech has a natural growth curve. Successful fintech firms are usually part of an ecosystem system and build smart experiences that banks cannot.

Innovation happens where there’s cost of friction. If you look at the history of this new range of fintech, it started with payment. It moved on to lending, crowdfunding, and then into wealth and advice. It then moved into trading, corporate banking, and private banking — the top-end.

So there is a kind of natural growth curve on this. Specifically, the fintechs that succeeded are the ones that believed in being part of a system. PayPal was successful because of eBay. WeBank is successful because of WeChat. Alipay is successful because of Alibaba. So the biggest and most successful are the ones critical to the system.

The most successful ones build a very smart experience. They bring in a whole new customer base to an organization or enable a bank to enter in a region without having to set up a huge technology stack when you partner with a fintech.

Truth 2: Credit scoring is an area with interesting innovations.

The ability to measure risk in nontraditional ways is fascinating.

Generally, tech companies go after consumer banking, such as payment, and e-commerce companies go after business banking. They definitely have an advantage in doing credit scoring over both financial institutions and fintech start-ups as they see the flow of finance [of their respective customers].

They have amazing data and analytics. And they can do stuff that no banks are allowed to do even if they wanted to. This is incredibly helpful in credit scoring. The data can tell how people use their phones. What time do they call? How many times do they call the same number? How long do they make the call for? How do they pay their phone bill? All these actually give you really good indication to their credit worthiness.

It does give false positives to false negatives. Take me as an example. I grew up in a very poor part of England. Most of the friends I grew up with are quite poor. So if you base your lending decision on my Facebook network, I wouldn’t be able to get a loan. So you can’t 100% rely on it, but you can blend it with traditional scoring.

Truth 3: Outside of credit scoring, robo advice could also be intriguing. So could Insurtech and RegTech.

Obviously robo advice is very interesting, but the business is declining. The margin is shrinking because these companies just click and do naïve robo advice. They just set up large portfolios and buy some [exchange-traded funds] ETFs. Yes, that’s not robo advice. That’s ETF selling.

I would say, if you are a robo, banks always win. Banks make money off the product, so they can do free robo advice, and they still make a margin off the product they sell. The robot doesn’t have a product. They fill in the ticket to sell an ETF. The cost of customer acquisition is very high, but they will survive. There will be some consolidation just generally across fintech. Venture capital has started asking questions, “Where’s my money?”

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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