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Business News/ Opinion / Online-views/  A banker’s view of fintech
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A banker’s view of fintech

If fintech entrepreneurs want to come up with a holistic business proposition that actually solves a real-world problem, they must tap into the knowledge in banking

Photo: Pradeep Gaur/MintPremium
Photo: Pradeep Gaur/Mint

I met an old classmate last week whom I had not seen for a long time. Noor Menai is the chief executive officer of China Trust Commercial Bank’s US operations. We met because our children are now college-mates; in an example of history repeating itself, his child is now showing mine the ropes, just like Noor did many years ago when I arrived in the US as a neophyte from the subcontinent.

I used the opportunity to have a free-flowing exchange of views with Noor on the world of financial technology or fintech, which I have attempted to capture for this column. Noor is one of the world’s foremost experts in banking technology. For three decades, he has worked in all areas of the banking business at giants such as Citigroup and JPMorgan, including the back office where all of the financial technology comes together. He was also CEO of Charles Schwab Bank, which is noted for its extraordinary online capabilities.

He maintains that most people—including fintech entrepreneurs—don’t realize that banks are actually technology companies that happen to sell financial products. They are heavily focused on information and process management, and making sure that there aren’t mistakes made because they are dealing with actual money.

While the evolution of ideas in fintech revolve around a simple concept, which is to help people do things faster and on their terms, there is another aspect to technology in the financial industry, which is called regtech (regulation technology). Regtech promises to change an area where existing technologies around stopping money laundering still require manual processes and constant requests for human intervention, since subjective human judgment is critical to this process. Regtech holds out the hope that machine learning and process automation can reduce this need for manual intervention, thereby freeing up legions of bankers to concentrate on customers instead.

The US market is a front-runner in the global fintech stakes because it is the most mature. For a fintech product to become the standard in the US, it has to be bulletproof and adopted by a mainstream audience. Fintech is a less naïve undertaking in the US, whereas in emerging economies, someone might have a great idea and still ignore the reality that the idea may not work.

In our part of the world, the race is often about signing up the greatest number of users, and not whether a business problem can actually be solved, or whether the app actually makes money. These hard questions come up much faster in the US than in emerging economies.

We have already seen warning signs of this in the e-commerce space in India, where the rush was to garner as many users as possible and push large volumes through the e-commerce site—without considering whether the site itself was making money. This approach can lead to false comfort among fintech entrepreneurs in emerging economies such as India.

Notwithstanding the many predictions that fintech advances like blockchain will disintermediate the banking sector, the truth is that there is actually a symbiosis where fintech and banks need each other. While upstart fintech companies and banks are not exactly falling into each other’s arms yet, the fintech entrepreneur needs the banks for both their technology know-how and their control of the last step in a transaction.

If fintech entrepreneurs want to come up with a holistic business proposition that actually solves a real-world problem such as how to save for retirement, or send money to your mother in a faraway country, then they would do well to tap into the knowledge in banking. On the other hand, at the staid old big banks, the sunk cost fallacy was historically the biggest stumbling block when it came to fintech adoption. Banks tend to invest enormous amounts of money to automate processes, but by the time these large projects come to a close, they are already a generation behind.

This is a barrier to innovation because someone whose job depends on running a billion dollars already invested on technology infrastructure doesn’t want to be jeopardized by a newer technology that can do the same thing on a smartphone for a few cents. Also, how does a CEO of a bank stand up and say to shareholders, “I didn’t have a crystal ball; I couldn’t tell you then that I was sinking a billion dollars in a brand-new technology that turned out to be what the fax machine was to email"?

That said, despite these barriers, banks have not stood still recently as new digital solutions have made their presence felt. They are, in fact, adopting them at a higher rate by ‘disrupting’ themselves, which is reflected in the fact that some Indian IT services companies seem to be losing out at banks as the traditional IT spend is being shifted to this newer digital technology.

In an interesting example of this trend, Barclays Bank announced recently that the Israel-based start-up Wave, one of that bank’s partners, has designed and completed the first blockchain-based Letter of Credit—which supports the transactions of the import/export trade. Other banks have also shown interest in adopting blockchain products as an integral part of trade financing. While there is still manual oversight over the trade financing process, one can expect, as with regtech, that machine learning and process automation will be increasingly used to substitute for subjective manual judgment.

It would seem that the blockchain race I had referred to in an earlier column is on!

Siddharth Pai is a management and technology consultant.

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Published: 20 Sep 2016, 12:30 AM IST
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