Every bank in the world has their eyes on Asia today. When it comes to Fintech, China is undisputably one step ahead of the rest of the world. Four of the largest Fintech unicorns are from China. In fact, the financial arm of the tech giant Alibaba, Ant Financial, is the largest unicorn in the world with a valuation of US$150 billion.
Another major Asian market, India, has also seen interesting developments especially since its demonetization strategy at the end of 2016. No surprises then that, in contrast to the US and world average of 33%, 69% of Chinese people and 52% of Indian people have used Fintech. (Fintech adoption index by EY, 2017)
We’ve been monitoring the banking market evolution in Asia to help our clients identify new opportunities. Here is an attempt to explain what is happening in the banking industry in Asia in 4 main trends.
(Source: EY, Fintech Adoption Index 2017)
1) The Unstoppable Rise of Non-Financial Tech Players
Tech giants are the most dangerous competitors for banks in Asia. They’ve entered the financial market through their payments platforms and are leveraging on their big data and large user base to extend to most financial areas, from micro-lending to insurance and wealth management.
Alibaba was the first to adopt such a strategy. It had launched Alipay in 2004 as a Paypal-type service to facilitate transactions on its e-commerce website. Since then, through its financial arm, Ant Financial, Alibaba has entered the loan market, giving credit to drive consumption on its online shopping platform. Its lending division has doubled in the 15 months since the start of 2017.
Its main competitor in China is Tencent, best known for its social media platform WeChat, with 889 million active users. Tencent is actively trying to transform its payments service into a comprehensive financial services platform. The tech giant has gotten licenses for insurance, micro financing and most recently, the ability to sell funds directly to customers.
All BAT (Baidu, Alibaba, Tencent) are also working on blockchain projects related to finance.
Source: Mary Meeker’s 2017 Internet Trends Report(slide 223)
In India, Alibaba-backed mobile payment solution Paytm wants to become the world’s largest digital bank. Paytm received a license to become a Payment Bank, a new model of banks that can accept a restricted deposit of up to $1,533 per customer, a concept introduced in India in 2016. Whilst they are barred from issuing loans and credit cards, these banks are allowed to operate both current and savings accounts and can issue services such as debit cards, mobile wallets, ATM cards and online banking. In 2017, Paytm built the payments bank’s core foundation. In 2018, they will expand their banking outlets, targeting to set up 100,000 banking touchpoints.
In Southeast Asia, the ride-hailing startup Grab is also expanding its digital payment platform GrabPay into micro-lending and credit services.
All these players have global ambitions. They are eager to replicate their success in other markets. Ant Financial’s objective, for example, is to reach 2 billion users within 10 years.
2) Social Credit Scoring Will Decide Who To Trust For Every Financial Transaction
Just two years ago, online P2P lending was in an extraordinary boom in China. Three new lending platforms came online every day, and loan volumes were growing at hundreds of percent annually. But the last year and a half has seen a wave of regulations hit P2P platforms in China, leading to a consolidation of the market. There are less platforms, but the survivors are issuing more loans than ever.
The risk of fraud in the credit market has also moved Chinese authorities to establish a national credit reporting system. However, because of the lack of documented credit history, they have relied on tech giants such as Alibaba or Tencent to roll out social credit scoring systems.
Alibaba is the most advanced player, having rolled out Sesame Credit in 2015. Sesame Credit assigns users a score ranging from 350 to 950 based on five criteria: credit history, online transactional habits, personal information, ability to honor an agreement, and social network affiliations. Those with high credit scores have access to special privileges, including online credit, express service at hotels and airports, deposit waivers on rentals, and expedited visa applications to Singapore and Luxembourg.
The overall intention of the government has always been to create an industry-wide credit reporting system. The National Internet Finance Association of China is working on a centralized platform. By 2020, the Chinese government intends to make the Social Credit Score mandatory for every Chinese citizen. This will create a whole new ecosystem in China and is watched with interest by the rest of the world.
The trend extends to other Asian countries, as well as African and Latin American countries, suffering from a large unbanked population. Singapore-based startup LenddoEFL is currently providing social credit scores to over 50 leading institutions in more than 20 countries.
3) Facial Recognition and Fingerprints Are Replacing Passwords and KYC
More than 60% of Chinese people believe that biometrics, such as facial or fingerprint recognition, will be the only way to access banking services within 10 years, according to the Trust in Technology report. Facial recognition has been installed in bank ATMs in China since 2015, and it is being tested for everything from retailing at KFC outlets (“Smile to Pay” by Alibaba) to boarding flights in airports. Alipay lets you transfer money, check your accounts and file taxes using facial recognition as a verifier. Even traditional players like HSBC have introduced facial recognition to access its mobile app.
That trend is only going to grow, and it will not just replace passwords. Ant Financial just led a $600 million funding round in SenseTime, a Hong Kong company that provides facial recognition software to businesses and governments across China.
Facial recognition will soon replace the usual Know-Your-Customer (KYC) process to open bank accounts. Chinese tech giants are now working with the government on linking the national ID cards of Chinese residents to their respective apps using facial recognition. The impacts go far beyond from just opening bank accounts. It means Tencent and Alibaba’s apps will replace national ID cards and be used for everything from hotel check-ins, train ticket reservations, and access to social welfare programmes. Alibaba already rolled out an electronic identity card certified by the government in three cities in China.
In India, fingerprints and iris scans have already replaced ID cards (for those who had one). 1.17 billion Indians have now registered their fingerprints and irises in the government-based identity database Aadhaar. Thanks to an Open API policy, businesses can also integrate that database into services. That means Indians can now open a bank account by using only their fingerprint, in 10 to 15 seconds.
Facial recognition at one ATM from Agricultural Bank of China
4) Banks Are Relying on Open Innovation To Survive
With such a rapid transformation of the financial industry in Asia, banks here have understood better than anywhere else the importance of innovation to avoid becoming part of history.
All five big banks in China have allied with tech giants and built partnerships. For example, Tencent is working with the Bank of China, one of China’s largest state-backed lenders, on a cloud platform that will provide internet banking and funding solutions.
State-owned China Construction Bank just opened China’s first “unmanned bank”, an automated branch equipped with facial-scanning software, a virtual reality room, a hologram machine, talking robots greeting customers at the entrance and answering questions using voice recognition, and also offers touchscreens for paying utility bills.
The first unmanned bank just opened in China
Singapore’s largest bank DBS has spent US$3.7 billion on technology over the five years up to 2016. The bank successfully launched “digibank” in India, the first mobile-only bank with 82% of requests automated using artificial intelligence. The bank also launched the world’s largest API developer platform at the end of last year. The platform consists of 155 APIs in over 20 categories, which includes funds transfers, rewards, and real-time payments.
Digibank by DBS
All banks or financial institutions like Visa or Paypal in Singapore have also launched an innovation lab over the last 3 years and are working on Proof of concepts with diverse startups from the region. Banks are also working together and with the government in Singapore on blockchain projects, exploring for example KYC shared-services utility that aims to streamline the KYC process. That has turned Singapore into a Fintech hub watched with interest by the rest of the world.
Connect with us to learn more about Fintech trends and startups in Asia, or organise a learning expedition with us to meet the most innovative Fintech players from the region !