The Taiwan Banker

The coronavirus pandemic has upended many industries, with the financial sector no exception.Yet given the increasing use of financial technology (fintech) in finance, the pandemic-induced shift to digitization is an opportunity for many financial firms.For incumbent retail banks, it is imperative to accelerate digitization. Otherwise, their competitiveness could suffer as agile digital banks and other fintechs increasingly set the rules of the game.Before the pandemic, digitization was already widespread in the financial industry. However, Covid-19 has acted as a catalyst in this regard, fast-tracking digitization processes that might have otherwise taken much longer to fully implement. In particular, electronic payments and online banking have surged since early 2020. Whereas in the past, most people chose to transact and bank this way for convenience, now there is an added safety consideration as there are persistent concerns about the ability of SARS-CoV-2 to spread via paper notes and coins, as well as general face-to-face interactions. A recent McKinsey & Company survey illustrates these points. The survey found that Americans have become more accepting of digital financial technology since the start of the pandemic. Young millennials and Gen Zers (born between 1996 and 2015) are most interested in financial technology and have more financial accounts than other generations, the survey found. How to be a successful digital bank Digital banking is becoming increasingly prevalent globally on the back of enthusiasm for such services from the youth market and increased digitization of financial services amid the coronavirus pandemic. In Taiwan, two digital banks have launched thus far in 2021, both of Japanese origin: Rakuten Bank and LINE Bank, while online lenders have been active for longer in countries such as South Korea, the United States and various European markets. Thus far, digital banks have been less focused on segmenting customers than traditional banks, and instead have made an effort to cast a wide net by offering numerous free services and in some cases high deposit interest rates to quickly build their customer bases. For example, the San Francisco-based pure-play digital bank Chime offers free handling fees, free overdrafts when the deposit balance reaches a certain amount, and the ability to receive one’s salary in advance. Low or zero-cost services like these are extremely attractive to people with financial difficulties. For example, depositors can open savings and checking accounts with Chime. With direct deposit of one’s salary, a Chime customer can get paid up to two days early. In addition, when the deposit balance exceeds $500, they can also overdraft up to US$200 free of charge. This service is preferred by people with limited financial resources. Thus far, Chime has been one of the winners of the coronavirus pandemic, despite the pandemic’s negative overall effect on economic growth. As the unemployment rate rose in the United States last year, and more people fell on hard times, Chime benefited. The company’s services are more affordable than those of traditional lenders and it is possible to sign up for an account completely digitally; the process only takes two minutes. Since the pandemic began in early 2020, Chime’s monthly new registered users have reached 100,000, while the company's market value has exceeded US$14 billion (about NT$400 billion), making it the most valuable fintech unicorn in the U.S. as it has become valuable than Robinhood, an online brokerage firm. Chime is now on the road to an IPO. The pandemic accelerates digitization of the financial sector, helping banks attract more customers In markets where regulations are not constraining their activity too severely, digital banks are finding strong interest in their services. Even in rich countries like the United States, there is a significant portion of the population that is underbanked. Such a person likely has a bank account, but cannot get a loan due to a poor credit rating. Digital banks like Chime are catering to this market segment, and thus promoting financial inclusion. In the long run, digital lenders like Chime could indeed threaten the position of some incumbent banks. In some cases, it is only a question of what regulators are willing to permit. With that in mind, investors (and in particular, venture capitalists) are eagerly investing in digital banks. According to KPMG, compared with traditional banks, financial firms that have introduced fintech in their operations have operating costs that are 70% lower than those of larger physical banks, and can better control costs in general. At the same time, digital banks are nimbler than most incumbents, which rely heavily on manual operations. When it comes to corporate lending, better-digitized banks can process loans faster (in some cases, just one day) than their counterparts more reliant on manual processes. In contrast, when an incumbent bank processes a loan, it takes at least one week for funding to reach the customer’s account. Thus, it is no surprise that digitally adroit banks are not only more competitive and efficient than incumbents, also more popular with customers. The retail industry also offers financial services, challenging incumbent retail lenders With retailers increasingly offering financial services, financial giants such as JPMorgan Chase and Goldman Sachs are steeling themselves for a long battle ahead, setting up new dedicated departments and cross-industry alliances. Jamie Dimon, CEO of JPMorgan Chase, has said that the rise of financial technology is increasingly threatening large traditional banks. For example, many financial services such as loans, payments, or investments that were monopolized by traditional banks in the past have become more intuitive and easier to use and more efficient after the introduction of new technologies. Not only that, with the rise of online social platforms and the network effect, the popularity of new financial products has greatly increased, which naturally contributes to the increase in market share of fintech firms. These new technologies with platform channels are undoubtedly a big challenge for traditional banks that rely on interpersonal communication. Not only is financial technology advancing, but even large retailers such as Amazon and Wal-Mart are putting pressure on traditional banks. These retail channels have at their disposal a large amount of consumption data, and the introduction of electronic payments into their ecosystems allows retailers to also provide certain financial services. If banks do not want to see their market share further eroded, they will have to squarely face these challenges. Goldman Sachs and JP Morgan Chase are catching up To meet the challenge posed by tech firms and retailers, Goldman Sachs and JPMorgan Chase have both beefed up their digital capabilities in recent years. In the wake of the 2008-09 global financial crisis, Goldman Sachs began strengthening its competitiveness and as early as 2012, it began to invest in fintech firms. In just over eight years, it has invested in 58 fintechs and successively launched online banking and online loan platforms. This is evident in its aggressive deployment. Another veteran financial giant, JP MorganChase, also announced in June that it would acquire Nutmeg, a financial technology company with assets of more than 3.5 billion pounds, as a stepping stone to enter the UK retail consumer and investment market. In addition, Amazon, the global e-commerce leader, is targeting the giant emerging market of India. It started by moving into the local auto insurance market, and gradually expanded to health insurance and flights. In the future, Amazon will likely expand into more insurance services in India. It is easy to purchase insurance through Amazon Pay. The application can be easily completed in just three minutes, a stark contrast to the complicated and lengthy application process for traditional insurance products. Fintech is going mainstream, with venture capital playing a leading role Consumer finance-oriented fintech not only helps related industries to flourish but also allows venture capitalists to find attractive investment opportunities. For instance, VC investment in fintech in the United States is surging. In 2020, 21 VC-invested fintech companies in the U.S. successfully went public through IPOs, raising more than US$14 billion. In addition, 15 fintechs went public in the U.S. last year through a SPAC (special purpose acquisition company), compared to just 2 that did so in 2019. It is clear that fintech is booming, and that the SPAC route to going public is growing in tandem. Overall, catalyzed by the pandemic, the financial sector is fast-tracking digitization. Incumbent lenders, particularly those that are well-capitalized, can be expected to continue investing heavily to increase their digital capabilities, to meet the challenge from fintechs and offer better and more convenient services to their customers. Competition will intensify in the years ahead as fintechs, incumbent banks and firms from other industries (such as retailers) with strong digital capabilities all vie for a share of the pie.