The Taiwan Banker

Financial technology is changing the business models of financial institutions globally. Digital-first financial services has been beneficial to many people. For example, during the pandemic, mobile payments’ utilization rate in Taiwan has increased significantly, marking an important step in the progression towards a cashless society. In the future, the integration of finance and technology will inevitably become closer. Taiwanese financial firms need to be ready for these changes. Financial technology (fintech) is changing some key aspects of how financial firms operate, which has important implications for the industry’s future development. In addition to making financial services safer and more efficient, fintech is able to both boost financial inclusion and accelerate the digital transformation of incumbent financial firms. Digital transformation has sped up since the coronavirus pandemic broke out in early 2020, largely by necessity. In countries hit hard by the pandemic early on, the switch to online banking was swift, and likely irreversible. While Taiwan contained the virus exceptionally well last year, it also did not anticipate how the financial services industry should respond in the event of a local outbreak. When the outbreak came in May, Taiwan’s financial institutions were to some degree constrained by their reliance on physical branches and face-to-face interactions. To be sure, Taiwan is making good progress with mobile payment uptake and is on track to reach 90% penetration by 2025. But that process is more reliant on consumer and merchant behavior than that of banks. Indeed, changing the ways of certain traditional financial institutions (so that they fully adapt to the digital age) could prove to be challenging, unless they have clear impetus to change. Competitive pressure from fintech firms just might be that impetus. Venture capital is bullish on fintech The fintech boom shows no signs of slowing down, and some of the world’s largest technology companies are aggressively foraying into digital financial services, such as Facebook and Google. The presence of Big Tech in fintech is resulting in some consolidation, and it can be expected that M&A activity will pick up as large technology firms (usually through their venture capital arms) look to cement their fintech portfolios. While there has been talk of a fintech bubble for years, it never seems to pop – at least not yet. Meanwhile, VCs continue pouring money into fintechs. According research firm CB Insights, venture capitalists invested US$34 billion in fintech companies in the second quarter of this year alone, a record high, and for every US$5 of venture capital money invested, up to US$1 went to fintechs. Financial data provider PitchBook estimates that in the first half of 2021, VCs sold a total of US$70 billion worth of shares in fintech start-ups, which is almost twice as much as in 2020. One of the most prominent deals in the first half of the year was Visa’s acquisition of the Swedish fintech Tink for 1.8 billion euros (US$2.2 billion). Established in 2012, Tink provides services that make it easier for banks and other financial institutions to use consumer financial data. Tink is used by more than 3,400 banks and more than 250 million customers in Europe, which shows that Visa wants sees financial technology as integral to growing its European business. In addition, JPMorgan Asset & Wealth Management, an asset management company owned by JPMorgan Chase, has US$2.4 trillion in integrated ESG assets under management. To grow this business, JPMorgan Chase acquired the fintech startup Open Invest, known for its strong data analysis capabilities. This acquisition will help JPMorgan Chase better meet the needs of investors focused on sustainable investments. Data analysis capabilities are important given that such information is disclosed in real time, and allows investors to make better informed decisions about ESG-related investments. Finally, online insurance is another fast-growing area of digital financial services. In the first quarter of 2021 alone, there were 82 insurtech M&A deals totaling US$1.8 billion. Consumers and companies are forced to go digital Like it or not, consumers and firms are being forced to go digital because of the pandemic. While this process began years ago, it has accelerated since early 2020. While there are surely some inconveniences to be overcome, people are also finding that certain transactions can be completed digitally in a seamless manner. For digital banks and other fintechs that are designed to offer these kinds of digital services, it is easy to meet changing customer needs. However, for incumbent banks accustomed to physical branches and lots of paperwork, there is a learning curve that must be overcome. Incumbents will be at a disadvantage if they do not make a substantial effort to go digital. The largest financial firms and technology companies are not having trouble making this transition; Goldman Sachs and JPMorgan Chase, for instance, have been busy acquiring fintechs and other firms that they can use to strengthen their products and services in the digital banking era. Of course, not all acquisitions of fintechs by banks go smoothly. Sometimes the corporate cultures of incumbents and fintechs are too different, or due diligence work uncovers irregularities that necessitates nixing a deal. The Spanish bank BBVA’s acquisition of the fintech Simple (it bought Simple in 2014) is one deal that did not pan out; BBVA plans to shut Simple down later this year. One of the reasons there is so much hype about fintech is that the most successful fintech startups can achievement sky-high valuations long before they go public. Consider the US online payment services firm Stripe, which is valued at US$95 billion. Stripe started out in payments, but has gradually expanded its offerings and now includes services such as tax planning. According to the CB Insights Unicorn Tracker, as of mid-2021, there are 746 unicorn companies (firms valued at more than US$1 billion in private markets), up 56% over the same period a year ago, with a combined valuation of US$2.36 trillion. Of those 746 unicorns, 130 are fintechs, with a combined valuation of US$513.9 billion. Among unicorns, fintechs are both the most prevalent type of company and the most valuable, followed by internet services and artificial intelligence. Further, there are more than 33 “super unicorns” valued at more than US$10 billion, up 40% over 2020. 9 of those super unicorns are fintechs, with a combined valuation of US$250 billion. The financial services industry must rejig payment nfrastructure According to PriceWaterhouseCoopers’ (PwC) report on the future of payments published in the second quarter of the year, the financial services industry is undergoing a critical transformation process catalysed by the pandemic. PwC’s report has several key predictions. The first is that from 2020 to 2025, global cashless transaction volume will grow by more than 80%, from approximately 1 trillion transactions to nearly 1.9 trillion transactions. Secondly, by 2030, the total amount of global cashless transactions will surge to 3 trillion (Figure 3), reaching 2 to 3 times the current level. Finally, Asia Pacific will grow faster than any other region. In APAC, the total amount of cashless transactions will grow by 109% from 2020 to 2025, and 76% from 2025 to 2030. Africa will grow at a slightly slower pace, 78% from 2020 to 2025 and 64% from 2025 to 2030; while in Europe the growth rates will be 64% and 39% respectively; in Latin America 52% and 48% and the US and Canada (considered one market for the purposes of this report) 43% and 35%. At the same time, the accelerated transformation of digital payments will create new opportunities for the entire payment ecosystem. With the emergence of new business models, the financial services industry must rejig payment infrastructure. Trust will remain paramount in the financial services industry One of the most important trends that the financial industry must focus on is financial inclusion, which is increasingly enabled by digital financial technology, especially in developing countries. Mobile devices and affordable and convenient payment mechanisms will continue to drive inclusive finance while avoiding aggravating social divisions. At present, it is estimated that the penetration rate of smartphones will reach 80% globally by 2025, mainly through its continued rapid growth in emerging markets such as Indonesia, Pakistan and Mexico. This will allow more people in rural areas to access financial services. One thing that has not changed in the financial industry despite the rise of fintech is the paramountcy of trust. All the digital technology in the world is no substitute for integrity and reliability. Thomas Huang, chairman of Taiwan’s Financial Supervisory Commission (FSC), notes that trust will remain integral to the financial industry in the future, and that the fundamentals of banking have not changed. Banks must operate with integrity, regardless of whether they offer their services through physical branches or online. While digitization offers many benefits to the financial services industry, banking still requires a human touch. The human touch is integral to establishing and maintaining the trust on which the industry depends. The financial industry must keep this in mind as it adapts its business models to the digital era.