It may not be obvious, but mindsets are changing. Big banks are embracing innovation and, in some cases, trying to emulate the ‘dare-to-fail’ spirit at fintech startups. If 2016 is anything to go by, we should see more bank-fintech collaboration in 2017. Thank you, MAS.
Getting banks to embrace innovation
The basic business model for banks is actually quite simple. One, collect deposits from savers and lend out to borrowers. Two, facilitate payments. Three, execute trades in the financial markets. Put the three parts together and you have a typical modern bank.
Banking is competitive, but incumbents have inherent strengths. They have tremendous financial strength, built upon millions (if not billions) of savers and borrowers. The branch network is not easily replicable. And finally, the banking license is difficult to obtain.
Banks have nothing to fear except themselves. As long as they don’t do stupid stuffs like lending to risky borrowers or blowing themselves up with speculative investments, most banks are able to grow with the economy without much trouble.
Hence, there is no real impetus to innovate. Why fix something that is not broken? Blockchain for payments? Well, Swift serves us fine. P2P lending for SMEs? No, thanks. That’s too risky. Robot-advisory? That’s interesting, but our customers still want the human touch. These are some common replies one gets when talking to banks about innovation.
But banks now get it
No longer. Banks are now waking up to the fact that the pace of disruption is relentless. And although some are more skeptical, most agree that it is better to start experimenting now than to be completely blindsided by innovation. Today, all the major banks based in Singapore have in-house innovation units, and accelerator or incubator programmes.
This is in no small part thanks to MAS, the financial regulator. It recognizes that innovation will happen and wants to be on the right side of disruption. Take the example of Open API. This basically means opening up selective bank information to external software developers. As a bank, it makes little commercial sense – it benefits others and add little value to itself. But Open API catalyzes innovation across the industry and makes the customer experience richer. Customer wins, banks not necessarily as much. But MAS would not stand such myopic thinking. It sees Open API as an unstoppable force and strongly encourage adoption. Whether MAS uses the carrot, the stick or both, it is certainly working. All the three local banks have now announced Open API frameworks.
More collaboration in 2017?
2016 saw banks gingerly rolling out their fintech units and taking tentative steps at understanding innovation. There were some collaborations too. DBS struck cross-referral arrangements with p2p platforms MoolahSense and Funding Societies. UOB invested into equity crowdfunding platform OurCrowd and partnered ecommerce marketplace cloudBuy to launch a marketplace for SMEs. What is not immediately obvious is the culture of innovation slowly permeating through the mindset of banking management.
It is happening. At the recent MAS fintech festival, several startups that we spoke to remarked that banks are exploring potential areas of collaboration. This is unthinkable a few years ago. But banks now realize that they need fintech for their inventive spirit and fintech need banks for their domain knowledge. One Chief Innovation Officer even said that banks are in fact the biggest fintech players here!
2016 is a good start. And if past experience is anything to go by, 2017 would be a more fruitful year for bank-fintech collaboration.
Thank you, MAS. Well done.