Fintech partnerships - new cost paradigm for banks?
Following my recent pondering on sustainable economic growth I turn to fintech partnerships.
One thing is quite striking when you look at the results of the big banks. While profitability may have rebounded, return on equity is generally stuck in single digits. That is below the cost of capital.
Asian banks are doing better in this regard than most. But what the figures highlight is the pressing need for new thinking on costs. While the global revenue pool has shrunk since the crisis, regulatory pressure has pushed up costs and forced banks to put up more capital.
I believe only radical moves to reshape back offices, and embrace what fintech partnerships can offer, can bring costs back into line. Distributed Ledger Technology (DLT) – or blockchain – could well have a role to play here.
Asia in the lead
In many respects, the authorities in Asia are in the vanguard when it comes to promoting the use of fintech. The regulators in Hong Kong, Japan and Singapore, for instance, have set up dedicated teams to support fintech hubs. The end game – to eventually turbo charge their financial services sectors.
In Japan, bitcoin exchanges, funds and remittance companies are making numerous formal registrations with the Japan Financial Services Agency.
Japanese retail investors.
But, until there is a regulatory framework in place for bitcoin, no one is going to invest a single yen.
India and China are also experimenting with ‘digital currencies’. The People’s Bank of China first talked of launching its own cryptocurrency in January 2016 and has since carried out trials.
In India, blockchain solutions are being tested for core banking processes. The Institute of Development and Research in Banking Technology, established by the Reserve Bank of India, has partnered with the National Payments Corporation of India and a number of banks to test a trade finance application.
What fintech offers
In the short-term, the quickest wins may come from focusing on bringing automation to banking processes that have been left behind. At Euroclear, we have been working with a number of fintech businesses to deliver a range of solutions that address operational fails – Taskize or SetClaim - to deeply complicated market structures – and also on services to automate asset allocation for the funds industry.
What is for certain. Our objective as a neutral infrastructure is to fix market issues quickly and help to manage the increasing workloads imposed by new regulations.
But we are also keen to explore what DLT can deliver. We have pilot projects both in-house and through fintech partnerships. By allowing multiple market participants to use the same underlying record of securities holdings, DLT could transform the transaction processing environment.
I recognise that this may have an impact on certain services provided by market infrastructures such as Euroclear. But it is hard to imagine a DLT system without the oversight of a neutral party accountable for the integrity of the system and its data – a role for which we are ideally qualified and which we effectively play today.
I would suggest you read an article by my colleague, Luc Vantomme (Fintech focus – Time for a ‘reset’ in bank thinking) on this subject.
Ivan is the CEO for Euroclear Asia, based in Hong Kong and a passionate business developer and change leader. He is driven by new ideas that support the growth and internationalization of local financial markets and helping his customers reach their full potential.