Fintech on Friday: Banks wary of ‘big tech’ count blessings of regulation
‘Big tech’ platforms are increasingly integrating financial services into business models, competing against a challenged banking sector. Digital shoppers using Amazon and China’s Alibaba often dropped out of transactions before payments were taken, as the process was too slow, recalls Jeroen van Oerle, global fintech equities portfolio manager at Lombard Odier Investment Managers.
Most have since revamped payment processes and are continuing to innovate. “In order to increase the conversion ratio of e-commerce shoppers, they have refocused on payments,” says Mr van Oerle, who joined the Swiss private bank-owned investment house in January 2020, after six years as a fintech portfolio manager at Robeco in the Dutch port city of Rotterdam.
Having seen a massive increase in customer “stickiness” as a result, they began to analyse the extensive data gathered about the “fundamental nature” and behaviour of users, leading to subsequent incremental moves into lending, launching ‘e-wallets’ and managing cash in money market funds.
“The number one goal of Apple and all the others is to lock in existing customers, keeping them on their platforms for longer,” he says. This new mindset has enabled the “roll out” of financial services to customers poorly served by traditional players, with the trend accelerated by Covid.
“The digital piece is no longer just a ‘nice-to-have’ feature,” adds Mr van Oerle. “Those who have started on this digital journey several years ago are already winning.”
Victims of their success
But some tech players have become victims of their own success, now subject to suspicion from a society fearful of social media companies holding vast volumes of data on citizens. “Under [president-elect Joe] Biden, we may see new initiatives to cut the power of big social platforms, which could make them spin off financial activities,” he warns.
Although banks are already highly regulated and plagued by cost pressures, low interest rates and money laundering issues, it remains insulated from potential competition of more innovative technology companies in financial services.
“These rules have protected the sector from entrance of big tech players,” says Mr van Oerle. “Apple, Amazon, Google or ’Baba don’t want to be regulated as a fully licenced bank, as they would have to keep 14.5 per cent of capital on their balance sheet, which would imply their return on assets would decrease.”
In order to encroach further into wealth management and financial services, tech firms may need to co-operate more closely with banks. Apple launching credit cards with Goldman Sachs, Capital One Financial’s work with Amazon and Green Dot facilitating banking services for Uber are all examples of future partnership models.
“Regulation has added costs, but it also allowed banks to survive the threat of big tech,” he says.
Caught napping
Not all banks have innovated uniformly, says Mr van Oerle, with Covid exposing players lacking a clear digitalisation strategy. Banks forced to stop writing mortgages and curtail other branch-based business failed to replace revenues with effective digital strategy, now the most important factor both from the customer experience and business continuity point of view. “There is no offline world anymore,” warns Mr van Oerle. “This is really where the big difference is now between banks, insurance companies and asset managers. It’s a defining moment.”
North European, UK and Asian banking models have all responded to the crisis. “For the banks doing well, the whole process is digital, including signing documents and transferring data,” he says. The laggards had impressive digital plans, dragged down by a silo mentality. “They would build a nice shiny Ferrari car, which everyone would look at in awe. But when you open the hood, everyone laughs at the Renault engine, held together by tape and bandages. This is really where we are today.”
Mr van Oerle recently wrote a paper about how digitalisation – and tokenisation in particular – would transform asset management. This involves the use of a blockchain register to issue digital representation of assets, mixing in private companies, copyrights, paintings and other previously untradeable assets into portfolios, improving risk-return profiles through diversification.
This could lead to an investment revolution similar to that of the early 1990s. “Thirty years ago, asset management firms began to offer access to emerging markets, which retail investors could not previously buy into,” he recalls. Today’s move into tokenised “new assets” could herald a similar shift, potentially “democratising” investments. This is a fitting move for Mr van Oerle, a supporter of the Feyenoord Rotterdam football team, widely regarded in The Netherlands as the “people’s club”.
