Fintech and impacts on the banking and finance sector in digital transformation

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When talking about digital transformation in the financial sector and breakthroughs, we can’t help but mention fintech. This article will help you better understand it and its breakthrough impact on banking and finance.

1. What is Fintech?

Fintech (short for Financial Technology) is:

Computer programs and other technology used to support or enable banking and financial services.

We can all see technology pushing the workflow and processes in the financial services industry very strongly. Previous jobs processed with paper money, cumbersome computers and manual human interaction is now completely completed by means of digital interfaces. With the popularity of financial services around the world, the breakthrough opportunity for financial technology startups (fintech) is huge.

2. Classification: Which fintech groups are there?

7 fintech groups: robotics consulting, blockchain, insurance technology, management technology, digital banking, money transfer…

Business Insider Intelligence classifies the following financial technology/fintech services groups:

  • Robo-advisors and Personal Finance
  • Blockchain and Bitcoin
  • Insurance technology (Insurtech)
  • Regulatory Technology (Regtech)
  • Digital Banks
  • Payments & Remittances
  • Alternative Finance

3. Fintech ecosystem: Which are the 5 components in the ecosystem? How are they related?

According to Fintech analysis report: Fintech: Ecosystem and Business Model by In Lee, School of Computer Science, Western Illinois University of America, the Fintech ecosystem consists of 5 components Basically: (1) fintech startups (eg in payments, asset management, lending, capital mobilization from the community, capital markets and companies insurrance); (2) Technology developers (for example: big data analysis, cloud computing, virtual money, social networking…); (3) Government (for example, legislative and financial regulators); (4) Financial services customers (individuals and organizations), and (5) Traditional financial institutions (for example, traditional banks, insurance companies, securities, and brokerages and venture capitalists).

5 components in fintech ecosystem: fintech startups, government, technology developers, financial customers, traditional financial institutions. Source: In Lee, Western Illinois University.

The fintech startups: at the center of fintech ecosystem. These companies have an entrepreneurial spirit, have been promoting mainstream innovations in the areas of payment, asset management, lending, capital mobilization, capital markets and insurance by reducing operating costs, targeting more niche markets, and providing more personalized services than traditional financial companies. Consumers, instead of relying on a single financial institution to satisfy their needs, are beginning to choose the services they want from different companies. For example, in the US, a consumer can manage loans through SoFi, while using PayPal for payments, Rocket Mortgage gives mortgages and Robinhood to manage securities. Venture investors and private equity funds support and benefit from creating startups and fintech investments that increase significantly over time.

Technology developers provide digital platforms such as social networks, big data analytics, cloud computing, artificial intelligence, smartphones and mobile services, etc. Technology developers create a favorable environment for start-up companies to deploy innovative services quickly. Big data analysis can be used to provide unique personalized services to customers and cloud computing that can be used for fintech startups lacking cash to deploy services on the web platform with part of internal infrastructure development costs. Algorithm trading strategies can be used as a basis for robo-advisor robot services at a much lower cost than traditional asset management services. Social networks facilitate community development when mobilizing capital from communities (crowfunding) or personal-to-personal loans (P2P lending).

The government has created a favorable legal environment for fintech since the financial crisis of 2008. Depending on the national economic development plans and economic policies, different governments can make different regulations (such as licensing financial services, reducing capital requirements, and tax incentives) for start-up companies to stimulate fintech innovation and facilitate global financial competition. On the other hand, since 2008, traditional financial institutions have been subjected to more stringent adjustments, capital requirements and reports from regulatory agencies. Fintech incentives or reduction requirements allow them to offer more personalized, cheap and accessible financial services to consumers compared to traditional organizations.

Financial customers are a source of revenue for fintech companies. While large organizations are an important source of revenue, the main source of revenue for fintech companies is individual customers and small and medium enterprises (SMEs). A survey shows the most popular use of fintech services among young and wealthy customers. The first fintech users tended to be more knowledgeable about technology, young, urban and higher income. Currently, millennials (people aged 18 to 34, born around 1980-2000) make up a significant portion of fintech consumption in most countries. The demographic indicators show the advantages for fintech companies, in the next decade the technology savvy millennial will account for the majority of the population and promote the growth of technology financial services.

Traditional financial institutions are also the main drivers of fintech ecosystem. After realizing fintech’s breakthrough power and to reduce fintech’s impact on the market, traditional financial institutions are now re-evaluating their current business models and developing strategy to actively innovate fintech.

4. 6 Business models: How does Fintech make money?

Also, according to Fintech analysis report: Ecology and business model, there are 6 business models of fintech for services: payment, wealth management, crowdfunding, lending, market finance and insurance services. We will spend more time analyzing each model because it can reveal many breakthrough opportunities for financial institutions and fintech in Vietnam in the process of creating new products and services, bringing digital growth for businesses.

6 business models of Fintech: Payment, Wealth management, Crowdfunding, lending, financial markets, and insurance services.

Payment: relatively simple compared to other financial products and services. Fintech companies focus on payments that can get customers quickly with lower costs and are one of the fastest moves in innovation and acquiring new payment capabilities.

The two fintechs payment markets are (1) payment to consumers and retailers and (2) wholesale and corporate payments. Payment is one of the most used retail financial services on a daily basis, as well as one of the least managed financial services. According to BNY Mellon, fintechs payment to consumers and retailers including mobile wallets, mobile payments P2P (people-to-people), foreign exchange and remittances, instant payments and digital money solutions. These services improve the customer experience, who seek a seamless payment experience in terms of speed, convenience, and multi-channel access.

Wealth management: One of the fintech business models of popular asset management is robo-advisors, providing financial advice to a small price of a real mentor. They work by using algorithms to suggest a set of assets to invest based on customers’ preferences and investment styles. This business model benefits from changing demographics and consumer behavior that favor passive investment strategies, simple and transparent fee structures, and attractive economics for minimal investment or almost no investment.

Crowdfunding: Capital mobilization from the community consists of three parties: (1) project initiators or entrepreneurs need funding, (2) contributors may be interested in supporting goals or projects and (3) organization facilitates participation between contributors and initiators. The coordinating organization allows contributors to access information about various initiatives and funding opportunities for product/service development.

The most popular models are raising funds based on rewards, depending on voluntary contributions and equity. Capital mobilization from the community is based on the award of attractive fundraising options for thousands of small businesses and creative projects. In case there is any interest rate charged to the amount of capital mobilized from the community, the interest rate borrower is comfortable and can guarantee a refund within the stipulated time. In return for funds from supporters, businesses will usually return certain types of rewards. Crowdfunding based on voluntary contributions is a way to make money for a charity project by asking donors to contribute money. Crowdfunding based on equity is an attractive option for small and medium-sized companies (SMEs) as capital requirements increase, making them less prioritized by traditional banks.

Lending: Peer-to-consumer lending (P2P, Peer-to-Peer) and peer-to-peer (P2P) lending are another mainstream trend in fintech. P2P loan fintechs allow individuals and businesses to borrow and lend money. With efficient structures, P2P fintech companies can offer low interest rates and improve lending processes between lenders and borrowers. A small but important difference from a bank is that these fintechs are technically not related to lending, but simply a connection between lenders and borrowers and user fees.

Capital markets: Fintech’s new business models hold all capital markets such as investment, foreign exchange, trading, risk management and research. A promising field of capital market fintech is trading. Fintechs transactions allow investors and traders to connect with each other to discuss and share knowledge, order to buy and sell goods and stocks, and track risks in real time. Another area of the fintech capital market business model is foreign currency transactions. Foreign currency transactions are a service dominated by financial institutions. Fintechs reduces barriers and costs for individuals and small and medium enterprises involved in foreign currency transactions worldwide. Users can view live rates and send/receive money in different currencies securely in real time, all via their mobile device. Fintechs providing this service can do so at a much lower cost, through more familiar payment methods for individual or business customers.

Insurance: In fintech insurance business models, fintechs will create a more direct relationship between insurance companies and customers. They use data analysis to calculate and compare risks and because of the potential customer group, customers are provided products to meet their needs (eg car insurance, personal life, health and responsibility insurance). They also enhance efficiency with health care payment processes. The business model fintech insurance seems to be most easily accepted by traditional insurance units. This technology allows insurance companies to expand their data collection to non-traditional sources to complement traditional models, improving their risk analysis.

5. Fintech’s five major trends in the world in 2018?

Forbes has released an analysis of the top 5 Fintech trends of 2018, including: mobile technology, digital-only banks, Biometric technologies, Blockchain technology, Artificial intelligence.

Fintech 5 trends in 2018. Source (English): Forbes

Mobile technology: As more and more people use mobile devices; financial services will need mobility. According to PwC’s 2018 Digital Banking Consumer Survey, the number of people who like to use smartphones for bank transactions has increased. With mobile banking, customers can manage money without going to a real branch.

Digital-only bank: The trend for mobile banking has led to a large number of digital banks without branches or transaction offices. They are especially popular with millennials (people aged 18-39, born in the 1980-2000 years), who often use smartphones for financial transactions. Examples of digital banks are Revolut and N26. These banks provide applications that allow customers to manage money on the move. No longer wondering, visiting bank branches will decrease drastically in the near future.

Biometric technology: In the digital age, the financial industry is increasingly at risk of cyberattacks. Therefore, security has become the top priority for fintech. One of the ways to prevent fraud is to apply biometric technology. However, security is not the only reason to use biometric authentication. This technology also makes it easier and faster to log into applications.

Blockchain technology: The financial industry is one of the first industries to test blockchain. More and more fintech startups use blockchain technology because of its transparency. Another advantage of blockchain is that smart contracts can automate financial operations. Therefore, financial institutions are expected to continue to focus on this technology.

Artificial Intelligence (AI): Most experts agree that AI will have a big impact on fintech in the near future. There are several reasons why fintech uses AI. First of all, AI automates tasks such as data analysis, thus saving a considerable amount of time. This technology is also used to create chatbots and robo-mentors. But more importantly, AI can help detect fraud by tracking customer behavior patterns.

Fintech also has certain limitations and challenges, especially customer attraction and profitability. Therefore, the fintech is more willing to cooperate and adjust the business model.

Banks, financial institutions and insurance companies themselves have also developed strategies to ensure they are still relevant and competitive. Many units carry out innovative strategies, buy back, cooperate or build their own fintech. The love-hate-close relationship between the financial institutions in the industry and the fintech is still changing. One thing we can be sure of is that fintech is not only perceived as a threat, nor can it be ignored.

6. Fintech in Vietnam: potentials, opportunities and challenges

Fintech Vietnam picture March, 2017. Source: Asian Development Bank (ADB), Mekong Business Institute (MBI).

According to statistics in Vietnam as of March 2017, there are 48 fintech in 9 different areas, with 22 units in the payment segment (accounting for 48%)

Statistics of 48 fintech in Vietnam in March 2017. Source: Fintech News.

It seems that these units are also struggling to attract customers to use mobile technologies (applications, QR code, etc.) and economic and profit problems.

Many big players in technology and telecommunications businesses have also entered the market with their solutions such as VNG with Zingpay/Zalopay, FPT, Viettel and VTPay, VTC with VTCPay, VinaPay/VNPay, etc.

In statistics that do not include fintech of banks, financial groups such as Quickpay, Savy of TPBank, VPBank’s VPDirect or enterprises that have invested heavily in innovation, such as ACB, VIB, Shinhan Bank, Bao Viet… or cooperation between VPBank and Timo, between Momo and Standard Chartered Bank and recently with Sunlife in providing insurance services. In March 2018 in Hanoi, VietinBank officially announced the Cooperation Agreement with Fintech – Opportunity Network (ON) to provide Customer Connection Services on a digital platform.

Other financial sectors such as insurance, securities, fund management, assets, etc. seem to be “listening” to the situation and have not had many breakthroughs (or I don’t know yet?).

Vietnam’s fintech ecosystem is actively involved and strongly promoted by venture capital funds, nurseries such as VinaCapital, Topica, VIISA, nest, Expara, BTIC, etc. It is true that a startup country has never seen many funds, many startups, many “sharks”… as it is now! The shark tank program on TV attracted a lot of attention from everyone. I know many of the ICO/virtual money development and soon-to-be-released units also hire “troops” in Vietnam to operate. Show that there must be some reason – like technological capacity, creativity… in Vietnamese people?

The State Bank is also studying to build an experimental legal framework to promote the development of Fintech enterprises, in line with the guidelines and orientations of the Government of Vietnam on the creation of the legal environment and favorable business for creative start-up support activities under Decision No. 844/QD-TTg dated April 18, 2018 of the Prime Minister approving the scheme “supporting the national entrepreneurship ecosystem to 2025 “. It seems that the policy is clear, the problem is mainly in the issue of implementation and creating a practical legal corridor for the development of fintech. NATEC (Department of Market Development and Science and Technology Enterprise) is also taking strong steps on this content.

Looking at the Singapore Fintech Festival example (November 12-14, 2018) attracts 30,000 people from more than 100 participating countries, I think fintech Vietnam has a lot of potential, and banks can research more closely competition cooperation strategies with fintech. In order for this ecosystem to grow healthy and in the right direction, there will be more to do! In the next 3-5 years, which units will emerge leading in this ecosystem?

Hue Tran
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About the author:

Ms. Hue Tran has nearly 4 years (2013-2017) working at Gartner in the position of Senior Account Director, also cooperating with many senior leaders of leading enterprises in Vietnam. She has a deep understanding of digital transformation and technology application in business strategy. Later, she went into the financial sector, working in anti-money laundering sector at Accuity (Regional Account Manager). She has also assisted organizations in Asia to transform internal communications at Workplace by Facebook. Passionate with digital transformation, she has continuously researched, explored, learned and actively participated in many activities related to this topic such as Vietnam Journey Group, Digital Bank, IT Leader Club, Launch,…

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