FinTech  is  getting  a  lot  of  attention  lately  and  one  of  the  hot  topics  is  Bank-as-a-Service.  This  is a trend  started  by  Bancorp  in  the  US  (with  100+  private  non-bank  labels  now) and  more  recently,  a neobank  in  Germany,  Solaris  Bank  developed  modular  based  banking  toolkit  with  various  modern banking APIs. The esteemed and star-studded panel explores this topic, as well as  the challenges of scaling FinTech startups.

Meet the panelists at Techsauce Summit 2016 presented by Digital Ventures,

• Chris Skinner – CEO of The Finanser and CEO of Banking on Blockchain fund
• Vladislav Solodkiy (Slava) – CEO and Managing Partner at Life.SREDA VC
• Axel Winter 
• Moderator: Mohit Mehrotra - Southeast Asia Leader, Monitor Deloitte

Why haven’t newer entrants having able to scale up in Thailand?

Axel - Financial services is a complex environment, financial services is a commodity, to be successful, you really want to mix business models together. The deep thinking of what is a mature business model/technology platform has not arrived in a few markets. Nevertheless, some of the telcos and players in the payment space is already doing it. It takes time and it’s a difficult thing to do.

In Asia ex China, what are the challenges for large FinTech providers to scale up?

Chris – Thanks to the technology of today that is APIs, apps, analytics, blockchain, cloud and mobile etc, one can open source financial services. Hence, it’s not as difficult to launch something as a startup and change the game. For example, Stripe, Paypal and Klarna are changing the game in FinTech. For the past 5 years, the focus has been in Europe and America, in particular London and Silicon Valley as the FinTech hubs. Now it’s coming around to China, Singapore and Hong Kong as billions of dollars going into new models. In Europe and America it’s been about making the old banking system better, whereas here in Asia it’s actually creating new business models and system for financial inclusion.

Slava – The biggest problem for banks to scale to new technologies and new FinTech products is that they’re still thinking about new players as competitors. But, Amazon 10 years ago saw the trend that new players coming into the e-commerce industry and invested money in servers and engineers to support and help Amazon to scale. They decided not to compete with new players and provide infrastructure to them. Now, AWS generate 12% of Amazon’s revenue and 64% of profit. It is an Amazon style moment for banks now especially in Asia today. Do they want to develop services internally and compete with new players or to use the power of third party providers and generate 64% of profits by leveraging their license and existing infrastructure? In terms of scaling, they have to split their business into infrastructure business and real business.

Should financial services provider do Bank-as-a-service or Banking-as-a-service?

Axel – To take the longer view, one is that banks can create partnerships with anyone in the world and find new products and services to be a consumer player. Personally not a very likely scenario as banks has shown that they’re not

And then we look at the hardcore consumer businesses which requires different attitude and thinking and these players would be much closer to the customers. In this scenario, the bank would be the provider to service providers like AWS using APIs. This creates new business models for the banks and I believe that this would be the new norm.

Chris – It comes down to what does the customer want? There has not been a raft of customers leaving banks as they are considered as a secure store of money and regulated by government licenses. The question now is that does the customer want to move to design their own banking services using apps and APIs capabilities to link things together. Digital savvy customers are doing that and creating a lifestyle financial system that suit the way they live, rather than having something that is imposed upon them that’s the standard offerings that offers no personalisation. The more we see digital lifestyle financial structures being developed, which are coming from the FinTech community, banks would have to absorb those and build a hybrid. We went from FinTech 1.0 where everything is attacking the banking system, to FinTech 2.0 where the banks are incubating, accelerating and supporting that system to FinTech 3.0 which hasn’t come yet, where we have a hybrid structure of Fin and Tech fully integrated. The lifestyle financial structures that are offered will come from the incumbents and equally with the incumbents integrating a whole range of services from startup companies.

Who have done a great job in FinTech?

Slava– The best example is US-based Bancorp. When 2006 financial crises came, it pushed them to think about new business models otherwise they would be bankrupt. Many players are coming into the financial industry so they thought they could create new products using third party providers and focus on things they do best. Traditional banks try to do everything and it’s not the best solution. So, they launched the first bank-as-a-service platform – with Paypal, Google, T Mobile and Simple Bank launching products on their infrastructure. BBVA decided to split their business and compete with Bancorp in the US. Solaris Bank in Germany launched their platform not only for their own bank but also deployed this middleware bank-as-a-service platform in the UK and also connected with O2 and also provided this to Deutsche Post to launch financial services. There are not many players creating bank-as-a-service platform as it requires both an understanding of this philosophy and also deep pockets. But this is very necessary for Asia, and this cannot come from just a single bank. One bank cannot create a bank-as-a-service platform as the platform has to connect different countries. It has to be a platform between different banks and perhaps with Telcos too.

Is bank-as-a-service something that the banks in the region are open to doing?

Axel – I think bank-as-a-service will happen and it is happening. This is a good business model for banks. Ultimately, it is the only way to create truly new products and services. Banks have a very small vertical at the end if you look at the lifecycle of their products. The API would happen in the future.

Is it better to build your own APIs or bank should look at renting these capabilities from others?

Axel – Quite a few banks would try to acquire the technology from the market. This would be something banks can reinvent or better invent themselves. Even if it’s a commodity, banks can still differentiate in that space and build their own.

Chris – Incumbents have millions of customers, centuries of history and a strong capitalisation position. On the negative side, they have a physical infrastructure of distribution with technology of the 1960s and unfortunately this is their “handcuffs of heritage”. So the challenge of becoming an open source financial institution is that they’ve got millions of dollars invested in technologies that they’re just keeping the lights on and they don’t have any money left reinvent the lights. That’s why FinTech is coming into its own space and saying they can take the new technologies available and plug them into APIs to offer analytics services, better user experience, lower cost and higher scalability through cloud. Because of their handcuffs of heritage, the banks can’t embrace these technologies so easily which is why they have to move towards a hybrid structure to become an integrator of these components over time. As they integrate these components and APIs and other services from FinTech startups, they can then take off some of their handcuffs of heritage. To do that, the bank has to have a different culture and attitude, and the biggest challenge for most banks is that the leadership has no knowledge of technology and no understanding of what this means and therefore haven’t got the capabilities to make these decisions to do this right. That’s why DBS stands out in this region because they have someone who understands the background of technology as their CEO and they brought in a pretty disruptive Chief Innovation Officer who is doing some interesting things and other banks can’t do the same. But Asia is different from Europe and US because Asia isn’t so handcuffed by heritage. To be fit for the 20th century means open source, internet based and digital.

Slava – Sometimes, to build something from scratch is smarter, faster and cheaper than to try to change something that already exist, especially if these bodies are already very big and fat. One example of banking mindset – one banker said their new mobile app is much better than Simple Bank in terms of new design and functionalities but one still has to go to the branch to sign some documents and download the app, and go to the branch again if they encounter any problem.

What’s one thing that has to change in the digital ecosystem in Thailand?

Axel – Need deeper technology skills and appreciating/evaluating technology skills better.

Chris – Government involvement and stake in the digital ecosystem – should look at it things properly and get to the skin of the technologies. Successful centres like London, Singapore and Hong Kong are successful because the government are actively encouraging innovation. The UK government ordered the Bank of England to create a blockchain based real time settlement system.

Slava – Life.Sreda completed their research “Money of the Future”: more than 100 companies globally now provide open APIs for FinTech players and banks. For people who are interested to know, download it for free.

Question from audience: Blockchain/cryptocurrency presents the ability for users to own their private key and have complete control of their money. What is the barrier to entry to this?

Chris – It’s a technology issue. The general population have no idea what cryptocurrency, blockchain, bitcoin is. For those who understand or have some knowledge, it’s difficult to work out how to use them because technically it’s too difficult. We’re at that stage where we have the infrastructure, knowledge and technological capabilities but there’s no way to put it in the customer hands. In the next 5-10 years, when is it in the customers’ hands, it would be transformational. For digital identity, if you put the private key infrastructure for the customers to own and accessible under their command, rather than under the ownership of a bank or government, then we can see radically different business models.