Fintech Decrypted

A guide to helping you understand this thing called financial technology and how it is changing our lives.

Chances are, you have probably heard the term “fintech” being mentioned in passing conversations or perhaps in the news. But what is it actually?

Fintech is short for “Financial Technologies”. In broad definition, it is used to describe new technology applied to improve and automate the delivery and use of financial services1. Fintech was initially used to refer to technology employed by established financial institutions at their back-end systems1.

Since then, there has been a shift to more consumer-oriented services and therefore a more consumer-oriented definition of the term1. Today, fintech is often used to reference technologies that are disrupting traditional financial services, including mobile payments, money transfers, loans, fundraising and asset management2.

So what? You may ask.

The reality is fintech may potentially change finance as profoundly as the issuance of the first permanent banknotes by the Bank of England in 16953. Some opine that fintech may not only change the way we bank, purchase and invest, it may change the very definition of money as well3. Fintech is big, it is growing, it is disruptive3 – and it is already impacting your life, even if you may not be aware of it.

Globally, it is estimated that the value of fintech investments will amount to about US$40 billion by 20204. While fintech is still relatively new in Malaysia, it is growing rapidly4. Sixty-six percent of Malaysian banks surveyed in 2018 aimed to reach digital maturity by 2020 and are very much focused on investing in technology inline with their growth strategies5.

Without doubt, the growth and evolution of fintech will change the financial industry and impact our lives in the future.

Evolving how we bank

Thanks to fintech, we have seen banking undergo a significant transformation6. The days of lining up to deposit or withdraw money at the bank teller have been replaced with online banking, mobile banking apps, and even fully online banks6. Through online banking, banks can offer a combination of minimal fees and convenience that traditional banks may not be able to match6. To keep up, incumbent big banks are adapting by investing in their own fintech innovations or working with fintech start-ups4.

At HSBC, our online banking platform and mobile banking apps provide the convenience of banking wherever you are in the world, whenever you need to access your finances. The recently introduced real-time payment and collection DuitNow service, for example, allows you to perform instant domestic fund transfers 24/7 to and from banks in Malaysia via HSBC Personal Internet Banking and our mobile banking app. DuitNow aims to simplify online banking transfers by doing away with difficult to remember bank details, and requiring only a mobile or identity card number for individuals, or business registration number for companies – ultimately promoting a cashless society. As we continue to invest in fintech, we are also exploring innovations like the potential for a blockchain-based trade finance platform in the future7.

Financial advice for the masses

Where financial planning used to exist to serve the elite – that is no longer the case6. Fintech offers a new degree of accessibility and transparency to consumers seeking financial advice across all stages of wealth planning, from the young to the retiring6. Through the use of digital tools, financial advisors now have the ability to scale their services to provide personalized advice based on your individual needs6. For example, advisors can leverage big data to create in-depth analyses of your investment account, which can then be used to provide solutions to help you reach your financial goals6.

Alternatively, digital advice models allow investors to select their own unique path for building wealth while working with an advisor on their own terms – a shift fuelled by the increasing popularity of independent robo-advisory platforms6. This has prompted big banks, brokerages and mutual fund companies to adopt and offer similar services to better serve their customer and investor needs6.

Along these lines, HSBC’s enhanced Portfolio Allocation Service (PAS) – based on a needs-based investment approach – allows investors to get guidance and information online while maintaining control over investment decision-making. Through PAS, you can receive guidance on a reference Asset Mix portfolio allocation to construct a diversified investment portfolio which fits your risk tolerance.

Changing the lending landscape

Need a loan or financing? Big banks aren’t your only options anymore. Peer-to-peer (P2P) lending has injected new life into the lending industry as fintech start-ups compete alongside big banks6. P2P lenders have provided consumers and business owners, who may be seeking an alternative to traditional lending options for various reasons, with new paths to financing6. For example, stricter lending rules may drive some consumers to pursue a P2P loan if their credit rating proves problematic for qualifying for a bank loan6.

Grab Financial Group, the fintech arm of Grab, recently announced a host of new fintech services including SME lending, insurance, online payments and merchant network8. In the fintech lending platform space, Grab has partnered with Japanese consumer finances company Credit Saison focused on providing people with the financial backing they need to become Grab drivers8. Looking ahead, the joint-venture will provide working capital loans for SMEs in Singapore and lending across Southeast Asia8.

Expanding investor opportunities

Fintech companies are also removing financial barriers which may have previously kept certain investors out of the market by providing lower initial entry points6. For example US-based fintech start-ups like Digit and Acorn are allowing investors to invest with their spare change rather than requiring large lump sum investments upfront6.

Crowdfunding is doing the same for investors as well. Real estate crowdfunding and equity crowdfunding have opened new asset classes to both accredited and non-accredited investors which were previously difficult for all but a select few to access6. Investors are now able to maximise portfolio diversification while minimizing costs, regardless of your net worth6.

The Securities Commission Malaysia approved six equity crowdfunding operators in 2015 to provide alternative investing and funding platforms for investors to small businesses and entrepreneurs4.

For consumers, fintech is a great democratisation of services2. Which is great for everyone. The disruption it has brought has allowed you to be able to access data and information anywhere and everywhere – that it should be normal for you to be able to manage your investment portfolio or make a payment online while waiting for your Grab ride2. That you can expect a seamless mobile banking experience whether you are banking in Malaysia or halfway across the world2. And that soon, you can expect to be able to pay with your mobile phone or smart watch anywhere you go2.

As fintech continues to grow and evolve, HSBC aims to take advantage of these digital innovations to deliver banking solutions that fit seamlessly into your day-to-day life and put your finances at your fingertips wherever you are, whenever you need it.

Fintech explained9

Unravelling some of the key terminologies you need to know to understand fintech.

Cryptocurrency - A cryptocurrency is a decentralized digital currency which uses encryption – the process of converting data into code – to generate units of currency and validate transactions independent of a central bank or government. Bitcoin and Ether are the most common forms of digital currencies.

Bitcoin - Probably one of the most well-known fintech terms and widely known in mainstream finance, Bitcoin is the first and one of the most prominent cryptocurrencies used by traders in fintech. Bitcoin was designed as a peer-to-peer payment network without the need for governance by any central authority.

Blockchain - Blockchain is a form of distributed ledger technology that maintains records of all cryptocurrency transactions on a distributed network of computers, but has no central ledger. Blockchain experts believe the technology can provide transparency for a multitude of different industries beyond just financial services.

Open banking - Open banking refers to an emerging idea in financial services and fintech which stipulates that banks should allow third party companies to build applications and services using the banks’ data. Supporters of open banking believe that an open banking ecosystem will allow fintech start-ups to develop new applications such as mobile apps to allow customers greater control over their bank data and financial decisions.

Regtech - Regulatory technology is technology which helps companies within the financial services industry meet financial compliance regulations. One of the main priorities of regtech is automating and digitizing Anti-Money Laundering (AML) rules which aim to reduce illegally obtained money, and Know Your Customer (KYC) processes which identify and verify clients of financial institutions to prevent fraud.

Insurtech - Insurtech is a subset of fintech which relates to the use of technology to simplify and improve the efficiency of the insurance industry.

Robo-advisor - Robo-advisors are platforms that automate investment advice using financial algorithms. The technology limits the need for human financial advisors, thereby reducing the cost of managing an investment portfolio.

Financial inclusion - Financial inclusion refers to fintech solutions that provide more affordable finance alternatives to disadvantaged and low income people who may have little to no access to mainstream financial services. It is one of the key areas for fintech companies operating in developing markets.

Sources:

1Investopedia, Fintech, 5 April 2019.

2Forbes, The complete beginner’s guide to fintech everyone can understand, 10 February 2017.

3The Australian, Bitcoin is just the beginning, 13 April 2019.

4iMoney.my, Introduction to fintech in Malaysia, 31 January 2017.

5New Straits Times, Fintech activity at the forefront of 2018, 31 December 2018.

6Forbes, 5 ways fintech is changing Wall Street, Main Street and everything in between, 23 August 2017.

7The Edge Markets, Fintech: Malaysian banks getting ready for more fintech, 2 April 2019.

8E27, Breaking down how Grab is doubling-down on its financial product, 19 March 2019.

9CNBC, Everything you’ve always wanted to know about fintech, 2 October 2017.