Fintech threat! Alipay hit $100b in less than a year with zero branches, DBS took 50 years to get there ||

It has been more than a year since the man who runs America’s biggest bank had warned that Silicon Valley was coming to eat Wall Street’s lunch. “Silicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking,” JPMorgan CEO Jamie Dimon had warned in his annual letter to shareholders in April 2015. Piyush Gupta, chief executive of DBS Group Holdings, Southeast Asia’s largest lender, says he is surprised that the ‘Whatsapp moment – the tipping point for fintech has not happened yet’, even as he warned that things could change overnight.

To explain the gravity of the upcoming fintech disruption, and the challenges that banks and the traditional finance sector are confronted with, the DBS chief executive listed out stats: “Last year there were about 12,000 fintech startups, and these companies (in total) have raised over $65 billion in private equity (PE) money. The single biggest PE money last year went into fintech sector – more than medtech. So think about it – lets say 1% of those companies are successful, you’ll still wind up with 120 successful companies,” Gupta explained in an interaction. Highlighting the case of Alibaba, the DBS chief executive described the Chinese e-commerce giant’s operations during the last 12 months as the ‘most vivid case study on fintech’,

“Alibaba is the biggest payment company in the world. They transfer more money through Alipay then anybody..any banks. They do hundreds of millions of transactions. They are one of the fastest fund gatherers in the world. They hit a hundred billion dollars in less than a year with zero branches – No branch, hundred billion dollars. DBS took 50 years to get hundred billion dollars. They did it in 12 months. They have the fastest growing loan book. They grew their SME and consumer lending book by $12 billion last year. Their cost of credit is lower than any bank. And guess how many branches they have? Zero,” he said. Alibaba, he said, offered a window to the future, as ‘a non-bank player was redefining the landscape whether it is raising money, making payments or lending money’. “If Alibaba can do that, why is it not going to happen to the rest of the industry. It has to happen,” he added.

But even prior to Jamie Dimon’s often quoted letter to his shareholders, Gupta had warned about the coming disruption to banking, linking this to his own experience as an entrepreneur in 2001. In September 2014, in a post on the company website, Gupta had said: “Banks in Asia are on a burning platform of competition from mobile and internet companies. If we don’t embrace digital – and quickly – there is a real danger that our lunch will be eaten.”

In this post, Gupta highlighted that internet 2.0 was very different from the dot-com boom that the world had witnessed about a decade-and-a half earlier.

In 2001, on turning 40, Gupta left Citi, to try his hand at entrepreneurship, as ‘everyone was caught up with internet fever’. He launched Go4i.com along with India’s leading media house Hindustan Times, and five weeks after his venture had kicked off, ‘the dot.com bubble burst and money from venture capitalist firms dried up’.

Gupta said internet while internet 1.0 had disrupted his life, but had not impacted banking. “With Internet 2.0 and mobility, the game has been re-defined,” he had added in his post.

His September 2014 post had also pointed that the biggest payment company in this region was no longer a bank, but Alipay.

“Nine months after entering the asset management business, Alibaba became the world’s fourth largest money market fund, with more than USD 80 billion in holdings and more than 80 million customers, all from a standing start,” he had said.

Are banks such as DBS nimble enough to make this transition and ride the fintech wave? Gupta said that it is not too late for a course correction for other regions, as changes in China are unique to that country.

“There is no other country in the world where you have an Alibaba which has made the impact that has happened in China. So to some extent, other countries still have some time to be able to do this. Second is that, the banking sector from 2008 to 2014 was totally engrossed by Basel capital liquidity. In the last 2 years, everybody that I know has started focusing on the problem. But having said that, I think it’s not an easy transition. Like in every other industry, legacy and income in banks are very hard to change because you have to change a culture, and culture changes are not easy to do,” he added.

While he expressed confidence that DBS could make the transition under his watch, he was also candid with this views that a many of Asia’s large banks would get caught out by the fintech revolution.

“That is the big bet that we’re trying to make at DBS – that if you have the capacity to be nimble, to change the culture, change the technology and to transition to the new way of working, then you might actually benefit from this discontinuity,” he said.

Over the last 18 months, Southeast Asia’s largest lender has also followed an aggressive fintech strategy, with accelerators in Singapore and Hong Kong, that support and mentor dozens of startups in this space. Earlier this year, DBS picked up strategic stake Kasisto, a startup which employs artificial intelligence (AI) to enhance retail and consumer banking, and it recently entered into cross-referral agreements with peer-to-peer (p2p) lending platforms Funding Societies and MoolahSense, becoming the first local bank to initiate partnerships with these crowd-financing platforms.

Gupta also acknowledged that over the last 12 months, Singapore has taken giant strides to reinvent itself as Asia’s fintech hub. This move comes as the city-state’s multi-billion wealth management industry faces stagnation, even as is confronted with a slowing economy.

“In the last 12 months, the Singapore government has really woken up and stepped up its game. So between the Monetary Authority of Singapore’s regulatory sandbox, the Infocomm Development Authority putting money into fintech startups, and several other grants being made available, there are a lot of experimentation that is going to happen. And the one thing that Singapore can do uniquely is involve the public sector. And if you get national projects to happen with public sector participation that can catapult you,” he added.

Last year, MAS had announced that it would invest S$225 million (US$164.2 million) in local fintech startups and a slew of grants are also available from other government bodies, as the city-state attempts to become the leading center for fintech in Asia. MAS’s regulatory sandbox allows local fintech firms to try out new solutions without having to worry about being on the wrong side of the law.

Gupta further added that DBS’s expansion into large countries such as India, India, China, Indonesia, would be via the digital route, equivalent to a fintech play.

“There are pretty much no examples of any foreign banks going in (to any country), and building a retail business organically. Even in the lat 3 years, the banks who had some ambitions to try to do that are all pulling back because nobody makes money. The cost of a distribution infrastructure is too big and with today’s shareholder value considerations and quarterly results, nobody has the 20-30 year pay back horizon that HSBC did in 1960s in Hong Kong or DBS did in 1970s,” he explained.

Gupta said that DBS was looking to emulate the strategy adopted by ING Direct, an online bank, that has operations in several countries.

“ING direct is the only bank from the internet 1.0 days which stood the test of time. Today, the third largest retail bank in Germany has zero branches. Zero branches and $140 billion balance sheet. There have sizeable business in Australia with zero branches. So ING direct over ten years demonstrated, it is possible to do it, as people habits change and countries evolve. Our own bet is that based on the examples of companies like ING Direct and Alibaba, we believe that the time has come where you can build out a viable retail bank based on a digital transaction,” he added.

In April this year, DBS launched a “mobile-only bank” in India, and had set itself a target of having 5 million customers and a deposit base of Rs 50,000 crore over the next five years.

Gupta said the concept of a ‘mobile only bank’ was a bet on the future, and said the company’s analysis of digital growth in China over the last five years, had given it the confidence that other countries too would follow the same trajectory.

“Everybody uses Alibaba, Taobao, WeChat all happened in the last five years. The bet I’m making is that China is only 3-5 years ahead of India and Indonesia and if that can happen in China which is the same demographic, same size, same geography then it will happen in the other countries over the next 3-5 years,” he said.

Another factor that played a key role in DBS opting for a digital-led strategy for India was the smartphone growth in the country, which is expected to at between 500 million to 700 million by 2020.

“If only 10% of the 500 million smart phone users ready to do banking and finance on their phones, it gives us a market of 40-50 million people. The whole population of Malaysia is 25 million people. It’s a big enough market for us,” he added.