In 1942, Austrian economic prophet Joseph Schumpeter coined the term “creative destruction.” Schumpeter envisioned innovation to be the key driver by which industries are “destroyed” and replaced with newer, more creative ones. This force is seen rapidly transforming the world of finance – from the legacy of branches, tellers and vaults to the future of data, algorithms and money.
There are very few countries and governments in the world that embrace change as quickly and with such agility as Singapore. Over just two decades, Singapore has successfully transformed itself from a manufacturing hub to a knowledge- and ideas-based economy.
This shift has impacted every sector in the country’s economy – including financial services.
Little island, global lighthouse
Back in the mid-90s, Singapore’s financial services industry operated almost entirely within a one-kilometre stretch in its Shenton Way Business District.
Domestic banking had just been opened to foreign competition, and the Monetary Authority of Singapore (MAS), the country’s main financial regulatory body, was still in the process of sharpening the country’s financial regulations and promoting the nation as an international financial centre.
Today, Singapore’s financial services industry has become one of the top financial capitals of the world with most international banks having a presence here. The country’s move from being part of the global physical supply chain to the global digital and social supply chains is helping attract and anchor global flows of transactions and capital. The country is also recognised as one of the premier global wealth management centres, managing a whopping $2.7 trillion of the world’s assets.
Innovators, incumbents & institutions: A fertile mix
Singapore has been unique in that all three key players in the financial services industry: innovators, incumbents and institutions are actively shaping the transformation journey. This contrasts with the US where it has been primarily the innovators and in Europe, primarily the regulatory institutions.
As Singapore’s economy shifted drivers over the past two decades, so did the role of the MAS. From focusing solely on core accountabilities such as price stability and supervision of the financial system, the MAS has led the transformation by assuming a greater leadership role in developing Singapore’s financial services to be a world leader. The creation of the fintech and innovation group in 2015 and the chief data officer role in 2017 within MAS are a clear indication of structure following strategy.
To date, MAS has rolled out several national innovation and funding assistance schemes such as the Financial Sector Technology and Innovation (FSTI) scheme and a S$225-million funding commitment in 2015 to support the creation of a dynamic innovative financial services ecosystem in Singapore.
Furthermore, the Singapore government’s Committee on the Future Economy (CFE) report released last year laid out a strategic industry transformation roadmap to chart the future of the country’s financial services sector.
At the heart of it lies the creative transformation of financial technology – or fintech.
The future of finance: from physical bricks to digital clicks
As early as 1994, Microsoft Co-Founder Bill Gates made the provocative statement that in the future “banking [would still be] necessary, [but] banks will not”. Two decades on, we are seeing this play out around the world and it is no different in Singapore. Physical branch and ATM footprint is rapidly being supplanted by digital distribution and service delivery.
There is a tremendous drive by innovators, incumbents and the institutions for the country’s financial sector to go digital. Local banks like DBS and OCBC are leading the way people and businesses will manage their finances. Banks and insurance companies, for example, are beginning to seamlessly connect up their customer value propositions and product delivery models to various "adjacencies" (or related consumer sectors) such as healthcare providers, property dealers, auto dealers, wedding planners and renovators; offering more contextual, personalised and embedded engagement.
Several homegrown fintech innovators have emerged around specific domains: examples such as Instarem, SoCash and SingX serving cash and remittance needs; Smartkarma, Bambu and Weinvest serving investment needs; Kredivo and Funding Societies serving borrowing needs; Policypal serving protection needs; Crayon Data providing hyper-personalisation through digital storefronts.
In July last year, the Association of Banks in Singapore (ABS) rolled out PayNow, a unified interbank peer-to-peer funds transfer service where residents can connect their bank accounts to their mobile phone and identification numbers – this service will be extended to merchants this year.
Enabling Singapore’s SME to capture the global marketplace
According to Singapore’s Budget 2017, small and medium enterprises (SMEs) accounted for half of Singapore’s GDP. The growth of digital marketplaces and internet adoption in the region are key drivers for the expansion of the market for SMEs here. However, more needs to be done to truly serve this segment.
Financial needs from these smaller players tend to be more varied and nuanced, and require a breakout mindset in terms of risk and reward. It is still commonplace for a 90-day turnaround for a commercial loan to be granted, if it is approved that is. The industry needs to come up with more alternative forms of financing that use transaction data analytics and non-traditional scoring to serve borrowing needs with speed for equipment, working capital, supply-chain, receivables, etc.
B2B payments are a massive opportunity with so much of the flows still in the traditional bank transfer, cheques and even cash era. Building and providing digital access to regional and global marketplaces is a third major opportunity area.
Technology for finance: A two-speed transition
Two of the key factors of production in the future of finance: data and algorithms, require a new breed of technologies and approaches to create the “stack” for a robust “moat” against competition.
Whilst a nascent journey along the adoption curve is observed in the Singapore financial services industry, the existence of and still-critical enterprise mainframe infrastucture means that the transformation journey will be a two-speed phenomenon. The trend is however unmistakeable, particularly among leading local banks such as DBS and OCBC. Traditional back-office product processors on mainframes are getting commoditised and decoupled from front-end customer facing apps, CRM and data applications through middleware and cloud computing.
Increasingly, banking applications are becoming cloud-native, data from processing and service channels being connected up through information buses to data lakes. Technology development approaches are increasingly resourced through in-housing of app developers and data scientists who partner selectively with nimble external partners who specialise in mobile apps (e.g. Tagit, Codigo), human-centred design (e.g. 2359), text/voice-analytics (e.g. Active.ai) and deep-tech such as machine-learning (e.g. Tookitaki).
The life cycle of systems development that used to be run on a project basis using waterfall techniques is rapidly being replaced by agile approaches that rely on a series of three-week sprints to three-month release cycles.
The transformation of the local financial services industry rests on the robust adoption and deployment of technology that ultimately should lower the cost of serving customers with speed and relevance.
New world of finance, new risks
Former British Prime Minister Winston Churchill once said, “It is always wise to look ahead but difficult to look further than you can see.”
For all the immediate benefits, there are several new, clear and not-so-clear, and present dangers and risks to Singapore’s financial services industry, associated with new technologies that are always-on and the increasingly connected up digital ecosystem.
The risk of a cyber-routed massive denial or dislocation of the banking system, the risk of automation and AI/model-based operations resulting in a unforeseen disruptive event go rogue, and risk of contagion of an event in one part of the connected ecosystem rapidly spreading to the rest are among the key new risks that the industry players must focus on, even as the adoption of new technologies is robustly supported.
In recent times, the elephant in the room – data privacy – has received global attention. As the local financial ecosystem goes more digital and customers transact more digitally, immense volume of public and private data will be generated. Greater level of permissioning among millenial consumers of financial services has enabled several new entrants.
Varying standards and interpretation of data privacy amongst industry players means that MAS needs to continuously set the bar and review it. Some jurisdictions have moved to a right-based privacy framework rather than the commonly prevailing consent-based principles. This trend will need to be reviewed. The risk of a social backlash that could emerge as a ‘class action’ against the creeping invasion of privacy cannot be overestimated.
The need to continue maintaining the highest standards in the prevention, detection and action against the risk of financial crime remains as one of the key priorities of the Singapore financial services industry, due to its pre-eminent position as a global wealth centre. In this regard, the MAS continues to be an exemplary, constructive partner with the industry to help keep them “ahead of the curve”.
Let a thousand flowers bloom
Whilst it is evident that the Singapore government is keen to push forward with its ambitions of digitally transforming the country’s economy, ultimately, it is about the industry participants creating the right environment that will ultimately create global game-changers. There is a need for a more robust innovation mindset . Most of the currently ‘disruptive’ entrants are adapting products, services or business models that already are seen to exist in the US or Europe. Equally, investors need to provide true innovation capital which is willing to be patient and fund R&D in finance and related technologies. Venture capital funding locally (and around Asia) is often a bet on “execution risk” rather than “innovation risk” (as in Silicon Valley) and accordingly, capital is deployed by founders mainly towards market/channel development and customer acquisition.
There is greater opportunity for the incumbents to accelerate the journey towards Open Banking. In an initial but fairly constrained step, banks in Singapore have set up their own API portals, and are encouraging the developer community to build new and innovative uses for these API through accelerator programmes, funding, mentorships and commercialisation opportunities. However, such initiatives do not facilitate true ecoystem connectivity and have seen limited success. Elsewhere, there is active regulatory thought and action in this regard resulting in UK announcing open banking in January, and Hong Kong launching an industry consultation paper in March this year.
It is still too early to fully assess the benefits innovation will bring to Singapore’s financial services industry. Ultimately, it must assist in the social objective of serving the broadest segment of society and not end up widening GINI. However, the combination of the innovator, incumbent and the institution has helped establish the successful staging of the first phase of the transformation journey. In the process, Singapore has delivered a lighthouse effect to the rest of the world. Thereby, underlining its unique ability. As the little red dot that punches well above its weight.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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As a venture partner at Jungle Ventures, Arvind helps the firm source, evaluate and manage portfolio companies in the fintech space focused on the ASEAN/India geographies. Arvind leverages deep subject-matter expertise in global financial services to serve founders, investors and institutions.
Prior experiences in ASEAN and EMEA over two decades at Citi, Barclays and HSBC include startup of credit card and branch networks; transformation of local and cross-border wealth value propositions; and pioneering deployment of analytics in risk and CRM. Arvind works closely with founders at big data, AI/machine learning applied to regulatory compliance, and alt-lending startups.
He also serves as senior advisor at McKinsey & Company, working directly with financial services clients on digital transformation agenda. Arvind is a regular speaker on fintech and related topics, recent engagements being at the Hong Kong Fintech Week 2017 and Global Fintech Summit SG 2016.