Most of you have a fair idea about FinTech, where the original financial system is improved upon by the use of technology. A widespread & straightforward example of this is the online banking services that most of the traditional banks offer through this platform. TechFin, on the other hand – coined by Chinese Tech giant Alibaba’s founder Jack Ma in 2016 – is where Tech companies provide financial services with a more customer & technology-centric approach. Before we go any further, let’s talk about the causes of this evolution.
The banking industry is experiencing disruption at an increasing pace. Over the past few years, traditional financial institutions and non-traditional FinTech firms have begun to understand that collaboration may be the best path to long-term growth. At the same time, big tech firms are offering financial services, creating FinTech solutions. The rationale for collaboration is the ability to bring the strengths of both banks and FinTech firms together to create a stronger entity than either unit could bring on their own. For most FinTech organizations, the primary advantages are an innovation mindset, agility (speed to adjust), a consumer-centric perspective, and an infrastructure built for digital. These are advantages that most legacy financial institutions don’t possess. Alternatively, most banking institutions have a scale, stronger brand recognition, and established trust. They also have adequate capital, knowledge of regulatory compliance, and an established distribution network. The challenge will be the ability to develop an environment where collaboration can flourish as opposed to stifling the beneficiary attributes of either partner.
It will be useful here to compare the rise of American tech giants to those from China. It’s a tug of war between the BATs (Baidu, Alibaba & Tencent) of China & the GAFAs (Google, Apple, Facebook & Amazon) of America. During the post-dot-com bubble era, the silicon valley tech giants relied on advertising models to grow & generate more viewers – the most prominent examples being search engines like Google and social media platforms like Facebook. Apple started primarily as a hardware manufacturer as well with its mobile phones while online market platforms like eBay acquired PayPal to power & process its transactions. Amazon, on the other hand, used a credit card to process payments on its platform using the old school online merchant account.
China, in contrast, lagged initially in the technological adoption & assimilation coupled with its low Credit card penetration rates. However, this changed with the launch of Alibaba (Hangzhou, 1999), a B2B (business to business) platform, which eventually transitioned to a B2C (business to consumer) platform. The Chinese tech giant incorporated payment processing functionality from the get-go to avoid this hindrance. Alibaba extended its payment system, Alipay, to its B2C sister concern Taobao to process customer transactions. While Amazon provides a money-back guarantee to its customers, Alibaba provided peace of mind to its clients by keeping the money in a trust account until the goods are received & approved by them.
Alibaba’s huge customer base provided it the leverage to launch other innovative ventures like Yu’eBao or “leftover treasure,” which offered a higher rate of return than the banks to customers who parked their funds in the account. The Wall Street Journal reported this new venture amassed 370 million account holders and $211 billion in assets in just four years, second only to the largest money market fund – JP Morgan Asset Management. Then came the online gaming startup – Shenzhen based Tencent with the functionality of built-in micropayments based on the freemium business model. Gamers could play free of charge but had to pay for value-added features & products. When Tencent transitioned into a mobile app by introducing instant messaging through QQ for Youth & WeChat, eventually, they captured a user base of almost one billion users! This large user base learned to transact through the innovative solutions built-in the instant messaging ecosystem of the app. WeChat now also allows customers to use third-party apps from within their mobile platform, including the financial ones without ever exiting their App.
Furthermore, in 2015, Tencent launched WeBank – China’s First Online-only bank using sophisticated credit analysis based on the WeChat social media usage & online purchase patterns of its customers. These analyses are also used to service lenders in the traditional financial ecosystem. QR codes (Quick Response codes) are seeing widespread usage in an increasingly cashless Chinese society. Chinese smartphone users can also use scannable codes to facilitate O2O (Offline to Online) payments. We understand the emergence of “financial supermarkets” under the banner of these big tech companies in China. For example, Alibaba’s Zhao Cai Bao offers fixed-term deposit products from third-party financial institutions or individuals. These products compare to services that were only available to institutional fund managers and existing retail sales distributions via the traditional banking channels.
Meanwhile, the GAFAs in the U.S started to adapt to this tech push from the Chinese IT companies. Facebook’s popular messaging app WhatsApp is beginning to incorporate a lot of the innovative features of WeChat. Apple has also transformed from being a hardware vendor for mobile phones to providing services like iTunes & the App store. Amazon has ventured into subscription-based models like Amazon Prime, which offers value-added services like online streaming services besides providing a wide variety of financial services as well as leveraging its vast user base. Similarly, Google has gone from a search engine to a portal offering a multitude of free online services under one roof. Besides this, the GAFAs are investing heavily in the next-generation ABCD technologies – namely Artificial intelligence, Blockchain, Cloud computing & Data. It remains to be seen how long will it take GAFAs to use the TechFin model employed by the Chinese BATs to directly compete & participate in the Finance arena given their broad user base, techno prowess & consumer-centric behavior. Probably the one thing hindering the GAFAs is the stringent regulations related to providing financial services in the U.S., which banks are used to working with. Tech giants, on the other hand, have brand names that are trusted among the millennials to handle their finances, especially when the banks have lost their credibility after the recent financial crisis.
Jack Ma famously called Alibaba and their tech giant peer-group – TechFins, declaring their intention to sneak into financial services. In a piece published in the People’s Daily in June 2013, Jack Ma stated as follows:
“There are two big opportunities in the future financial industry. One is online banking; all the financial institutions go online; the other one is internet finance, which is purely lead by outsiders.”
Banks were too focused on their battle with FinTechs then that they perhaps were blindsided by the rise of TechFins. The first quarter of 2019 has been eventful, with major headlines from big tech firms like Facebook, Apple, and Alipay. FinTech means ‘Financial Technology.’ We use this term to indicate technological applications in the world of finance. Blockchain, smart contracts, AI, machine learning, algorithmic trading, and other similar technologies are changing the world of finance at a fast pace.
On the other hand, TechFin, being used in comparison with FinTech. FinTech takes the original financial system and improves its technology. TechFin is to rebuild the system with technology. In general, FinTech vs. TechFin means the battle between finance and tech firms for the dominance of the financial world.
The difference between FinTech and TechFin is based on the origin of the underlying organization. FinTech usually references an organization where financial services are delivered through a better experience using digital technologies to reduce costs, increase revenue, and remove friction. A basic example of a FinTech offering is the mobile banking services that most traditional banks offer. More commonly, FinTech refers to non-traditional financial offerings such as PayPal, Zelle, and Venmo in the U.S. and digital-only Starling Bank, Monzo and Revolut in the U.K. Alternatively, TechFin usually references a technology firm that finds a better way to deliver financial products as part of a broader offering of services. Examples of TechFin companies include Google, Amazon, Facebook, and Apple (GAFA) in the US. And Baidu, Alibaba & Tencent (BAT) in China. In both instances, the success of these organizations in finance will be based on the ability of the institution to collect and analyze massive data sets, learn from the insights to improve personalization and digital engagement in real-time and expand offerings in response to consumers needs.
Even with the best collaboration, the ability of legacy financial institutions to compete in the future banking ecosystem will be challenged by the TechFin powerhouses. Built on digital platforms, these large technology organizations are efficient and have already found ways to reduce operational costs and monetize their business models. An increasing percentage of consumers are willing to use financial products offered from these non-traditional firms – especially where the experience is superior to that provided by legacy organizations. A potential to shift revenues from other businesses (such as retail) to enhance banking offerings can completely change the competitive equilibrium. It is expected that the demand for products and services from FinTech firms and large tech companies will only increase as more consumers become familiar with new digital offerings. This is especially true for younger consumers who have grown up with digital devices. More and more, people will get annoyed when they’re forced by bank policies and processes to use non-digital channels for everyday banking business. Traditional banking organizations cannot rely on providing checking accounts and loans only. Competitors are already eating away at significant parts of the banking value chain with the potential of limiting banks to becoming nothing more than utilities. As financial and technology organizations embrace a broader view of banking, offering both banking and non-banking services, the ultimate winner will be the consumer regardless of which provider they select. The following aspects are the base of successful TechFin company:
Huge technology firms such as Google, Apple, Alibaba, Amazon have access to a much bigger and diverse customer portfolio compared to the financial firms and newly-established innovative FinTech firms. Commercial products are approached more carefully by the public due to their nature, whereas even a 10-year-old can use an online shopping website or a smartphone. Technology firms do not offer financial services as their main product but as a new feature to their established product. Hence, convincing people to use AliPay or ApplePay is much easier to persuade them to use a FinTech firm or another innovative method of payment. It is not even an actual convincing process. Still, a mechanical online form-filling for most users as the trust of their beloved-technology firm prevents them from considering newly-added features in detail. Technology firms can also access new customers much more quickly compared to financial firms as they can use the alluring image of the technology world. They have a distinct advantage of trust, especially concerning the young population. Technology firms can claim the role of ‘the savior’ against the not-very-uncommon image of financial firms as ‘the villains.’
For obvious reasons, technology firms have much better infrastructure compared to financial firms. It is their home, while financial firms are mostly obliged to cooperate with a technology firm to build their infrastructure. These firms already have foundations that successfully serve millions of people all around the world.
Banks and financial firms are relying on intensive tricks to convince people to give their data, whereas people are intentionally providing personal information to tech firms. With the help of this much more significant and detailed dataset, tech firms can pinpoint both the general and individual needs and target their audience with more tailor-made financial products.
Regulation is complex for both tech and finance firms. Big tech firms are struggling with data protection laws, whereas banks and other financial firms are regulated by specific legislation. However, it is almost sure that financial regulations are much stricter than the regulations tech firms are subject to, especially with the regulatory effects of the 2008 Financial Crisis. Financial firms are regulated not only national level but also via international agreements. Of course, financial regulation does not apply solely to financial firms but also financial services provided by other firms. In other words, it is inevitable for technology firms to be subjected to financial regulation in case they start providing financial services on a large-scale. Still, they have the advantage for now for two main reasons. Firstly, what they do is not mostly covered by traditional financial regulations, which is the same for FinTech companies as well. Hence they can get away without provision for a while within the gray areas. Secondly, as technological applications are challenging the whole financial world, countries are reluctant to introduce strict regulations that would stifle the innovation.
Furthermore, some jurisdictions even adopt much lighter rules to attract FinTech firms, which would be the benefit of tech firms as well. Consequently, in terms of regulation, technology firms can stay under the radar as they are not ‘financial’ per se. However, if they are monitored, they can still benefit from the regulatory uncertainty created by FinTech firms.
With IBM entering the remittance market through World Wire, Facebook is testing out Whatsapp payments, Alipay entering the UK market in a big way. Apple, despite the protest from the banking sector, promoted Apple Pay and claimed that it could disrupt the banking. Amazon has already started the disruption with its lending services for its SME clients, payment service for its retail customer, and its account project. A research conducted by Bain shows that Amazon is almost as trusted as banks with regards to money, and it is believed as an online shopping platform. It is expected that Amazon will have 70+ Million customers for its banking/financial services in the next five years. Penny should have dropped for the banks. Whatever you call it, FinTech or TechFin, large technology firms now have a growing appetite for the financial world. Once they come with a full focus, it might not be a level playing field for financial firms considering that technology firms can have the best of both worlds with the help of their established customer base and technological infrastructure. However, the regulation is still uncertain for technical applications in the world of finance, regardless that they are applied under the name of FinTech or TechFin.