Can Fintech disrupt traditional markets? Prudential: Internet banking and robo-advisors cannot disrupt the existing banking and wealth management landscape

21st Century Business Herald reporter Hu Tianjiao Beijing reports that the new crown epidemic is deeply affecting the ecology of the service industry. As for its specific impact, Prudential Fixed Income (PGIM) said in its report that the new crown epidemic is fundamentally reshaping the pattern of services in developed and emerging markets, bringing about a reshuffle of winners and losers.

Shehriyar Antia, head of special research at PGIM, told 21st Century Business Herald that emerging Internet banks and robo-advisors have failed to threaten traditional players in the field of banking and wealth management in most cases, and most of the end result is that the former is either copied or acquired.

In Shehriyar Antia's view, technology makes the "barbell" development of the service industry inevitable, so investors need to find two types of "cutting-edge disruptors", that is, to cross regulatory barriers, find a clear path to customers, or embrace innovative start-ups.

In addition, Shehriyar Antia said that investors must understand and grasp regulatory risks. "The most important thing about the financial regulatory environment is that it's so different, and it's a real global trend, investors may be able to strategize around the tightening of the regulatory environment in different countries, but it's important, absolutely, to understand it, because it's a huge unknown."

There is no way to disrupt the existing landscape

21st Century Business Herald: Why do you think that emerging Internet banks and robo-advisors cannot disrupt the existing banking and wealth management landscape?

Shehriyar Antia: Yes, emerging internet banks and robo-advisors have really failed to threaten traditional players in the banking and wealth management space in most cases.

The dilemma of robo-advisors is that it is difficult to reach new customers and achieve scale growth. Whereas in places like the U.S. and Europe, distribution networks are run by traditional global managers, where robo-advisors are similar to private capital, making it difficult to reach new customers and build scale.

BlackRock and JPMorgan Chase are either acquiring new robo-advisor startups or replicating the latter's technology and platform. In other words, it's hard for emerging participating institutions to reach new customers, and big players either acquire them or build their own smart wealth business capabilities.

The ecosystem of emerging banks and fintech platforms is somewhat different from that of robo-advisors. Emerging banks are largely not competing directly with major banks for top quality, consumer and business customers. In contrast, the former's target customers are customers who have rarely participated in banking business before, and customers who have been abandoned or ignored by large commercial banks. In emerging markets, there may be a considerable number of people who are left out of traditional banking.

However, the growth potential of emerging banks is limited because they target only a small percentage of the total population. If it wants to continue to grow rapidly, it must compete for top customers. When they do, large commercial banks in many regions will not allow new banks to thrive. Large commercial banks will either acquire emerging banks or try to replicate their technology. As a result, disruptors and the financial services industry face real challenges, and not all new entrants will succeed.

21st Century Business Herald: Is there a difference between the development of the service industry in emerging and developed markets, and will this bring about the focus of the investment field?

Shehriyar Antia: Chinese consumers have now moved beyond the credit card stage to use digital payment methods such as Alipay directly, which is actually the case in all emerging markets including India (such as Paytm), Brazil, Colombia, and Mexico (such as MercadoPago).

For investors, differences between countries or regions are important, meaning that investment opportunities around payments will vary. Regions such as the Philippines and Malaysia, where cash payments dominate, may emerge with super-digital platforms that will make the region's digital revolution possible. In a market dominated by credit card payments, digital investment opportunities exist in payment companies themselves, including those that are streamlining processes and increasing efficiency by adopting new technologies, as well as payment companies that offer consumers more payment methods.

In short, technology adoption happens in different places, and for investors, this difference means that the opportunities presented by technological disruption will manifest themselves in different forms in different markets.

21st Century Business Herald: In the future, will emerging banks overlap with traditional banking businesses, and what kind of integration will occur?

Shehriyar Antia: When emerging banks really try to win over the same customers as large commercial banks, there's going to be a real customer battle, but in the service sector, especially in financial services, the fact is that customers tend to be sticky and it costs a lot of money to acquire new customers.

Even if emerging banks are able to provide better services, better products and better interest rates, many will not switch to their original banks. Because it's a bit of a hassle, switching banks, brokers, or wealth managers needs to be supplemented with more work, and clients and services tend to be more sticky. Because of this, I think many emerging banks will eventually be acquired by traditional banks.

Regulation has shrunk again in some areas

21st Century Business Herald: Which economies/regions do you expect to be more tolerant of regulatory attitudes towards emerging banks? In what ways will emerging banks face regulatory contraction in the future?

Shehriyar Antia: The most important thing about the financial regulatory environment is that each region is so different, and it's really a global trend.

First, emerging banks provide financial services to groups that were previously detached from financial services, and different regulators have different views on this. In places like China and the United States, regulators have yet to impose the same level of regulation on emerging banks as traditional banks, which are attractive in these regions. But for regulators in some other countries, particularly in the UK, there is already a trend of regulators regulating the operations of these emerging banks and requiring them to adopt higher anti-money laundering standards.

In terms of loans, some fintech platform companies in the United States and Australia are able to charge loan rates that are much higher than those allowed by banks, described by the media as "predatory loans", and these emerging banks and fintech platforms are currently able to expand by charging higher interest rates, but they are also likely to face the risk of regulatory changes.

21st Century Business Herald: If the development of the two ends of the "barbell" is really inevitable, where are the investment opportunities? What regulatory heights do you expect to eventually reach in both areas?

Shehriyar Antia: As robo-advisors have shown us, not all tech disruptors can succeed in the service sector. Investors need to find emerging companies in the services space that can do two things, which can be seen as "cutting-edge disruptors" and are ultimately the most likely to succeed.

First, whether in financial services or healthcare, "emerging disruptors" need to overcome regulatory hurdles, and second, they need to find a clear path to their customers that enable them to leverage their technological strengths to scale up and grow. We see tremendous opportunities in payment platforms such as MoMo or Grabpay in Southeast Asia and MercadoPago in Latin America.

In addition to these successful disruptors, there will be a small number of traditional companies that embrace rather than resist innovation, which can also be classified as "cutting-edge disruptors." A good example is Australia's Commonwealth Bank, which works with venture capital firms to capture the latest technology and innovations and integrate them. Existing technology leaders will be difficult to replace because they will become more powerful. Therefore, it is important for investors in the general service sector to look for two sets of winners in the financial services and healthcare sectors to look for technological disruption in the service sector.

In terms of supervision, different societies and countries have different decisions when regulating an industry, and high regulatory thresholds will increase the entry difficulties of new entrants. There is no doubt that regulation affects competition in different ways and affects potential innovation.

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