Let me start with a disclaimer. I was in the banking industry for a while. That glamorous career with pretty good pay and a lot of perks was very difficult to leave. My business right now still cannot afford to pay me as much as my last banking salary, not to mention the corporate car and (heavily) subsidised mortgage. Sometimes I still imagine what life would be like had I stayed in banking.
I don’t meet my old colleagues in person too much nowadays. Jakarta is that cruel. You know they’re around but we’re all too busy with our own jobs. And we seldom cross paths. The network of investors and startups don’t mix well with the network of banks. That is until earlier this year when JP Ellis (founder of cekaja.com) initiated a financial technology (fintech) meetup which we hosted at our coworking space Comma. There’s been 3 meetups so far and it’s not just the startups who are present, other stakeholders were also there, including people from the big financial services companies
Fintech is the new sexy category. Everyone is talking about it. For startups and investors, it’s exciting because of the opportunities ahead. For banks and other financial services, it’s scary because you feel like Indiana Jones being chased by a boulder, you have to keep running without knowing what other dangers lie ahead. It’s that Temple Run game in real life
Everytime I meet my old colleagues in banking now, they ask what is happening. I think it’s great that they want to learn and try to adapt and ensure they keep being relevant. A bank invited me for a chat with some of their senior management to find out more. An organisation based overseas connected to see what is happening in Indonesia. An embassy of a neighbouring country wants to link up their fintech industry to Indonesia. All of a sudden fintech is as trendy as a heavily-pomaded-pompadour haircut
We always have an interest to invest in financial services. Besides our old banking background, we believe the right services can provide livelihood improvements to a lot of people. Money is not everything but a lot of things needs money, unfortunately.
This week I was invited to share about fintech startups to an event full of bankers. It was interesting to see a mix of reaction: those who already are thinking of doing something and those still trying to understand what’s happening. Considering the interest, I’ll reshare here a quick overview of what is going on with fintech. Very basic stuff but I hope it serves as a good starting point for those who haven’t got a clue of what’s going on. For those who has seen what’s happening in the space, I encourage you to add to my observations, help me spread the word
Is it the end of financial services as we know it?
You may have read about some media writing headlines such as “A Massive Wave Of Startups Is Coming To Crush The Big Banks” and “What banks can learn from media companies that were hit by the digitization tsunami a decade ago”
After print media, telcos, radio and TV, are banks the next to lose their dominance? Bill Gates went as far as saying, “Banking is necessary, banks are not.” So is it really the end of the (financial service) world? And specifically for Indonesia, is the change really coming that fast?
Indonesian banks have the telcos as a great example. Back in 2000, the mobile revolution started and most Indonesians now have access to mobile phones without ever experiencing landline connections. It is not entirely impossible that the 80% of Indonesians currently without bank accounts will be transferring money to each other in the near future, without having a bank account.
The disruptions are real
Has there been any real examples of financial disruption? In more mature markets, we have seen quite a few of them. Let’s look at some memorable ones (at least memorable for me)
In most markets, the digital revolution starts with media and e-commerce. The e-commerce revolution during the first ‘dot com’ boom (late 90s) in the US was led by ebay and Amazon. US has the highest credit card penetration in the world so payment was actually not a big problem for B2C e-commerce like Amazon. It’s a different story with ebay’s C2C e-commerce model. Only a few sellers have the capability of accepting credit card payments.
Then came Paypal.
Back then they were the only payment system that allows peer-to-peer money transfer using debit/credit cards. The rest was history. Majority of ebay transactions were (and still are) completed using Paypal. After Paypal’s successful IPO, ebay ended up acquiring the majority shares valuing them at S1.5 billion in 2002. An unprecedented amount for a tech company at the time. And Paypal is still very much a major force of the US payment industry up to this day
Not to mention they also created the ‘Paypal Mafia‘, former founders and employees who have risen in importance and become household names in the tech industry as entrepreneurs and investors.
Last year, LendingClub became the first peer-to-peer lender to go public, with valuation of approx. $8 billion.Not bad for a startup launched in 2007 to reach that kind of valuation in 7 years. But what is more important is that they disrupted the main function of a (retail) bank: an intermediary. With LendingClub (and so many other P2P lenders), people can get a loan financed by other people directly. Better margins for everyone and leaves the bank with nothing but being a place to store the money.
InVenture is very interesting because their credit scoring enables better microloans, giving even more access to people using their mobile phones. One of the most painful problems for Indonesian banks have been the unavailability of credit scores for first-time borrowers, and they solved it quite well. Thanks to InVenture’s credit score, many people can get microcredits that they previously could not access.
Square just filed for IPO last week. I only found out because I was at a Blue Bottle coffee shop making payment using my credit card, which was then swiped to their Square reader. That was when my colleague told me about Square’s IPO. Huge news in Silicon Valley not because of the size of their IPO, but whether Jack Dorsey can maintain both his positions in Square AND Twitter. Businesswise, Square is a serious contender for banks’ card acquiring (EDC) business
Outside those US cases, you cannot look away from Alipay’s dominance in the Chinese payment market. Their size is now estimated to be 3x of Paypal (in terms of transaction volume). They managed to solve the problem for a lot of customers, and also parent company Alibaba’s problem for completing transactions. Most of their Chinese users have never owned a credit card. And guess what? They are seriously moving into other Asian markets, including Indonesia
In terms of financial inclusion, the story of M-Pesa in Kenya has become legendary. The country jumps from a huge number of unbanked population to being cashless now, thanks to the ability to transfer and transact through mobile phones
Even closer to home, there are a couple of startups trying to solve a remittance problem for Filipino migrant workers to send money to their family back home. This is a huge space as the Philippines is the world’s third largest remittance market after India and China. They are all still at a very early stage but it’s definitely a very interesting space to watch
What’s happening in Indonesia?
It is amazing how much is actually happening in Indonesian fintech space without the banks or other large financial institutions knowing. There are a couple of banks who are very serious about ‘countering’ and working to avoid the threats. But most bankers I met have never heard of any of these fintech startups:
- Bitcoin Indonesia
(disclaimer: list may not be exhaustive, but these are the ones that our team have had a look at some point)
After 3 meetups in Comma, some of the initiators took to formalise it to be an association: Asosiasi Penyelenggara Teknologi Jasa Finansial. Kudos to the initiators for the collaborative effort! Some bank representatives were involved, but the number is still very small. If banks are serious about it, they should be much more involved, before it’s too late to join the party.
What can banks/other traditional financial institutions do?
I personally believe it should not be a zero-sum game. Even Gates said that banking is still going to be important. Paypal and Alipay still runs on top of the existing bank accounts (and credit cards, in Paypal’s case). Even P2P lenders still work on top of basic bank accounts, although the scary part is that the banks don’t have control of the money going back and forth in their system. Looking at the ‘best’ practices from around the world, there seems to be a couple things they can do:
1. Invest in the startups to align and enjoy the gains
If you can’t fight them, join and support them. Many international banks have set up their own corporate VC and set aside some funds to invest in the startups. These are some that I have heard of:
– BBVA Ventures
– Santander InnoVentures
– SBT Venture Capital
– HSBC Ventures
2. Be part of the ecosystem
In most startup ecosystems, one of the important component is incubators/accelerators. Banks can easily be partner/supporter/sponsor for these programs. They should also make available some of their executives to be mentors in the program to help the entrepreneurs. Some startup incubators have set up in Asia:
– Fintech Innovation Lab
– Startupbootcamp Fintech
“Let’s start tomorrow then!”
Before jumping into the ocean, there are a few words of caution:
- a venture investment mindset is totally different from traditional banking and lending. As someone who have experienced this firsthand, I can only say that you should prepare your mindset and reset your thinking about business. Having said that, the instinct of risk management gained from banking has helped me a lot (although the mitigations can be very different)
- remember that most startups fail. Some say the rate is 9 out of 10, but research has said that the failure rate to reach 10th year is about 75%
- be ready to double-down on the successful ones. Just like in the casino, you might want to risk more if you sense that you have been dealt good hand
- be involved to nurture the ecosystem. The Indonesian entrepreneurship/startup ecosystem only started around 5 years ago. There are still a lot of things that need development, and it can only be done by the players who are already in it: entrepreneur capacity building, other investors (angels, VCs, PEs), mentors and definitely for fintech: regulators
- don’t do things by yourself. The key is collaboration and partnerships. Note that a lot of the corporate VCs and accelerators in my example above born out of a collaboration between a bank and another experienced partner. If you think you are too big to work with someone smaller, that’s exactly the kind of mindset that Goliath had before David slayed him with his slingshot
Enjoy the ride!
The famous quote from Jon Kabat-Zinn said, “You can’t stop the waves, but you can learn to surf”