CFA society organised second CFA India Fintech Conference in Bangaluru on March 8, 2019. Summary of key takeaways :
Session By Mr. Chris Skinner, Author of Digital Bank. Fintech a Global Perspective.
Contributed By – Sandeep Gupta, CIPM, CFA. Conference Co-chair
History of finance goes back 100’s of years with the Knights Templar and the creation of Switzerland as a country. The rules and regulations created over centuries has led to the modern banking system. Technology cannot replace the rules and regulations that create the trust for cross border trade.
Chris feels that Banks will continue to be relevant and disagrees with Bill Gates Quote “We need banking, we do not need banks”. Banks may not be necessary for payments, loans, savings and credit. These are things that banks do. But the core of banking is creating a trusted store of value. Also acting as a trusted intermediary for exchange of that value with others that you do not trust. Crypto currencies is a wild west without regulations leading to frauds with no recourse. Regulations are required. Banks are not stupid. They are trying to innovate but it’s very hard. However, we have to move from analog to digital. There is a great difference between digital and industrial banks. Digital banks are creating change and immense value without requiring as many people.
Chris presented some interesting statistics on how Fintech and new age banks have caused a change for existing banks in number of employees and total Value. Those statistics seems to suggest that while No. of employees in traditional banks in 2018 vis a vis 2016 are on decreasing trend , this trend is on increasing side for Fintech and new age banks.
Stripe which is valued at $ 20 billion is basically 7 lines of code. It was setup only in 2011. In the same period, JP Morgan has also grown valuation phenomenally while reducing the number of people massively. J P Morgan is getting rid of stupid jobs. Anything that a machine can do is a stupid job. Fintech communities connect and need not necessarily create.
Fintechs like Stripe makes certain processes at the traditional lenders non-competitive. Stripe is a B2B service which is invisible to customers. If you build an API, other people insert your code into their process and you get a share of the fees and can create immense value. The traditional business model of back office, middle office and front office at banks used to be integrated. Digital can pick-up one part of the process and do it better.
In the US P2P lending is regulated and is reducing the spread between borrowers and lenders. It has been reduced to 150 basis points vs. a difference of 400 basis points at traditional lenders. This makes traditional banks non-competitive. However the traditional bank back office has a wealth of data. But they cannot remain dumb with their data. JP Morgan software now does in seconds what took lawyers 360,000 hours of lawyers time. Every job that can be replaced with technology will be. People have to retrain and reskill. People will become trainers, explainers and sustainers of the technology.
Teams are growing smaller and example of Amazon was shared where they have a concept of a two pizza team. Any team that needs more than two pizzas for lunch is too big. Decisions are to be made faster. Banks are introducing digital when they need to make a cultural transformation and include it into their DNA. Legacy infrastructure and structures have to be regenerated. Technology is business and the business is technology. There can no longer be an IT Department. Data is not oil, a fossil fuel. It is like air which is all pervasive and essential.
Focus is to be on customers. Banks of the future will have different roles. A bank is an asset management company. Historically it was physical assets but in the future it will be digital. Facebook is also a digital vault. But how secure is it? Data is money and is valuable. It needs to be secured. Banks can play a key role in that area. Banks can be partners in life events of customers. Apps and API’s can play a major role in integration and can play a more holistic role. Banks can be a curator of multiple Fintechs.
Session By Mr. Kunal Shah, Founder Freecharge / Cred.The Evolving Payments Landscape
Contributed By – Sandeep Gupta, CIPM, CFA. Conference Co-chair
Kunal conducted a well-received session anecdotally without any slides. He highlighted that the lines of payments, banks, ecommerce, chat, smart phones, telecons, fintech are all blurring. He highlighted the power of increased distribution and creation of platforms.
He gave an example of the English language which is the global platform of communication. India has benefitted from this platform. Platforms assimilate features. In the past the English did not have good numerical system and they used the inefficient Roman numerals. Trade was inefficient to conduct using roman numerals. The Indian / Arabic system was more efficient and replaced the roman numerals in the English Language. This is the core principle of how a product eats other products.
On disruption; he gave an example of Whatsapp payments. The consumers trust on Whatsapp is much more due to its ubiquity. So when Whatsapp launches payments as a feature, it can disrupt the entire landscape. Whenever a large product which has a large distribution, decides to make a new feature; they wipe out an existing product. Example is digital cameras. A product “the cell phone” which was more distributed and in all our hands (most of the day) killed this product. A digital camera has now become an icon in our smart phones. In fact; most of the icons in our smart phones today are actually products that have been assimilated. Videos are now playing inside Whatsapp.
If potentially a telco which has 500 – 600 million customers decides to start lending; it can potentially disrupt banks. If a hardware company with 300 million devices decides to do investments and mutual funds; they have the distribution to disrupt traditional investment platforms. Some may argue that they do not have the capability. Capabilities can be bought. Distribution is critical. Today reaching 500 million customers is very easy. A telco can build this scale in 4-5 years. The world has become a efficient superconductor. Whenever a good joke is made; in less than 12 hours everyone knows it. Great ideas; jokes, bad news is spreading extremely fast. High distribution and trust can create new features into products very fast.
Malls today attract customers by organising events. Similar analogy was extended to temples of India in the past. The shops around the temple did well when the traffic to the temples increases. They used to compete with other temples. Similarly PayTM has a lot of Daily Average Users (DaU’s). They went into news as it attracts more people onto the platform. This creates scale and distribution reach. Tik-tok in China is loans company. Is it a social media company, fintech or a lending company.The lines are blurring.
On Crypto and money Kunal had the following views. Money is an imaginary concept and we have agreed to exchange goods and services based on this. Demonetisation erodes the trust in the currency. Whenever a regime changes there is demonetisation. India has witnessed over 20 demonetisation events in its history. Currency is introduced through power. If the people don’t trust the regime, they will look at alternate methods of hoarding wealth. Gold creates interoperable trust acceptable by most. If the US government decides to launch its own crypto currency,people may shift to that because it is being endorsed by a powerful backer. Historically when a King adopted a religion; the people also adopted it. Human behaviour moves from the rich, influential and powerful downwards to the poor. A brand like Kylie is transitioning from a personality to a brand which is trusted by people. Popular Instagram influencers are more effective than a TV Ad.
When there is lack of trust; it gets concentrated to a few trustworthy players who accumulate immense power. Countries with lower trust grow slower. Removing trust barriers is very important. Conglomerates exist in countries with low trust. A company like Tata can put its name across products and people will buy it. Similarly PayTm can now get into multiple businesses using the trust created and its distribution reach. Uber and Ola are not Taxi companies but Trust Companies. Air BnB is a trust company. Strangers can engage with each other without fear. A shoe brand also may not manufacture the shoe themselves; but the moment they put their brand on the product; customers can trust the quality. Decentralisation is not needing a brand to create trust between two people. If humans can trust each other without requiring an intermediary, wealth will see a massive redistribution.
On the occasion of Women’s day Kunal mentioned that the participation of women in the workforce needs to be increased. Only 10 – 12 % of urban women are working. For a faster per capita growth of the country it is important to improve this metric.
On millennials, Kunal had an interesting insight. In every home there is a Chief Technology Officer who is between 14 – 18 years. That person is showing the rest of the family on how to use technology.The role of this 14 -18 year old is also shifting to that of the chief procurement officer. While the products are being designed for 40-year olds, the influencer is a 14 – 18 year old. Millennials are able to communicate effectively and this generation is disproportionately smarter than ones before.The delta is large because they were born with Internet. They have instant access to information from the internet. They prefer working for new age company and have a disdain for ‘Uncle’ companies.
The session was followed by a very interesting Q&A between Navneet Munot, CFA& Kunal Shah.
Some interesting snippets.
- How many of us know what is our salary per hour. This is important to understand the value of time. If a company has an IT department, itcan never become a technology company.
- Once you achieve distribution; companies can be created at will. Amazon was not a tech company. Because of their distribution reach; they were able to create AWS.
- On innovation & regulations Kunal had an interesting retort. When the first knife was invented; it could have cut someone’s hand. However, it was not banned and we still use knives. Similarly, if Whatsapp has been used to spread fake news; it is not prudent to simply ban it.
- MRP is bad for the country. Products should be charged more for the rich than what is charged for the poor. This is the ethos of capitalism. Anything else is socialism.
- You cannot make money anymore from Payments. However, the distribution achieved through payments can be used for creating features that can make money.
- All businesses are at risk due to cross sells.
- Anyone who can predict the future more accurately will be able to make more wealth. Technology helps in this. No company is safe from disruption.
Session By Mr. Varun Dua, Acko. Insurance in the Digital Economy.
Contributed By – Sandeep Gupta, CIPM, CFA. Conference Co-chair
Key Issues Addressed were
- Overview of Indian Insurance Market
- What is digital Insurance & the role of technology
- How is Acko addressing the gaps in the market.
India is the 4th largest Auto Market in the world. India has only got 30 – 40 odd insurers which is very small compared to markets like China, USA etc who have many more (300 – 400). In India before privatisation there were only 4 PSU’s insurers. Hence the insurance industry in India is very young and has only developed over the last two decades. The penetration of Non-Life Insurance as % of GDP in India is very low (0.9%) currently. However the Market is growing rapidly at 22 % with the private sector outpacing the PSU’s many of whom are now ailing.
The Role of Digital / Technology in Insurance can be segmented across 4 parts. Product, Price, Distribution and Claims. Initially in the first phase, digital has worked to put the existing products online. This was done by the likes of Policy Bazaar, cover fox etc.. In the future, the entire value chain is expected to move online. This will happen when data and analytics comes online. It can change the dynamics across all aspects of Product, Price, Distribution and Claims. The amount of data and intelligence that is available creates new products and the possibility of better pricing. The very nature of the product will change as digital can bridge the distance between the insurers and the insured.
The main costs of any insurance company are distribution, opex and claims. The distribution costs of 8 – 10 % cost in the traditional system can be brought down significantly through technology. The same efficiency can be brought into opex. With regards to claims, the customer credibility can be established to put customers into green channels where claims can be settled more efficiently which has been a bane for traditional insurers.
The three challenges for insurance was Non availability of data leading to blanket underwriting, High Distribution Cost due to all new insurers chasing the same distributors and Investment float incomes (more of an AUM business) vs. an insurance play.
Acko is tackling these challenges by alternative distribution challenges. Better underwriting through better data and analysis. The key is to identify better customers. Acko is focussed on the insurance business and on how to acquire good customers. There are now 100 million insurance customers online in India. Acko have sold low value products of Rs 1 or 2 to over 18 million customers. Acko covers customers of Ola and they compensate passengers for things like missed flights etc. Acko captures detailed information like flight times, cab arrival timing etc. which powers their claims processing. Another focus is Online Auto Insurance which currently is only 6 % of total market. This is expected to grow to 15 – 20 % in the next few years.
Availability of data through multiple sources of information like Amazon, Ola etc. can help price products better in future. As an example; if a customer is using Ola & Uber more than 25 times a month, he deserves a better insurance premium on his car which is not being used much. Trustworthy customers should get their claims processed immediately. In the US; facial recognition that can detect truth vs lie’s is being used to process claims instantaneously.
The world of insurance is evolving rapidly and the existing players may soon face a Blackberry Moment.