Asia loses out as fintech start-ups head to the West

Financial technology start-ups are mushrooming in key Western cities but Hong Kong is missing out, a forum hears. Asian financial centres are warned of their failure to cultivate the groundbreaking disruptive firms.
Asia loses out as fintech start-ups head to the West

Hong Kong is being left behind in the race to create disruptive financial technology start-ups, a speaker told an AsianInvestor forum.

The successful pioneers of fintech are predominantly in the West, where it was claimed the new technologies are no longer the future – they are already here.

With traditional revenue-generating tools no longer making any money, investment banks are already implementing new tools, the forum was told.

And China is on the rise with an innovative form of internet- and social media-based credit rating, with Alibaba tipped to become the world’s biggest rating agency.

Paul Schulte, founder of Hong Kong-based research house Schulte-Research, said that while there has been talk about fintech taking off over the next 3-5 years, it was actually happening now.

“The capital markets structure and the commercial banking structure that we have currently – the architecture already exists to replace it. This is a global unstoppable phenomenon,” Schulte told the Asian Investment Summit in Hong Kong last month. “It’s catching on like wildfire and Hong Kong and Singapore are only just waking up to this.”

He pointed out where the most fintech companies were located around the world – the San Francisco Bay Area had 191, London 99 and New York 68, according to data from research house Venture Scanner. Singapore is trailing far behind with 21 such companies, but still had the most of any Asian city, while Hong Kong hosted a mere six such firms, just in front of Sydney, which has four.

Schulte lauded London mayor Boris Johnson’s efforts to attract disruptive technology companies and create a fintech hub, comparing it to Hong Kong, which “has got to get with the programme”.

The types of burgeoning fintech solutions already in existence include personal finance, equity finance, lending, retail investment and bank infrastructure.

Schulte cited as an example of successful fintech the peer-to-peer lending sector, which has now made nearly $100 billion in loans.

Fixed income was the latest financial sector under attack by disruptive technology, said Schulte.

“[Fixed income was] the last thing that was profitable for investment banks because it was inefficient - imagine having to make a phone call to sell a bond,” he said. “Look at margins on fixed income trading – they’re collapsing. Fixed income, commodities, equities and currency platforms are all evaporating inside investment banks.”

Schulte also sees investment structures and margins at retail banks disintegrating, with new and cheaper disruptive firms like Experian, Palantir and Kensho replacing traditional roles, such as research analysts.

He said that HSBC and Standard Chartered in particular were being left behind, and that because of their complex regulatory structures they could be leapfrogged by nimbler and technologically-savvier rivals.

However, Goldman Sachs and venture capital firm Sequoia were among the most adept in making investments in fintech companies, Schulte said.

Finally, Schulte sees Chinese e-commerce giant Alibaba as on course to becoming the world’s biggest credit ratings agency.

Because of the lack of Western credit scores in much of Asia, regional credit ratings were turning to other ways to score individuals and companies. Sesame Credit Management, which Alibaba launched in January this year, would within the next two years have accurate ratings on 900 million people and on every company in China, Schulte predicted.

This would be possible because Sesame would have access to its e-commerce parent’s vast trove of user data and social media behaviour, which it could use to build credit scores. From someone getting married or divorced to who their friends were, all would be used to build up an accurate financial picture of an individual.

Schulte said: “[This is a] completely new revolutionary understanding of data analytics and big data – these are the new ways to create ratings for individuals and corporates.”

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