FinTech-bank deals slow, not impossible: PwC’s Arslanian
It can be difficult for conventional banks to buy in services from financial technology (FinTech) firms. There are however ways to overcome such barriers, says Henri Arslanian, FinTech and crypto business leader for China and Hong Kong for business services firm PwC.
Mr Arslanian was speaking in a wide-ranging interview with Innovation Hong Kong on the sidelines of the Finovate Asia 2018 conference in Hong Kong. He is also chairman of the FinTech Association of Hong Kong, an advocacy group for the sector.
He also discussed the relatively slow pace of development in using the digital technology of blockchain – also known as distributed ledger – for back office business functions such as trade account settlement, compared to the faster pace of activity regarding application of blockchain technology in the cryptocurrency sector.
Mr Arslanian is also an adjunct associate professor at the University of Hong Kong. There he teaches graduate courses on entrepreneurship in finance as well as what is said to be the first FinTech university course in Asia.
The Finovate Asia autumn conference had heard several speakers suggest the relationship between the incumbent banks and FinTech firms had moved from one of outright competition and sometimes even confrontation a decade or so ago, to a realisation that each side had something to offer the other.
Nonetheless conference delegates several times heard it had been hard for banks to cooperate with outside FinTech providers, compared to the way other legacy industries had been able to consult and collaborate with digital technology firms, to the advantage of all the parties involved.
In his commentary to Innovation Hong Kong, Mr Arslanian mentioned some challenges specific to Hong Kong FinTech start-ups.
They included the difficulty of setting up an account in the city’s conventional banking system; a necessary step for businesses of the FinTech variety. The consultant also mentioned some wider cultural challenges regarding the outlook of conventional banks versus FinTech firms.
FinTech into banks
Even if the FinTech firm had found “the right internal champion” at the bank who was ready to buy business-to-business (B2B) FinTech services from outside, there was still a number of hurdles.
“You hope that person doesn’t change job… that budget is made available… and that you will get the time to focus” on the service product “you are building”, stated Mr Arslanian.
“Once that is done you hope you are going to be able to go through the procurement process; the compliance process and IT security; and then be able to sell to the bank. It’s a pretty difficult process, frankly,” he added.
The PwC executive suggested that the local regulator – and regulators further afield – might be less of a barrier to market entry for FinTech start-ups than supposed.
“In many cases regulators are probably more aware of the innovation of FinTech than many of the people working in traditional financial institutions,” Mr Arslanian said.
He added that – in the Hong Kong context – he doesn’t think “the regulators get the credit they deserve for the work they have been doing in FinTech and overall innovation”.
Mr Arslanian noted: “A few years ago, if you or I wanted to speak to the [local] regulators, it was almost impossible, unless you were a licensed entity. Right now with most [sectoral] regulators there’s a hotline to call, there’s email [contact points]; and they will most likely meet you if you want. It is really a change of mindset in how regulators approach not only FinTech but start-ups in general.”
FinTechs like compliance
The expert indicated it was probably simplistic to characterise incumbent financial institutions as either inherently more compliant of regulations than FinTechs, or more interested in having a culture of doing so.
“If you look at the data, the UN estimates that today, despite all the work we are doing in the AML [anti-money laundering] space, we are able to capture less than 2 percent of laundered transactions. The fact is that we [society] are failing when it comes to AML,” said Mr Arslanian.
FinTech start-ups had “an advantage” regarding AML compliance, because they often saw it as a business opportunity in itself, rather than as simply a process in some other form of financial business.
“Think about the cost for [traditional] financial institutions of complying with AML. That’s where RegTech – regulatory technology – can help,” he stated. Not only could such digital technology “do these functions more effectively, but also more efficiently,” he added.
For those financial businesses without legacy technology constraints, the sector had been seeing “use of biometrics; and AI [artificial intelligence] when it comes to AML processes,” stated Mr Arslanian.
The “biggest challenge” faced by the FinTech start-up community “without any doubt in Hong Kong, is opening a bank account,” said Mr Arslanian.
“They need a boring traditional bank account for their day-to-day activities,” he stated.
Anyone in the field that had tried to set one up knew “how unpleasant that experience is,” he noted. “‘Unpleasant’ would be tolerable. In many cases it’s impossible to open a bank account.”
Mr Arslanian said sometimes incumbent banks had a “lack of awareness” of the FinTech sector. “They just don’t understand it,” he said.
Additionally, opening such accounts might not “economically make sense,” for the traditional banks, “while banks’ own processes” could also be a barrier for the newcomers.
“If we had to give a grade to the user experience for a start-up to open a bank account at a traditional bank, for sure it would be an ‘F’. It’s terrible,” stated Mr Arslanian.
Virtual banks’ potential
He said however that the role of “virtual banks” – soon to be licensed to provide banking services in Hong Kong – could eventually spread from the retail customer segment, to work for small and medium-sized enterprises.
“I personally believe the [FinTech] ecosystem would be double or triple the size if [conventional] account opening was not a problem,” he noted.
One of Mr Arslanian’s key roles at PwC is advising clients on building public and governmental trust in blockchain, including in terms of accountancy practices.
“As you can imagine, double-entry accounting was not meant for crypto assets. So we are doing a lot of thought leadership on that [accounting] issue and assisting clients on that front,” he stated.
“A lot of the ICOs [initial coin offerings] or crypto exchanges are – believe it or not – probably better at KYC [know your customer] and AML right now, than a lot of traditional financial institutions; the reason being, they are able to leverage the latest RegTech not only on the on-boarding side [customer acquisition] but also on the AML side,” Mr Arslanian suggested.
“We are using some of the best practices we have in the traditional space and bringing it to the crypto space,” he stated.
That included “from a compliance perspective: protection of customer funds; and from a market surveillance perspective,” noted the expert.
“Any services we are offering to crypto come under what I call the 80:20 rule. It is 80 percent the same thing in principle,” as non-crypto business; but “20 percent is a new crypto-twist: like cherry cola,” versus the standard cola, said Mr Arslanian.
Nonetheless he noted that blockchain as method of trade settlement and back office accounting had been “moving more slowly than people were expecting,” compared to market interest in “cryptocurrency and crypto assets”.
Mr Arslanian observed: “I always ask companies if they would be happy to move their entire back end to blockchain: maybe not… [but] in many cases it is a solution looking for a problem.”
Where he was “more optimistic” was blockchain as an enterprise tool in areas of growing interest to business and regulators. These included “traceability and provenance” of funds in relation to trade financing.
“I think we are at one of the most exciting periods in financial history. What we have seen in FinTech and what we are seeing in crypto is a big part of that,” said Mr Arslanian.