Building New Generation Digital Banks with Programmable Money and Trust: Are You Ready for the Next…

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@ btekmen Bulent Tekmen Co-Founder Colendi , ininal, Next Ventures

Banking is one of the sectors that most successfully implements technological developments in their products, services and processes. However, the actors of the transformation started with digitalization in finance are not only these banks anymore. According to Facebook report of Millennials + Money: The Unfiltered Journey , 92% of millennials, the largest single generation ever with their average age of 26.5, don’t trust traditional banks and this is no doubt shaped by the 2008 Financial Crisis. The most striking result was the new products and services which have for a while started to appear in the market and extend their reach. For example, in recent years, tech giants, Alibaba and Tencent, Ping An, Baidu and more that have both massive customer bases and vast cash reserves have provided new choice of payment for especially many unbanked customers with their digital wallet services replacing cash and credit cards in both local and global market. When the integration of technology and innovation into the financial sector is considered, it’s possible to say that despite its late start compared to its Western “counterparts”, the most important one, US, China was currently enjoying a “late-mover” advantage in fintech sector along with the liberalization of its economy.

According to MIT Review January 2019 The China Issue China’s mobile payment market has reached a whopping 15.4 trillion $ magnitude, about 41 times that of the US. The growth and adaptation difference between the two countries demonstrate how different approaches, investments and supports by the general population can create two sets of trends.

If you look back a couple of years ago It’s not surprising that while two Chinese technology and payment companies, Tencent’s WeChat Pay and Ant Financial’s AliPay had respectively reached of 231.9 and 213.4 bn USD capitalization, whereas the US companies, Paypal, Mastercard and Visa were standing at of 47.6, 112.4 and 181.2 bn USD according to 2016 Factset financial data and analytics report. In another market study done by PWC “Global Top 100 Companies by Market Capitalisation” report published in 2018, There are two new entrants in the top ten, Chinese technology companies, Tencent and Alibaba, replacing US companies Exxon Mobil and Wells Fargo. While the US still dominates Global Top 100 with 54 companies in 2018 compared to 42 in 2009, China holds the second position with 12 companies (two more than last year and three more than 2009). Especially, Chinese technology and payment companies have the second largest absolute increase in 2018 compared to the data in 2017 with the rates of change, respectively 82% and 75% in market cap among 20 top countries across the globe.

As of March 1st, 2019

So, where does all of the Tencent and Alibaba’s value come from?

Let’s start with Alibaba. The success of it lies in part, with Alipay, the third-party mobile and online payment platform under Ant Financial, Alibaba’s affiliate company that processed payments for 1.1 billion transactions on Alibaba Group’s Tmall.com and Taobao.com. Ant Financial has now approximately 450 million active users by providing an ecosystem for Alipay according to data from Analysys International Enfodesk; and this digital payment service has already begun expanding outside Alibaba’s reach to provide e-commerce operations for a larger client base in Mainland China.

The second giant company, transforming itself virtually into a digital bank for its customers, Tencent was designed as a popular messaging application used by over 800 million people for daily communication and payment activities.

Mobile Payment Market China

Since 2016, there has been 30% annual growth rate in user acquisition because of the opportunities provided by its flagship product, WeChat and digital payment business WeChat Pay that gives access to financial management, banking transactions, peer-to peer payments and more.

Mobile Payment Market China

From Payment to Banking

Hong Kong government has planned to provide digital banking licenses to the China’s top technology and payments companies, Ant Financial, Tencent, ZhongAn, Xiaomi for the first time. This is another groundbreaking accomplishment by these tech giants that disrupt the older traditional banking system that we are familiar with. Such an attempt of Hong Kong government can be understood in the context of a policy change based on the aim of transforming the country, as this semi-autonomous region governed by China, is now evolving into a smart city by opening its own market to the online competition.

Image by Brigitte Werner from Pixabay

Until recently, we’ve come to know only a few banks such as Hang Seng Bank, Standart Chartered and HSBC owning a lion’s share of credit cards and retail mortgage loans with approximately 66% in Hong Kong according to Goldman Sachs researches. For example, HSBC ensured its leader position in the market in last year with $1.4 billion profit obtained thanks to its wealth management and retail operation policy for the second quarter. However, we still could see unsatisfied customers with the existing bank models. According to the Accenture researchers’ report published in 2017, just over half of customers in Hong Kong are satisfied with their current banks compared to 88 percent in the US. Accenture Asia Pacific managing director Fergus Gordon commented, “There is a large majority of customers in major markets who are willing to do banking with different models, and digital banks have a great opportunity to tap into that.”

The rise of the new fintech giants also seems the have started to affect the lending scene. Growth is very significant, both in amount and transactions which is a true indication of the success of their expansions. WeChat’s WeiliDai, although started operations in 2014, have seen a massive growth to surpass 133 billion dollars of loan amount in 2017 with 12 million customers. The growth ratios suggest much more growth in the upcoming years. It’s not just the loans given out, these two major platforms also are becoming the mainstream methodology for investing funds. Alipay’s money-market fund Yu’e Bao, receives investments up to $3,000 yielding an annual return of 4%. The total amount has surpassed $160 billion.

However, we can say that the unsatisfied customers with traditional banking models is not just peculiar for the Hong Kong market. For a long time, the bidders hope to challenge the “oligopoly” of traditional banks in market by offering a digital alternative to customers who are unsatisfied with their current options in most of the markets in global scale in today’s world.

Hong Kong

Other fields of tech stepping into the banking scene

As the competition grows between the tech giants and traditional banks to satisfy their customers, we’ve come across a wide range of new tools and platforms such as artificial intelligence (AI), machine learning and Blockchain infrastructures which opened the door to other capabilities. It can be concluded that such technologies disrupt traditional financial landscape and reshape the methods of financial institutions on providing services in accordance with the expectations of “incredulous” customers.

Especially the Blockchain technology, as a disruptive innovation, is shaping up to be a challenge to the existing social, economic and thereby, political relationships in both local and global level. It seems to perfectly combine the transparency of Internet with the security of cryptography. People’s expectation for a more “trustful” and democratic world of data is coming to being day by day. The democratic character of Blockchain is not just related to its capacity to enable people to verify their own data but also to its ability to provide an infrastructure for sharing economy that involves all participants in the network.

The Tech giants are aware of the power of Blockchain technology in various fields and they have recently started to integrate the technology into the artificial intelligence mechanisms of their companies. For example, Alibaba, one of the most giant e-commerce company in China, started to use Blockchain technology to accelerate payment process in the international arena. On the basis of Blockchain technology, the users’ account balance will be verified through smart contracts. Thus, without the need for more servers, the system will be more cost-effectively worked over Blockchain networks.

Old Players, New Looks

As the most “disruptive” innovation in today’s world, the Blockchain has been the “buzzword” and ubiquitous technology of 2018. Today, even messaging app Telegram have conducted the TON project based on the Blockchain technology with the aim of increasing the real-world applications of cryptocurrencies through the idea of first-ever mass-market cryptocoin. Basically, “TON is a decentralized and robust supercomputer transferring high volumes of information or value.” The project is expected to bring non-censorship and anonymity through Blockchain decentralized infrastructure. As TON will achieve maximum security with minimum transactional time, the ecosystem is poised to become a Mastercard/VISA alternative. According to TheBlock, a report for investors of the project, TON Virtual Machine is a software enabling smart contracts to be executed is mostly completed at that time.

Facebook announced that they were also working on a new coin that would enable Whatsapp users to exchange crypto coins.

As blockchain and fintech revolution is happening worldwide, more giants from various countries are getting more eager to jump into the scene. In the last week of February, Japanese “Megabank” Mizuho Financial Group, which is currently standing at 1.8 trillion $, announced that they will be launching a new stable coin J-Coin with the hopes to use it in payments and remittance services. This is a second move after Facebook had announced that they were also working on a new coin that would enable Whatsapp users to exchange crypto coins. If we are speaking of giants interested in the blockchain technology, we also have to take into consideration the latest stablecoin project of JPMorgan. As one of the biggest banks of USA, JP Morgan seems to have started to get involved in the blockchain scene and they are now after being a “reliable” institution with their stable currency in a considerably volatile market. These three examples are not the perfect representations of a “decentralized” coin per se, but it is a perfect use case of the blockchain technology deployed by a centralized company.

Race of blockchain adoption

Telegram a direct competitor of Whatsapp is one a few steps closer to the finish line of their vision. The 5 year-old new messaging app already managed to raise 1.7 billion dollars in a private ICO and is fiercely bearing down on the vision to create a cryptocurrency platform based on their messaging app. This is considered to be 2018’s boldest attempts to drive mass adaption of blockchain applications.

Messaging Apps and Their Payment Services

At this point, it’s inspiring to realize the increasing wave of the “alternative economy” channels created not only by the traditional banks that have started to use digital technology and above-mentioned BigTechs transforming into the new digital banks but also by newly emerged Blockchain-based startups with the “shared economy” slogan.

Is Blockchain for BigTechs or against Tech Giants?

Although BigTechs can be considered alternative digital banks for the traditional in recent years, it is paradoxical for massive technology companies to unite Blockchain and AI since such tech giants continue to act as “gatekeepers” for preservation of data. In contrast, cryptographic protocols designed around Blockchain aims to allow users to have more control over their private data. Therefore, as the number of alternative channels aimed at the idea of “self-sovereign” user identity increases day by day, the suspicion toward the efficiency of BigTechs increases in a similar manner.

Therefore, the mission of some Blockchain-based startups can be understood in the context of “uncompleted” shared economy. Their intention is to create a path based on the trade of data instead of currency, and thereby, erasing the hegemony of the technology oligopolies by providing free access to the information. Through decentralized and distributed ledger system of Blockchain technology, the entire process divided between several nodes is now faster and more trustful because of the requirement of licensing that includes legally binding contracts and permissions for commercial purposes. Blockchain enables users to sketch contracts easily using built-in tools and efficiently transfer the rights to their data to other entities. As a result of which, through Blockchains, it can be considered more fairly awarded content creators for the work they do in the context of “sharing economy.”

The new technology implies decentralization and the world seems to adapt to the idea very quickly

It would be a very optimistic prediction if we say that blockchain technology will have an equal positive effect all over the world. We have already begun to see major differences in approach to these new tokens and innovations. Some countries are already assuming the leader role thanks to their innovative approach and risk appetite. China’s increasing trend in technological investments and growth in patent applications favor the country immensely. However, many western countries like Switzerland, Malta, Germany, USA, Estonia and the other Asia giant Japan do not lag following suit. The Swiss city of Zug has already earned the reputation as the Blockchain Valley thanks to their early recognition of the power of this recent technology, which they supported by establishing regulations for the private ventures that intend to use blockchain. The new technology implies decentralization and the world seems to adapt to the idea very quickly, as we are drawing closer to a future where Silicon Valley giants will not be leading the world anymore. With the new lead of these countries and more of them joining in this ultimate technological revolution, the regions adapting the new tech is expected to go through a significant improvement in revenue and growth.

Sources:

https://www.pymnts.com/news/digital-banking/2019/ant-tencent-xiaomi-hong-kong-digital-banking-license/

https://www.jpmorgan.com/europe/merchant-services/fin-tech-revolution

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http://www.iresearchchina.com/content/details7_49288.html

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