Can coronavirus mark the beginning of a digital financial revolution?

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To open an account around the year 2012 was a treacherous task. You would have to collect your documents, physically submit them to the authorities and then be a victim to the hostile interrogations. But, the struggle didn’t end here. You would have to wait for weeks to get credentials of your account, complemented with heavy expenses and ample time investment.

But soon, digitalization took into the atmosphere and things changed then and are still changing and will keep changing for the financial sector. The pandemic has accelerated the online banking business and digital transactions. From every micro vendor to a businessman dealing in crores every day is now dependant on technology more than ever before. The coronavirus is can be thus, seen as the beginning of a digital revolution.

Tech advancement has obviously had a direct impact on e-commerce and the transformation of retail, but in addition to that, it is birthing major alterations in the field of finance as well. The share of the cashless transaction has been magnum in quantum and growth, reaching levels that were expected at least five years down the line in the normal course of business. America witnessed an 85% rise in mobile-banking traffic and a whopping 200% jump in online-banking registrations in the month of April itself.

This marks the onset of a new era for both the suppliers and consumers of finance, which basically means everyone. Conventional banks now hold only a 72% share of the total market value of the global banking and payments industry. this figure was 81% at the start of the current year and 96% a decade ago. Out of the total market value, 11% is held by Finance technology (Fintech) firms such as PayPal or Ant Group. In the current year, their market value has increased by as much as 100% taking them to reach $900 billion. The remaining 17% is held by conventional non-bank payments firms such as Visa.

Digitalization may take a backseat or a break in the fields of entertainment or retail, but in finance, it now looks to live on. Banks have access to different regions virtually making them the sole runners of the monetary ecosystem. So, we can say that the new and old would reach a complementary position with the precise features of the hybrid system being different in different regions.

The most prominent example of rapid digitalization is in online payments. The cash in hands of people may have increased but its net pace of circulation has dramatically dropped. On the other hand, interestingly, the usage of credit cards has seen a spurring rise. Thanks to online shopping and e-commerce facilities.

Governments in as much as 31 countries have extensively promoted the usage of contactless or digital payments and banking transactions. The payments via Visa and Mastercard jumped up by more than 40% in just the first three months of 2020.  

Several businesses, including schools, gyms, clubs, and retail, have gone into the cashless phase of their lives because of the pandemic. The smart dealers have leveraged the pandemic in their favor by immediately upgrading from cash registers to direct debits.

Mobile wallets (such as PayTm wallets) had become commonplace even before the pandemic but the novel coronavirus has exponentially accelerated their growth. A survey showed that nearly one-third of Singapore’s 18,000 street hawkers now have the facility to receive payments by scanning a QR code by July 2020. This marks a jump of nearly 50% in a time span of just 60 days. In the month of May alone, the sum in m-pesa held by people in Kenya jumped by one-fifth.

To your mesmerize, this not all.

As millions of people sit trapped in their houses, receiving incomes as well as stimulus cheques, stock trading has also reached new highs. A lot of tyros tried their hand at betting on stocks while relaxing on their sofa using zero-fee e-brokers. Talking in numbers, the brokerage industry has seen the opening of 50% new trading accounts during the pandemic alone. Not just stocks, but policies are being sold online as well. The insurer hired agents who had to earlier physically work to sell policies can now do all of it virtually, that too with high efficiency. Asian Unit of Manulife says it can now sell 97% of its products via online measures.

Now, let’s talk about Banking, the core of retail finance. As expected, it has also been influenced by this surge in digitization led by the pandemic. Lenders of the west have reported a rise in installation as well as usage of their mobile applications or net banking. Digital finance has roped in more people than ever into the global banking system during this time. DBS, Singapore’s biggest lender, opened nearly 40,000 accounts for migrants assisting them to send digital money to their families. Kenya’s largest bank, KCB, says that the number of its mobile app users has doubled since the existence of COVID-19.

The changes now appear to stick in the long run with a lot of technology avoiders being forced by the dynamics to learn, grow, and adapt the tech advancements. Reckons Forrester, a research firm, states that in April almost a fifth of adults in America used digital payments for the very first time.

Lately, Bain, a consultancy firm, also conducted a survey which shows that 95% of the digital banking customers plan to continue using it even after the virus is contained. Banks’ intentions of reducing physical footprint have reached another step as they close physical branches more quickly than planned. Lenders in Brazil have already shut down nearly 7% of their total stock (approximately 1,500 branches) while Europe lenders plan to close 2,500 branches.

Taking the advantage

Several big tech firms have worked on collaborations and cracking deals to gain mutual benefit from these hard times.

Apple with Goldman Sachs has launched a Credit card as well as a payment tool. Google has also partnered with several banks to offer current and saving account services.

Where does all this leave banks?

A lot of fintech firms definitely have an edge over conventional banks with their better app interface and risk analytics. But they cannot replace the lenders.

Why? Because banking as an ecosystem can be split into two variants.

  1. Core banking- It refers to the heavily regulated and capital-intensive activities such as running a balance-sheet undertaken by banks. This generated $3trn in revenue worldwide with a return on equity (ROE) of 5-6%.
  2. Freer-wheeling banking: This includes all the simplified and less capital intensive activities such as payments or product distribution. It yields $2.5trn in sales with a return on equity (ROE) of 20%.

Fintechs are involved majorly in the latter. But for this, it is a prerequisite for the banks to stay alive and profitable.

Can these 2 agencies co-exist? This question takes us to China. The world’s most populated country witnesses a duopoly of Tencent and Ant group. They use strong algorithms for pricing and distributing loans to small firms as well as individual customers across the country. Yet, whatever they sell is based on and has its roots in the balance sheets maintained by banks. Banks accept the deal because it gives them access to the remotest of places while fintechs stay in the deal because of the heavy chunks of profit they charge.

The co-existence is also heavily dependent on regulatory norms. China has no such restrictions to protect the banks while on the other end, America has taken all possible steps to protect and safeguard the interests of its banks and credit card firms. America has been extremely slow to build fast-payment pipes and has made it really hard and cumbersome to gain digital-banking licenses. It has shifted the power of deciding when data should be shared, and at what price to the people themselves. Europe and all other nations somewhat struggle in the middle of these two extremes.

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