Standard Chartered recognises risk in financial technology firms
Lender sets high bar for fintechs looking to team up with banks
Standard Chartered’s chief innovation officer has some tough love for financial technology firms.
Many of the hottest topics that fintechs are flaunting as the next big thing simply will not cut it as core processes for the global bank, says Anju Patwardhan – not today and unlikely in the next few years.
One theme that has captured the attention of a gamut of bankers this week at Sibos, the global forum put on by the financial infrastructure organisation SWIFT, is the application of the block chain database at banks.
The block chain, the technology that underlies the cryptocurrency bitcoin, is supposedly an incorruptible system for recording transactions and proponents say it is only a matter of time before it moves into the heart of the banking industry.
Not so fast, says Patwardhan. Standard Chartered has already determined that it wants nothing to do with bitcoin, the digital currency created in 2009 that exploded in value starting in 2013. As for the block chain that everyone is talking about, the regulatory issues surrounding it could keep it out of banking for the foreseeable future.
“Not for another three to five years, if it ever becomes mainstream,” she told the South China Morning Post in an interview.
Getting picked up and integrated into the core operations of a global banks is no easy task. For a technology to be bought or licensed by Standard Chartered and integrated into its credit modelling systems, the company that provides it must have seven or more years of data from the system, and preferably data from an economic downturn, Patwardhan says.
That hurdle eliminates the vast majority of fintech startups, which characteristically have short histories and a tendency to vanish as quickly as they appear.
“We need to know they are going to be around”, she says, if Standard Chartered is going to bring their technologies into the bank.
The latest wave of fintech firms have homed in on credit, namely shaking up the models that traditional banks have used to make lending decisions. Many firms are using social media data in order to assess customers abilities to repay small, unsecured loans.
Using social media data is not in the cards for Standard Chartered either. Patwardhan says social media sites are fraught with inaccuracies including fake profiles.
Many startups touting new models for credit assessment, including some of the small lenders at Sibos this year, have a near-sighted outlook on credit risk, she says. Kreditech, a Germany-based firm that gives small loans, says its algorithm for making lending decisions allows it to enter a market and turn a profit within a year with an ultra low bad loan rate.
Patwardhan wants to see the company’s lending three years down the line, a time when bad loans often begin to hit balance sheets hard.
While she may sound harsh, Patwardhan’s job is not to discourage innovation. She oversees an agenda that is trying to support thought leadership and broad employee engagement in innovated thinking. Standard Chartered also sponsors a fintech lab in San Francisco and is opening another in Singapore.
However, with a background as a risk officer, she cannot help but recognise the inherent risks associated with fintech firms charging into the lending business. Peer-to-peer lending in China, a somewhat unregulated realm that has experienced a rapid rise along with ample cases of collapse, is a key example she points to for how investors have lost large sums after handing cash to fintech firms that thought they got banking.
“If the fintech space is mainly facilitating payments or providing the technology, I think it’s a good outcome for everybody. It’s good for the tech company, it’s good for the bank, it’s good for the consumer,” Patwardhan says. “But the minute they start taking money from retail investors to do lending – which I think they don’t know so well – it becomes a different proposition.”
The future of banking will be collaborative, with fintech firms set to greatly change the way customers access and use their banks, she says. But the banks will still form the backbone of the industry, and keep calling the shots.