In this part, Mike talks about the China influence on Fintech, Blockchain and other disruptive trends
Mike, I was in Shanghai a few months ago and I was blown away at how isolated I felt. I didn't have the banking and other apps that the Chinese consumer has. I felt cut out of that economy. On the other hand, the Chinese consumer is so connected and digitally savvy. How do you see Chinese influence spreading to other global financial centers?
I just ran a seminar at a conference that I go to every year in the Alps. It's a fun conference, put on by one of my investors. I ran a seminar for the morning on the Chinese Fintech Model. I was the moderator and we had a whole bunch of knowledgeable people in the room discussing China.
You’ve been in Shanghai. You walk into a restaurant. it may know who you are through geolocation. You scan your QR code. The menu shows up. You order on-line, you just walk out, and you're billed. Your account is then linked to the restaurant and everything works effortlessly. Payments can be embedded in your WeChat account.
There are a couple of things going on that are very difficult for us in the West. First of all, a lot of the bank services are being delivered by a third party wallet outside of the banking system. They're not being delivered by a bank. Ant and Tencent effectively are running these huge balances that keep the wallet. So we’re beyond the security of the banking system for holding balances.
The second thing that's quite important is our concepts of data privacy aren’t there.
Government has basically sponsored this massive infrastructure that totally integrates everyone into the financial system for every single thing that they do. You get that utility at the expense of sharing all your information with government. Loose controls on anything to do with privacy and that makes all that work. At this point the Chinese consumer doesn’t care about privacy in the same way, or has no choice. Maybe that will change in the future, but not now. That drives a level of integration and service provision that we can’t come close to.
When you think of whether the Chinese model will come to the West, I think, the answer is probably unlikely. The U.S., is the most difficult market for financial innovation because U.S. banking regulations are so hard with banking regulated by 50 states. There have been attempts by the federal government to put in a national banking law and the states have defeated it each time. Fintech innovation in the U.S., in anything that touches actual money, is incredibly difficult. The States have said, "No, we're not giving up our ability to protect our consumers," all of which means that it takes millions of dollars both in license fees and operation fees to build an innovative regulated financial platform in the US.
So in the US, Fintechs focus on technology first, and then the regulated platform becomes the bank. Then the bank delivers the service and buys in the tech. So I think the US model will be very bank focused. In Europe where there is a single source of regulation it is easier to be a larger banking alternative which we’re seeing with the growth of large Neo Banks.
But the scenario that's more interesting -- and this is the summary of my seminar with a lot of really smart people -- what's much more interesting is, the Chinese may not care that much about Europe and the U.S.
If you look at the places where that model is going, it's all over South Asia and all over Sub-Saharan Africa and all over Latin America. The Chinese financial firms have figured out that the European and U.S. privacy standards, mean that the Chinese model of third-party wallets, total integration, and government access without so much concern for data privacy is not going to work in Europe and the U.S., but it's going to work everywhere else. It could come to dominate the whole of the world, except for Europe and the U.S. We'll end up as a museum of how things used to done. The Chinese visitors are already piling in.
How about India's or Singapore's influence?
The interesting question here which has come up a couple of times, is whether there is a third pole globally in terms of financial models? That's India, which hasn't worked as aggressively outside of India, and is a totally different economic model and will soon have a larger population. In India everybody now also has a government-issued ID. There is some level of state knowledge and control but nowhere near the amount the Chinese have. With such a massive internal market, tech savvy entrepreneurs, access to capital, India could develop a financial model more closed than China but with greater integration and ease of use than the West. After the demonetization of the 100 Rupee note a few years ago, cash payments went massively electronic through Paytm and others almost overnight. So there is scope. Whether India will end up as a third economic pole is an interesting question.
Outside of Paytm, which is huge which exploded after the demonetization of the 100 rupee note, we haven’t seen that many India Fintech product companies. Lots of expertise, the banks have huge development shops and large integrators. But the Indian market is large enough, like China, that internally focused products can get massive scale and eventually export. To go back to the Chinese model, when you go to China and see that total integration of the financial system, it's pretty impressive but its likelihood of spreading in Europe and in the U.S., we think, is really low. However, you can also think of it this way: if China’s economy grows at 8% and India grows at 6%, if you paid a 2% penalty for a little bit more data privacy, maybe it's okay.
Singapore has a very active Fintech market, actively encouraged by the regulator and the government. But the S.E. Asia internal market is quite fragmented and except for DBS, the Development Bank of Singapore, most banks are not that tech savvy. Think of Singapore like Israel—a hot tech market focused on export.
What other trends excite you?
I think the transformation of insurance is now very interesting. Insurance is about the ability to identify, price, manage and share risk. Now that we have the ability to collect massive data on everything, we can now refine our ability to identify and manage risk and then to distribute that risk across other venues. Additionally there are new kinds of risk. How do you insure self-driving cars, or shared vehicles, or home owners insurance for shared properties or drones. Insurance is usually the last industry to ever transform as it’s so conservative. Sometimes we think banks are conservative, but you're seeing a lot of InsureTech startups these days. You should look at a company called Trove, which is pretty interesting.
People always ask about blockchain and crypto which I think isn't that interesting as a financial service at the moment. In terms of asset trading, crypto is very interesting. But in terms of a financial services delivery vehicle, say payments or FX, it seems to have come and gone. No real advantages as yet in speed or cost. There is a lot of experimentation with blockchain based financial systems and distributed ledger systems in the larger banks-but right now that is still only experiments. There are other ways to solve distributed data problems. A few years ago, when you attended Money2020, the major annual Fintech conference, the booths were full of blockchain and crypto start-ups. Walking around this year, they were there, but hard to find.
When I think of the conference I just came from, it was very innovative, and quite fun. What were the themes? The themes were InsurTech; the difference between selling to millennials to selling to the people who have the money, who are the baby boomers; and how innovative firms are trying to capture younger people without money because, ultimately, they're the people with money in 20 years.
