FinTech Rising Interview: Emmanuel Daniel
A global perspective on FinTech innovation through a Southeast Asian lens.
Let’s face it. We, the people of the United States, tend to look at the rest of the world and its economies from one perspective: our own, especially in an election year. Yet our decisions in finance, technology, and regulation have global consequences for the future of money and the technologies that manage it.To get a global view of FinTech developments and the future of money, I turned to Emmanuel Daniel. He founded The Asian Banker in 1996. TAB provides intelligence reports on the financial services industry in the Asia Pacific, Middle East, and other emerging market regions. His book The Great Transition: The Personalization of Finance is Here came out last year. Trained as a lawyer, Emmanuel graduated from the National University of Singapore and the University of London. He has also been cited for entrepreneurial and journalistic excellence.
I met Emmanuel in Amsterdam at the 2010 Sibos transaction banking conference, where the innovation focus was mobile payments. We met one another in person at Money20/20 Asia in 2018 when blockchain technology and bitcoin were high on the innovation agenda. Now, the media focus is on the state of FinTech investment, especially mergers and acquisitions. Our conversation covered:
Platform plays versus banking and credit plays and how investors are beginning to change their focus.
Measures of FinTech business success.
The importance of foreign exchange revenue to payments FinTechs.
The power of regulators and large financial institutions to shape innovation in finance to support traditional financial institutions.
Continuing U.S. dominance as the global reserve currency.
Emmanuel’s PR firm contacted me upon the release of technology research firm CB Insights’s Q2 2024 FinTech Trends report. We talked on July 24, 2024 and started our conversation with that.
Collin: The state of investment is traditionally a measure of market health, and the CB Insights report on the first half of 2024 just came out. It’s still a down year after a record in 2021 and a good high in 2022. Now, it’s like a second hangover year. What’s your sense of FinTech investment and growth today?
Emmanuel: The thing about reports on FinTech is they tend to be incremental in their views. The reason I wrote my book is I tend to take the long view. I looked at the numbers in the report, both the U.S. and Asia, and what I see happening is that 2021 was the period when you had a number of platform opportunities. FinTech was being treated like any other platform play, and platform plays tend to get higher valuations in venture capital funding. From the CB Insights trends report, not just the latest second quarter but also last year’s, you see investors beginning to distinguish between platform plays and credit plays. The baseline credit plays are maturing, and they require a treatment that is unique to them.
Collin: Let’s step back just a bit and define platform plays versus credit plays to give some context.
Emmanuel: The platform play narrative is to onboard millions of customers and then monetize them. So, the venture capitalist is really willing to wait for a long gestation period of onboarding before the monetization process starts. Big platform players like Stripe (the largest deal in the Q2 2024 CB Insights report) eventually will become an organic growth credit play, where the emphasis will move toward customer-level profitability. As a platform play, Stripe is compared to all other payment platforms. How many customers is it onboarding quickly? You know, to have more customers to monetize. . . . And the customer-level profitability is very thin. That’s okay with the platform players.
Collin: How about an example of a credit play.
Emmanuel: In the U.K., we finally have a traditional FinTech bank that is technically profitable: Monzo. Monzo is not a platform play. It’s a banking, credit play. There, you’re going to look at Monzo's balance sheet. You look at the cost of funds, how deeply they’re able to generate deposits, and how it’s being deployed to the lending (credit) side of the business. That’s where a lot of the gestation work is taking place right now in FinTech.
You see this in Southeast Asia. Southeast Asia is not a platform play because it is many different countries. They’re all highly fragmented, and there’s not enough scale to make any one platform as profitable as they would be in China or the U.S. or even the U.K. The market needs to mature sufficiently for the banking play to become profitable. And there are some good indications that the banking play will become profitable.
Nium (global realtime payments) is one of them. There are a number, like Grab (the ride, delivery, and FinTech firm), for example, which is going into the credit business right now. You know, we will have to wait to see how those numbers work out. (Grab stock slid based on missed targets, Bloomberg reports.)
Collin: What are the implications both for Southeast Asian FinTech firms and also from a banking point of view?
Emmanuel: Southeast Asia as a whole is now inundated by a large number of digital banking initiatives. And the majority of them are going to be unprofitable. But the few that are going to be profitable will tell us whether, by the laws of large numbers, they are able to scale and, therefore, become profitable or whether they’re able to work out business models. Will they be able to work based on traditional banking balance sheet parameters, like the ability to generate deposits or liabilities at the lowest possible cost and then lend them out at the highest possible profit?
In Asia, there are a number of potentially profitable areas in FinTech. Credit is definitely one of them. Transaction banking and remittances are others, and within that, there are the effects of foreign exchange. You have a constellation of different countries, so FX immediately becomes a very important revenue generator.
Collin: Do you see any intersection between traditional banks in maybe the U.K. or Europe, possibly in Asia with FinTech players through Open Banking? That’s been promised for some time.
Emmanuel: The U.K. is actually the home of open banking. My preliminary assessment of open banking is that the bank challengers or the disruptors lost.
Collin: Sounds about right.
Emmanuel: The customers have gone back to the banks. They trust the banks more than they trust the new disruptors. For areas like payments, for areas like credit, the disruptors need to demonstrate a lot more access to keep the funding base, and that’s what hasn’t happened.
The whole idea of open banking is that if I give my data free to a whole range of different players, some will come back to me with a viable business idea on financial services. It’s multifaceted. One is the data itself. The second is the cost of funds. And the third is product, whether it’s payments or credit or custodian services. The disruptors haven’t been able to demonstrate viable product sets. Although the market has been open to them, they can’t demonstrate the efficacy of a banking balance sheet.
Collin: We haven’t talked about digital assets yet. What’s your take now that cryptofinance is back or at least investor excitement in cryptoassets is back.
Emmanuel: For digital assets, Animoca Brands (a Hong Kong-based game software firm) is on an acquisition spree. . . . to build their revenue. They say that they’re profitable. The primary metrics on which we evaluate digital assets are totally different from traditional banking. The valuation of the assets that they are invested in and also the players that they are invested in are a lot more fragile and a lot more unstable in terms of valuations. Animoca says that it’s very profitable, and it’s actually one of the biggest contributors to M&As out of Asia right now because it’s doing a lot of acquisitions around the world.
Collin: You mentioned FinTech disruptors and how the banks have essentially won. The disruption of banking by FinTechs has long been a promise of startup founders, especially in payments and banking from mobile apps and API-based services. What areas seem promising, or are traditional financial services? I hate to say winning, but it’s the best I can do.
Emmanuel: So, Collin, I’m not interested in the incremental changes that are taking place in the industry. What I’m saying is that finance will eventually be disrupted in a fundamental way. And until I see the elements that triggered this fundamental disruption, I have nothing to say about yet another remittance company. Yet another, you know, peer-to-peer lending business and all that. I need to see the fundamental change. Now, what have the regulators been doing so far? They’ve been harnessing all that innovation to benefit traditional banks.
Collin: Yes, they certainly have.
Emmanuel: While a lot of the new players are praising the regulators and saying, yes, regulation is good for the industry, actually, the regulators have insidiously re-architected the industry to be absorbed back by the incumbents. And this is the same in almost every country. I would say that the U.K. is the one country where the regulators have truly had an open mind, with the stated objective of supporting FinTechs and also in what they call their sandbox initiative. It’s a more open-ended agenda. The language is very, very different than the regulators that say, if you’re not sure, come and see us. We’ll take a look, and we’ll tell you what to do. So that’s why I think that the regulators have been instrumental in re-architecting innovation to be first absorbed by the traditional bankers, and only then will they allow the disruptors to come in and provide a proposition that is different. And that’s really very hard.
Collin: Can you provide an example?
Emmanuel: TransferWise, which is now called Wise. Its original proposition was not even technology. It was simply a netting of payments between its home country, Estonia, and the U.K. If you wanted to send a remittance from the U.K. to Estonia, they basically deposited in the U.K., and it never leaves the U.K. And money deposited in Estonia, never leaves Estonia. Then, they are netted against each other, and the payments are sent.
They went into remittances in a big way, and they realized that you needed to put in a lot more technology. A few jurisdictions required them to make actual transactions. In other words, the foreign exchange actually enters the country; otherwise, they would not get a remittance license. So, they needed to modify their business model.
In countries like Singapore TransferWise was forced to work with banks on either side of the transaction for KYC (know your customer) reasons. So, the regulator will not allow them to originate their own customers except for customers that already have bank accounts (in country). They had a fine line in replicating the original business model in new jurisdictions. So TransferWise (now Wise) has now become an incredibly complex company with as much infrastructure as traditional players. And that’s where a lot of the cost of the business is today.
And no matter how low you bring the transaction costs in a remittance or a payments business, the real income is still in foreign exchange. So they need to preserve that advantage to the extent that they can keep their own Forex cost lower than that of their banks. If not, they simply will not be able to upset the banks. But these are still early days.
Collin: So that story led me to think of digital assets and cryptocurrency. You know, bitcoin was to be a decentralized payment system, but that hasn’t really happened much. Now, we have regulated bitcoin ETFs and, as of yesterday, a regulated ethereum ETF. And who do you think makes most of the money? That would be our traditional fund managers. It’s an overstatement, maybe, but accurate enough.
Emmanuel: Yeah, I have a theory that—this is something I say in my book—innovations in finance always happen in times of distress, not as a result of intention or desire. What the U.S. has done in bitcoin is technically banning retail stablecoins. I think—I really believe this—that they have set the stage for banks to eventually become stablecoin issuers in their own right. It’s heading in that direction.
Collin: The U.S. has a history of private money issued by banks until our Civil War in the 1860s, which the North financed by a new national currency and new national banks. It isn’t implausible to say that U.S. cryptofinance regulation is designed to ensure that the federal government, the large national banks, and large asset managers remain firmly in control.
Emmanuel: I look at it from a global perspective. The U.S. has a number of objectives to meet and a number of threats that it sees to its dominance. And it also plays to the question of whether the U.S. dollar continues to be the reserve currency of the world. If the U.S. ever loses that, it affects the ability of the U.S. to raise capital or to issue more debt that the rest of the world will absorb and buy. There’s one last trick available to the U.S., and that is to digitize and tokenize the U.S. dollar.
Collin: What is your opinion on the U.S. losing its reserve currency status?
Emmanuel: We are not there. It’s an existentialist threat, but it’s a long play. Right now, all the other options don’t add up to a real threat.
Collin: I’m totally on board with that.
Emmanuel: I mean, you have honor between thieves in all of the other options. In a multilateral world, even if the U.S. dollar as a percentage of global trade or remittances falls from about 80 to 90, which is where it is now, to 30 to 40 percent, it will still be the dominant reference currency for the rest of the world. None of the others have the capacity to reach that kind of number. . . . RMB is maybe 5 percent, and they are using only on a bilateral basis specifically between China and their trading partners. . . . It’s not freely floated, and the Chinese government would come in there and put all their foreign exchange on the table to protect the currency. The Euro didn’t reach reserve status even though it’s freely floated because it was protected. The U.S. doesn’t do anything of that sort. So central banks around the world buy Treasury bonds, and UDS is the reference rate for currencies around the world.
Collin: Well, listen, we’re a little over our time. Is there anything you want to end with?
Emmanuel: Yes, one thing that’s important in looking at the CB Insights report is that one of the biggest problems in FinTech valuation is the ability of different markets to discover a reference benchmark for valuations. Southeast Asia does not have a benchmark valuation at all. If you talk about IPOs as an exit, the IPO markets in a lot of Southeast Asian countries are broken. Totally broken. For the platform players that we talked about, the valuation was provided by individual venture capitalists like Masayoshi Son of Softbank. When he enters Southeast Asia, whatever he is willing to put down becomes the benchmark valuation for all of the other FinTech projects in the market.
But when he exits, the valuations just collapse. I feel that is the single most important problem that FinTechs in developing countries in general, but Southeast Asia for sure, face. And China is out of the window now because they don’t know the market that can carry any of the FinTechs that they have in the country because the state has taken over the market there.
Collin: Okay. Thanks for your global perspective on the FinTech market. Always a pleasure talking with you, Emmanuel.
This interview has been edited for clarity and length.