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P2P and the Future of Finance

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P2P is now an utterance that commonly haunts and regularly hangs by the mouths of both pin-stripe suited financiers at Wall Street as well as hoodied entrepreneurs at Silicon Valley when deep discussions happen over the future development of financial services but what exactly is it and more importantly, what ramifications does it hold for the future course of finance?

Peer-to-Peer (P2P) Transfer Services facilitate the direct transfer of funds between individuals, generally from their credit cards or bank accounts via the internet and/or mobile phones as the primary mediums for such services. To date, most P2P transfer services have followed and can be typified by 2 conventional models. The first model, which was originally established and adopted by PayPal, sees consumers connecting their bank account to the user accounts offered by P2P providers, which they may then use to directly engage in near-instant transfers between members of the network. Alternatively, many recent models (such as that adopted by Square) append on the existing network-rails and new transaction technologies offered by major card providers (i.e. MasterCard, Visa) such as the Original Credit Transaction (OCH), which enables users of their platforms to perform near-instant transfers with their debit cards alone without necessarily attaching a bank account. All in all, P2P transfer services directly or indirectly side-step traditional fund transfer services (such as wire-transfer), as many strive to create a faster, easier and more convenient way to engage in the fund transfers than existing services and traditional methods.

When comparatively assessed, P2P Transfer Services offer several distinct advantages over the traditional fund transfer services offered by banks. These advantages can be aggregated and considered as the following:

Accessibility

P2P offers improved accessibility to fund transfers services for users. Whereas, many traditional fund transfer methods still involve varying degrees of physically accessing the bank and/or complex procedural requirements, (examples may include cheques, remittances and currency exchange.), most P2P platforms provide a straightforward no-frills service that harnesses the internet and internet-enabled mobile devices to facilitate the transfer of funds from potentially any location that has internet access. They are built around interactive, mobile-friendly interfaces that emphasise the customer experience. Registration happens online and saves trips to the banks, IBAN’s are replaced with email addresses and phone numbers. Without many proscriptive or complex procedural requirements (i.e. such as those requiring physical access-points, overbearing requirements in downloading and signing up) to access the services themselves, such platforms allow even the most isolated (users) to engage in commercial activity”​. This distinct characteristic has resulted in the growth of P2P platforms in many developing countries, where citizens lack direct access to bank institutions and infrastructures. An example of this can be seen in the market penetration of M-Pesa in Kenya, which has become the dominant way for domestic money transfers within the country.

Speed  

The processes and models that underlie many P2P transfer services has enabled many providers to offer a faster service compared to traditional fund transfer methods. Specifically, innovations in technology and business models as well as the lack of regulation in many countries have allowed P2P transfer platforms to develop and provide to consumers unmatchable fund transfer speeds. This can be best seen in the context of cross-border money transfers. In the conventional (regular) model of cross-border money transfers, consumers have to access the bank’s premises or use another instrument to pay for the transfer. After which, the bank usually does not process the individual’s transfer until the end of the day, when it aggregates and sends all transactions that it has gathered throughout the day (as a singular transaction) along with appropriate file preparation to the Settlement Bank which is then transferred via SWIFT (or another similar network). The Receiving and Remittance Banks adjusts and implements the exchange rate before it finally arrives in the Beneficiary’s account. As a result of the intricate processes involved, cross-border money transfers can often take more than 2 days or more. On the other hand, providers like TransferWise allow for near-instant cross-border transfers as its model routes cross-border transfers differently. Rather than engaging in a direct transfer through conventional routes (as stated above), TransferWise redirects different recipients of equivalent transfers that are going in opposite directions and provide the funds from a pool of local funds that it has amassed domestically in each country.

Low-Cost

Building upon the understandings established so far, it is not surprising that P2P providers is able to offer a substantially lower-fee for transferring funds. As many of the platforms do not need to establish their own financial infrastructures or devices) and pursue more cost-effective means of conducting money transfers (as is the case with TransferWise). Resultingly, the operational costs of many P2P platforms are very low compared to banks. This has allowed such providers to offer lower costs for its services that many have strategically employed to build user-base and market share. This can be clearly observed in comparing rates between P2P providers and banks for cross-border transfers, many of which are between 0.5% to 0.15% whilst Banks usually adopt commissions of 5% or above.

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Despite these advantages, in many aspects, P2P Transfer Services have also been unable to match advantages enjoyed by the bank.

Trust

To begin with, many have been reluctant or slow to adopt P2P transfer services because of doubts over security and the lack of trusts with many startup P2P providers. In a recent survey, 30% of consumers surveyed in the United Kingdom expressed their belief that many online providers cannot be trusted with their personal information. Such figures have been seen in other research reports, that undoubtedly demonstrate that despite the recent proliferations of P2P platforms, many consumers believe that the banks are in a better position to protect sensitive information. Such beliefs are based on perception and belief of consumer that the banks possess greater track record, reputation and resource to safeguard their security.  Furthermore, banks are subject to comprehensive state regulations in many countries that protect consumer’s funds as well as proscribing liability which foster an image of required accountability. As a result of which, many consumers have tolerated the slower and more expensive fund transfer services offered by banks on the basis of a perceived trust premium that they believe is enjoyed with such services.

Service

Banks which generally possess great resources and capabilities are able to provide a vast amount of supplementary services in addition to fund transfer services offered. For example, the wide availability of local premises are desired by some consumers that prefer physical accessibility and interaction with service providers. Furthermore, security services that are tied to fund transfers such as real-time notification of account activities, active verification, dispute resolution centers and action fraud teams are services that are non existent with many P2P providers as they lack the resources and departments to realize them.

Nevertheless, in recent years, many P2P fund transfer startups have seen substantial development and growth. In fact, P2P transactions now stand at $ 1 trillion dollars and mobile P2P transactions are expected to increase by $ 86 Billion in the next 3 years. Indeed, many providers are encroaching on the market share held by banks. The best can be seen in the international remittance industry.  International remittance has become a particularly active industry for P2P fund transfer startups where this can be seen. The industry is expected to grow to $700 billion in 2016 from $436 billion in 2014 as more money is sent primarily from developed economies to developing and emerging ones while the US remains the largest market with 10% of the market. According to a recent Goldman Sachs’ Report, over the next few years, $6 billion of profits found within international transfer market is at risk because of new fintech entrants. This figure is only a representation of the current state of affair, which may be cumulative as current P2P providers build up userbase or more entrants enter the scene. Nevertheless, there are indeed many players currently moving into and growing within the scene.

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Some of the most notable startups and key movers in the current industry include:

Transferwise, an online-only money transfer service that has been able to charge very low commission rates and mid-market exchange rates by developing an innovative business model that matches consumers directly and localizes transfers. Launched in 2011, Transferwise has been growing 15% to 20% month-on-month, and it has transferred more than $3 billion using the platform, saving its customers money in the process. Transferwise currently supports over 300 currency routes and has been recently valued at over $1bn US and has been backed by many important investors including US Based VC Andreessen Horowitz.
WorldRemit, an online transfer service that also allows for cash-pick ups. Initially launched in London in 2011, the company aims at to disrupt the remittance market by offering lower rates. It currently processes over 250,000 transactions per month.
Xoom, a US-based remittance company that specializes in international payments from the US to 37 countries including China, India, Mexico and Brazil. In 2014, the company helped move $6.9B generating $160m in revenues.  Xoom was recently acquired by PayPal, which aims at improving transfer services and leveraging its 169,000,000 active users.

In today’s globalized economy with the proper investment, such startups can grow tremendously fast as they target and solve a specific customer pain and offer something new, exciting, and financially promising. According to CB Insights, the average cost to launch a startup is a thousand times lower in 2011 than in 2000 which naturally has led to lower entry-barriers. What’s in common for among all the major players highlighted above is that they have actively and quickly established their own markets and seen unprecedented growth.

More importantly, beyond the remittance industry, P2P fund transfer has successfully been applied in the context of (mobile) payments  and recently seen great penetration in emerging markets such as China. China has seen a parallel rapid development of unconventional third party payment companies like Alipay and Tenpay. The growth of these payment methods can be understood by the fact that conventional payment methods are both less rooted and less convenient for consumers. Based on recent research from Goldman Sachs the opportunity for the emergence of unconventional payments methods is further attributed to the relatively low penetration of credit card usage (only 23% of card transaction volume in 2013 vs. 44% for the US). Contrastingly, Alipay, which is the leading service of this kind in China was introduced within the Chinese Internet giant Alibaba “as a way of facilitating payment between buyers and sellers where there is limited trust and no physical contact”.  Progressively it achieved a dominant position even as an independent payment services employed outside Alibaba group. Alipay is part of third party online payment which  according to iResearch Consulting Group accounts for approximately 60% the total volume of online payments and it is growing increasingly reaching $ 5 trillion yuan in 2013. This is an important point, as from a POS(point-of-sale) perspective, mobile payments may be quickly replacing debit and credit card payment methods, especially when one takes into account the rise of mobile payments with the rise of complementary payment technologies being developed such as NFC (i.e. whereby your phone can be used as a card) by top technology firms. Furthermore, with its own P2P features, the user base is growing at an unprecedented rate and penetrating emerging markets.

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The overall growth and consolidation of P2P providers can be explained by a number of trends stemming from advancements in technology, changes in regulation, as well as new demographic shifts that are making their mark in the current landscape by altering the traditional ecosystem.

In terms of regulations, one notable trend is the increased effort by governments and regulatory bodies in cracking down on money-laundering and fraud, specifically in the realm of international C2C money transfers. Compliance with imposed protocols constitute an increased cost for huge banks and established money transmitters. According to a report by Goldman Sachs Global Investment Research, ongoing regulatory and enforcement costs impose a regulatory burden around 4% for established players versus less than 1% for new incomers, thus benefiting new entrants and allowing them to be more competitive.

Importantly, demographic trends have a powerful influence on the adoption of any technology or habit as well. A crucial factor impacting the embracing of smaller money transfer services is the consumer’s’ level of comfort regarding their sharing of personal information. AlixPartners have recently produced a study of US consumers which indicates that comfort with public availability of personal information is a function of generational and cultural factors. 55% of the respondents under the age of 35 were either “very comfortable” or “extremely comfortable” with sharing personal information with corporations in exchange for offers or rewards. This percentage has an inverse relationship with age group; 42% for respondents between the ages of 35 to 44 and 31% for those between the ages of 45 and 54. This information suggests that the younger generations are ready to overcome the “legitimacy” barrier held by established players and experiment with newer and more innovative forms of money transfer.

Within this context, the World Economic Forum has suggested, in its recent report: ‘The Future of Financial Services’, that these non-traditional/dominant providers may come to directly compete with current banking fund transfer services as superior alternatives and may transform into dominant solutions when they are able to achieve the critical mass. These implications for banks are hard to ignore as many of these services not only represent revenue streams for banks and their operations but more importantly, significant value-adding services for their customers that may lock them in for the provision of other financial services offered. As such, the growth has certainly pressured certain banks as seen in their responses. Banks have made several attempts to respond in various forms. Some banks have been trying to match and compete with the rates offered by P2P startups by improving their transfer service rates through various ways.  Others attempt to resolve accessibility issues. For example, ICICI Bank of India has been on the forefront of adapting to changes as it has been improving its online services to become one of the most convenient and customer friendly remittance banks, with the ambitious aim to be one of five largest remittance companies. Whereas, others have even tried to directly compete and participate in the P2P fund transfer scene by coming up with their very own platform that offers similar services to many P2P providers. An example of this is Barclay’s Pinggit, a mobile application on most mobile operating devices, developed exclusively by Barclays, for their account holders to easily send and receive money from one another, albeit with significant limitations to amounts transferred.

Despite this, there has yet to be a bank that has introduced or have been able to pursue a successful response in the face of the P2P’s unprecedented growth. This is because  banks face innate challenges to respond due to their nature and size as large and bureaucratic firms. For example, in the US, all of the top 20 banks employed at least 12,500 employees and averaged around 58,000 employees. Furthermore, the top four banks in the world have assets worth $14.7 trillion, equaling approximately 93% of the US GDP. Almost all of the large banks are public corporations. This poses a challenge for banks trying to gain traction into the highly innovative field of mobile P2P payments: as businesses cross $25 billion in revenues and start publicly trading, they lose a lot of innovating power.

There are many explanations behind this phenomenon. One argument states that such companies become more risk-averse, and are more focused on short-term profits, as they have to meet certain investor expectations. Furthermore, as they employ more people and run well-structured Human Resources departments, they tend to employ more risk-averse personnel and less “Innovation Leaders”. In comparison to banks, third party mobile payments providers tend to be small in size, and therefore don’t have the innovation limitation in this highly evolving technology field. Even though some statistics indicate the superiority of small firms’ ability to indicate, many large firms have surpassed this challenge (Apple, Google); therefore, it is not impossible for banks to retaliate using constant innovation.

Even if large banks continually innovate enough to stay competitive, the market landscape in their desired economy of operation may create obstacles for them to do so. The bank’s’ success is highly correlated with the consolidation of the banking sector. For example, the limited degree of success for banks to retaliate in the US can be explained by the fact that over 8,000 banks exist in the market, compared to only 111 in the UK. The consolidation of the banking sector in the UK has facilitated the birth of the Payments Council to ensure the utility of payment services within the UK. The Payments Council, dominated by large players in the banking industry, can coordinate retaliation efforts with greater ease. An example of such a coordination effort is apparent in the case of UK P2P payment company Paym, which is backed by 9 out of 10 large UK banks. Therefore, the banking sector’s ability to fight back is highly affected by the market landscape within the economy, and may differ from location to location.

In totality, banks face various challenges in retaliating against third party P2P payment companies.

Callum Connects

Jonathan Oh, CEO & Co-founder of Supplycart

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Jonathan Oh’s enquiring mind and love for learning has led him on an entrepreneurial journey, with him starting Supplycart which helps businesses manage their offices better.

What’s your story?
I am a person that just can’t sit still. I was always intrigued by how the world spins and how people connect. Spending a lot of time outdoors, I had an affinity with exploring new paths, thus leading me to become a serial entrepreneur with experience in creating, operating and building new companies. I am a firm believer there is so much to learn in the world and I love talking to people about ideas, what they are passionate about and what drives them.
Starting off my career in the medical industry, I realised I had a flare to create something that mattered, something that impacted other people’s lives. After exiting my first company in 2014, I continued my journey with two other ventures with a purpose to look towards impacting businesses in the region together with like minded individuals, and here I am.

What excites you most about your industry?
Being able to part of the SME tech industry and seeing how technology is moving SMEs to go digital to improve workflows and efficiencies is an exciting space to be in. Users are consumers. More and more, they are familiarising themselves with using technology in their everyday lives. We foresee the SME space to be the next area where adopting new technology would become vital for any organisation to remain relevant. As I have dabbled in this industry for close to nine years now, I am really looking forward to working with more people in the business community to make a change.

What’s your connection to Asia?
Born in Malaysia, I had the opportunity to go abroad and I realised there was so much to do back home. Spending time in Melbourne, Australia for a couple of years and recently Silicon Valley, it has provided me with experiences and insights into the difference a multicultural community can make. It also made me aware that Asia is still a very culture driven economy, as each country has its unique differences. I believe that the time is right to be in Asia now. We are a growing economy and a lot of exciting stuff is happening in this region.

Favourite city in Asia for business and why?
Malaysia. I believe Malaysia is still a very attractive destination for business as it’s close to other neighbouring countries within the region and travelling between the countries is easy. There is also proper infrastructure in place, an affordable cost of living and a sizeable pool of talent. The government also has numerous initiatives for technology companies to apply for MSC status that permits companies to hire foreign companies without restrictions. Malaysia is the perfect launchpad to start growing businesses regionally. From a culture perspective, we are multicultural, which promotes diversity in business and language is never a barrier here.

What’s the best piece of advice you ever received?
“The difference between a businessman and an entrepreneur; one does a markup and the other creates value.”

Who inspires you?
I would say the people around me inspire me. I wouldn’t narrow it down to a particular person but lump it up with family, workmates, entrepreneurs and friends. From my eyes, everyone has a certain drive, a certain glow and strengths that sometimes they do not see, and that inspires me. I believe the journey to success is never alone, it’s with people.

What have you just learnt recently that blew you away?
Something recently that blew me away, made me realise, visually about how much time I have left. I was reading and stumbled upon the writer doing this. This might sound morbid but I drew a horizontal line and started plotting the year I was born all the way up to when I think I might go. It showed me that I have spent 25% of my life growing up, I am going to spend another 55% of my life working and the final 20%, maybe retirement. It got me remembering all the milestones I have achieved and to be thankful for and above all, how I want to spend the 55% of my life doing what matters the most.

If you had your time again, what would you do differently?
I believe that I am exactly where I need to be because of the experiences I have had before. Thank god for the journey so far. It has been filled with ups and downs, new experiences and people along the way these have moulded me. I guess a small thing, if I had my time again, would be to pick up playing a musical instrument which I think still possible now. You are never too old to learn anything.

How do you unwind?
Unwinding for me would be spending time with my family and my two little boys. The little ones are such a bundle of joy. Reminding myself to have balance in terms of not missing the early years with them. Other than that, having coffee with other entrepreneurs, sharing ideas and learning from them is also another way I unwind.

Favourite Asian destination for relaxation? Why?
A term I would use would be “cuti cuti Malaysia.” This means heading to a local destination for some R&R to save on the cost of going on overseas to travel. Top of my the list would be heading to a farm or the jungle with clear river waters and a waterfall all to myself. Staying the night, out in the open under the stars, with a campfire and heading back to nature. The other option would be taking a boat to one of the furthest islands in Malaysia, just before the border of Indonesia, to get away from civilization.

Everyone in business should read this book:
I would actually recommend two books that everyone in business in the early years should read. ‘Founder’s Dilemma’ and ‘Start with Why.’ After being in a couple of businesses and many mistakes later, I came to realise the importance of starting it right. Both these books address the whole mind-set on what founders need to have from selecting who is it we start a business with to why are we starting the business. The business foundation is built from the founders and moving forward everything is built from there. Sometimes we are so into the business that we forget we need to be on the business as well. I would have definitely avoided a couple of bumps if I came across these much earlier on.

Shameless plug for your business:
Manage your office better, that’s our motto. We are always on the lookout to work with organisations, suppliers and partners in this field for partnerships and collaborations.
Supplycart is a B2B procurement platform addressing a need for a change in the way companies manage their office supplies, products and services. We enable suppliers and companies to adopt digital technology when selling and procuring for their business, resulting in a more efficient and productive workforce.
Supplycart provides an easy to use, convenient platform that streamlines the whole procurement process by allowing users to quickly order and reorder, receive instant quotations, obtain quick approvals from necessary approvers and fulfilment items are coordinated/planned to ensure a timely a speedy delivery.
Businesses can now focus on the more important matters in growing and sustaining their business while leaving managing the office to Supplycart. Our vision is to be the number 1 office platform for businesses across South East Asia. “Your office will never be the same again.”

How can people connect with you?
https://www.linkedin.com/in/ohjonathan/
e : [email protected]
w : www.supplycart.my

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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Callum Connects

Trung Nguyen, Founder & Managing Director of Advertising Vietnam

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Having initial success with his first start up in the ad industry, Trung Nguyen went on to start other ventures in the ad world in Vietnam. He now has the largest agency community in Vietnam.

What’s your story?
Three years ago I got my first job in the advertising industry. I worked for a local agency in town, and I fell in love with the creative industry. In June 2015, I founded Agency Life Community in Vietnam. It quickly became the most engaging community in the ad industry. The main content focuses on entertainment. After six months we had over 30,000 organic followers, now we have 120,000 followers.

Because the industry had been good to me, I decided I had to something for the industry to help the industry be better. So, I opened http://AdvertisingVietnam.com – a creative industry ad site which keeps advertising informative, creative and inspiring.

After more than a year in the ads industry in Vietnam, I figured the industry needed a better solution for the recruitment of good staff. Given I own the largest advertising community platform, why don’t I utilise Agency Life to help connect talent with ad agencies. So, I founded job site, AdJob.Asia in January 2017.

What excites you most about your industry?
The ad industry is a creative one with very passionate people who are always challenging themselves. The exciting part for creatives, in the morning they might be working on a baby brand and in the afternoon they are answering a beer brief. There is so much diversity. Every day is the new journey.

What’s your connection to Asia?
I am Vietnamese.

Favourite city in Asia for business and why?
Thailand. The Thais are the kings of the creative industry in SEA. Thai ads are very smart and creative.

What’s the best piece of advice you ever received?
Do what you love.

Who inspires you?
My friend, mentor and partner Mr Nghi Nguyen, founder of BrandsVietnam.com. We started our businesses at a similar time. He doesn’t see us as a competitor but rather, he believes that we share the same passion and we are working to provide better knowledge for the ad community.
Mr Nghi also guided me a lot when I first opened the business. I am inspired by his vision to make our marketing industry better.

What have you just learnt recently that blew you away?
Our business is a startup company and as a founder I do everything from operations, business development, planning and strategy. However, this is not the good way grow our business. You have to share the workload – find a co-founder or hire a great employee to help share the workload. “If you want to go fast, go alone. If you want to go far, go together.”

If you had your time again, what would you do differently?
Quit my full time job sooner.
During the first year of running my business, I was still working as an ad manager for an agency. However I lacked focus at work due to the overload of work and it affected the company I used to work for. I strongly recommend people who have an idea to start their own business, quit their job early on and focus 100% on it from the get go!

How do you unwind?
Play with my cat.

Favourite Asian destination for relaxation? Why?
I love to travel throughout all of Asia. I enjoy new places and meeting new people.

Everyone in business should read this book:
The Carpenter: A story about the greatest success strategies of all.

Shameless plug for your business:
AdvertisingVietnam.com is a site where you can quickly update yourself on the advertising news in Vietnam. We have 15,000 unique monthly readers who are professional people in the advertising and communications industries.

The Agency Life, https://www.facebook.com/agencylife is largest agency community in Vietnam. This is the right place for ad agencies to share their creative work.

AdJob.Asia now has more than 160 agencies in Vietnam who use our services. We are a leading recruitment service for the advertising industry in Vietnam.

How can people connect with you?
You can connect with me:
Facebook: https://www.facebook.com/trungnx26
Email: [email protected]
LinkedIn: https://www.linkedin.com/in/trungnx26/

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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