This article was first published in the January 2016 Singapore edition of Accounting and Business magazine.

After a lively exchange over the evolving frontiers of corporate finance during the annual ACCA Singapore debate in September, it was established that the local banking sector is being shaken up by an onslaught of digital financing platforms which better meet the needs of a growing swathe of businesses in the market.

By the end of the hour-long session, which was moderated by Cesar Bacani, editor-in-chief of CFO Innovation Asia, at least half the audience was convinced that Singapore’s largest banks would eventually lose some 50% of the corporate finance market to digitally driven companies within the next 10 years, compared to just a third before the debate.

While banks have thus far been able to adapt to the modernising landscape, it will be a completely different ballgame going forward. That’s because digitally enabled firms are revolutionising the way many businesses can obtain financing without going through the banks. Now, crowdfunding marketplaces where peer-to-peer lending can take place are rising to fill a space in the market where banks are unable to lend. That could damage the corporate finance businesses and wrench market share away from the world’s most venerable banks, including Singapore’s DBS Group, United Overseas Bank and Oversea-Chinese Banking Corporation.

In a recent report, the financial services research firm MyPrivateBanking estimated that the global crowdfunding industry was likely to reach US$1 trillion by 2025 compared with just US$5.1bn in 2013, according to Forbes. Against that backdrop, participants in the debate deliberated the motion that Singapore’s three largest banks would eventually relinquish their position as the dominant players in corporate finance to crowdfunders and other peer-to-peer (P2P) digital lending platforms within the decade.

Serving a gap

Gabriel Low FCCA, Southeast Asia CFO of GEA Westfalia and a proponent of the motion, reckons that banks have little time left to play catch up on the digital front if the recent progress of crowdfunding is anything to go by. He points out that last year, US-listed Lending Club and Prosper Group successfully helped borrowers raise US$6bn through P2P lending. 

Separately, Dalian Wanda Group, China’s largest commercial property developer, managed to raise US$800m by bypassing the banks and going straight to the crowd. ‘Just last year, the banks were starting to look like [they were] too big to fail again. But crowdfunding has taken hold of the market, accelerating in the last two years and we cannot stop it,’ says Low. ‘It is a serious threat to the traditional bricks-and-mortar banking model.’

That’s because members of the crowd are stepping in to help finance start-ups with new or unconventional yet promising business models but which are unable to obtain funds from the banks. Virtual reality company Oculus Rift is an example. In 2012, the company managed to raise an initial US$2.4m in funds through Kickstarter, a P2P lending platform. The move was so successful that within two years, Facebook had acquired Oculus Rift for US$2bn.

‘Would Oculus have been able to obtain the funds from the banks?’ asked Low. ‘I doubt so. For start-ups and companies in gaming, emerging technologies and entertainment, chances are people in the crowd understand those business models more than the banks and are more willing to lend them money,’ He added that as a rising tide of younger entrepreneurs enters the market with more innovative business ideas, they will borrow directly from the crowd and bypass the banks entirely. ‘The scale of this will rise as crowdfunding helps more under-banked businesses to grow. This will eat into the market share of the banks.’

Fellow proponent Tan Li Ren, head of business development at Singapore P2P lender CoAssets, pointed out that, in many cases, banks are not able to lend to young businesses without a proven track record. While there are close to 190,000 small and medium-sized enterprises in Singapore, making up 80% of the domestic market, the majority of these businesses are unable to borrow from the banks because of existing regulations. ‘If you have been operating for less than three years, for example, banks will not extend credit to you.,’ Tan said. ‘As a result, many SMEs with good growth opportunities cannot expand.’

Speed and flexibility

Another reason traditional banking and corporate finance is losing relevance is the ease with which businesses can obtain the funds they need to grow from the crowd. Free from the high costs associated with operating a large bank, crowdfunders can lend at more competitive interest rates than the banks. ‘Online platforms do not carry the high infrastructure costs that banks have with their legacy technology and cost base, these cost savings are passed on to consumers of the loan,’ said Tan.

With the aid of technology, crowdfunders and other digital P2P platforms are also able to disperse the required funds to borrowers much faster than banks. At CoAssets, it typically takes less than 30 days to issue a loan, whereas it could take up to three months to get a similar loan from the bank at a higher rate. Meanwhile, at Lending Club, it usually takes around seven days for funds to be dispersed.

As fellow proponent Patrick Teng, who is founder of the forex trading start-up Six Capital, put it: ‘Banks have been dominant until now because previously they fulfilled a role that could not be delivered in any other way. That is however no longer true due to the digital revolution. Today, technology means the services offered by major banks can be provided more efficiently, with more stability and more conveniently, by new, disruptive entrants.’ 

He points out that, already, some central banks in the region are beginning to explore crowdfunding options to reach out to individuals and start-ups who do not have access to banking. ‘The digital revolution enables a democratisation of finance in a way not previously possible,’ he said. ‘It has created the ability to draw on the resources of crowds and entire populations, smashing down barriers to entry in the process. Independent, flexible and agile firms are now able to enter markets, gain scale and offer services more efficiently and at higher levels than the banks can match.’

Catching up

Still, crowdfunders are not likely to take over the market without first facing a fight from Singapore’s banks, which have not been sitting idly by. ‘What the banks have learned is that they need to increasingly digitise because our clients are expecting us to provide differentiated services in this space now. Banks are directing more resources towards developing smaller business units so that we can execute faster and better service the SMEs and smaller business communities in Singapore,’ said Robert Whittemore, assistant general manager of the Bank of Tokyo-Mitsubishi UFJ and an opposer of the motion.

Fellow opposer Ajay Sunder, who is vice president of telecoms in APAC for Frost & Sullivan, pointed out that Citibank has already acquired 14 financial technology start-ups in a bid to innovate digitally and stay relevant to borrowers. Citibank isn’t the only one playing catch up; HSBC is investing US$1bn in automation technology while Goldman Sachs has already set up a lending unit for small businesses which is being funded by institutional investors. Meanwhile, DBS has allocated US$1bn to strengthen security across its digital platforms to ensure borrowers are protected from fraud.

Venkat Padmanabhan, president and global finance head (products) at Olam International, believes that alternative finance models are not in direct competition with banks as the risk and return profile of the former is completely different from the banking model. ‘Banks also pride themselves on the ability to offer a personal touch to customers, while understanding the business through long term experience – all of which cannot be replaced in the medium term,’ he said, adding that, if necessary, ‘banks are well equipped to jump on the bandwagon and create a separate division to take on these alternative forms of financing’.

For now, the biggest advantage banks have over their new competitors is the regulatory framework that ensures compliance and transparency between lenders and borrowers. ‘When we have non-regulated industries, there is increasing risk and opportunities for fraud. We do not believe that lending communities will support this environment,’ said Whittemore. The way he sees it, the more realistic way for individuals to lend and borrow is by doing so on a trusted and regulated platform, which the banks are able to provide.

‘The digital disruption faced by the banks is an evolution, not a revolution, of the sector as the banks in partnership with the regulators will soon develop comprehensive corporate financing solutions to better meet the needs of the business community,’ he said.

While that may be the case, it was clear from the audience’s feedback that crowdfunders and digital enablers have a head start in capturing a large swathe of the Singapore market. In that light, the banks will have to work doubly hard to remain dominant and relevant in corporate finance moving forward. 

Kristin Kang, journalist