Banking through the pandemic

In this Future of Asia podcast episode, we discuss how the banking sector is dealing with this crisis, how they should think about recovery and growth, and some of the big discontinuities and shifts that can be seen in the financial sector today. An edited transcript of the podcast follows. For more conversations on Future of Asia, subscribe to our podcast here.

Oliver Tonby: Hello. I am Oliver Tonby, senior partner at McKinsey in Asia. Welcome to the Future of Asia podcast series. The Asian century has begun. Asia is the world’s largest regional economy. It is at the center of the technology revolution. It’s at the center of consumption growth, consumers of the future. It is at the center of climate risk and what we need to do to mitigate. As our economies evolve further, Asia has the potential to fuel and shape the next normal. In each episode, we are going to feature conversations with leaders from across the region to discuss what Asia’s rise means for businesses everywhere.

Joydeep Sengupta: Welcome to the Future of Asia podcast. My name is Joydeep Sengupta, and I lead knowledge for McKinsey’s global banking practice. In this podcast, we are going to focus on how Asia’s banking sector is faring through the pandemic. We’re going to discuss the resilience of the region’s banks over the past year, and the challenges that lie moving forward.

Clearly, as we entered the COVID-19 crisis banks were quite well-prepared, with their balance sheets being far more resilient than perhaps they were during the crisis of 2008. Having said that, all of us are aware that banking fortunes are quite tightly linked to the fortunes of economics. And the outlook in many of our markets remains quite worrisome, where trillions of dollars of GDP are still under threat, and the near-term recovery of the economy is quite patchy and uncertain in many of our markets.

So, the real question, which we would love to discuss today, is: how has the banking sector dealt with this crisis? What is it that puts some banks ahead? How should they think about recovery and growth? And what are some of the big discontinuities and shifts that we are seeing in the financial sector today?

A part of the crisis has accelerated many existing trends. We have also seen some new trends emerge because of this, and we’d love to have a discussion around that. Joining me to tackle these themes are three very senior journalists, who, day in and day out, have a close eye on the financial sector in the region. Our guests are Ira Dugal, banking and finance editor at BloombergQuint based in India; Jamie Lee, deputy editor at The Business Times Singapore; and Chris Wright, Asia editor of Euromoney. Thank you very much for joining us today and a warm welcome to you.

Let me start with Ira, and let me start with the big question, which is, we are now more than a year into the pandemic, how do you think banks are doing navigating this crisis?

Ira Dugal: Joydeep, thanks for having me on this podcast. I think it’s a rare time, at least in India, when you can say, “Hey, these banks did better than expected.” But at this point in time, that’s what we’re saying. The banks seem to have done better than expected. We’ve had a decade or so of great turbulence in the Indian banking sector. So naturally, there was enormous trepidation of how another downturn in the economy would impact banks.

There are two parts to the answer. The first part is that on the surface and on the reported numbers right now, things are looking far better than anticipated. The gross of bad loans is at about 7 percent, far below what the regulator had predicted, or the forecast which is saying it could rise as far as 13 percent. So, we’re not anywhere close to the peak. There are a couple of underlying issues which could start to come up. So, we are holding back on the, “Hey, we won this battle” story.

One of those is hitting bad loans because of a peculiar court order, which will come up in the next quarter or so. So, that could add another percent, or percent and a half, to bad loans. But as things stand right now, it certainly looks like the large corporate delinquencies which could have been feared have not come through. The small business delinquencies have been prevented or pushed back by government support, and the retail delinquencies, while large in number, are not very large in value. So, banks are perhaps a little bit well-placed to deal with that. I won’t go on for minutes and minutes, but I’ll just say that things are looking better than they were expected to, and that’s a rarity for the Indian banking sector to be able to say that.

Joydeep Sengupta: Thank you, Ira. The only thing which frankly worries me now is the second wave and the implications of that, but I guess we’ll come back to that in a moment. Let me move to Jamie—what are you seeing in the region?

Jamie Lee: So, over in Singapore we’re seeing a similar trend, which is that the Singapore banks are doing much better than they themselves anticipated. If you look at the credit cost estimates they put out a year ago, in the last results briefing, they’re all rolling back on that and saying it’s going to be at the midpoint of that. We have anticipated how much bad loans might come through, and we think that’s going to roll back. So, I do think that Singapore banks seem more prepared and are certainly ready for any bad loans that may come. I think some of the moratoriums that have come through have certainly postponed some of that pain, but at the same time, the Singapore banks are also ready for that, which is why we’ve seen those buffers put in.

The interesting thing about the moratoriums is if you see some of them taking on a mortgage debt holiday, for example; some of that money went towards the market. So, you’ve seen some arbitrage happening there, and the markets were doing very well. Some of the business owners took the opportunity to pay down some of their more expensive loans with the debt holiday that was provided to them. So, you also see some arbitrage happening as well.

We can take a deeper conversation on whether that is right or wrong. But I do think, ultimately, it also gives you a sense that some people were not as disadvantaged as what moratoriums may seem on the surface of it. So, I also think that simple banks will continue to benefit from the wealth management growth that we’ll see here from Asia. Singapore continues to be a strong financial hub, and I think they will continue to capture some of those flows. I think, also, with the trade tensions that have come up, one thing that has always stood out is that ASEAN will continue to be this marketplace for the region. Tapping that market has been successful to varying degrees, but I think the trade tensions now bring it to a stronger focus. I think that will put the Singapore banks in a good state.

Joydeep Sengupta: Thank you, Jamie. I think—somewhat like India but a little bit different—clearly, for Singapore banks, most banks are regional in nature, and you’re living in an uneven neighborhood in many ways, right? So, I think some of that will potentially play out as well this year as we look at the impact of the health crisis being different across markets.

Let me switch to Chris—you’ve got a real vantage across Asia. How do you look at what banks are doing? How are they faring given the crisis?

Chris Wright: Well, thank you, Joydeep. Very good to be here today and thank you for having me. Like you, Ira, and Jamie, I’ve been pleasantly surprised so far by what we’ve seen about bank readiness and resilience for COVID-19. And I think really, you can trace it back probably more than 20 years to the Asian financial crisis—you are just seeing a far stronger, more resilient, better provisioned industry than we used to have. And it’s been built out of previous pain points, where banks have learned lessons and just got smarter and better. They haven’t put their head in the sand, they’ve provisioned properly, and they’ve been pretty well placed for what has come their way.

Even with that being said, some of the numbers have been extraordinary. Jamie just alluded to the Singapore banks’ earning season, you saw OCBC’s MPLs (marketplace lendings) completely flat year-on-year for 2020 but it included the pandemic, DBS’ and UOB’s barely touched.

Not everywhere is as prudent and well-run as Singapore, but look to the Philippines where Benjamin Diokno, the central bank governor, proudly launched the new law—the first law, they call it—allowing for bad banks to acquire nonperforming asset (NPA). It’s a good dynamic thing you do in a crisis to allow people to shift their bad debts away, which is great, but does it actually need a system-wide bad debts in the Philippine banking system of 3.6 percent? It was 20 percent during the Asian financial crisis—I’m sure you remember. So, everything is coming through things much better than you might have expected.

But there is a caveat, of course. Now, the moratoria have been coming off without great pain to the banking sector, but they’re not completely off. And it is logical that the worst of the debts are the ones that are still under some kind of protection. This varies around the region, and I believe Malaysia and Indonesia still have about 20 percent of loans under some kind of protection. And we’re not really going to know the full picture until those roll off. You’ve seen the government of China Banking and the Insurance Regulatory Commission expecting bad loans to rise this year. The same is true with India, it may not prove to be as bad as we might have thought. So, we’re not out of the woods yet, but I do think the system is coming through this probably in better shape than any of us had any right to expect.

Joydeep Sengupta: Thank you, Chris. I think if I were to sort of just summarize the views I heard from all the three of you—I think one is a little bit of surprise that things are much better than what you anticipated, with a tinge of caution, that there may be some things lurking beneath the surface, which might emerge a little while down. But overall, the banking industry seems to be much better than what any of us anticipated when we were first hit, and we were looking at this situation.

So, let me then move to something—which I think we ourselves have observed—accelerating quite dramatically during the crisis, which is the shift both from a consumer’s point of view, but also from the bank and industry point of view to digital. In many ways I think I’m curious to hear from you, how do you see this playing out? Particularly with the rise of fintechs and many places issuing new digital bank licenses. How do you see the digital environment playing out both from a supply perspective of new players, but also from a perspective of existing banks, in terms of their ability to adapt to this changing environment? And this time, maybe I start with you, Jamie.

Jamie Lee: So, I think it’s an interesting point to think about bad debts. If we think about bad debts being low in the banking system, the question is where did more vulnerable loans go? And you will see that some of the fintechs have started to take on some of that—what is commonly defined as shadow banking—in part because there continues to be a demand, right? Why chain financing, for example, where we know the smallest guy gets squeezed? They’re often not backed by banks. And that’s also why you don’t see these relationships pop up on their balance sheet, because it’s not a banking client to begin with.

So, the fintechs have stepped in to fill some of that gap. And you actually see that, despite so many calls for banks to support more of the smaller guys, they haven’t come quite to an understanding of how they should assess these guys on a running cash flow basis. They’re only starting to do this now, and to varying degrees of success. So, I would say the fintechs have come in to take on that space. How significant would that be? I think eventually, though, these fintechs will have to start partnering with them, and lot more than before. There probably needs to be some sense of humility from some of the banks that some of the fintechs have been able to crack this, right? But the fintechs have a smaller pool to play with, and now, the banks have the ability to leverage up and use more data analytics and push that across the entire supply chain.

Now, why is this significant for digital banks? If we talk about Grab, if we talk about Sea, or any other digital bank that is out there—they are in part capturing some of those flows the banks didn’t want or couldn’t figure out how to tap. So, the question is, would the banks move fast enough or decide this is worth it? Or will these digital banks come in to fill that gap? The question then becomes, how profitable will that be? Those are questions I think will be interesting for us to watch.

The other question is, of course, if you look at Sea and you look at Grab, you will see that the market valuation of these guys is at a few multiples of where the traditional banks are. So, could having digital banks mean a way to re-rate traditional banks? The problem with traditional banks is they may want to invest in digital, but it’s seen as a cost. For digital banks, when they do it, it’s seen as an investment. Now on the surface, their set of investors might seem very different. But if everyone is going to invest in some part of technology, perhaps these two investors will start to converge. And if so, then perhaps, traditional banks have been held back because of this idea of, “I can’t put on costs without having a very clear matrix on return.” Now, they may be able to reconcile some parts of it. Now, if the two basis of investors are truly separate, you will find that the premium some of these guys are holding in the market may continue to be as such, because the two investors don’t seem to match.

I tend to be a bit more optimistic, and I tend to think that the investors have a sense that technology will touch every part of our economy including banks. That means that if banks don’t level up, they’re not going to be playing very well. So, I do see some of that differential starting to converge, and that means the traditional banks have actually become more competitive because they realize investors are starting to practice this.

Joydeep Sengupta: Thank you, Jamie. I think you point to three very interesting elements. One is, I think the point that there are spaces in the market, which you see new players beginning to occupy. Two, the fact they seem to have unlimited investment budgets, which continue to be valued well, whereas incumbent banks, when they spend that kind of money, it’s seen as cost and returns are expected more immediately than longer-term. And number three, I think, just in terms of the pace of adoption, then you see a little bit of a difference. Chris, would you agree with that or would you have a different perspective?

Chris Wright: Yes, I would agree with that. But I think it’s very interesting to look at digital with the prism of COVID-19 and what that did to digital adoption, because through a rather cold matter of survival, it was a great forcing function for digital adoptions.

In a lot of Southeast Asian cities, if you wanted to have any kind of involvement with the financial services system—and therefore have electricity and eat—you went digital, you had no choice. Rather shyly, there are very large number of bank chief executives or central bank governors who will readily admit that COVID-19 did a ton of work for them; in forcing people to move across to digital channels. This is on the retail side, but there’s elements of it in transactional banking at the corporate level, too.

Now, the question becomes, “Does that stick when we all go back to something like a normal life? Does everyone go back to the branches or are they quite happy with their phone?” And actually, if a lot of people have learned convenience through digital banking, which they’ve been forced to do through COVID-19, they’re probably going to stick with it. A number of banks are already proving it’s much better for them from a return on equity perspective to have digitally engaged customers, rather than those that tend to want to go through—what we might call the analog channels—going to a branch.

I think all of this is relevant because for a lot of banks—not necessarily digital front runners who have had some work done for them—and the bigger digital client base, it rather changes their positioning as the fintech onslaught arrives. Because certainly beforehand, they would have assumed that the low hanging fruit was pretty much gone. Alipay, WeChat, Paytm in India, Grab, Gojek—they were taking the easy stuff and banks have more or less given up on it. But now I wonder if they might actually fight for some of this?

And I’m reminded—Jamie will remember this—on December 4th, the night when the Singapore licenses were announced. I just thought this was very, very telling. This was when Ant, Sea, and Grab got their digital licenses and everything. The very first email I received that night was not from any of them, not Grab, not Ant, not Sea, it was from DBS. And it said, “We congratulate the successful applicants and welcome them to our world, where digital banking is already a reality.” And there is a message that we’re trying to get across there. So, “Yeah, good for you. You’ve got a license, you can do this.” We’re already doing it.

So, there are two big questions for me: one is, how much of a battleground becomes about transactional stuff? Which is simple and which fintech has clearly revolutionized, but some banks are going to want to hang on to. And then the second question is, how far beyond that do we go? Are we really going to buy mutual funds through Grab? Are we going to seek financial advice through Grab? And where does that delineation call? So, I’m sort of answering with something of a question, but I’m sure you’d have a view on it yourself, Joydeep. So, I’ll stop there for the moment.

Joydeep Sengupta: Thank you, Chris. I think it’s probably a very appropriate question, and I guess we’re all searching for the answer to that question. But I do want to ask Ira one thing, you listened to what Jamie and Chris said and there are two very interesting things: one is basically the impact of COVID-19 and the acceleration of customer adoption, but also the massive spend in digital infrastructure that the government has made over the last two to three years. How is that playing out for many of the new age fintechs? Because one thing which is also interesting—to observe a little bit to the point Chris and Jamie were both making—is that the incumbent banks seem to be riding on that and moving quite rapidly as well. How are you seeing this battleground playing out?

Ira Dugal: I’d like to separate this into two parts. There is the transaction part—that is, the payments part—and then there is the digital lending part, and I’ll give you short answers on both.

So, the transaction part is very clear. There has been massive adoption in the last two years; the public payment rails and Unified Payments Interface (UPI) have led that adoption, and everyone is benefiting from it, whether it’s the banks or it’s the Google Pay and PhonePe, etc. I still don’t see that, though, as something that’s eating into the incumbent banks, because at the backend, there are still banks who are using UPI. But at the backend, there is a bank. So, I don’t see Indian banks being particularly sort of perturbed about the fact there are these third-party applications up front, which are taking the initial part of the traffic because they’re still backing a lot of that traffic.

So, the digital transition on payments on transactions has continued and yes, there is battle. But I think the battle is within the fintechs, as opposed to between the fintechs and the banks. I think they’re growing together. I think the challenge for banks is almost from themselves as much as it is from these fintechs, because many of them have realized in the last year that their technology, their legacy technology, is just not up to speed with the kind of adoption we have seen. And many of them, as we know, are scrambling to try and get that in order. One large bank has faced strictures from the regulator, and on account of outages on the digital front.

So, there is certainly that journey that is continuing; it’s sped up, and it’s to the benefit of all of us, certainly in terms of ease of transactions. But there is a small team—picking up from what Jamie was saying—which is entirely different, which is what happened on the digital lending side. And then I’ll link back to what I was saying about banks having done better than expected in this current COVID-19 crisis, but nobody knows how these digital lending platforms have done. And the reason that’s important is because they went into the markets banks didn’t want to go into, or they went into the new to credit markets. They use alternative credit scoring techniques and they tried to build new models for cash flow-based lending, but these are not public entities. So, we don’t know how they did, but their experience is actually going to be tremendously relevant because if they came out relatively unscathed, you will start to see the slightly larger, non-bank lenders wanting to go into that market, and then eventually banks wanting to go into that market as well.

But if they’ve seen blow ups, and perhaps we’ll know this when we start to see filings from them in a few months or so, then that will be a push back to the idea of greater financial inclusion, or lesser financial exclusion in India. So, I think the digital journey to me is two parts in India: deposits and transaction payments. For deposits, let’s keep out of it because deposits remained the preserve of large banks in India, but how digital lending beyond the banks have done is relevant to see in this period. And of course, transactions payments: there’s going to be enormous competition and nobody’s going to make money out of it. They’re all going to fight, but that’s to our benefit, I suppose.

Joydeep Sengupta: Thank you, Ira. Maybe I have a couple follow-on questions on that, and I’m not going to direct it to anyone so please jump in. One, I just want to pick up on something that Jamie said earlier on this which is—let me re-characterize this—the absence of a level playing field, whether it’s from an investor lens or regulatory lens, and I think we hear that quite often. How are you looking at that evolution as you talk to regulators, existing players, new players in the market? Do you think there’s going to be more convergence, whether it’s from a regulatory freedom perspective or a perspective of how investors look at it? Do you see the divergence continuing?

And the other question is—linked a little bit to Ira’s last point—we talked a lot about the fintechs, but the one category which I’d love to hear your views on are the major tech players, including some of the large owners of ecosystems. As they enter the market, what’s the level of influence you see them exerting in terms of market dynamics?

Jamie Lee: I’ll answer the first question. Essentially, if we talk about regulators or transparency, I would point to the fact that once Grab is listed, as Sea is, their numbers, financials, and their successes in financial inclusion will come to be assessed by the market. And that’s essentially how regulators ensure there is some kind of level playing field. If, at all, information today is the great leveler. So, the more information the marketplace has, the better decisions they will be able to make. I think that’s important, so we would probably need to scrutinize a lot more of the numbers closely.

The second is also to think about where regulators should be in the great scheme of things. So, payments, as an example, is a good one. In Singapore, we have a real-time payments system and fintechs have been allowed to tap this system, or this ‘railway network’ as I like to characterize it. It would probably be safe to assume there was probably some lobbying and pushback from the banks to say, “This is not something for the fintechs.” But I think the regulators ultimately made a decision that payments are a utility. It is ultimately for the benefit of every consumer. It doesn’t really matter which pipe it goes through, so long as that pipe is safe if you’re connected and connected right, you don’t introduce cybersecurity risk to it. At that point, it should be a utility for everyone, so it’s not a remit just for the traditional banks. And I do think that philosophy and that broad-mindedness is important in terms of regulations.

The other thing is, at what point do you step in for regulators? I think it’s a difficult question. I go back to the global financial crisis, where people talked about ’too big to fail’—how do you define it? It always comes down to systemic risk—how much system risk do you cause? And for fintechs, while they have risen to a certain scale, the question still remains how systemically important they are.

Certainly, in other markets, they are critical. So, I would say Ant is probably something that’s systemically important today. But even if some of the smaller fintechs collapse, what system risks would there be? If a supply chain financing firm collapses but it only takes 0.1 percent of loans, we have to say the regulators need to let that go. But if a company like Ant comes in and they take in a significant share, then we have to say ‘it’s too big to fail’. The problem often is, at what point do you decide they become too big to fail? And unfortunately, regulators are always a little bit more reactive. I do think regulators have to take a much closer look. They have to be a lot more sensitive; they have to understand domino effects a lot more than before. And I suspect they would be asking a lot more questions than before, and I think fintechs need to be ready for that.

Chris Wright: If I may follow up on Ant—I think we can really learn a lot from the regulatory position in China around the fintechs. The way it started out; it was just the perfect environment for a fintech to operate within China. They have absolutely everything going for them. You had a market in which ordinary retail had been underserved and somewhat ignored by the big banks; you have a huge and growing population where people don’t have particular concerns about privacy, and certainly don’t mind transacting through their phone because they are technologically literate. And the regulation in the early days was extremely benign, I think. That’s how Ant, Alipay, Tencent, and WeChat grew so big so fast, and then of course, spread out into other markets, into the backend of Paytm, for example, in India.

But the speed and severity of the turnaround and the regulatory position towards Ant and Jack Ma, must tell us something. And what does it tell us? I think, to my mind, what became clear in the prospectus for the Ant listing was just how much of what Ant was doing was really getting into the absolute heart of mainstream banking. There was a great deal of lending, but without any advanced balance sheet on the line. I think that may even have been a shock to the regulators, and I think there was a recognition that this has a far greater degree of systemic importance than was perhaps previously evident. Everybody loves it when it adds convenience and it brings consumers into the mainstream—and all of those are good things—but I think there was a real wake up moment when they realized, you actually have a level of importance to our financial system that we are uncomfortable with. Now China, of course, marches to its own particular beat; there is really nowhere else that’s quite like China. But no matter where you look in Asia, regulators must be trying to make the same calculation, which is: what is our tradeoff between convenience, customer engagement, and a systemic risk?

Ira Dugal: Absolutely. In fact, I’m going to pick up what both Jamie and Chris are saying. In India, we’ve seen the regulator’s—at least in the last few years—first take a hands-off approach. You start with payments, for instance. I remember a year and a half back asking someone whether this sort of trend of cash backs just to get payment volumes, is something that the regulators would be worried about. They said, “No, it’s not putting the system at risk. There’s no reason for us to intervene.” Fast forward 18 months, you started to see the National Payments Corporation of India (NPCI), which is the quasi-regulator, start putting volume caps. So, at some point, just as Jamie was saying, they start to realize that there is a systemic risk in the growth of one party and they start to come in.

It will be the same in lending as well. You talked about fintechs, Joydeep—Google Pay, PhonePe—or any other sort of large tech pack clear. If they start to move beyond payments and start to say, “Okay, now we’re going to get a non-banking financial company (NBFC) license and we’re going to start lending,”—just their network will allow them to perhaps scale up very rapidly. That’s the point at which you really need to see what level of regulation comes in. In India, the regulator has perhaps thought along those lines because they have put in a graded, or suggested a graded framework, for non-bank lenders, which is based on size exactly that way.

So, the bottom layer, which is small companies that don’t have large assets under management (AUM), will perhaps be allowed to innovate. And that’s great because you do need that innovation, particularly in an economy like India, which is highly under-penetrated in terms of credit even now. But as some of these fintech things start to grow far larger and their size in terms of lending capacity grows, then they will be subject to regulations that are closer and closer to banks, and I think that’s absolutely the right thing to do.

Just because they are fintechs and they have the potential to bring innovation to the market, I don’t think you can sort of sleep off and suddenly wake up one morning to large systemic risks building up, as Jamie said. That holds true across payments, lending, and most definitely deposits, but we haven’t opened that up, so I’ll leave that out for now. But yes, fintechs will have far more influence in the next few years. Their influence will go beyond payments, I have no doubt about that. And the regulatory approach will be most interesting, although I think they’re preparing for that in some ways.

Joydeep Sengupta: Thank you, Ira. That was great. And in fact, maybe I’ll also end with a question again, which is whether you see—as Chris was saying—that all the regulators in the region will adopt the Chinese playbook from a regulatory perspective?

You also touched upon innovation, Ira, and I do want to talk about a couple of things which have more recently accelerated in the post-COVID-19 world. One is obviously blockchain as a technology and the notion of cryptocurrency. Everyone’s kind of watching the price of Bitcoin with amazement. Regulators have been ambivalent in the past; in some places, they’re being much more supportive. So, looks like things are in a bit of flux. What are you seeing and hearing on this, Ira?

Ira Dugal: So, I think, you know, on the blockchain part and separating blockchain technology, I don’t have too much to say. I do know that Indian banks have been experimenting—there was a consortium of banks that had come together, and the areas are similar to what’s happening across Asia, perhaps on trade finance, on overseas payments. I know there were experiments going on, but I don’t know that they’ve reached any level of scale where they have gone to market in a big way. So, perhaps that’s still a work in progress. I think everyone will accept that there is large potential there—has that potential fructified? I frankly don’t know that it has, because it hasn’t come to market in a big way.

In terms of cryptocurrencies, again, India is a unique market. Banks have had trepidation in dealing with the broader cryptocurrency universe because of regulations in the back and forth on regulation. So, perhaps I’ll let Jamie and Chris pick up more on that conversation a little bit more, coming in from other parts of Asia than from India.

Chris Wright: Sure. Well, if I can address the blockchain side, I agree with Ira that I think trade finance and payments, particularly cross-border payments, were probably the two areas where blockchain appeared to have the greatest potential. But I think between them, they also illustrate both the opportunities and the difficulties that are involved with blockchain technology. They both appear to fit perfectly well. Cross-border payments are just fiddly and expensive, and it’s unduly complicated and partly because there are concerns about fraud and anti-money laundering (AML). That appears to be custom made for blockchain; you can sort all of those things out with a common distributed ledger.

And I think that’s beginning to happen. You saw just last week, JP Morgan decided to use a specific Asian corridor. And actually, remittances from Taiwan to Indonesia is the one they chose as a proving ground of some of its blockchain-enabled tools for cross-border payments for identity verification, and so forth. And this is not really a proof of concept, they’ve gone beyond that now. This was actually launched as a supposedly commercially viable solution. We’ll see how it flies and hopefully it will go bigger from there. To my mind, global payments or cross-border payments is the one area where you can say, “This really, really should work.”

Now trade finance, on the face of it—perfect. If anything ever needed disruption, it’s trade finance. The only reason anyone on earth still owns a fax machine is because trade finance is so incredibly antiquated, disjointed, and has all of these moving parts—documents have to be stamped—distributed, a ledger should fix that right away, shouldn’t it? But the problem is, I think what a lot of people who are trying to do that have learned is that there are just so many people who need to coordinate simultaneously. It’s not like global payments where it’s really who’s standing and who’s receiving it, and some regulators as well.

In trade finance you’ve got customs agents, shipping forwarders, governments, quality certifiers, and it’s not just for tech—that’s the other problem with trade finance, it’s the legal side. What happens if my good does not arrive in the form that it was supposed to? That’s not actually a technology question. The technology is fine, conceptually, but real life, rather, gets in the way. And that’s the one problem with a distributed ledger technology—you do need everybody to get on board at the same time. And you’ve kind of reached the point where the technology has been proven, but that’s no longer the point. So, that I think is the next step, as it always is with these things, is just gaining scale, gaining momentum, and getting enough people to agree. That’s the challenge now.

Jamie Lee: I would add two points to that. Definitely, trade finance needs to grow up and reach the modern age that we are in. There are two parts of this. The point about the legal side needing to become digital is a real problem. Simple things like digital signatures are not necessarily accepted in different parts of the world, and different parts of the world have different standards for what a digital signature should be. Just that alone hinders the process.

The other part is that actually, there are different blockchain systems. And when you put a bunch of very competitive people together in the same room—of course here I am referring to banks—they will try to lobby and push for their system, which they will claim is better than the other system. And these systems all have to ‘speak’ to one another. Fundamentally, I think that is a problem. The term is coopetition, where you have to figure out that it makes better sense for you to cooperate—even with a competitor—and then take a larger pie together, rather than fight over whether system A or system B is better. I think there has been some conversation and some pause because of that.

It fundamentally boils down to this: I think blockchain is there to actually bring trusted partners together, while taking away some part of that competition that has hindered them from working more closely together, and some parts of that are still being sorted out. So, it’s not a technology issue, it’s a people issue. And we need to come to terms with that so blockchain can finally flourish and be set free.

Joydeep Sengupta: Thank you, Jamie. I think your last statement always rings true. Most things about technology are not technology issues, they’re people issues. Let’s move to the last question before we wrap up this fascinating conversation. I want to come back to one macro trend which we have always seen during financial crisis, which is mergers and acquisitions (M&A) and divestments. If you look back over the years, every time there’s been an economic crisis, we’ve seen mergers—both in terms of number of deals, as well as the size of deals—go up at least two times more than normal times. How do you see the M&A environment shaping up in the markets here? Ira, maybe let me start with you.

Ira Dugal: I think the exciting part on potential M&A here is if the Indian government opens some of its banks for privatization. I think that’s what we are all watching for. There are talks that potentially they could put up two banks first, and if that succeeds, they may consider more. I think that’s where the M&A excitement in India will come from. There will be interest potentially from people who may not have been allowed into the banking sector so far, and I refer to large corporate entities, but that is subject to the Reserve Bank of India permitting them to come in. So, I think that’s where the anticipation is, whether it happens or not. There are many steps between the regulatory changes required, then the government deciding on banks, and going ahead with privatization.

Outside of the government banking sector, though, I think Indian M&A has always been driven by stress. We’ve seen in the last 12, a little more than 12 months, two such deals—one wasn’t really M&A but there was the resolution of Yes Bank, and there was a much smaller bank conducting Vilas Bank, which was merged with DBS. But it’s always been a distressed M&A story. We’ve seen very few deals in Indian banks, which are just two banks saying, “Hey, we can do this together, and we’re going to do this better.” I don’t know that that will change even now; I still think that it’s going to be a story of either distress or a government sellout story. And the second, if it happens, is going to be of great interest and something new to report about. So, we’re looking forward to that, which hasn’t happened yet.

Jamie Lee: I can jump in quickly on that—I would say over in Asia, broadly, if you see Citi deciding to exit several markets there, the question is whether some of those assets will come to play. Speaking from the bank from Singapore’s perspective, I assume they would take a look at it without jumping the gun saying that they will buy things. But M&A, the question about the global financial crisis still comes to mind, which is that you can’t be all things to everyone, and Citi’s latest decision suggest this as well.

That also means that for the banks they want to acquire, they will ask, “We’re not going to do this just to thump our chests and to say we’ve got the money to do it.” They will be careful—is there a cultural fit and the technology fit? Because the technology pipes have to fit a lot better than it was, and investors would punish poor M&A choices if the returns are poor. So, this is the environment they’re working with.

I do think that while M&A looks attractive on paper, there’s a lot more caution than, say 10 years ago. Unless assets are easily tacked on, it’s a matter of just taking on some assets and the liabilities are easy to deal with. Otherwise, I think they will take a second, third, or fourth look before they make decisions on that.

Chris Wright: Jamie’s right, Citi is very interesting to look at. They do intend to sell a lot of those businesses, and they’re not just closing them down. Some of them are very good. Citi’s Taiwan operation works perfectly well as an institution in its own right, but if you look at the potential buyers of those things, there’s a couple of trends you can identify. Who might they be? Japanese banks are a possibility. You’ve seen MUFG Bank expand into the region over the years by acquiring local businesses. And they’ve done that, of course, because there is just zero growth in Japan—certainly in anything around consumer—and therefore exposing yourself to higher growth. Asian markets make a great deal more sense. MUFG’s already done it to a degree, but for SMBC, Mizuho, that’s still a possibility.

I think the role of private equity is very interesting. Again, in Japan, this has been a major force for buying financial as well as industrial assets. So, we could see private equity step in by an individual constituent business of Citi and then try and flip it again, at some point, in rather a more normal economic environment. In Taiwan itself, that could be a scale play. You could see someone wanting to buy Taiwan’s operations and merging it into any of the major houses there. It will be really interesting to see if anybody goes for their ASEAN businesses, minus Singapore, because Singapore is not on the block and try and buy all of that on mass. That makes sense for an OCBC or UOB.

In some ways, those sorts of acquisitions have gone out of fashion in the last five years; this idea of having to buy scale and brick-and-mortars, it kind of takes you back to the point where Piyush Gupta often talks about the fact that he wasn’t able to buy a bank in Korea. It was actually one of the best things that happened to him, because it would have been the wrong sort of deal that was out of step with the time. It was better not to buy brick-and-mortars, not a huge institution, but instead to buy digital capability. So, maybe M&A in the future in the banking sector will be characterized not so much by buying other banks, but buying technological capability.

Ira Dugal: I’d briefly add the India Citi part—I think the question is whether the portfolio will be sold in bits and pieces. Early interest seems to be mostly in their credit card book more than anything else, but yes, there have been large full buyouts talked about, but certainly the credit card portfolio would be of interest to a number of Indian banks that are looking to grow and take dominance in that market.

Joydeep Sengupta: Thank you, Ira. Thank you, Chris. We are almost at the end, so maybe I’ll start with the end, which I think, on this point on M&A. I do think the point Chris made is very interesting, which is are we going to see a different type of M&A era, which is not just the more classical merger of banks, but also maybe banks with fintechs, and banks with technology companies? Given the way banking is evolving, do we see a different type of M&A era? I think that’s an interesting question, which will play out over the next few years.

I would also say on the topic of how banks are doing, I think we were all quite pleasantly surprised by the degree of resilience and the optimistic outlook. At the same time, Jamie made one point which I registered: there is a social contract, and there is a lot of government spending which has supported many of the businesses which have indirectly benefited the bank. I think there is a broader question around banking for good, for society. And I do think that is a debate which is certainly on the table: what are banks doing beyond just the profit motive in terms of social obligations?

And I think the third element is really the evergreen debate among fintechs, banks, and technology. What is clear is customers have moved on, and in many ways, COVID-19 has been a real accelerant to digital adoption. For customers, the question is will the existing financial institutions keep pace? And the regulators, how will they deal with this and the evolving landscape between new banks and existing banks? In reality, there may eventually be a mix, which we all will learn to deal with.

Let me end by firstly thanking the three of you for giving me the opportunity to interview you. I think this is what I should be doing more often, rather than responding to your questions. So, Ira, Chris, and Jamie, thank you so much for joining us today, and I very much look forward to continuing our dialogue.

Oliver Tonby: You have been listening to the Future of Asia podcast by McKinsey & Company, to learn more about McKinsey, our people, our latest thinking, visit us at mck.co/foa, or find us on LinkedIn, Twitter, and Facebook.