Galen Stops quizzes Jon Vollemaere, CEO of R5FX, about whether fintech solutions will be used in China, and emerging markets more broadly, to effectively replicate existing FX markets or create an entirely new ecosystem.
Galen Stops: How does the FX market in China compare to those in Europe and the US?
Jon Vollemaere: A lot of the Chinese dealing rooms look like the Western FX markets of the late ‘90s in the way that they’re set up and the lack of technology in them. There are the obvious differences in culture and language, but the spread of potential customers is also quite different as well. There are the mega banks, the regional banks, the industry specific banks, the provincial banks, and they’re all completely different in terms of how they operate. The size of the banks is also very different, even a regional bank may have in the region of 10 million customers.
One other interesting area right now is that Chinese stockbrokers will soon be allowed to trade FX, which is new. Obviously we’ve been having some exciting conversations with those firms.
GS: How do all these different banks in China interact with one another? Is it like in more developed FX markets, where the smaller banks are clients of the bigger banks or do they compete with one another?
JV: There are the top half-dozen banks, who are the main market makers on CFETS, and the other banks trade with them because they soak up all the liquidity for onshore renminbi amongst themselves. G10 markets are extremely fragmented and patchy due to limited credit relationships. But all the trading is still very manual, so when I say the dealing rooms look like the late ‘90s, I mean that they have four people to do a job that could probably be done by one person today.
GS: Do you see fintech solutions being implemented in China, and emerging markets more broadly, to effectively replicate the FX market that already exists in Europe and the US, or will these solutions be used to create new market structures or trading paradigms?
JV: The first thing to say is that what might happen in China is completely different compared to what might happen in, say, Turkey or Russia, which is in turn different to Korea or Indonesia. In some of these markets, places like Vietnam and Myanmar, where there is no real financial market technology to speak of, they will probably end up leapfrogging to the latest and newest technology, but it will be a bottom up change, not a top down one. So the initial focus will probably be on remittances, and they’re not going to build the same remittance system that we have in traditional developed markets.
But in terms of fintech solutions, there’s also a political element to consider. For example, China will never join a US dollar based system, whereas countries like Indonesia or Sri Lanka might be happy to sign up to something like that because it gives them a lot of legitimacy on the world stage.
GS: Focusing on that last point, if China won’t sign up to dollar-based systems, will they replicate these systems but just within China?
JV: Well they already have many of their own systems that are the equivalent to others around the world and they’ll copy Western ones to the extent that it’s useful for them to do so. Their attitude is very much that the rest of the world will come to China, not the other way around. And that’s true more generally, not just in financial markets. That’s what the Belt and Road initiative is all about: getting products into China faster, using those products to manufacture goods, then turning them around and sending them back out again quicker.
GS: When you’re operating in Chinese markets, what are the biggest challenges that you face as a fintech?
JV: Firstly, people and organisations are wary of non-Chinese providers. There is a natural caution towards new ways of doing things, the language barrier can be tricky but also the business culture is totally different. Here’s a great example: in China a contract might only be a couple of pages long and state fairly simply that one party will provide a service or product and the other will pay for it. If you start expanding that contract Chinese partners might be confused about why you’re filling it with things that could go wrong. But in the West, that’s exactly what a contract is. There are a lot of differences like that and I doubt we would have been able to launch a product in China if we did not have a local partner in the form of the Shanghai Clearing House to help us.
One thing that is the same in China as in the West relates to the questions we get regarding the FX market. Because a lot of the R5 team were there at the start of platforms like Currenex or EBS, we’ve fielded these questions before, so it’s just the language that is different now.
GS: When it comes to emerging markets, are the challenges you face idiosyncratic to each country or are there general themes and issues that you come across?
JV: In the press I often see articles talking about how you cannot treat the emerging markets as one block because they’re all completely different, and then I’ll see the same publication produce an article the following week about how the “EM block” has moved in one direction or the other. And yes, while there are some commonalities in terms of currency movements, due to these currencies trading against the US dollar, the issues and opportunities are completely different in each market.
The one thing that is very similar across all of them is that there is very limited trading access and extremely limited credit in and out. They also all have a desire to access bigger markets and access new pools of liquidity. That, and they all seem to dislike Donald Trump.
GS: When we talk about fintech, the word that inevitably gets thrown around is “disruption”. When it comes to emerging markets with less legacy technology and infrastructure is fintech still a disruptive force?
JV: You’ll never see the word “disruptive” on anything that we put out, because I think the word is so overused.
However there are areas where fintech is changing things in these countries. Take, for example, the Starbucks that I go to in Shanghai, where absolutely everybody pays using WeChat. I’m the only guy who’s there with cash because it’s difficult to fund a WeChat account with a foreign bank account. There are shops that will now only take WeChat as a form of payment, so I consider this to be quite disruptive.
There are also legitimate uses of blockchain around the world that I think are disruptive because of the massive cost savings compared to how things are done today.
But a lot of capital markets fintech is evolutionary rather than revolutionary, with solutions making existing processes easier and more efficient. That’s what we do – improve access, give banks in China access to banks in London, and allow the banks in London to trade with new counterparts in China.
GS: As the markets in China continue to develop, will FX trading go electronic very quickly or will it be more of a slow and steady progression?
JV: I think that it will be the former. Right now 99% of the Chinese market is manually clicking on a GUI, but that will change. Firstly, we’ll see more and more liquidity takers on the other end coming from automated pricing engines coming out of the UK, Hong Kong and the US. Then it’s only a matter of time until the Chinese banks build their own.
So although Chinese banks are not market makers in CNH they will be once they get their heads around the technology. Ultimately, I can’t see any reason why Shanghai shouldn’t become the market maker for renminbi in the same way that Frankfurt was for the Deutsche mark regardless of where you were in the world or the time. This is something that Hong Kong understands very well, whereas Singapore is trying to sweep this under the carpet and I think that London, and in particular the British government, also understands this well because they’re trying their absolute hardest to make London the offshore hub for all Chinese financial products.
Now, one thing that technology will change in China is that they won’t need as many people in the dealing rooms, and that will be a problem because the banks are big employers. They literally have four people to do one person’s job and I don’t see the banks becoming four times bigger, so I’m not sure how they will solve that issue.
GS: I see that authorities in places like Singapore and Hong Kong have been keen to promote fintech solutions and fintech firms, do the authorities in the markets that you operate in have a similar attitude?
JV: Yes, you’re right there has been a lot of buzz and a lot of support. But all the authorities seem to like latching onto success stories and they all see fintech as very much a retail thing. It’s more focused on, say, a new insurance product that can be bought via a mobile phone, which is popular because the man on the street can understand it and someone in a remote village can now get access to insurance. These are the sort of products that get the headlines.
At the same time I think regulators and government departments are well aware that there’s so much inefficiency inside every part of the finance industry and technology is the way to fix it. The big banks used to develop these solutions but they don’t anymore – it’s like in pharma, you get the little guys developing new drugs, experimenting and then once they find one that works, it gets adopted by all the firms. We are now starting to see more and more of this type of approach.