Chaudhury, CEO at GreenArc Capital, emphasised that the growth of environmental, social and governance (ESG) in the asset management industry is transformational, and how asset managers evaluate impact investing factors need to be more transparent. The key issue in today’s microfinance industry is the embedded cost. Technology is now enabling the cost of the transaction to go down and the lower the cost the more impactful inclusive finance can be.      

The key points that were discussed include the following:

• The shrinking of the loan book and de-risking of the balance sheet by companies due to the COVID-19 pandemic is a good opportunity for impact lenders targeting distressed assets.
• Peer-to-peer (P2P) lenders have held their stance in developed markets but the penetration in the emerging market is still low; thus the challenge for players in an emerging market is to find a way to scale up the business in a sustainable way.  
• Around 50% of asset managers have tagged themselves as ESG focused compared to 24% five years ago, and the number is estimated to reach 90% by 2025.  
• Regulation in the emerging market tends to be conservative to financial innovation like P2P due to previous experience in financial crisis and the lack of ability to supervise.
• The cost to manage an impact portfolio is higher than a traditional one but new technology like AI and data help solve the problem.

Below is the edited transcript of the interview:

Emmanuel Daniel (ED): I've been thinking a lot about how the impact of the global pandemic in 2020 is going to shape financial services going forward. I have been thinking about topics such as non-performing loans (NPLs), the strength of the banking system, and the nature of capital itself. How that's going to be evolving over time. Interestingly, my conversations with many different people in financial services revealed that many people in the industry seemed to think that the future is going to be a lot more of the same.

And very few banks and governments talk about the fallout that is coming to us from the pandemic. The need to regrow economies on the strength of the local communities, as well as the NPLs, the damage to capital that needs to be captured and quantified and the issues that we need to deal with going forward.

I've been very fortunate to be with Bikram Chaudhury whose business is to start looking at the NPLs of all the fintechs, the startups, the P2P lenders, the so-called microfinance credit players that are going to be thrown up into the marketplace and create an industry around these distressed assets that will surface as a result of the pandemic. So I've invited him for a conversation and the most interesting part of Bikram’s profile is that he's a recovering investment banker. So let's start with this new opportunity that you are in the process of creating for yourself as a result of the pandemic.

Bikram Chaudhury (BC): I run a startup called GreenArc Capital which focuses on impact lending. I've spent my career in top tier investment banking firms. The last of which was Credit Suisse where I spent 15 years across Hong Kong, London, and Singapore. Prior to that, I was with Deutsche Bank. And before that with Bankers Trust which is actually being taken over by Deutsche Bank.

The focus of my career has been on large scale capital markets. The movement of large sums of capital facilitated by capital market transactions in fixed-income which encompasses the entire structured credit space, the illiquid lending space, and the classic credit lending that banks do.

GreenArc was founded with the premise that capital needs to move beyond one metric which is the financial return metric. The world of impact investing is looking to capture not just financial returns but social capital returns. People call it the environment, social and governance (ESG) metrics. And impact looks over and beyond that as to what positive effect you are having on the world when you deploy capital.

So our focus in the space is actually on two areas. One is we finance conservation primarily of rain forests which is a very difficult thing to do because of the lack of metrics around such activity. And the second is financial inclusion which started with microfinance. And we look to bring institutional capital into these segments - the base of the pyramid of emerging market economies and poorer countries. GreenArc does this via technology-enabled platforms. We have a tech solution in place that allowed us to deploy into microlending portfolios and easily scrutinise credit and impact.

ED: So GreenArc Capital, would I describe that as a boutique investment firm? Do you do any investment and underwriting at all?  What is your asset under management?

BC: We are not a licensed asset manager. We are in the last stages of our Monetary Authority of Singapore Capital Markets Services (MAS CMS) licensing as a P2P fintech which allows us to offer a product to accredited investors not to retail. However, our platform itself is not geared towards crowdsourcing or crowdfunding. We work primarily with institutional investors such as large funds or large banks to evaluate and better capture the risk and returns around the capital that they deploy into the space. So our tech platform is a look through that enables large volumes of microloans to be validated and credit-rated at the loan by loan level. We also run an impact analysis that allows each loan to calculate impact at the loan level which is very rare.

Now, what tends to happen in impact investing and also in ESG investing is that this market or this new asset class hasn't kept up with the needs of institutional capital. I look at the impact and methodology as credit rating prior to credit-rating agencies being ratified or being enshrined in regulation. If you think back to when credit rating first started there were a number of methodologies and several players. Each of them claimed that their credit rating process was better than the others.

There are very few common standards. If you look at any impact fund or microcredit fund, the way that impact is measured and reported is post-fact. Typically you would have sustainability, the equivalent of the sustainability reporting piece. So you'll have an impact report that is generated by the said asset manager or institution that then reports the metrics that are valuable in evaluating their portfolio. However, this is always done post-fact, on an annual basis. And a lot of the numbers are consultant-driven. So the same consultants or auditors into the field who then estimate the impact it had such as the number of kids dedicated, gender equality in the portfolio, and so on.

When we started GreenArc we took this problem and we reversed it. We said how can we create this for ourselves or our investor that eliminates all these processes?

So what we did was use the data tape that is used in lending portfolios. We use demo data tape to read off most of the impact metrics that we tabulate. Now it is important to say that we do not have our own methodology. The taxonomy for impact is today maintained by a non-profit organisation called the Global Impact Investing Network (GIIN). They published a taxonomy of impact metrics that you can capture as an impact investor. However, they leave it to every specific impact investor to develop the weightages and the metrics that are required. Either it's a vast field of metrics, it's up to you to choose whichever metric you require.

So think about it as financial reporting or ratios you can choose from your perspective which ratios are relevant to you as a bank or as a trading company. It's very similar in the impact reporting space. But our methodology is we work with a steering group within impact called the Impact Management Project, which is a non-profit. It's funded by several institutional funders. They publish recommended methodologies. So we are part of that cohort of people who work to publish common standards. And in fact the reason I'm giving you all this colour is because ESG and impact washing have a certain cynicism about how these processes work at the institutional level. People are like, you can report anything, and it’s all kind of wash impact, wash anyway. So from a tech perspective, our tech solution has eliminated that issue. Not entirely but we have ensured that for the borrowers that we work with and for the portfolios that we work on, these numbers can't be kind of made up. There is a certain check and balance.

We also use data science to tabulate and do what I would call category one that checks on the data we gather. For example, if there is a portfolio of small and medium enterprises (SMEs) in Indonesia, and one SME is reporting a 30% female employee ratio. We will then tabulate it to the metrics that we know for that particular country, region, or area. So 30% sounds good on the face of it. But when you look at Indonesia, actually the average SME employee ratio is 37%. So this is underperforming. You have to check what goes on at that level. This is the impact side of it. On the credit side, we use alternative credit scoring. But we stay more at the traditional credit level. We have a partnership with the National University of Singapore (NUS) and their Asian Institute of Digital Finance which we pull on the large credit database that they have to be able to credit score the portfolios that we originate. We don't create our methodology. We work with investors based on the data that they require to feed them the required impact data. The scoring that we do is validated scoring. We don't use a proprietary algorithm but we supervise the lenders that we work with and check on the credit scoring via third party measures.

ED: How many portfolios do you have? What is the size and how many customers? Are you working with specific investors using the platform that you've created?

BC: We work in the private space. We haven't gone public with the platform. But we have 14 lenders across Southeast Asia that we work with. The last mile lenders like the institutions that lend the portfolio. We work with two large institutions for their deployment of capital.

ED: Do they buy your portfolio eventually, or are they just investors?

BC: They eventually finance the portfolios. Now the nature of the financing will depend on the jurisdiction or the creditworthiness of the portfolio. Typically, lenders always keep a certain amount of skin in the game with the portfolios. So it's not a 100% pass-through and that subordination depends on the comfort level that the lending institution has with the micro-financier or the fintech.

ED: Okay, so you're a fintech working with fintechs?

BC: That is correct. You can think of us as a fintech of fintechs.

ED: What is your sense of how the whole P2P and impact and the inclusive lending business evolved as a result of the pandemic? What's the scenario out there right now?

The shrinking of the loan book and de-risking of the balance sheet by companies due to the pandemic brings opportunity for impact lenders targeting distressed assets

BC: The impact, to put it mildly, has been brutal. Very few lenders whether new or old have come out positively in the pandemic because we're not out of the pandemic yet. Then you've seen loan books and lenders fail.

You've seen loan books shrink substantially up to 80%. You've seen massive de-risking of balance sheets. So not just fintech lending, not just P2P lending, but you've seen the de-risking of regular balance sheets as well. You've seen entire sectors created; tourism, hospitality, the entire travel industry, the so-called growth sectors, in classic emerging market economies. You've seen all these sectors kind of nosedive and go into distress. Not because of any fault of their own, but the pandemic is very much a macro event and it impacts everything down. Once the demand dries up, then everything up to the supply chain suffers.

The global economy is expected to contract from 5% to 8% this year. About 100 million people are going to be pushed into poverty this year. Out of these 100 million people, 80% were falling into extreme poverty or below the poverty line from poor and middle-income countries but not the rich countries because they've strong safety nets. They have strong relief programmes like Singapore or Europe. When you go to India, Indonesia, or anywhere else, there's not much of social backstop. COVID-19 has a disproportionate impact on populations with the most socioeconomically disadvantaged segments taking the brunt. People talk a lot about K-shaped recoveries and recessions. What people are talking about is very much K-shaped. In other words, if you're a white-collar employee there is some disruption to your life but to a certain extent the business does continue. However, if you're a blue-collar worker the impact on your livelihood and work is substantial during the pandemic. Your factories closed down. If you work with a tourist guide, you can forget about business. If you're on a daily work basis, you can imagine the impact it had.

This is now just a bit of an Asia focus. Out of the 100 million people globally that would go into poverty this year, approximately 38 million are from East Asia, which excludes South Asia. If you look at the graph, these are the percentage of shares of households with lost earnings in the crisis. You can see that there's a disproportional impact, the poorer you are as a country. In Myanmar, you have an 85% impact on households. Indonesia is very close to 80%, Cambodia, 80%, and so on. So, again, coming back to the thesis that the impact is disproportionate on poorer countries.

Everyone knows intuitively that a pandemic increases inequality massively. The International Monetary Fund (IMF) numbers estimate that the gains in inequality that have been achieved since 2008 are going to be wiped out totally in one year. So, 10 years of progress are going to be wiped out in one year.

And welfare, one of those difficult to estimate indicators, like the welfare of an individual or welfare of an economy. But the IMF has taken a stab at it. And you can see that the welfare decline has a substantial impact. And the only mitigation to the poor quality of life is your ability to tell that ‘you work’ if you have that ability, there is a certain cushion. The blow to your earnings, income or quality of life would be reduced. If you are in a rural area or being educated in a school with no internet facilities, that's not mitigation that you can count on.

ED: I've seen the rise of impact investment, microfinance or inclusive finance over the last 30 years or so. You have the origins of Grameen Bank, for example, and so on originating the industry, and a lot of that origination had to do with being very sensitive to the nuances of the local communities. In Bangladesh, it was women's groups working in group projects which were very sustainable. When these models were extended to countries like India where the private equity guys and the venture capitalists came in with hot money from the US mostly using inclusive finance and microcredit, they found out that it didn't work because they were trying to deploy hot money. Secondly, they weren't sensitive enough to the profile of the communities that they were serving. So they were serving the migrant male population living on the outskirts of the city in slums or migrant locations outside the city. The credit profiles changed dramatically unsustainable, and so on. Deploying inclusive finance in emerging markets required us to be very sensitive. And now, what you are involved in is the second half of the business which is collections, credit quality, and sustainability for the long-term, and the economics of the Gini coefficient, the disparity between rich and poor, and their availability, or the access to capital, income, and so on. You're now seeing the second half of the equation. Your alternative credit score models that you use. Many governments have been very prescriptive and very stringent with P2P lending. One of the reasons P2P lending is floundering is because of regulation being put in place. In the US and in the Western world, P2P lending has found a niche, which is, it's like actually more subprime lending below a very highly banked population. Where else in the countries where P2P lending seemed to have a better story to tell are in developing countries but the problem is regulation. So talk to us a little bit about the space that you're playing in. What is the regulation or what are the operating premises of the space that you're playing in?

BC: So as you know, household credit to gross domestic product (GDP) is a good indicator of banking and financial inclusion penetration in a society.

When you look at the developed market, typically household credit to GDP is about 80% to 100%. When you look at it for countries like Indonesia, the Philippines or India, that number is 17% for India, it is 12% for Indonesia, and 10% for the Philippines. Fintechs in developed markets have found a niche below this pyramid. So there's banking going down, there  are mortgages, regular credit card assets, bank lending, and below that is where the fintechs operate. They look at the margin, and micro, small and medium enterprises (MSMEs) that have been rejected to give them credit. In emerging markets, when you take Indonesia, the Philippines, or India, where credit penetration is still in its teens, you can see that there are still a lot of low-hanging fruits for lending institutions.

How do you penetrate this? How do you scale these lending models? How do you ensure that you're taking the right credit nations? How do you look at it from a cultural and community perspective to ensure that what you're doing is sustainable? And that you conform to social norms or what the society expects out of capital deployment.

Regulations were conservative in financial innovation like P2P due to previous experience in financial crisis and the lack of ability to supervise

Now the regulatory space has played second fiddle to this. Regulators tend not to be the most responsive of advocates for this space. And so you've seen even new lenders with innovative models in the area. Now why does that happen? You can't blame the regulators because they've been coloured by various crises that have happened in respective markets. They have seen new models come and go, misrepresentation and fraud at a massive scale.   I would pin down the issues around the regulatory environment to a prior bad experience or credit crisis. Secondly, a lack of faith in their own ability to govern and stay on top of these new lending models.

Even as regulators, the institutions lack faith in their ability to monitor risk at the institution’s level. What you see is that even if new institutions are given licences, especially in India, they tend to get buried under paperwork from a regulatory perspective and find it very difficult to do their businesses or they denied licences or operating freedom to be able to fulfil the original premise. So I won't blame regulation. They're coloured by their previous experience because they're not as tech-enabled or not as forward-looking as the new breed of lenders. They find it very difficult to allow them to operate without what they consider adequate supervision. They don't have the comfort of supervising these new-age lenders.

If you think about it from a developed market perspective, a lot of the regulators have taken the view that these are not ‘too big to fail’ yet. They operate at a scale where they are experimenting and it's fine to have a few mix-ups just to see if there's something innovative that comes out of that. It's a bit of an attitudinal change as well. You see that across the region, for example, Vietnam today still does not have a proper digital lending supervisory policy. The fintechs are regulated as pawn brokers or old-time money lenders. So, there's this gap between governance and where the market has gone to. So I'd see this as a call for the supervisory institutions to modernise rather than that they are holding back. The faster the regulators get their act together and how they monitor and enable technology lending, the better it will be.

ED: What is the role that you play? Who are your clients? And how are you onboarding them?

BC: We work today with institutional investors and we act as advisors to their lending because we're not licensed to intermediate these pools of capital. But we help them in the origination and risk and credit analysis of their target lending.

ED: Do they buy the portfolio themselves?

BC: That is correct. We're not a balance sheet player. The institutions that buy these portfolios are large family offices specifically in Europe and the US that have defined their impact lending mandates. You have today several large pools of capital that look to deploy capital with impact objectives. So we work with these investors to deploy their capital in line with their impact objectives. In the family office space, the preferred alignment is to the United Nations (UN) Sustainable Development Goals (SDGs). The way that this SDG alignment is achieved is via the impact metrics. This link sounds stannous to you but once you have the impact metrics mapped at the core portfolio level, it's quite easy to look at. How much contribution are you having on gender in your portfolio? How many additional women are you being employed? The entire process is mapped on, therefore, these investors can look at what they want to achieve and look at how well those lending portfolios are achieving these goals.

ED: What sizes are we talking about?

BC: This is fixed-income. Now a typical transaction would be between $5 million to $10 million at the micro institution level, on a lending basis.

ED: Is the cost of managing a distressed portfolio or an impact portfolio higher than that of a traditional portfolio?

The cost to manage an impact portfolio is high but new technology like AI and data help solve the problem

BC: Yes, however, that's the precise nature of having a tech-enabled platform that automates these requirements. One of the big issues in microfinance, financial inclusion lending, and the impact space is the notional size. The more you can reduce the per transaction cost, the more you can facilitate smaller transactions that are more impactful. The entire premise behind having this, and that's why we call us a fintech, is having this process tech-enable is that it allows you to scale and keep your cost per transaction down to competitive levels. In a large institution like Credit Suisse the cost of onboarding a client, just the know your customer (KYC) and onboarding any kind of client, is about $20,000 to $30,000. And this is ignoring the lending cost, the diligence, and everything else, it’s just the KYC part. So that immediately for a firm like that to be able to do a $2 million transaction, the economics don't make sense. So, therefore, for a financial institution you need to take the number to $20 million for that entire transaction to be economically feasible for that financial institution.

However, for the base of the pyramid lending, it's very rare to have a $20 million transaction size. You see institutions not participating in those smaller transactions via technology and the aggregation of lending portfolios. You can get that scale and blend portfolios to be able to achieve that.

One of the premises of having a tech platform and all this spending time and effort to build these facilitation pathways is that you can effectively finance $2 million tickets as effectively as you did with $20 million tickets. You can also get smaller investors who would only invest $2 million to participate in such portfolio.

ED: And these are qualified investors because they are at high risk.

BC: They are not rated portfolios. They don't have the regulatory credit rating, etc.

ED: It's interesting because I've seen P2P itself being pushed in China and by different players. Some go straight matching investors with borrowers directly and at a retail level and some take that portfolio approach. At the retail level it was very successful initially but the GDP that was growing at that time was about 8% to 12%. This year it is at least 6% and 6% is still very good. You end up in a situation where you've got more investors than you have borrowers. You need to do far more due diligence. You need to be far more secure and defensive in building the business. You're not an investment bank?

You're not touching the portfolio. They don't go on your balance sheet so you're not a fund manager. You're more like a service provider to both sides of the equation. How much of the actual business do you see? Or do you only visit with them when they are distressed? What are you seeing on the distress front in the markets that you serve as a result of the pandemic?

BC: I would say what you call a consulting model or whether you call it the facilitation model, I think capital markets have provided that utility function since markets existed. Our role in that is to direct capital towards this lesson on segments. We are not interested in helping people buy China's sovereign bonds. That's not our business. Our business is to look at private loan portfolios that are being originated with high impact and attract institutional capital to it. Our ability to attract capital is measured by our origination abilities, the premise that I talked to you about. How do you reduce the cost and the throughput of this analysis because this analysis needs to be done for every investor? No investor invests in blind pools. The premise is that as you lower the average cost, the throughput, you will attract more capital to the space which is our way of creating impact in this space.

Now, the second question is where we are focusing on right now because we see the necessity to finance these portfolios. What we see is the driving need of the current crisis. What we've seen is that a lot of the portfolios that were originated in bull market times have gone distressed in terms of proportions. These NPL numbers are high. There is no institutional process which you can deal with these NPLs. The idea is how do you create an ethical NPL management process? For all these new portfolios that have been created in the last few years, how do you ensure that they are digested comfortably? How do you ensure that these loans are worked out with minimum disruption to the individuals involved and the economic conditions that prevail in these markets today? It's still very much an ongoing process.

ED: What we're not getting is a true picture of what the fallout is and by country. So if the fallout might well come over time, countries releasing data showing that the NPL is much higher, the traditional institutions are stressed and also how they're capitalised. You were saying that among investors, the nature of capital was different before ESG and after ESG. Give us some of these concepts that you use to attract investors and the reason that traditional institutions in the west might well be interested in investing in impact portfolios.

Asset managers who focused on ESG grew 50% in 2020 and expected to reach 90% by 2025

BC: The global asset management industry today is $80 trillion and this is across all assets. In 2015, approximately 24% called it ESG funds. That's still a large number but you know 24% of the industry had already tagged themselves with ESG labels. So they invest in conformity with some kind of ESG policy.

They would not invest in tobacco or armaments, etc. But still that branding was useful. As of 2020, 50% of the industry is ESG label.

In five years, what you've seen is the transformation of the entire asset management industry to go from one-quarter of the sustainable label to 50% sustainability labelled or pledging in some form or fashion that they will follow these policies. If you look at the forward estimates, for example, Deutsche Bank’s report on ESG, they expect 90% of the industry to be ESG labelled by 2025.

Why is this happening? One is the largest wealth transfer that you're seeing in the west from the baby boomer generation to the millennials. This is the largest wealth transfer in the history of the world. $24 trillion or so in this decade is moving from the baby boomer generation to the millennial generation.

The millennial generation truly has a lens on capital and their own lifestyles that believe in sustainability. They believe in giving back to society, in ensuring responsible stewards of the planet and resources, which is not true of our generation. If you look at private banks and the studies that they've done, millennials almost tend to have a much higher proportion of sustainable label assets in their investment portfolios as compared to earlier generations. It's a change that will drive this through.

The second thing is regulation. You can already see that there's regulation in the European Union (EU) level. There are consultation papers out with differing capital standards for brown assets versus light green assets and blue assets.

The next iteration of financial regulation is going to include sustainability metrics. The EU has the Sustainable Finance Disclosure Regulation (SFDR) which will require all asset managers and financial advisors to classify their investment funds by March 2021. So it's not even in the future, it is now. You can see there are three categories - grey, light green and dark green. If you're an asset manager in EU today, you will have to disclose what proportion of your assets conform to which category.

The banks are putting in place capital metrics to come into risk-weighted assets as well. If you look at the factors, there’s massive awareness in a generational shift. The younger people today are far more conscious of their collective responsibilities than our generation. This is rapidly being enshrined in regulatory environments. The US under the present administration has gone backward in this phase but I expect they will pick up a bit once the new administration comes in, in terms of how they regulate the space.

I was conscious that this discussion was meant to be an NPL. So you can see, this is a Standard & Poor's (S&P) estimate for the Asia Pacific non-performing assets (NPAs) and credit losses. S&P estimates that NPAs can rise by $600 billion. Credit losses in 2020 alone is $300 billion. They predict a pretty severe hit to the banking systems in emerging market countries. They rate India, Mexico or South Africa are going to take probably four years to even emerge to a capitalisation level, which is pre-crisis.

Developed market and other markets are not that well either so they're predicting that these markets will probably get there by 2023 namely, US, UK, France, Australia, Brazil, and so on.

So the numbers are pretty grim. There's not a lot of regulatory or public policy discussion on how this will be mitigated. How will these systems be recapitalised? How will we ensure that capital is adequate to flow back into these economies because it's not just enough to print money or monetise debt as people have been doing in this crisis?

ED: The quality or the definition of capital will change as a result. Once you put in an ESG component, capital will look very different. Triple-A rated capital will look different from a triple-B rated capital because now there's this added component. The countries that benefit from this re-rating are no longer the developed stable countries but where capital can make a difference on impact. So the whole character of capital changes as a result.

BC: The earlier microfinance lending that happened in India was ‘hot money’ like money looking for financial return with a very short-time horizon. How fast can I get out? How fast can I flip it? And that causes issues. These metrics come into mainstream finance even at the institutional and bank level. This is very positive from a global emerging market (EM) perspective. Because this entire North-South divide has been about the exploitation of the Southern economies. Natural resources are going out because capital is scarce. You can command a premium for capital and that's how you play the value extraction game. The sooner this happens, the faster this is enshrined in regulation. This is a virtuous cycle. Once the asset managers see that it's easier to raise capital with an ESG tag they're like, “Oh, let's go raise money within Asia and then we'll do whatever we have to do with it”. But increasingly, that arbitrage will narrow. If you are raising money with an ESG tag, there's going to be governance around that to ensure from a compliance and reporting perspective that you are following the social objectives that you laid out. I think this is a positive development and should be encouraged.

ED: I want to test you in traditional banking and about the way microfinance has evolved. Traditional banking has a formula. Both the asset and the liability side of the business should match each other in terms of accountability, nature of both the assets and the liabilities. There's a kind of a dimension, a synergy between assets and liabilities, which is increasingly not necessarily related in capital markets and the new forms of finance. So if you take a lot of the digital banks that have evolved in Europe today, they're all great on the liability side and then they are hamstrung when it comes to deploying the asset side. When they do deploy it the issue is not so much, how much they can raise or how cheaply they can raise, but who they raise it from. Otherwise, the business model just doesn't hold. You are right now matching investors to distressed assets that are arising from today's pandemic and so on. What sort of synergies or dynamism do you need to see between the investor and the assets being invested in to make this a long-term sustainable business model for yourself?

BC: What you're seeing especially in the developed markets is that the neo banks have been focusing on the liability side of the balance sheets. They've been looking strong at attracting deposit money via their regulated product and superior customer service and digital offerings. But once this capital has come, they find it difficult to build the traditional side of the balance sheet.  I would take a slightly more nuanced view on that and take you back to the theory of why companies exist. Companies exist when the internal friction between transactions that is inside a company is lower than the external friction. The company itself, within the company. Internal transactions take less effort to do and it makes sense to aggregate into companies and have a pool.

If you take that into the digital space, what you're seeing is the bucketing of specialised services and facilities. So the neo banks have proven themselves very strong at attracting deposit money on the liability side. As long as they can deploy this money externally without the same friction, or with equivalent internal friction that a J.P. Morgan does or a DBS does, the system as a whole is fine.

So the need of the hour, for example with the neo banks, is to find those asset only specialists that allow them to deploy the capital that has been raised from this particular bunch of licensed institutions into the next specialised lending institutions. Unless you are ‘too big to fail bank’, you won't have both sides of it. You need to focus and you need to specialise. Even when you look at the large, private wealth managers like UBS or CS, their focus or what they're good at is attracting private banks and wealth and high net worth individuals. They're not necessarily good on the asset deployment side. That's something that had to create over the years. The premise for Credit Suisse taking over First Boston was that they needed to deploy capital. There was too much capital on the creditor’s balance sheet that they were deploying into the First Boston franchise. In today's more transparent and tech-enabled world, you don't need to do this as long as you can efficiently deploy this capital from one institution to the other via good capital market linkages.

ED: Thank you very much. You have given very incredible insights that contribute to how we assess and how the different players will evolve over time.