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need for

speed wHy JAPANESE REGIONAl BANKS SuFFER HEAVy lOSSES CAN CHINESE BANKS wIN AGAINST AlIPAy? wHy SuNDAy BANK IS A THING IN KOREA wHICH AuSTRAlIAN BANK BEARS BRuNT OF HOuSING DOwNTuRN

Mark Surgenor Head of Wealth, HSbC p.16


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Michael Moon, Managing Director, Payments, Trade & Communications, Asia Pacific at SWIFT talks about how gpi has significantly improved the crossboder payments process by introducing traceability and enhancing speed and transparency. Could the gpi be the biggest thing to happen to cross-border payments?

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Mark Surgenor, head of wealth at HSBC, reveals the bank’s ambitious plans to take advantage of the explosive growth in Asian high-net worth wealth. He discusses how HSBC is beefing up its wealth management, retail and private banking teams by up to 1,3000 roles to service the region’s rapidly growing millionaire population. The issue also features a report from S&P detailing how Chinese banks have been growing their mobile and online banking businesses in a bid to wrestle market share against the digitally dominant Alibaba and Tencent. Check out McKinsey’s annual payments report which highlighted the role of Asia as a global payments powerhouse. In November 2018, the team gathered the region’s leading banks in Hong Kong for the Digital and Open Banking Conference which tried to map out where the financial services industry is heading and the technologies powering this shift. Over at Sibos 2018 in Australia, Japan’s biggest banks revealed their plan to streamline the paper-intensive trade finance process. Our special report, meanwhile, discusses the open banking movement in Singapore which has consistently zoomed past Australia and Hong Kong in the regional rankings. Enjoy the issue!

Tim Charlton

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Can we help? Editorial Enquiries If you have a story idea or just a press release please Email: abf@charltonmedia.com and our news editor will read it. Media Partnerships please Email: abf@charltonmedia.com and put “partnership” on the subject line and it will forward to the right person. Subscriptions Email: subscriptions@charltonmedia.com Asian Banking and Finance is published by Charlton Media Group. All editorial is copyright and may not be reproduced without consent. Contributions are invited but copies of all work should be kept as Asian Banking and Finance can accept no responsibility for loss. We will however take the gains. *If you’re reading the small print you may be missing the big picture    

MICA (P) 249/07/2011 No. 67

2019

Retail Banking Forum ASIAN BANKING AND FINANCE | March 2019 1


CONTENTS

16

INTERVIEW

SWIFT’s Michael Moon on shaking the dust off the global crossswift 10 INTERVIEW 18 border payment process

analysis

28 open banking

ANALYSIS

FIRST

INTERVIEW HSBC targets US$1b in additional revenue by 2020 from asia’s super rich

EVENT COVERAGE

06 Vietnamese banks grow high-yield

20 Chinese banks are putting up a

12 Digital and Open Banking

Conference: Asian banks race to

keep China’s tech titans at bay as

retail arms

07 Australian banks hit by housing downturn

fight against tech titans

22 APAC fuels the global payments

boom

14 Digital and Open Banking

08 Are Singapore banks bracing for another round of O&G woes?

10 Japanese banks hold out in bid for

survival amidst profit crunch

Published quarterly on the second week of the month by Charlton Media Group Pte Ltd 101 Cecil St. #17-09 Tong Eng Building 2 ASIAN BANKING AND FINANCE | March 2019 Singapore 069533

fintechs up their game

OPINION

Conference: Can open banking

deliver on its promise amidst

30 Open APIs threats

scattered customer data?

32 Four Crucial Defense Strategies

26 SIBOS 2018: Japan’s megabanks

against revenue erosion for Private

Banks in Asia

digitise with blockchain

For the latest banking news from Asia visit the website

www.asianbankingandfinance.net


PROCASH Terms and Conditions apply.


News from asianbankingandfinance.net Daily news from Asia most read

financial technology

retail banking

Hong Kong rejects a third of virtual banking applicants

Singaporeans are less satisfied with their credit cards in 2018 Singaporeans have expressed About a third or 10 of the roughly 30 applications received by the Hong growing discontent over their Kong Monetary Authority in its first existing credit cards with overall batch of virtual banking applications satisfaction falling 9 points to 718 despite an improvement in 2017, will not be processed anymore due to the lack of sufficient information according to a yearly study conducted by market research firm J.D. Power. on authorisation criteria.

investment banking

China’s explosive wealth boom triggers private bank hiring spree The surge in Chinese high-net worth wealth means no shortage of clients for domestic private banks who enjoy home court advantage and international banks who are only recently joining the fray and muscling against incumbents.

4 ASIAN BANKING AND FINANCE | March 2019

cards & payments

Japanese banks trial blockchain technology to settle payments Japanese banks have moved into field trial stage with the initiative exploring the use applications of blockchain technology to settle payments. The trial will be conducted by the Japanese Banks’ Payment Clearing Network or Zengin - net.

foreign exchange

Indonesia’s big 4 banks hold firm against tumbling rupiah The forex loan compositions of Indonesia’s Big 4 which stand at less than 15% and foreign currency borrowings that account for less than 3% of liabilities, shield them from the severe rupiah depreciation, according to UOB Kay Hian.

lending & credit

Korea’s shrinking bad loan record at risk as SOHO loans turn sour Small office/home office loans (SOHO) issued by banks and non-banks in South Korea rose 15.6% to $525.5b in June in a development that puts to risk the country’s slimming bad loan burden, according to Moody’s.


Thought leadership article

Revolutionising banking operations with SmartStream’s artificial intelligence solutions The technology can optimise processes in all levels, from reconciliation, to stress testing and payments.

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inancial institutions around the Asia Pacific region are rapidly developing their own artificial intelligence (AI) tools to aid their operations as part of the digitalisation strategies that will provide them the leap towards a more digital future. This is something that SmartStream is leveraging in building its own innovations team focussed on developing tools and case studies in the deployment of AI for the use of financial institutions—not only to benefit the experiences of their clients but to also improve the efficiency of their operations. Push for AI For Peter Hainz, SmartStream’s global presales programme manager, the decision to implement AI for banks and other financial institutions is something that would be deemed inevitable given the advantages that the technology offers. “The main driver is cost efficiency, so when we’re looking at, for example, automating the transaction matching process, this is a classical example,” he said. “Another is the regulatory space. So when we’re looking at the regulatory space, we have a lot of data. So, data is collected and used, for example, for stress testing and for analytics.” He also highlighted the advantages that banks in the region are trying to reap given that 70% of these financial institutions are likely going to use AItools and technologies in their various operations, including collections and recovery by 2019, according to a survey by FICO. “We can use the data for anomalies with AI. One more driver, I would say, if you’re looking at the operations process, and the user experience is the exceptions management and then routing the exceptions to the right stakeholders,” he explained. Fast chips, massive data The push for AI, according to Smartstream, has gone hand in hand with the advancement in technology. “Super fast chips, in combination with massive amounts of data give algorithms a massive boost, so banks have massive amounts of data and this is very important, for example, for data

analytics,” he said, although he underscored the fact that AI is a tool and not the be all and end all of things for banks. “It’s about 80% of getting the data right and 20% of getting the model right,” he said. “What is also very important if we look at, for example, information overload. So, what is fake news, what is real news. Natural language processing is used to extract the right data and to differentiate between fake or real news.” Optimising workflow through AI Hainz also shared certain examples on the operational processes of banks and where banks can potentially leverage artificial intelligence. He mentioned that AI, in its purest sense, can affect and improve operations of financial institutions at all levels. AI can optimise the work flow in the back office, including the reconciliation process—where you get the data, transform the data, match the data, and look for exceptions—as well as in cash sweeping. For the mid-office segment, AI-powered tools and technologies can aid in stress testing activities as well as in supervision. For front-office activities, AI can be leveraged for payment scheduling and payment throttling. Some of the use cases include digital fingerprint, invoice extraction, and looking at anomalies on balances and other financial statements. SmartStream, for its part, has been offering artificial intelligence-based solutions to banks and other financial institutions through its innovations team, “a collaboration made up of highly skilled members, including mathematicians, applied data scientists, and computer scientists.” This group is tasked to evaluate and deploy artificial intelligence, machine learning, and blockchain models with financial institutions with cost efficiency and workflow enhancements as the main objectives. Some of the benefits that banks and financial institutions can get

Peter Hainz, SmartStream

from the innovation lab of SmartStream include lower operational risk or the ability to spot anomalies in transactions; enhanced profit efficiency given that routine, reduction in repeatable tasks; and faster response time due to machine learning. Further, banks stand to benefit from AI by coming into the possession of more informed business insights, and less exposure to processing failures, which will ultimately help any organisation’s decision making process. They can also leverage on identification of patterns that could provide customised offerings to customers; alerting and learning from unusual transactions. Additionally, it can also help banks stay competitive through the adoption of new algorithms, and better human capital development as the staff are able to direct their focus and resources on more skilful and value-adding tasks.

“It’s about 80% of getting the data right and 20% of getting the model right.” ASIAN BANKING AND FINANCE | March 2019 5


FIRST property market to grow their retail and personal banking businesses. “By customers, credit to companies remain the largest but credit to individual is growing in proportion,” analysts from market research firm StoxPlus noted. Indeed, the ratio of consumer credit to total outstanding loans in Vietnam correspondingly grew from 12.3% in 2016 to 18% in 2017. The development was particularly evident in 2017 when consumer finance surged 32.5%, effectively contributing 5.43% to headline credit growth figures (18.17%) as it assumed the role as a key driver of country’s lending growth.

philippines’ largest corporate default philippines

RCBC has the largest exposure at $140m

Five of the largest banks in the Philippines have joined forces to cover a combined loan exposure of $412m after the local shipbuilding unit of Korean conglomerate Hanjin declared bankruptcy in a development shaping up to be the largest corporate default in the country’s history. Local media outfits estimate the loan exposure of Rizal Commercial Banking Corp (RCBC) at $140m followed by Land Bank of the Philippines at an estimated $80m; Metropolitan Bank and Trust Co at $72m; Bank of the Philippine Islands (BPI) at $60m and Banco de Oro Universal Bank (BDO) at $60m as Hanjin’s loans are larger than the $386m of losses that the country’s banks had to declare after the global financial crisis in 2008. Apart from its debt to Philippine lenders, Hanjin Heavy Industries also owes around $900m to Korean banks. In the worst case scenario where banks are forced to make provisions for their full exposure, credit costs as a percentage of the banks’ pre-provision income is set to increase to between 20 and 140 basis points, from 6 to 26 bp, according to Moody’s Investors Service. Immaterial risk The central bank, however, was quick to dismiss concerns that the default represented a material risk for the stability of the financial sector as Hanjin’s debt only accounts for about 0.24% of the Philippines’ total loans and 2.48% of foreign currency loans.“This represents less than 1.25% of the total assets of RCBC, which could be the worst hit, whilst the impact is even smaller for the least affected BDO bank, constituting just 0.11% of total assets, according to our estimate,”Fitch Solutions said in a report.“Even if in the event that the consortium of Philippine banks call for the forced sale of the Hanjin shipyard to strategic investors, the value of the company’s assets is said to outstrip its loan liabilities.”

6 ASIAN BANKING AND FINANCE | March 2019

Vietcombank is aiming to grow its retail loan share from 36% to 50%

Vietnamese banks grow high-yield retail arms vietnam

B

anks in Vietnam are moving away from lending to businesses and state-owned enterprises as they cash in on the lucrative consumer finance market that is projected to be worth $44b in 2020. In February 2018, Southeast Asia Commercial Bank acquired consumer finance firm Posts and Telecommunications Finance Company for $31.3m. This was followed by reports that Orient Commercial Bank is also eyeing the acquisition of at least 70% in an existing finance company. In a similar development, the share of retail loans in Vietcombank’s loan portfolio in H1 2018 hit a four-year high as the bank aggressively aims to grow its retail mix from 36% in June 2018 to 50% by 2020. Middle class consumption Consumer loans in Vietnam grew by a compound annual growth rate (CAGR) of 52.3% from 2013-2017 as banks took advantage of the country’s growing middle class population and improving sentiment in the domestic

The consumer finance market is projected to be worth $44b by 2020

Enhanced profitability The expansion of the retail banking business in Vietnam is a welcome development for the country’s lenders which have historically lagged behind their more developed peers in Asia in terms of return of equity (ROE) and return on assets (ROA). “Better Net Interest Margins from Consumer Loans, Fees and Commission income incentivise many banks to shift focus from corporate banking to retail clients,” the analysts at StoxPlus explained, adding that banks can also receive a boost in fees and commission income as well as a one-off income from partnerships with life insurers. Moreover, operation efficiency has also improved owing to the cost effectiveness of retail model and the pay-off of investment in technology. Fitch Ratings also lauds the retail model as it has helped in reducing loan-concentration risk and improve banking yields. “Retail has been a key growth driver for banks and expected to remain so, increasing profitability.”

Vietnamese banks’ retail-powered profit rally

Source: Fitch Ratings


FIRST Credit growth will be negatively impacted given that mortgages account for approximately 60% of the total loan portfolio of the banking sector

Westpac and CBA are the most vulnerable given their large mortgage holdings

Banks hit by housing downturn australia

I

t has been a dismal year for Australia’s biggest banks as loan growth is expected to continue trending downwards from 4% in 2018 to 3.5% by end-2019 as the once-heated housing market slows. Of the country’s biggest banks, Commonwealth Bank of Australia (CBA) and Westpac stand to be the most affected by the downturn due to their larger exposure to Australian mortgages compared to National Australia Bank (NAB) and Australia and New Zealand Banking Group

(ANZ). Together, the Big 4 control roughly 80% of Australia’s home loan deposit market. After a steep uptrend in property prices that has bestowed several Australian cities with the recognition as some of the world’s most expensive housing markets, residential property prices have recorded a cumulative 1.9% drop in value since September 2017 thanks to falling prices in Sydney and Melbourne. “We expect credit growth to be negatively impacted given that mortgages account for

approximately 60% of the total loan portfolio of the banking sector,” said Fitch Solutions. “Banks will also be negatively impacted by the low interest rate environment and heightened regulatory oversight as the authorities seek to improve the conduct of the sector.” Australia’s Big 4, however, remain in strong position to weather a severe housing downturn without experiencing significant losses in their balance sheets under stress test conditions of home price declines from 20-60% and default rates of 1020%, according to Fitch Ratings. “The tests showed that the banks’ ratings would be resilient to the moderate scenarios, reflecting adequate capital buffers and strong profitability,” the credit agency said. “House-price growth should moderate further, as banks continue to tighten underwriting standards for mortgages; interest-only loans convert to amortising repayments; and additional housing supply comes on to the market.”

Banks in Australia and Hong Kong have significant property exposure compared to their APAC peers

Source: Fitch Ratings

THE CHARTIST: rural banks bear the brunt of china’s unrelenting deleveraging Rural commercial banks (RCBs) and joint stock commercial banks (JSBs) are feeling the greater impact of China’s deleveraging more than megabanks and city commercial banks, especially on the deposit and loan fronts. As the non-performing loan ratios for the big state-owned banks fell from 1.7% to 1.5% in Q1, RCBs and JSB’s have seen theirs rise to 2.5% and 0.1% respectively. In fact, Guiyang Rural Commercial Bank nearly had all of its capital wiped out after its bad loans ballooned from $126.93m (CNY841m) to $1.18b (CNY7.8b) in June, highlighting the growing risk. “Small and medium banks are the weakest link in the deleveraging process, because of a lack of deposits and their dependence on market funding,” said Grace Wu, head of China bank ratings at Fitch Ratings Ltd. in Hong Kong.

The bad loan ratios of commercial banks are trending upwards

Source: S&P Global Ratings

Funding buffers are under constraint for smaller players

Source: S&P Global Ratings

ASIAN BANKING AND FINANCE | March 2019 7


FIRST why korean banks open on sundays south korea

Are banks bracing for another round of O&G woes?

How much is Coastal Oil Singapore’s fleet worth?

singapore

Shinhan Bank

When Shinhan Bank opened a Sunday Foreign Currency Center in Uijeongbu, Gyeonggi Province where foreign workers are known to reside, it represents the latest attempt by the country’s banks to cater to the growing transaction requirements of foreigners who have found a home in South Korea. Designed with their particular banking needs in mind, the center has capabilities to conduct consultations in Thai, Vietnamese, Cambodian and Russian. This development is the latest in a series of banking initiatives to capitalise on the proliferation of foreign workers which hit 1.67 million in December 2018 from 747,000 in 2005, according to data from The Korea Times. With the country’s stable economy, attractive climate and plentiful business opportunities, industry estimates expect foreign workers to easily account for 5.8% of the population by 2021. The country’s largest bank, KB Kookmin Bank, also has seven similar centers across the country - five in Gyeonggi Province, and one each in Seoul and Gimhae. The bank also launched KB Account Free, a cash wire service available for those without a bank account. The receipient, such as the dependent families, can receive money by confirming a code exclusively sent to the Korea-based sender. Thanks to this innovative service, the bank’s foreign currency remittance transactions hit a value of $635m (KRW723b) in September 2018. “The number of foreigners is expected to increase up to 5 million over the next decade, a reason why we deem them our new, significant customers,” according to a KB official. “Once we establish ourselves as a customer-friendly, reliable provider of banking services, a large number of foreigners will likely maintain a relationship with us and possible recommend us to their acquaintances, a great way for us to expand our presence both here and overseas.”

8 ASIAN BANKING AND FINANCE | March 2019

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oughly half of troubled crude oil supplier Coastal Oil Singapore US$354m debt is owed to Singapore’s three largest banks, in a development that brings to mind the terrible oil and gas malaise of 2016. Of its peers, OCBC has the largest exposure at US$122.7m whilst DBS and UOB are both owed US$29.9m and US$19.5m respectively. On a net basis, DBS has the smallest exposure after it seized two of Coastal Oil’s vessels, Atlanta and Coastal Neptune in January 2019 on the grounds of US$5.4m and US$3.6m of mortgage claims whilst O&G loans account for c.5% of UOB’s loan book with most of the exposure in the downstream segment. The total market value of Coastal Oil Singapore’s assets is roughly estimated at US$40-45m, according to Clarkson Research. However, Andrea Choong, analyst at CIMB Research, estimates that the tese assets would not be sufficient to cover its debts and is likely to result in a slight earnings reduction for its three Singapore creditors. In the worst case scenario, credit costs could rise by 1-6bp with DBS’s credit cost set to increase by 1bp (to

Source: CIMB Research, Clarkson Research Services

24bp in FY19), OCBC by 6bp (to 19bp) and UOB by 1bp (to 19bp).“The readthrough from credit costs would dent earnings by 0.3% for DBS, 0.6% for UOB, and 3.2% for OCBC,” Choong said in a report.

Roughly half of the troubled crude oil supplier’s US$354m debt is owed to Singapore’s three largest banks

O&G malaise of 2016 Despite the earnings reduction, Coastal Oil’s troubles are unlikely to replicate the O&G downturn of 2016 where banks embarked on a massive round of portfolio clean-up in the second half of 2017 to account for larger bad debt. “Potential rise in non-performing asset (NPA) ratios is minimal: DBS’s ratio would rise to 1.57% (from 1.56%), OCBC’s to 1.44% (from 1.38%) and UOB’s to 1.65% (from 1.64%). There ratios have stayed broadly stable over the past year since gradually creeping up from 1.0% for DBS and OCBC and 1.4% for UOB in 1Q16,” Choong explained. “We do not think that Coastal Oil’s liquidation is indicative of more material deterioration in the sector,” she added.

Japanese banks tie up for QR code payment service JAPAN

Japanese account holders may soon be able to pay via QR codes as the country’s top banks have joined forces to launch a unified smartphone payment service that is tentatively slated for rollout by April 2020. Payment amounts will be debited from the buyer’s bank account. A trial will start in October 2019 amongst a wide net of retailers with initial target audiences including small retail brands and mom-and-pop Mizuho has agreed to unify QR code specifications operators. Banks also hope to popularise the service for online shopping and utility bill payments in the coming quarters. The collaboration comes at a challenging time for the country’s banks who have been grappling with a streak of negative earnings from their loans as the country rapidly ages. Japan’s top three megabanks - Mizuho, MUFG Bank and Sumitomo Mitsui Financial Group earlier agreed to unify QR code specifications in June in support of the The QR code payment service will go live on 2020 country’s cashless push.


Finance company of the year - india

Empowerment through financial affordability and convenience for India’s poor households Muthoot Microfin provides micro-finance facilities in a push to improve the quality of life in India.

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aving entered the 131st year of business, Muthoot Pappachan Group’s endeavors & practices are still deeply rooted in the promise of empowering human ambition through innovative, technologydriven solutions to make a difference in the lives of every common man in India. Through its customer centric approach and focus on the ever-changing needs and aspirations of customers, the group has successfully diversified and expanded its financial services from traditional chits and goldbased lending into a more comprehensive financial marketplace with offerings such as microfinance, vehicle loans, unsecured business loans, affordable housing finance and other third-party products. Based in Kerala, India, the Muthoot Pappachan Group’s microfinance arm “Muthoot Microfin” prides itself on making formal credit available to the informal sector of the Indian economy. Mr. Thomas Muthoot, managing director of the company firmly believes that financial inclusion of the economically weaker section of society is important for the socio-economic

Thomas Muthoot, Managing Director

growth of a country with one of the largest BPL populations. He envisioned to start the microfinance business for women empowerment after taking inspiration from the impact of Grameen Bank in Bangladesh by Nobel Laureate Mr. Muhammad Yunus and from C.K. Prahalad’s renowned book ‘The Fortune at the Bottom of the Pyramid’. “Our goal is to reach out to the mass population in India who are underserved by the mainstream financial institutions like banks. Muthoot Microfin products are fundamentally designed to stabilize and enrich poor households by empowering women. Many women in Indian households are not involved in any economic activities; we aim to uplift them to the mainstream society through supporting their income generating activities. We believe economically activating women will bring about an enormous change in the present situation among women in India,” Mr Muthoot said. Business with a service Microfinance institution evolved from the operational experience of the Muthoot Pappachan Group’s flagship company, Muthoot Fincorp Limited. Muthoot Microfin offers financial services to the Bottom of Pyramid communities without a collateral. Apart from group loans, through microcredit facilities, the institution finances various third-party products enabling borrowers to improve their quality of life. Through this, the institution has financed large quantities of solar torches, mobile phones, water purifiers and building toilets in the villages of India. However, sustainability is crucial to carry on with any business vision. While the institution’s objectives and goals are socially oriented, the management makes sure the business serves clients and stakeholders alike. Muthoot Microfin has above 1.3 million active clients with a portfolio outstanding of $ 486.88 million as of September 2018. Business with service is a principle strictly followed by the group companies,

where Mr. Thomas Muthoot and management have constantly demonstrated that the group’s activities don’t stop with mere financial lending; the wellness of clients is equally considered important. Muthoot Microfin therefore conducts financial literacy classes, skills development training, market linkage establishment and medical wellness camps to residents who do not have easy access to these facilities. The vast shortage of housing in the low-ticket informal sector of the Indian economy convinced the group to set up the Housing Finance business of Muthoot Pappachan Group. The company has built up a field-based assessment model to assess income on the basis of cash flows and in the absence of formal income documentation. In 2014, Thomas Muthoot received SEN Inclusive Business and Community Award by YPO-WPO, recognizing the women empowerment drive undertaken by Muthoot Microfin. Apart from the prestigious ‘Finance Company of the Year – India’ award at the ABF Retail Banking Awards 2018, Muthoot Microfin also received Golden Peacock Award 2018 for Business Excellence, Best NBFC at CIMSME - MSME Banking & NBFC Excellence Awards, ‘Client Protection’ certification by ‘Smart Campaign’, ‘ Most Trusted Microfinance Brand’ by IBBA, Champions of Rural Markets Award from Economic Times and HR Strategy Award by the Asia Pacific HRM Congress and the company is also a certified Great Place to Work.

CONTACT Company name: Muthoot Microfin Limited. Address: Administrative Office: Muthoot Microfin Limited, 5th Floor, Muthoot Towers, M.G. Road, Cochin-682035, Kerala, India. Phone number: 0091 484 427 7500 Email: mpower@muthoot.com Website: http://www.muthootmicrofin.com/

“Muthoot Microfin has over 1.3 million active clients with a portfolio outstanding of $486.88m by September 2018” ASIAN BANKING AND FINANCE | March 2019 9


FIRST

Japanese regional banks hold out in bid for survival amidst profit crunch japan

T

he share of Japanese regional banks losing money on their core businesses is set to rise to about 60% by 2025, according to projections from the Financial Services Authority (FSA). As it is however, banks look set to meet the estimates earlier than expected as 52 out of 106 the country’s regional banks have been bleeding from losses on their lending businesses in the past two years, data from the FSA show, in a development highlighting the struggle of banks operating outside Japan’s major cities. The crippling operating conditions caused by the ultra-low interest rate environment may have pushed banks to unscrupulous practices to turn a profit as seen in the resignation of the Higashi-Nippon Bank chairman in August 2018 over a lending scandal. Suruga Bank also published a report that revealed how employees resorted to fraudulent activity to meet unrealistic targets.“The tough domestic environment has affected the whole Japanese banking sector, and other banks may have allowed governance standards to slip in response to these challenges,” according to Fitch Ratings. Following reports of improper conduct, the FSA launched onsite inspections in August 2018 to monitor the internal auditing

activities of regional banks, with plans to progressively widen the scope of oversight. Regional banks have come under the most pressure in the sustained squeeze on the banking sector as they generate around 85% of gross profit from net interest revenue. They also do not have the luxury of turning to overseas markets like their larger counterparts that have been steadily growing their overseas footholds in an effort to counter challenging conditions back home. Regional banks also have limited expertise in developing complex products like savings and wealth management, insurance, retirement planning, and re-mortgaging that could respond to the evolving needs of Japan’s rapidly ageing population.“Regional banks face the challenge of developing infrastructure to efficiently service lessdensely populated markets with older customers who can be uncomfortable with technology,” added Fitch. Fintech ventures, M&As In May 2018, seven Japanese regional banks namely Senshu Ikeda Bank, Gunma Bank, San-in Godo Bank, Shikoku Bank, Chiba Kogyo Bank, Tsukuba Bank and Fukui Bank have joined forces to create a financial technology research company that aims to

Fee income has been in a slump

Source: Fitch Ratings

use AI to analyse deposit account activity and study the use of technologies to reduce office work and bring costs down. The government is also studying the feasibility of easing rules on regional bank consolidation following orders from Prime Minister Shinzo Abe to boost the efficiency and competitiveness of the struggling sector whilst lending support to geographical diversification and address risk concentrations. One area that advisers could possibly look at may be the drawn-out process to approve bank mergers after it took two years and two months to clear the merger between Shinwa Bank and Eighteenth Bank. Although regional banks have begun consolidation efforts as early as 1990s with smaller Tier 1 regional banks merging with city banks, consolidation has been slow, Fitch Ratings analyst Kaori Nishizawa noted. Moreover, around 50% of Japanese companies rely heavily on regional banks as their main source of borrowing, government documents show, highlighting the spillover risk should regional banks fail.

myanmar

Myanmar warms up to foreign banks in sector overhaul Foreign banks in Myanmar are now allowed to lend to local businesses in the latest move by the central bank in November to speed up the rehabilitation of the country’s banking sector. In a letter signed by deputy governor Soe Thein, the Central Bank of Myanmar said that the aim was to give local businesses more access to financing. “Employed properly, this new capital will allow the expansion of existing enterprises, fund the establishment of new businesses, and along the way stimulate the creation of new products, new markets, new employment opportunities – and improved economic growth broadly,” Sean Turnell, economic advisor to Aung San Suu Kyi said. Myanmar’s banking sector, which has suffered decades of mismanagement under the former ruling military junta, only recently opened its door to foreign banks as part of sector overhaul that began in 2011. As part of this agenda, the country has allowed 13 foreign banks to add import financing to their trade finance service suite in August 2018 months after enabling seven overseas lenders 10 ASIAN BANKING AND FINANCE | March 2019

to provide export financing solutions. However, the current administration still has miles to go to fully liberalise the financial services sector and keep up with its Southeast Asian neighbours given the dominance of the country’s four state-owned banks that account for over 60% of total banking assets. Although Myanmar has welcomed privately owned lenders as early as 1990s, the 1997 Asian financial crisis as well as the 2003 domestic banking crisis has severely held back the development of the sector. International banks could only operate in Myanmar via joint venture agreements with local banks or assist foreign-invested companies, data from ASEAN Briefing show. Such banks are also restricted to just one branch per banks and are mandated to invest a minimum paid-up capital of $75m. Foreign banks operating branches in Myanmar include ANZ, ICBC, OCBC, UOB, Mizuho, MUFG, Sumitomo Mitsui Banking Corporation, Shinhan Bank, Maybank, State Bank of India, E.Sun Commercial Bank, Bangkok Bank and VietinBank.

Myanmar’s banking sector significantly lags behind its regional peers

Source: Milken Institute


Domestic Technology & Operations Bank of the Year - malaysia

RHB drives digital innovation with iSMART and SME Financing Online platforms The bank is committed to enhancing the customer experience through technology-powered tools.

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elivering superior customer experiences has always been RHB Bank’s priority for its SME clients. The bank strives to help make SME businesses easier and to be able to do that, strong internal capabilities within the organization is essential where its people must have the aptitude to understand what customers want before reaching out to them with the right offerings. Hence, in 2017, RHB launched its Digital Transformation Programme (DTP) in line with the Bank’s FIT22 vision. RHB had embarked on an end-to-end SME customer journey to serve its customers better and achieve better results by applying a crossfunctional Agile way of work, empowering its people to have faster speed-tomarket and increased productivity while maintaining customer centricity.

Digital drivers In line with DTP, RHB launched its iSMART and SME Financing Online platforms over the past year, offering its customers the experience of two important breakthroughs in Malaysia’s banking industry. Both products have since amassed a large following, thanks to the bank’s dedication to digital transformation and its commitment to technological innovation. RHB considers the iSMART platform and SME Financing Online platform as two

Jeffrey Ng, Group Business and Transaction Banking Head

successful customer journeys, offering simple, fast, and seamless processes to customers on-the-go. With these platforms in place, RHB can easily leverage technology to provide its customers with utmost care, updated information, and the perfect product for their present need. iSMART, launched late in 2017, was designed to provide best-in-class advisory services to SMEs, with digital capabilities that allow RHB’s Relationship Managers (RMs) online access to all RHB Bank’s products enabling better service to its customers. iSmart highlights the importance of flexible salespersons who can work with customers anytime, anywhere as the platform is a digital sales tool which equips salespersons with X360 notebooks and a VPN access to help them work remotely and ease their processing and documentation process. The platform can assist SMEs in determining the appropriate financial solutions through structured discovery module. iSmart also provides peer benchmarking for SMEs in similar industries as well as financial health checks. Customers not only have access to structured solutions to their needs, but also access to simulators to help them understand the products better. Loan assistance Within months after the launch of iSMART, RHB took on another challenge and rolled out the SME Financing Online platform in June 2018, offering customers the ease to perform their financing application online after the pre-eligibility screener. The solution is a self-service digital onboarding for SME customers for short-term unsecured lending that is simple to apply. The platform provides financing of up to RM300,000 for tenures between six and 36 months with no collateral need. Through RHB’s SME Financing Online platform, customers can benefit from approval in principle (AIP), quick TAT with as fast as 5 days cash-in-hand, only two documents required, and real time dashboard status of their application.

“SMEs can receive financing funds in as early as five days”

“With this, customers are able to apply for financing online and submit supporting documents digitally, all within 10 minutes. It’s simple – only two documents need to be submitted – a digital copy of the applicant’s directors Malaysian Identity Card (MyKAD) and past 6 months bank statements! Applying for SME financing is fast and easy – two days is all it takes for customers’ application to be approved and they will receive the financing (funds) in five days,” RHB said. To develop the technology for iSMART and SME Financing Online, RHB started from scratch and used a combination of technology platforms for the development of the applications. Both products are highly-secure, using features such as two Factor Authentication, secured VPN client, Anti Virus and DLP which are installed on all of the frontliner’s notebooks (devices) to ensure data and security are not compromised. DNS and DDOS protection are also in place. As for the application itself, protection of data transmission on key integration points, secured SSL, secured communication (FTP), encryption algorithms are in place as part of the security features of the platform RHB considers the iSMART and SME Financing Online platforms as complements to help the bank deliver end-to-end customer experience through topnotch digital capabilities. The launch of the SME Financial Online portal in June marked a significant milestone for RHB, as it allowed the bank to offer the service exclusively to businesses from the wholesale, retail, manufacturing and business services industry. It is one of the bank’s strongest value propositions, considered to be instrumental in driving the SME business and increasing revenue.

CONTACT Company name: RHB Bank Berhad Address: RHB Centre, Jalan Tun Razak, 50400 Kuala Lumpur Phone number: 03-92068118 (Overseas and West Malaysia) & East Malaysia at 082-276118 Fax: N/A Email: N/A Website: http://www.rhbgroup.com/

ASIAN BANKING AND FINANCE | March 2019 11


Event coverage: DIGITAL & OPEN BANKING CONFERENCE

The panel answers live questions from the audience

Asian banks race to keep China’s tech titans at bay as fintechs up their game Incumbents are launching VC arms and innovation labs to avoid being outpaced by innovative fintechs.

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s the global growth momentum shifts towards Asia, financial institutions across the region are forging closer ties with the very firms working to challenge their dominance in an attempt to tip the scales in their favour. The number of new financial services players accounted for 17% of the global banking industry in 2017, consulting firm Accenture said in a report. Although these tech upstarts only accounted for 7% of the banking industry in China in 2017, the disruption they pose is evidently more felt in US, Canada and UK where they accounted for 19%, 47% and 63% of their country’s respective banking structures. On the regional front, the industry shake-up in Asia is only set to intensify as more agile and scalable players enter the fray following the steady stream of capital injections

12 ASIAN BANKING AND FINANCE | March 2019

The number of new players accounted for 17% of the global banking industry in 2017

received by these challengers, said Sam Tanskul, managing director at Krungsri Finnovate at Asian Banking & Finance Digital and Open Banking Conference at Hotel ICON, Hong Kong. According to CB Insights, Asia already holds the distinction as the world’s top fintech market after snapping up 47% of global VC volume in 2016. Empowered by regulators and backed by prominent VCs, angel investors and family offices, challenger banks wasted no time to unbundle and repackage the wide array of services already offered by traditional banking players such as savings account, instant transfer, insurance, loans and overdraft in order to wrestle market share. Indeed, the funding raised by UKbased challenger banks Atom Bank and Revolut skyrocketed respectively from $138m to $342m and $15m to $321m in 2017 onwards compared

to the years before, Crunchbase data show., highlighting the risk to banking bottomlines. Heightened collaboration “Consumers sfhited their preference to digital offerings and we faced competition from aggressive attackers - leading to margin erosion,” admitted Ajay Mathur, Managing Director and Head of Consumer Banking Group & Wealth Management at DBS Bank Hong Kong. Scully Cui, principal at Bain & Company reckons that the proliferation of challenger banks presents three likely scenarios with one extreme maintaining the status quo and another anticipating a ‘big tech takeover.’ However, a middle scenario sees banks co-existing with fintechs with the former providing core banking services such as lending and transaction accounts


Event coverage: DIGITAL & OPEN BANKING CONFERENCE and fintechs choosing to thrive in their own niche like P2P payments. So far, the industry is appears to be heading towards the second scenario as non-bank digital players dominate the game. “Digital players already have seamless experience, deep brand equity and trust plus control over critical data while traditional players are relegated to supporting roles,” added Cui. To prevent any further disruption from their bottomlines, banking players have been rolling out out dedicated spaces for collaboration and innovation and sponsoring accelerator programmes as players increasingly exhibit ‘co-optition’ (a portmanteau between cooperation and competition) to survive, said Ken Lo, founding member of online insurance company Zhong An International. “Collaboration is the new innovation,” echoed Smita Gupta, senior director, regional marketing for APAC at financial services software provider Finastra. “Collaboration accelerates choice and innovation for consumers.” This development is particularly evident in the tie-ups of mega state banks and fintechs in China such as Industrial and Commercial Bank of China and Jingdong, China Construction Bank and Ant Financial, Agricultural Bank of China and Baidu and Bank of China with Tencent, said Raymond Chan, Managing Director at Chinese fintech company 9F International Business who is also applying for a Hong Kong virtual banking license. Krungsri Finnovate is another example as its parent company,

Smita Gupta of Finastra

Krungsri, is recognised as the first bank to launch a fintech accelerator in Thailand in order to tap on the wide pool of startup expertise. In Singapore, the indudstry collaboration manifests itself in the form of controlled environments for experimentation aptly called innovation labs. Singapore’s big three banks, AXA, Metlife, Mastercard, PayPal and Visa have chosen to set up such spaces in the Lion City as they set out to create new revenue streams and boost existing ones through initiatives aimed at enhancing productivity and speed. In November 2018, three global banks - Bank of China, Deutsche Bank and Westpac jumped on the bandwagon and simultaenously unveiled their innovation labs in the city state. DBS Asia X Lab in Fusionopolis is one example although the bank has taken this one step further with its hackathon programme called Hack2Hire. On it second year, the bank launched the campaign with the goal of hiring up to 100 IT recruits. Mathur of DBS suggests that the bank should aspire to be so deeply integrated within the day-to-day life of the consumer - from utility payments, lifestyle purchases and personal finance aspirations like housing, car and retirement - to the extent that it appears invisible but indispensable. “The new value is not being a bank - it is to understand the role of products and services in the life of a consumer,” he stressed. “Our approach begins and end with the customer, placing their needs at the core of what we develop.”

Krungsri Finnovate’s Sam Tanskul on the fintech boom

Krungsri Finnovate is the corporate venture capital arm of Krungsri Group, the fifth largest bank in Thailand, under Japan’s Mitsubishi Financial Group (MUFG). In an exclusive interview with Asian Banking & Finance, Sam Tanskul, managing director at Krungsri Finnovate, highlights how closer collaboration between banks and fintechs is adding significant value and transforming the delivery of financial services in Asia. How is Asia making headway in the global fintech landscape? We have the largest population, dominated by China and India. Moreover, Southeast Asia has become an emerging market where most startups from across the world have seen an opportunity [to grow and expand their business], especially in Singapore and Hong Kong. The Asian fintech is the most invested startup in the world right now. How is Krungsri Finnovate paving the way for enhanced cooperation between banks and fintechs? Being the very first corporate venture capital in Thailand and operating for almost 2 years already, there are three core pillars for Krungsri Finnovate. The first one is what we call accelerator or what we call Krungsri RISE. We have done three batches already- we worked with over 30 startups in the batch. The second is strategic partnership between the startups and business units. We have 30 startups working with Krungsri right now. If they are working well and would like to raise funds, then they will be considered for investment. We did four investments already - one is for robo-wealth startup Finnomena; the second one is in online payment gateway Omise, and the third one is in real estate marketplace Baania. In August 2018, Krungsri Finnovate also did an indirect investment in Japanese fintech and VC firm, SBI AI & Blockchan Fund as part of the execution of its digital banking and innovation strategy. Which fintech vertical are you looking to invest in? Within all the banks right now, we are looking at AI or machine learning startups. So anyone developing anything connected to AI or machine learning connected with the banking products, I think we will welcome them. Second one is blockchain technology. We believe in blockchain technology, so anyone keen in blockchain and could help in growing the bank together is a partner that we are looking forward to work with. The third one is also critical. With all these powerful technologies coming online, we cannot comporomise on the security front. So any cybersecurity technology we are looking forward to be partners with. ASIAN BANKING AND FINANCE | March 2019 13


Event coverage: DIGITAL & OPEN BANKING CONFERENCE

Panelists explore the multiple use applications of emerging technologies to banking

Can open banking deliver on its promise in Asia amidst scattered customer data? Banks do not have the monopoly on data as telcos, hospitals, and agencies are also information arsenals.

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o surface new opportunities and ways of doing business, banks have been turning to open Applicaton Programme Interfaces (APIs) in a bid to court growth, according to Chun Man Hui, Regional Principal Solutions Architect at Software AG Asia. In this regard, it is necessary to differentiate between the three types of APIs from private ones used for internal information exchange; partner APIs designed to connect with select business partners for value-added services and public APIs which has the highest revenue and innovation potential. “API is both the mandate of the system developer and a corporate policy,” said Eiichiro Yanagawa, senior analyst at Celent’s Asian Financial Services Group. Through the process of sharing data with third-party players, banks can unlock data monetisation

14 ASIAN BANKING AND FINANCE | March 2019

A successful Open Banking strategy is the key to extending a bank’s products and services beyond the traditional banking realm

opportunities and reduce costs as they only need to forge partnerships to be able to provide a product or service offering from the data that’s otherwise gathering dust. Open banking also goes hand in hand with empowering customers through enhanced transparency, lifestyle integration and more personalised and real time interactions and effectively engage with them on their own terms, explained Finastra’s Gupta. “A successful Open Banking strategy is the key to extending a bank’s products and services beyond the traditional banking realm,” she said. Banking players keen on getting the early hand on their open banking journeys need to focus on securing ‘must win battlegrounds’ such as retail (HNW, mass affluent, mass) and corporate (MNCs and SMEs) and consequently launching new business models

like aggregators, digital bank, infrastructure provider and treasury management to win over these critical areas, added Bain’s Cui. A comprehensive open API strategy also requires an acrossthe-board effort not just from the bank’s dedicated IT team but also strategy, operations and marketing & communications teams that will define and carry out an API vision by redesigning products and services, design developer and TPP strategy and eventually buildout technology enablers, explained Yanagawa. “A number of existing business processes are going to change, some potentially dramatically such as mortgage origination,” he added. However, KC Tsui, Head of Quality Management & Head of AI at HSBC notes that the open banking agenda is marred by a number of formidable challenges


Event coverage: DIGITAL & OPEN BANKING CONFERENCE Innovating only technology is not effective as it important that the people using it develop and evolve

Mathias Helleu of 8 Securities

limiting its promise. The scattered nature of customer data which are located across a wide array of institutions, that is not limited to banks like hospitals, travel agencies, airlines, telcos and even Netflix, pose a challenge to opening up data and the unreachable connections they generate in the process. Customers are therefore left to wonder whether they are in possession of a complete set of their personal data and control over what and how much can be seen. Faced with this daunting problem, Tsui cites an initiative by

World Wide Web inventor Tim Berners-Lee called Solid (Social Linked Data) which is working to give users back full control over their data. Through the creation of a personal data store (POD) that is stored in the user’s home, workplace or with an online Solid POD provider, users are free to move their data in any way they want. Similarly, Jasmine Ng, Director of Investments and Special Projects at NEM Malaysia made the case for blockchain technology to transform the delivery of financial services given its immutability,

decentralisation and consensus mechanism which could be applied for a wide range of financial services and compliance. Indeed, on May 2018, HSBC claimed to have made the world’s first trade finance transaction using blockchain whilst Ant Financial has also tapped on the tech for a money transfer service from Hong Kong to the Philippines. Beyond the technological upgrades, banks should also rethink their human resource strategies given that legacy mindsets pose just a big a problem as legacy assets, said Yanagawa. “In other words, innovating only technology is not effective - it is important that people using it develop and evolve,” he stressed. “Because new technology is used by new people, older technology does not change because old people keep it.” Mathias Helleu, chairman and co-founder of wealth management and trading platform 8 Securities echoes the sentiment as he outlines the urgency of digital banking tools given that tech-savvy millennials are tipped to hold $6t in disposable income by 2020 - more than any previous generation. “The customers of tomorrow will not use the tools of today,” he said.

smart banking

Next two years is make or break for banks in Hong Kong as upstarts enter fray

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rom 2019 to 2020, the competitive landscape in Hong Kong’s financial services sector is set to transform rapidly as the de-facto central bank prepares to award the first batch of virtual banking licenses within 2019. Raymond Chan, managing director of Chinese fintech firm 9F International Business, outlines the the firm’s competitive advantage as 9F contends with a motley array of fintech, telecomm operators, retail banks, stored value facilities (SVF) license holders and Chinese tech giants in Hong Kong’s heating virtual banking race. 9F has tied up with homegrown fintech firm VST ECS and an undisclosed international company that has expertise in operating a

virtual bank overseas in pursuit of the virtual bank license, according to local media reports. With the company’s 12 years of accumulated industry experience and 63 million userbase, Chan suggests that 9F is in strong position to nab the virtual banking license given its experience in using AI and big data for credit assessment, risk control and customer services. “The new players are equipped with new technologies and they will be providing customers with new customer experience and mission is for financial inclusion as well. So, they will challenge the traditional banks with their technologies, user experience, and all their new initiatives,” Chan said, although he adds that the road ahead is also fraught with challenges for incumbents and new market entrants alike. “All the banks, including the traditional banks and the virtual banks, have to do the same thing differently, to cater for the changing system and for the changing environment and the changing customer.“ The virtual banking push is one of seven efforts spearheaded by the Hong Kong Monetary Authority (HKMA) to future-proof the city’s financial services sector for the digital age. Other initiatives that have come online in 2018 include the formulation of a policy framework for open API and the launch of a real-time money transfer system called the Faster Payment System. “There’s a shift along multiple fronts which are pushing Hong Kong into a very positive direction,” Marc Entwistle, Asia-Pacific FinTech Strategy at EY said in previous interview. “It’s down to who will move fastest, who can innovate fastest.” ASIAN BANKING AND FINANCE | March 2019 15


We want clients to value us and think of us first whenever they want to look at their wealth needs across Asia.

Mark Surgenor head of wealth, Asia-Pacific HSBC


INTERVIEW

HSBC targets US$1b in additional wealth revenue by 2020 from Asia’s super-rich

The bank is adding 1,300 roles that will be assigned primarily in Hong Kong, Singapore and China.

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ith Asia tipped to lead high-net worth wealth creation as Western powerhouses lose momentum to the region’s upstarts, HSBC is banking on its accummulated expertise and heritage in an effort to capture the wealth of opportunities arising from the region’s explosive wealth boom. Of the 2,158 billionaires around the world in 2017, Asia is home to 814 such individuals with a combined net worth of $2.7t, according to a report from UBS and PwC. In fact, over three new billionaires were minted weekly in Asia in 2017 with China setting the pace as it created two new billionaires on a weekly basis. The rapid pace of wealth creation in the region coupled with Asian billionaires’ significant investments in emerging technologies like AI, machine learning, blockchain and crypto informs the increasingly bullish expectations of UBS and PwC who, at the current growth rate, forecast billionaires based in AsiaPacific to be wealthier than their US counterparts in less than three years. In response to this explosive growth momentum, HSBC has been steadily beefing up its frontline wealth teams supporting its wealth management, retail and private banking segments by adding 1,300 roles primarily in Hong Kong, Singapore and China. In particular, HSBC Singapore’s retail banking and wealth management business will target individuals with US$1m in investable assets, together with its private banking unit which targets individuals with over US$5m, in particular the ultra-high net worth segment with US$100m or more in investible assets. HSBC is looking to grow wealth revenues by at least US$1b by 2020 from retail and Private Bank wealth management, insurance and asset management. In this exclusive interview with Asian Banking & Finance, Mark Surgenor, head of wealth, Asia Pacific, at HSBC discuss in detail the bank’s edge over its peers in the region and how it plans to stay ahead of Asia’s rapidly evolving wealth management game. HSBC is adding a significant number to its retail and private banking teams by 2022 in a bid to capitalise on the explosive boom in Asia’s high-net worth wealth. What role will Asia play in HSBC’s banking agenda? We expect that Asia will become the largest creator of wealth world-wide – the region’s total share of global private financial wealth is forecast to overtake North America by 2021 – and is growing rapidly. So it’s a huge opportunity for us. We see opportunities across retail banking, wealth management and private bank segments. Geographical boundaries are disappearing for the emerging wealthy in Asia – they are travelling more, studying more overseas, investing more internationally, and have businesses in multiple markets. With needs, aspirations and investment philosophies that are highly mobile, our customers have complicated lives that need the

help of a bank that can fully support them. HSBC’s global network and especially our long heritage in Asia gives us the edge to support such clients’ wealth needs across different markets. How is the Asian banking market different from Europe and how is HSBC leveraging on this heritage to capture the Asian market? What are the opportunities and challenges of the Asian pivot? Well, if you think about our geographic spread and our capabilities - we have private banking, we have Jade, we have Premier, we have asset management, we have insurance - and a lot of that is locally embedded into all of the key countries across Asia where the growth is going to come from. The real opportunity for us is to put all of that together and make sure we bring the very best of HSBC to our clients, and make sure we capitalise on that opportunity and give the best possible service that we can. Against a chronic talent shortage in Asia, what strategies is HSBC deploying to lure and retain in-demand relationship managers when Chinese and international private banks are also beefing up their teams? The key for us is making sure that we have the very best proposition for relationship managers – we’re confident we have something to offer other players can’t easily match. In terms of personal development, HSBC gives a lot to groom our people, develop and retain them – be it through courses via HSBC University, or support for employees obtaining country or global accreditations. As well as recruiting externally, HSBC will fill some of the new positions through internal promotions: we pride ourselves on having a robust programme to grow talent. The ability to deliver for our customers is also attractive to future employees – we can connect our customers to our global network, help provide for a broad range of financial solution needs from retirement to legacy planning, and this comes alongside manufacturing supported by our insurance and asset management arms. The key for us is making sure that we have the best proposition for our relationship managers. HSBC gives a lot to groom our people, develop and retain them.

What are HSBC’s goals in the next three to five years? We’ve talked about the opportunity and we’re making a huge investment in people. We’re also going to invest significantly in digitisation to help support and empower our frontline, and enhance customer interactions. It’s really making sure that we do the very best for our customers. For us, ensuring that we’re successful over the next three to five years will be about leveraging the capability we already have, and bringing it together our investments in people, capability and technology, and making sure that we can serve our clients better than anybody else. Our goal is simple – to be as client-centric as possible. We want clients to value us and think of us first whenever they want to look at their wealth needs across Asia. ASIAN BANKING AND FINANCE | March 2019 17


The gpi service is designed to take away those business process frictions in the environment and provide a new service level in terms of speed, transparency, traceability and information.

Michael Moon Managing Director, Payments, Trade & Communications, APAC, SWIFT


INTERVIEW

SWIFT’s Michael Moon on shaking the dust off the global cross-border payment process SWIFT gpi promises speed, traceability and transparency as it helps usher in a new era of payments.

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ichael Moon is the Managing Director, Payments, Trade & Communications, APAC at SWIFT where he is responsible for the development of the company’s payment business and for delivering clearing and settlement solutions in both the high value and retail payments sectors. In an exclusive interview with Asian Banking & Finance at the sidelines of Sibos 2018 at Sydney, Moon makes a case for SWIFT gpi, opportunities and challenges as well as new frontiers to overcome.

is about one year old now. Payments also need to carry rich information, such as invoice numbers, in order to ease reconciliation. This wasn’t really happening in the past but it is permitted by gpi. It’s a major innovation and transformation and probably the biggest thing that happened to cross-border payments in decades. Right now, we have 360 banks that have joined the SWIFT gpi service. We went live with gpi in May 2017 so in a little over one and a half years, we’ve completed one hundred million gpi payments and we’re doing about one million gpi payments per day. That’s gpi - it’s designed to take away those business process frictions in the bank environment and provide a new service level in terms of speed, transparency traceability and information.

How many banks are currently part of the SWIFT network? There are over 11,000 institutions, including 2,000 large corporations, connected to the SWIFT network. In Asia Pacific, we have about 3,000 institutions. If you take Southeast Asia, we have about 700 or 800 banks. The way the network works is that each day we’re transacting somewhere between 30 and 35 million live messages and a further 100 million messages in files over the network. We offer our network for financial messaging at the lowest financial cost. Typically, it costs about 2 or 3 euro cents for the carrying of one message. Importantly, the network technology is very fast. I can pick up a message here in Sydney and the network can carry that message to Beijing to London to New York in two or three seconds.

With the participation of 12 banks, SWIFT was able to successfully trial instant cross-border payments using the newly launched New Payments Platform in Australia. Can you tell us more about this development? When we spoke to the banks, there was one major thing driving the speed of payments - it was the availability of the banks and their opening hours in their recipient market. There’s a 3-hour time difference between Beijing and Sydney. If you’re a bank in China and sending on behalf of a customer at 1:00, it reaches Sydney at 4:00 when banks and their operating processes and systems are effectively closing. So the payment has to wait until the next day. What we did with this test is with the NPP and banks in Australia, they provided an extended operating hour basis, the ability to process incoming payments to Australia through that instant payments platform. The fastest payments was 18 seconds - from China to a bank in Australia through the NPP to another bank. We also tested corridors between Thailand and Australia, Singapore and Australia. All of those payments were under 30 seconds too. We’ve tested the ability to process through the new payments platform; we think we can do the same thing for Singapore’s FAST System, Thailand’s PromptPay and Hong Kong’s Faster Payment System to connect crossborder payments with these domestic systems.

How do you see this network further expanding into the region in the coming months? We’re investing a lot in Asia. We’ve been investing in our people, we’ve been investing in the services that we have in Asia. In China, we have 500 customers. We have about 50 in Thailand, similar number in Malaysia, 200 connections in Singapore and similar numbers in Hong Kong. We also operate a large office in Kuala Lumpur, Malaysia. which is our second largest employing center globally after our office in Belgium. We’ve actually doubled our presence in the region in the last five years. What are the major challenges of banks in cross-border payments and how does SWIFT address these? The reality is that the problem is in the environment within the banks themselves. When you do cross-border payments, banks have to do compliance, AML, reporting, liquidity management, foreign exchange services - activities which I call business process frictions. In the past, payments were very slow, not traceable and not transparent with regards to fees. So in a world where you can track an Amazon parcel from a US warehouse to your front door step through a DHL or a FedEx service, in the past you weren’t able to do that with payments. So we’ve introduced traceability to payments. Each payment in gpi gets a unique tracking identifier and this

We’ve introduced traceablity to payments. Each payment in gpi gets a unique tracking identifier.

What other innovations are in the pipeline for SWIFT? You need to believe in a future that is open, fast, information-rich and always available. The next big things that are coming, we work with all of that. If you look at openness, one area that we’re investing in is API technologies so we can access API to use different technologies provided by third-party or fintechs. We want to scale that globally, particularly focusing on major corridors and delivering these cross border payments on a very fast basis. We have to believe that the future looks like that and start building towards that as well. ASIAN BANKING AND FINANCE | March 2019 19


analysis: CHinese banks

Nonbank digital providers have already saturated small-ticket transactions in the country

Chinese banks are putting up a fight against tech giants S&P notes that mobile transactions by banks rose 794% in 2014-2017.

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hina’s internet finance companies are driving the country’s banks to innovate and upgrade their digital offerings in a process creating new financial services to better fit a consumptionled economic growth model, according to S&P Global Ratings. In response, most banks will adjust to the digital disruption, although their market share in consumer-related finance will become less dominant. Financial technology is large and fast-growing in China. Since the launch of Alipay in 2012 and WeChat Pay in 2014, mobile-phone payments have soared to RMB320.4t (US$46t) from less than Chinese renminbi (RMB) 50t. On the online bank front, WeBank’s asset reached RMB81b by the end of 2017. Although still tiny compared with the Chinese banking system’s assets of RMB252t assets and loan balance RMB120t, this represented

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Businesses and the general public continue to trust banks with large transaction settlement

growth of 7.5x in the first two years of operations. And WeBank’s loan growth tripled last year, to hit RMB47b (US$6.9b). Disrupting the payments model The business model and credit impact is greater for smaller banks as they may lack the resources to make necessary technology upgrades. As a result, they may cede underwriting control on consumer loans to tech giants using big data and behavior models. Increasingly banks have been observed to be collaborating with internet finance companies on consumer loans, but these assets are under-tested through a cycle. Whilst internet finance companies see smaller banks as funding partners, they have less incentive to collaborate. The disruption in China’s payment services serves as a model for other transformations that could follow.

Chinese nonbank digital payment providers, led by Alipay and WeChat Pay are in many ways outcompeting banks on the payment services front. On the other hand, these companies are helping to grow new markets for all lenders. By transaction volume, digital payments conducted via nonbank providers overtook those transacted by banks in 2016. By end-2017, nonbank digital were almost double those of banks but in terms of value, banks still beat the rankings. Technology is clearly changing consumer payment behavior in China. Payments are made easy for both buyers and sellers, with a simple cell-phone scan of a vendor’s “QR” code. Thus they’re accepted everywhere, from online retailers to grocery stories to flea markets. Businesses can maximise customer relationships by offering discounts if the customer adds the vendor as a social media contact. These payment platforms are just another function under the main online retail/social media app, maximising clicks per day and in turn customer loyalty. However, a look at the trend in settlement fees shows that growth


analysis: chinese banks Chinese banks retain their value dominance in e-payments

Banks also have their own data advantage such as traditional transaction records and payroll information

Source: S&P Global Ratings

in online payments has come at some cost to banks, as indicated by declining settlement fees as share of total fee income. S&P believes that the falling growth in payment and settlement fee income will likely stabilise. This is because the nonbank digital payment service providers have already saturated the small ticket transactions, further explosive growth in this area is unlikely, and businesses and the general public continue to trust banks with large transaction settlement. In S&P’s view, banks are adjusting to changing payment behavior. Whilst the amount of nonbank third-party payments grew by 480% from 2014 to 2017, banks’ own mobile payments rose by 798% during the same period. Chasing such growth often involves collaboration with the disrupters. On platforms such as WeChat Pay or Alipay, banks cards are linked to enable consumers to make digital purchases. However, because these nonbank digital payment platforms act as the intermediary, banks receive significantly lower fee rates from these transactions. Consumer loan front “Big data” and hyperconnectedness will continue to expand the banking frontier. Individuals and small businesses with limited credit histories, for example, will increasingly be able to access banking services at their fingertips. If these new transactional

relationships are not managed well, however, digital loans could increase credit risks in China. Lending is a natural extension of payment and transactional services. Alibaba Group Holding Ltd. and Tencent Holdings Ltd., China’s two largest internet companies, both secured internet microcredit licenses soon after they started their payment businesses. Moreover, Alibaba launched the digital MyBank in 2015, the same year Tencent-backed WeBank also started operating. These developments raise some questions: do the lending arms of Chinese tech giants pose a threat to traditional bank loan business? On the banking operations front, yes, although a number of factors limit the disruption. First, accounts at the branchless digital banks have regulatory limitations on transaction volume and cash deposit-taking, which limits their retail deposit base, so their average cost of funding is typically higher. Second, these companies target smaller-ticket loans, e.g., a retail loan could be a few hundred renminbi whereas a bank consumer loan is typically in the thousands. Third, retail and small and midsized enterprise (SME) loans still make up less than one-third of commercial banks’ book, contributing around 24.7% of total bank loans by 2016. At least for now, S&P estimates that only a small portion of this is in direct competition with the clientele of the Chinese tech giants.

On the microcredit operations front, Chinese tech giants have a clear advantage in distribution and approval speed for small ticket loans, access to better behavioral and consumption data. They are quick to respond to changing market dynamics. Internet microcredit is also comparatively less regulated than banks, having to answer only to the local China Banking and Insurance Regulatory Commission (CBIRC) which brings us to the next question: do the lending arms of Chinese tech giants have an information advantage? In some areas, yes. Access to transactional, behavioral, and personal data has aided the rapid growth of digital financial services in China. Tech giants gets data from their platforms: Tencent through social media, Ant Financial and JD Finance from online transactions. Reigning supreme Banks also have their own data advantages, however, such as traditional transaction records, and payroll information. They can swap information among each other, and partner with local tax offices and other government agencies to get useful data. Banks also typically lend when there is a particular loan purpose, whereas the lending arms of Chinese tech giants are typically more liberal about loan purposes so long as the customer passes its credit scorecard; they also mitigate risk by limiting loan size and requiring fast repayment. S&P notes that whilst these fintech tools are efficient, they are untested through a credit cycle. From S&P Global Ratings “As China’s Internet Firms Grow The Financial Services Pie, Banks Angle For A Larger Slice

Battling it out for mobile payment dominance

Source: S&P Global Ratings

ASIAN BANKING AND FINANCE | March 2019 21


ANALYSIS: Payments

APAC fuels the global payments boom McKinsey notes in its annual payments report that revenues from the region’s payment providers hit $900b in 2017 to account for 44% of global figures with China playing a significant role.

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lobal payments revenues swelled to $1.9t in 2017 to represent the best single year of growth in the last five years. In last year’s report, McKinsey forecasted that payments would become a $2t business by 2020. Indeed, 2017’s market performance was so robust— its 11% growth rate fueled by continuing strength in the Asia-Pacific corridor—that global revenues are poised to surpass that $2t threshold in 2018, and to approach $3t within five years. This rapid growth makes payments an expanding and increasingly important component of the broader banking industry. After an extended period in which payments generated roughly 30% of overall banking revenues, this metric has turned sharply upward. Payments’ continued prominence in banking revenues might come as a surprise, given the continued pressure on payments fees—increasing competition and regulatory pressure—and ongoing low-interest-rate environments in many developed economies. On the other hand, the trend makes sense, given healthy underlying fundamentals, including electronic transaction and digital commerce growth, and increasing cross-border activity. Asian dominance The growth of the payments component also points to the imperative for financial institutions to develop and continually refresh sound payments strategies in order

Merchants accepting Alipay and WeChat pay are commonplace

22 ASIAN BANKING AND FINANCE | March 2019

The 20% growth rate for 2017, driven largely by liquidity factors, was Asia-Pacific’s strongest ever

to remain competitive as a market being reshaped by technology, new competition, and customer demands. Not surprisingly, global payments revenue growth is dominated by the Asia-Pacific region, as has been the case for several years. At more than $900b, the region now accounts for nearly half of global payments revenue— compared to less than a quarter just six years earlier—as well as four-fifths of recent growth. “Assuming the current economic state, APAC is going to drive about two-thirds of the revenue going forward just as we start to see all the growth in balances on the commercial side,” Philip Bruno, partner and head of McKinsey’s Global Payments Practice, told Asian Banking & Finance at the sidelines of Swift International Banking Operations Seminar (Sibos) 2018 held in Sydney, Australia. “And from a product breakdown, what we’re seeing is a little bit more drive towards domestic transactions. The liquidity side is going to be much more modest than what we’ve seen in the past.” Remarkably, double-digit growth has continued even as the base of business has grown. The 20% growth rate for 2017, driven largely by liquidity factors, was AsiaPacific’s strongest ever. Although McKinsey’s forecast calls for inevitable moderation, revenues in the region should continue to grow at low double-digit rates over the next five years, still considerably faster than any other region. “In APAC with great electronification going on in China


Analysis: Payments surprising is that the temporary slowdown in credit card usage following the financial crisis imposed a drag on North American revenue growth was only recently lifted. Comparing payments revenues across regions, McKinsey observes that payments revenue per unit of GDP (a measure of the cost of payments for consumers and businesses) in Asia-Pacific and Latin America is 50 to 60% higher than for Europe and North America. In addition, the share of electronic payments transactions in Asia- Pacific and Latin America is 60 to 65% lower than in Europe and North America. In other words, payments are significantly costlier for the economy in Asia-Pacific and Latin America, because the cost of processing cash and check payments is higher, as are the fees paid by consumers and businesses. “You would say that APAC and Latin America look a bit like the laggards in cost of payments,” Bruno said. “But these are the regions that are having the most interesting events going on to actually try to move this area.”

APAC will continue to drive revenue growth

Source: McKinsey Asia Personal Financial Services Survey 2017

and demonetisation in India. I would say APAC is the interesting one to watch that I would put on the consumer electronification that’s primarily at the consumer side but there are certainly some things going on in the commercial side as well,” added Bruno. Western regions flatline Latin America’s payments sector has been the fastestgrowing amongst major regions in the recent past (albeit off the smallest revenue pool); but growth rates flat-lined abruptly in 2017. McKinsey expects the region to return to average annual growtth of 8% over the next five years, second only to Asia-Pacific. Whilst several Latin American countries continued to deliver double-digit growth in 2017, Brazil’s payments sector—the region’s dominant revenue engine— was hampered by regulatory action targeting credit card rates (Latin America is reliant on interest for two-thirds of its card revenues). EMEA revenues were similarly near flat, continuing a trend that has persisted for the past decade. The developing nations of Eastern Europe and Africa have generated high single-digit growth, offsetting nominal declines in Western Europe. Fee revenues have been the primary factor in the growth that has occurred, whilst a persistent environment of low interest rates—reaching negative levels in some cases— acts as a drag on growth. A return to a stable rate environment combined with continued transaction growth will result in revenue growth in the mid-single digits for Western Europe until 2022, whilst Eastern Europe and Africa are likely to continue at their present pace of growth. At the same time, individual firms in the European payments arena, such as Adyen and Wirecard, are finding growth areas that has led to substantial valuations. After a period of tepid results, following the financial crisis, North America’s overall payments revenue growth returned to a healthy 7% in 2017, and is poised to continue at a similar pace over a five-year horizon. Credit cards comprise more than half of North American payments revenues, far more than any other geography, and will continue to grow faster than other products. More

Philip Bruno

Transaction dynamics remain strong Although the strong recent growth in global payments revenue has been broad-based and diverse, an increasing share is related to transactions. This as a positive development for banks and payments providers, as transaction revenues are more predictable and more readily controlled by financial services firms. Transaction-based revenue accounts for 40% of global payments revenue, from 37% in 2012. More specifically, whilst the overall number of transactions continues to increase, the true revenue driver is the electronification of transactions—namely away from cash—which more than offsets the downward pressure on fees. Over the past five years, the share of the world’s cash transactions has fallen from 89 to 77%. At the same time, the share of combined debit and credit card use has nearly doubled, from 5 to 9%. The decline of cash usage globally is expected to be even more pronounced over the next five years, due to an increasing range of payments options, the push toward real-time payments, the growth of digital commerce, and regulatory focus on payments electronification. Regional breakdown Given that the Asia-Pacific region accounts for over 60% of the world’s population, it is not surprising that it is responsible for two-thirds of global transactions. The fact that Asia-Pacific still lags behind other regions in overall electronification at only 21% illustrates the region’s ongoing growth potential. The move away from cash, as witnessed in markets such as China, will serve as the single-largest cause of global electronification. The share of electronification in China has increased more than ten-fold over the last five years, from 4% in 2012 to 34% in 2017. Meanwhile, North America has become the first region to execute more than half of its transactions electronically. At 450 electronic transactions annually per capita, it far and away leads other regions on this dimension. On the other hand, individual European countries are ASIAN BANKING AND FINANCE | March 2019 23


analysis: Payments executing no more than 20% of their transactions in cash, whilst generating 520 noncash transactions per capita per year. Growth despite pressures Cross-border commerce has continued on a healthy growth trajectory. Despite price pressures from increasing competition, cross-border payments of all types remain far more economically attractive for providers than their domestic equivalents. International cross-border payments revenues exceed $200b globally, split roughly evenly between transaction fees and foreign exchange (FX); estimated revenue per transaction remains healthy at nearly $45 per transaction (e.g., 600 vs. 6 basis points for a person-to-person payment; 11 vs. 5 for a business-tobusiness payment). Different avenues exist to capture the benefits of the growth of the cross-border transaction market. On one hand, major opportunities persist for improving the traditional correspondent banking model, whether on customer service, efficiency, or infrastructure performance. On the other hand, since cross-border volume growth has not been evenly distributed by geography or by segment, focusing on high-growth areas compatible with an institution’s business profile will maximise return on investment.

Cross-border consumer-tobusiness (C2B) payments are growing at nearly 20%

High-growth areas Whilst transaction growth in traditional crossborder payments segments such as the cash-to-cash remittance business between individuals (growing at 2%) and corporate cross-border transaction

flows to both consumers and businesses (nearly flat) is struggling to compensate for intensifying price pressure, other areas such as cross-border consumer-to-business (C2B) payments are growing at nearly 20% due to rising global consumption and expenditures on items like tourism and investments by a rapidly expanding global affluent class. Even the slower growth categories contain pockets of opportunity, such as higher-ticket account-based remittances (for affluent consumers and small and medium size enterprises) and cross-border disbursements to micro-enterprises (driven by the growing prominence of online marketplaces). The market for trade and treasury B2B payments is being reshaped by global transaction banks and their partners through initiatives such as SWIFT’s gpi, whilst others, such as Banking Circle, are targeting an increasingly promising opportunity serving payments service providers (PSPs). Options like Earthport and Inpay combine local clearing solutions with cross-border batch processing, providing straightforward and low-cost access to multiple countries without the need to maintain numerous account endpoints for low-value payments. Likewise, C2B, business-to-consumer (B2C), and consumer-to-consumer (C2C) payments represent fertile ground for nonbank cross-border innovation in a wide array of areas such as tuition, real estate transactions, royalty or insurance payments, and wages to on-demand workers. Improving the movement Cross-border payments, which have lagged behind domestic payments in terms of efficiency,

transaction banking

Transaction banks move to defend incumbent advantage from fintech upstarts Global transaction banking (GTB) is a thriving business, with revenues approaching $1t in 2017—nearly 50 percent of total payment revenues and half of wholesale banking revenues. Institutions apply various definitions to these revenue pools, some focusing on “core” products like trade finance and cash management while excluding the largely liquidityderived inflows that are a byproduct of such services. Both categories are growing nicely; nonetheless, incumbent banks face difficult choices as the pace of digital disruption accelerates across the commercial payments value chain. Banks can safeguard their client relationships, expand advisory services, and strengthen margins only if they take the lead in developing new strategies to address digital disruption in GTB. There is significant risk that banks will cede important aspects of the business to emerging digital challengers if they do not take advantage of recent advances in technology, regulatory changes, and new partnership models. Since the financial crisis, global fee-based revenue for core GTB products has grown 9 percent per year. Asia-Pacific is the largest market and is creating the most growth, at 20 percent per year over the past five years. The Americas (5 percent) and EMEA (4 percent) have also performed well. The pace of digital disruption is accelerating across all components of the GTB value chain, placing traditional business models at risk. If they fail to pursue these disruptive technologies, banks could become laggards as digital attackers address the friction points. 24 ASIAN BANKING AND FINANCE | March 2019

Global transaction banking revenues are estimated to account for 43% of wholesale banking revenues

Source: McKinsey


analysis: Payments transparency, and innovation, have recently begun to show progress. Introduced by SWIFT in 2017, gpi allows for faster transactions (nearly half are credited to end beneficiaries in less than 30 minutes, according to SWIFT), increased transparency on payments delivery status, and improved fee clarity compared to traditional correspondent payments. A late 2018 release will add features such as the ability to stop payment at any point in the payments chain as well as live transaction tracking. Whilst gpi stands to help banks address pain points associated with cross-border payments, it still operates within the established correspondent banking frame and requires adjustments of processes and systems, which create hurdles for a number of industry players. The new face of remittances Whilst the traditional cash-to-cash remittance market, serving low-to-middle income migrants, remains an important market, it has been under significant pressure due to adoption of digital solutions by migrants and growing price competition. To date, digital disruption has been concentrated in specific geographies and segments. According to McKinsey’s disruption readiness index, the largest sender markets are amongst those that are likely to transition to digital faster—for example, the US, UK, Canada, and Saudi Arabia. Major receiver markets such as India, Mexico and the Philippines, are poised to stay cash-centric longer. High banking penetration in the large sender markets also implies that the account-to-cash transfer arena is ripe for disruption. In this context, affluent segments are a lucrative growth space. Although affluent transactions may be less frequent, they are relationship and convenience focused, and thus less subject to price elasticity. Digital firms such as Transferwise, OFX, and HiFX are targeting this segment with advantageous FX pricing, digital ease of use, and high-touch customer service— and encroaching on banks, which still own 60 to 70% of the high-end market. Client acquisition cost also poses a major hurdle for digital remittance newcomers lacking a customer base. This makes partnerships with banks increasingly likely, allowing access to a better integrated customer experience whilst shielding fintech bottom lines from high acquisition costs. Success will require different strategies depending on use case, ranging from expanded roles in payments processing to custom APIs integrated with existing technologies to alleviate pain points and create unified global solutions. This is because success will hinge not only on price differentiation, but also on embracing a larger role in reshaping the end-to-end payments experience and creating new platforms with features such as receipt validation, supported with a robust marketing budget or partnership strategy for customer acquisition. From McKinsey & Company’s Annual Global Payments 2018: A dynamic industry continues to break ground

Major receiver markets like India and the Philippines are poised to stay cash-centric longer

Asia PACIFIC view

The shifting e-payments landscape The growing popularity of alternative payments solutions, and digital commerce in general, further contributes to the electronification trend. Global digital commerce volume exceeded $3t in 2017, with Asia-Pacific already comprising over half of this $3t and, due to the fast-growing Chinese market, will increase its share to nearly 70% by 2022. Mobile commerce, including in-app payments and mobile browser payments, is the dominant factor driving strong digital commerce growth, due to rising smartphone adoption, an increasing shift towards online shopping, and improvements in network bandwidth. Mobile commerce accounts for 48% of digital commerce sales globally as of 2017, and is forecasted to triple to $4.6t. Consumers and merchants alike are increasingly embracing app-based commerce and in-app payments, with retailers ramping up investments in mobile apps with innovative use cases to provide omnichannel shopping experiences for customers. Globally, mobile apps accounted for more than 30% of total digital commerce volume in 2017, and are expected to continue strong growth across all regions. Outlook The outlook for in-store commerce varies significantly by country and region: In countries with NFC infrastructure, tap-and-pay will drive growth; in the United States, instore app use will grow as consumer use of order-ahead increases; and in emerging markets, the introduction of new payments solutions will influence how people pay. In the United States, in-person use of digital wallets will increase at a 45% CAGR to reach nearly $400b in annual flows by 2022. Although most of this growth is expected to be on “pass-thru” wallets like Apple Pay, private-label wallets such as Starbucks and Walmart Pay will also continue to increase in popularity. Even with these gains, however, digital wallets will comprise less than 10% of US consumer in-person POS payments in 2022. China is one of the leaders on the contactless transaction front with 40% of in-person spending already on mobile digital wallets with almost all on closed-loop systems like WeChat Pay and Alipay. China’s ratio is projected to continue to increase to nearly 60% by 2022. Within the same region, Japan remains an untapped market as nearly 70% of consumers still prefer to use cash when making in- store purchases, mainly due to security concerns with mobile payments.

Mobile apps snapped up a third of global digital commerce volume in 2017

Source: McKinsey 2018

ASIAN BANKING AND FINANCE | March 2019 25


event coverage: sibos 2018 duplicate financing as documents are shared in real time to make transactions more transparent. Although Kamal notes that there is a challenge in a limited network, NTT Data has been conducting PoCs that connect the Trade Data Sharing Platform to Singapore’s National Trade Platform (NTP) and Thailand’s customs system. “The technology will be improved day by day. As a bank, we should create a global ecosystem that will bring us a bright future of the trade,” he said.

Banks and industry experts tackle the latest developments in the financial services scene at Sibos 2018

Japan’s megabanks digitise trade finance with blockchain The technology will reduce the risk of fraud and duplicate financing.

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apan’s three biggest banks - MUFG Bank, Sumitomo Mitsui Banking Corporation and Mizuho Bank - have joined a consortium of trade heavyweights that will implement a proof of concept (PoC) testing the use application of blockchain technology in import and export trade operations after global consultancy and IT firm NTT Data was able to confirm the effectiveness of the tech in streamlining operations. Trade finance is a heavily paperintensive industry as documents in the trade process come in the form of faxes, emails, PDFs, or Excel files that have to be manually entered into the company system. As such, banks and other trade players find the workload enormous and highly susceptible to human error. The consortium, which is made up of banks, insurance companies, cargo owners, maritime companies, logistics companies, customs, and import and export authorities in Japan, will set up a Trade Data Sharing Platform that connects various trade stakeholders and digitises documents to improve the efficiency and convenience of trade

26 ASIAN BANKING AND FINANCE | March 2019

Preparing and checking documents will be automated t hrough AI technology and the process will be shortened

procedures. Currently, the platform has 55 functions and 83 APIs for the prototype system. Before the consortium was formed, the first PoC was able to drastically reduce operating procedure time for letter of credit transactions, speed up procedures such as amendment of letters of credit, and confirm the high availability of blockchain technology. Meanwhile, the second PoC applied the technology to export marine cargo insurance policies, improving security performance and operational efficiency. Daisuke Kamai, head of eTrade product at MUFG Bank welcomed the launch from service providers like NTT Data as he suggests that they could not have acheived digitised trade on their own. The consortium meets every month to discuss overall progress status, objectives, and opportunities in the trade process. “Preparation of documents and document checking will be automated through AI technology and the process will be shortened,” Kamai explained. Blockchain technology also reduces the risk of fraud and

Asia as a trade finance hub With documentary trade volumes rapidly growing as global trade flows shift to Asia, a number of countries in the region have also recognised the potential of blockchain technology to boost their trade finance capabilities. In November, Hong Kong officially launched eTradeConnect, a blockchain-based trade finance platform which comes on the heels of a similar platform in India called the India Trade Connect which launched in May. The median trade finance transaction volume in Asia Pacific nearly hit 36,000 in 2017 to a total value of $2.15t, roughly double the level processed in North America and about 10 times the median volume in Africa, data from the International Chamber of Commerce show. “Asia-Pacific is still in a pole position: as an anchor for large portions of trade financing globally, which reflects the fact that major global supply chains and trade corridors are anchored or linked to the region,” ICC said. In fact, Asia-based trade corridors are expected to grow between 4% to 9% a year from 2017-2026 to account for more than a third (38%) of global trade flows by 2020 whilst the US share is tipped to drop to 8.7% as global banks continue to beef up Asian footholds to capitalise on the booming market. SIBOS is an annual banking and finance conference organised by the Society for Worldwide Interbank Financial Telecommunication (SWIFT). This year’s event was held in Sydney, Australia from October 22-25, 2018.


corporate client initiative of the year - india

A paperless initiative: ICICI Bank’s quicker way of issuing credit cards to eligible customers

Customers can get a credit card instantly based on pre-checked bureau scores

I

CICI Bank, India’s largest private sector bank by consolidated assets, announced the launch of instant issuance credit cards in August 2017. This first-of-its-kind offering in the Indian banking industry enables the savings account customers of the bank to get a credit card instantly, in a completely digital and paperless manner. This offering enables a few lakhs of pre-qualified customers to instantly get the credit card number and other important details online, using which, he/she can immediately start shopping online, without having to wait for the physical card to arrive. The facility significantly improves customer experience by creating a credit card instantly with an option to choose from a range of co-branded cards as well as cards

CONTACT Company name: ICICI Bank Ltd. Address: ICICI Bank Ltd, Corporate Head Office ICICI Bank Towers, Bandra - Kurla Complex Bandra (East), Mumbai, India Website: https://www.icicibank.com

from the Gemstone collection. Online application process Available round-the-clock and on all days, a customer can get a credit card instantly based on pre-checked bureau scores. The application procedure also incorporates an additional level of authentication in order to make the security of the offering robust. This facility to apply for a credit card in-aflash is available through the bank’s internet banking platform and on iMobile, the bank’s mobile banking application. To apply, customers can log-in through their internet banking account or iMobile Application by following these steps. First, click on the prequalified offers tab. Then, select the desired ICICI Bank Credit Card. Provide a few required details, accept the terms & conditions, enter the OTP sent on the registered mobile number, and, click on the ‘Generate Card’ button. The credit card number gets displayed to the customer, instantly on completion of this procedure. As a security measure, the customer needs to again login to his/ her internet banking account or iMobile Application to view the other details of

the card. With this, he/she can start making online purchases immediately. The card details can also be used to make in-store payments using Samsung Pay, without having to wait for the delivery of the physical card. The physical card is delivered to the customer within 10 working days to enable purchases at shopping outlets.

The card is delivered within 10 working days

ASIAN BANKING AND FINANCE | March 2019 27


ANalysis: open banking

A proactive regulatory stance has put Singapore ahead of Australia, Hong Kong and New Zealand

Singapore leads Asia Pacific in open banking readiness The city boasts top-notch scores in API adoption, fintech/third-party ecosystem, data-based transformation and state of innovation.

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ingapore retained the top spot in Asia’s open banking readiness index on the back of proactive decisions by its regulators to embrace the technology even as regional neighbours are only just catching up to the growing momentum to open up their data, according to Finastra’s Open Banking Readiness Index. With a score of 8.1, Singapore towers over Australia (7.1), Hong Kong (6.6), New Zealand (6.4) and China (6.4) with strong showing that has even outpaced the Asia-Pacific average of 5.8. “Singapore is most advanced in open banking readiness index in the region, primarily because of its Open Application Programming Interfaces (APIs) and data infrastructure maturity,” the report’s authors explained. The index evaluates a country’s readiness based on five factors: adoption of Application Programming Interface (APIs), fintech/third-party ecosystem, state of data-based transformation, data monetisation and state of innovation. As the regional top scorer, Singapore holds an ‘intermediate’ score for data

28 ASIAN BANKING AND FINANCE | March 2019

The city’s very own DBS Bank holds the regional distinction for its thriving fintech ecosystem with a massive platform of over 155 APIs

monetisation and an ‘advanced’ score for the four other categories. Regional outperformers In fact, the city’s very own DBS Bank holds the distinction as a regional leader in the fintech ecosystem subcategories with a massive platform of over 155 APIs across over 20 categories which it developed in late 2017 through its API developer hub, DBS Developers. OCBC also made Singapore proud with the regional recognition in the state of innovation subcategory amidst

steady adoption of AI, machine learning, robo-advisory, cloud and blockchain technologies. On the other hand, Citi leads in the API adoption subcategory with a thriving API ecosystem in Hong Kong that already counts partnerships with AIA Hong Kong and Octopus Cards whilst India’s third largest private sector lender Axis Bank leads in the data monetisation subcategory. It helps that one in three (33%) commercial bank customers in Singapore are already participating in open banking platforms with 35% planning the shift in 2019, according to a survey from consulting firm Accenture which also highlighted the opportunities for open banking to disrupt and create value in the corporate banking segment. “There’s been a lot of focus on retail consumers when discussing Open Banking, but some of the solutions will create a fundamental change in the corporate banking world,” said Divyesh Vithlani, a managing director at Accenture and ASEAN financial services lead. “The opportunities for banks in Singapore are clear and they should leverage the strong trust amongst corporate clients to offer cuttingedge open banking solutions that are relevant and important to SMEs and large businesses alike.” Dynamic regulation Singapore’s open banking readiness also received a significant boost from the proactive regulatory stance by the Monetary Authority of

Asia-Pacific Open Banking Readiness scorecard per dimension

Source: Finastra Open Banking Readiness Index


Analysis: open banking Singapore (MAS) which was the first APAC regulator to unveil open banking guidelines in 2016. A guidance on security standards and governance models can also be found in the “Finance-as-a-service API Playbook” jointly released by the MAS and the Association of Banks in Singapore (ABS). “Singapore continues to set the pace for other regulators in the region,” noted Finastra. Regulation plays a key role in open banking adoption as the presence of clear guidelines gives banks the confidence to open up their data and formulate strategies for third party use. Unlike Europe where banks only have until 2019 to meet the deadline set by regulators to comply with the revised Payment Services Directive (PSD2), lenders in the region enjoy relatively more freedom to implement their open banking strategies. “In general, banks in the Asia-Pacific can decide for themselves if they want to pursue it, how soon, and their preferred approach for partnering with trusted third parties,” Finastra explained. “So far, the Asia Pacific style of Open Banking appears to be a combination of capabilities, with different markets taking different paths. Whichever approaches are taken, capabilities will converge on providing more collaborative, innovative, and responsive banking services.” In fact, David Hardoon, chief data officer at MAS was quoted in a Bloomberg interview in April saying that Singapore is leaning towards a more ‘organic’ approach towards open banking as opposed to forced compliance. “You can come and say ‘thou shall do it’ but then nothing happens effectively,” Hardoon told Bloomberg. “The point being, we are heading there in an organic fashion. I believe the open banking approach is a good thing and definitely can benefit Singapore.” How did others fare? Singapore along with Australia which released open banking guidance in May 2018 and Hong Kong which already had an open API framework in July 2018 are at the top of the pack and rank as ‘early adopters.’ New Zealand, South Korea and India rank as ‘steady warm-ups’ as the three countries do not have concrete guidelines in place although a thriving fintech ecosystem can be found across the industry ripe for collaboration. Similarly, Thailand and Malaysia are dubbed as ‘fast followers’ with expectations of the first draft of guidelines set to be released by mid-2019 and early 2020. Despite their expansive banking networks, Japan and China are laggards and dubbed as ‘giants with potential’ as the former’s megabanks have ‘sunk costs’ in traditional banking processes, practices and systems whilst China is still focused on expanding oversight over non-bank firms offering financial services. On the other hand, Taiwan, Indonesia, Philippines and Vietnam still have other priorities to settle such as financial inclusion, digitalisation before they can fully embark on their open banking journeys. No guidelines are expected to be issued before 2019 to 2020. The Finastra’s Open Banking Readiness Index is developed by Finastra in cooperation with with IDC Financial Insights.

Singapore is leaning towards a more organic open banking approach as opposed to forced compliance

asia pacific view

Room for growth in open banking Leading banks who are most prepared for open banking offer at least five partner and public APIs to the external world but only 36% of banks in Asia Pacific have done so, according to Finastra, highlighting the significant room to maximise the promise of the technology. APIs, which facilitate the inbound and outbound flow of data, applications and functionalities, are critical in open banking adoption. However, banks in APAC are not sufficiently developing the segment with only 11% in the advanced stage of internal API adoption whilst a meager 4% in the advanced stage of external API adoption. Moreover, a little over a fifth (23%) of banks in the region have invested in an API management platform that enables control and configuration of multiple APIs within the internal infrastructure. “Banks need to map out a plan to move enterprise and business applications to Open APIs as a way to future-proof their technology. This migration needs to be done iteratively, potentially one application at a time,” explained Finastra, which cited Citi as a regional leader in this subcategory largely owing to the launch of its global API developer hub in November 2016. Top-performing players who are ahead of the open banking game also have a relationship with at least five fintech partners and at least 10 external partners that are not necessarily fintech. Such levels of collaboration will enable them to tap on new distribution channels and servicing capabilities without having to invest the time and resources themselves. DBS Bank, for instance, has onboarded over 50 partner companies to co-develop solutions aiming to enhance the delivery of financial services. Worryingly enough, only 8% of banks in APAC are in the advanced stage of fintech partnerships with 54% in the ‘low’ end of the spectrum. Staying ahead of the game also requires that banks invest at least 25% of their IT budget in “new” technologies like location-based services and voice technologies as well as have a central business innovation or digital transformation team to manage their digital initiatives. In this regard, banks in APAC have made headway with 63% of banks claiming to have a centralised team in place to drive innovation. Moreover, nearly half (45%) of digital channel workloads have already migrated to the cloud for top APAC banks, paving the way for smaller banks to follow and adopt new technologies with which they can innovate business models, products and services and modes of distribution.

Asia-Pacific Open Banking Readiness scorecard per dimension

Source: Finastra Open Banking Readiness Index

ASIAN BANKING AND FINANCE | March 2019 29


OPINION

EIICHIRO YANAGAWA Open APIs threats

F

rom a systems perspective, open APIs mean that a new communications path is being established linking information systems of financial institutions with the outside world. This brings new risks including data leaks, data fraud, and illicit transactions. There is also the possibility that data relating to user account information and settlement instructions will be exposed to the risks of leaks, tampering, and fraud via handling by TPPs. First and foremost, when financial institutions open up their APIs to TPPs, the fundamental system risk relates to the reliability of information regarding user (bank customer) identity verification and the account as well as account-related instructions. Today, financial institutions face an intractable problem when it comes to their information systems: how to ensure that they can correctly determine that authentication and account instructions are genuine. Fundamentally, the security risk is that a TPP makes an error, and the bank is held responsible, either by regulators or customers. In the case of Japan, the Japanese Bankers Association’s Review Committee Report on APIs details the fundamental principles of user protection and security measures. Regarding security measures, the report calls for continuous improvement, review, and advancements in the following areas: • API connection suitability and eligibility of third parties. • Measures to prevent unauthorized external, internal access. • Measures to handle incidents of unauthorized access. JBA and the industry groups seek the formulation of standards regarding user-protection principles and ensuring industry compliance. These include the following: • API connection suitability and eligibility of third parties. • Explaining, displaying information, and obtaining user consent. • Preventing unauthorized access. • Preventing incidents and the spread of damage • Disclosing and clarifying user responsibilities and compensation From a security perspective, open APIs also serve as an opportunity to revisit and review the relationships between financial institutions and technology vendors. Indeed, this will presumably be an opportunity to fundamentally restructure relationships due to the sheer increase in the number of financial institutions offering open APIs, the scope and scale of APIs provided by financial institutions, the services offered through APIs, the diversification of industries and external companies such as TPPs with which partnerships are formed, as well as advancements in API use relating to financial institutions, TPPs, companies, and consumers. In the open API era, financial services and their security will not be able to be maintained and managed by financial institutions 30 ASIAN BANKING AND FINANCE | March 2019

EIICHIRO YANAGAWA Analyst Celent

Prominent challenges to open API adoption

Source: Celent

alone. Rather, continued development and evolution by industry groups and across the entire value chain should be expected. Japanese financial institutions are also at a point where they should consider when the optimal time would be to externalize security overall and to use external certification bodies for security. Strategic alignment of risk awareness, tolerance, and positioning New business environments always come with potential upsides and downsides. The flip side of a business opportunity is that it can be accompanied by unexpected pitfalls. In planning the “migration” plan to the “new world” of open APIs, Celent believes that it is key to find a risk tolerance level suitable for your company, optimize positioning in the value chain, and strategically align your company’s core competencies and existing assets. In particular, consistency and alignment between core banking systems and authentication platforms might best be metaphorically regarded as an engine powering your company on the long road from open APIs to open API banking. New competition from nimble third parties New financial service providers that are not the traditional financial institution are deftly using new technologies to engage customers, and to secure a new customer base and, in the process of doing so, forming a new community around these activities. In the competitive environment of the new financial services industry, opportunities for traditional financial product service operators will erode as TPPs (distributors and new service providers) deprive them of opportunities to engage in dialogue with customers. That involves more than the temporary deterioration of the revenue environment for traditional financial institutions. It also includes the risk of losing future business opportunities due to changing customer needs and the loss of core customers.


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SiLVIO Struebi & de liu Four Crucial Defense Strategies against revenue erosion for Private Banks in Asia It is no secret that the private banking industry in Asia is facing revenue pressure on multiple fronts, with margin compression and revenue erosion becoming the new normal. There are a few key developments driving this pressure, including: -An evolving consumer base -Low-cost wealth management alternatives from fintechs -Future customer protection regulations As a result, leading private banks in Asia are seeking innovative solutions that will safeguard the future of their business. Here are crucial defense strategies that Asian private banks should look into: Increasing customer value through service differentiation and low-cost digital alternatives The future may see a move towards more specialist services, with banks leveraging strengths and focusing on USPs for specific high-value segments, such as offering expert advice for certain asset classes, club deals, etc. This shift will lead to significantly higher margins while parts of the core business will be further commoditised by Fintechs. Many private banks are looking to tap again into more retail or HWNI segments to drive growth. This requires a new client servicing approach and more low-cost solutions, such as online trading platforms. The winning strategy is to differentiate services to bring down costs, implement effective pricing across channels and client segments, and ensure smart integration of online private banking solutions to protect current margins. Improving the customer journey and enhancing client experience Private banks are seeking to improve the customer journey by providing analytic capabilities at every client touchpoint. The insights generated will enable them to remove sales barriers and adopt measures that steer purchasing behaviour. For this to happen, there is a need for a greater understanding of price psychology, and better client communication. Banks can start by investing in sales tools that support Relationship Managers (RMs) in sales planning, making product recommendations, setting target revenues and revenue margins per client, as well as flagging clients that are not on target, followed by suggesting corrective measures. Formalising advisory relationships with modular services At present, most customers with self-directed investment (SDI) accounts are only charged for trade transactions, with investment advice provided free of charge. Although leading private banks have attempted to monetise advice, their efforts to replicate EMEA advisory service models in Asia have met with limited success thus far, as customers are reluctant to pay high prices when investment advice currently comes at no cost to them. Many RMs hesitate to 32 ASIAN BANKING AND FINANCE | March 2019

SiLVIO STRUEBI De LIu Partner Senior Consultant Simon-Kucher & Partners Simon-Kucher & Partners

recommend clients mandates because they are afraid of losing the client relationship. In order to safeguard revenue, banks have to find a better way to monetise these services sustainably. Adopting multiple advisory models would provide a high degree of customisation and encourage clients to embrace higher service levels. The task for banks is to identify the various target groups across Asia and provide services that meet their cultural and personal investment requirements. Monetising access to clients and products Some private banks charge clients recurring platform fees to access special hedge funds, private equity investments or global markets. This shifts the focus away from monetising trade transactions (a segment commoditised by online trading solutions) to recurring market access fees for specialist, high-value services. On the other hand, banks are starting to monetise access to the client base by third-party vendors. To compensate for decreasing fund retrocessions and other kick-backs in the future, banks could consider charging vendors an explicit platform fee to access their distribution channel. Such a step may become critical in a growing open banking environment where banks integrate third-party financial services into their own value chain. In this scenario, banks will increasingly switch from being a provider of financial services to becoming a marketplace for financial services, and will therefore have to adapt their monetisation strategy accordingly. Implementing relationship pricing frameworks Banks that attempt to cross-sell fail, because most of them do not have a holistic sales strategy. We call this new pricing trend “relationship pricing�, which systematically considers the overall client relationship for pricing and discounting products and services. Pricing is used to reward clients for their loyalty and overall revenue contribution. At present, most banks do not even have tools that would allow them to assess the overall relationship to offer a structured discount. Tangible discounting criteria will grow in importance because regulators today are paying more attention to pricing and discounting practices. This has led to institutions implementing structured frameworks and rules-based discount engines to help RMs apply best practices and treat customers fairly. Opportunities in a changing wealth management landscape Despite the challenges, this is an exciting time for the banking industry in Asia, with advantages for both private banks and customers. Banks should seize the opportunity to provide a better targeted range of services and comprehensive pricing structures, and make a concerted effort to encourage customers to embrace costefficient channels in order to gain a head start in the competition.


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