Issue No. 99 DISPLAY TO 30 June 2020
TRADITIONAL BANKS vs
VIRTUAL BANKS Asian Banking & Finance
Dawn of digital banking
Malaysia, Singapore’s lenders may be at risk?
How ESG changed corporate banking
SMEs key to CIMB Singapore’s growth
Why Asian banks may consolidate
FROM THE EDITOR Publisher & EDITOR-IN-CHIEF
In this issue, we talked to Mastercard Asia Pacific’s Executive Vice President and Head of Services Matthew Driver to learn more about the payments provider’s strategy to stay relevant in the digital banking era, as well as their five-year forecast for Singapore’s financial industry. Turn to page 14 to know more.
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CIMB Singapore has also outlined a five-year plan to drive growth in its five key pillars of strengths under its new CEO, Victor Lee. Head over to page 12 to learn more. Greta Thunberg’s highly-followed environmental campaign put sustainability in everyone’s mind for much of the past year, and the banking industry is not spared. We approached senior officials and experts across the region to know more about how environment, social, and governance factors have affected ASEAN corporate banking, found on page 18. We also looked into how Hong Kong’s banks are faring with the back-to-back assault of the protests last year and the ongoing coronavirus pandemic. Turn to page 20 to learn more. Stay safe amidst these troubling times!
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MICA (P) 249/07/2011 No. 67
ASIAN BANKING AND FINANCE | q2 2020 1
FINANCIAL INSIGHT Sustainability and governance take INTERVIEW center swift stage in ASEAN corporate banking
segment report Crunch time for Malaysia’s e-wallets as firms set fees
MARKET REPORT Asian banks face consolidation as fintech, neobanks usurp market space
12 CIMB Singapore plays to its
8 Malaysia and Singapore’s small
29 Why winning in financial services
banks threatened as digital banks
enter the fray
30 The machine learning challenge:
14 Mastercard APAC flaunts innovation
20 Banks’ asset quality battered by
strengths as finance industry turns
to stay ahead in the digital era
COVID-19 and protests
requires ecosystem thinking Why does it matter to banks in
31 Accelerating Indonesian
microfinance with high tech and
32 The New Normal: how digital
Published quarterly on the second week of the month by Charlton Media Group Pte Ltd 101 Cecil St. #17-09 Tong Eng Building Singapore 069533 2 ASIAN BANKING AND FINANCE | March 2019
forces will upend banking in Asia
For the latest banking news from Asia visit the website
THOUGHT LEADERSHIP ARTICLE
How SmartStream’s managed services is transforming banking in Asia Pacific Managed services streamlines operations and cuts costs by eliminating manually intensive processes.
one are the days when banks needed to shoulder hefty charges just to maintain highperformance data centres. Traditionally, banks had to rely on data centres and often ended up paying for highperformance hardware that remained dormant over 80% of the time. Cloudbased outsourcing and managed services changes the landscape by allowing banks to mutualise their processes with similarly-situated institutions. “What we call managed services is in fact a mutualization of day-to-day activities. Our clients are mutualizing the processes so they can share the costs and our specialized resources to achieve quality output,” explained Nick Smith, Global Head of Managed Services at SmartStream. “Moving to the cloud provides financial institutions significantly more flexibility and scalability. It means that you only pay for high-performance hardware for the time that you use it, and you’re not paying for hardware when you don’t need it.” By moving processes to cloud platforms, financial institutions can benefit from high-performing technology at a fraction of the cost. Once they adopt managed services, they benefit from the mutualization of sharing those processes across multiple clients. “For instance, our clients no longer need dedicated applications, and they no longer need dedicated IT hardware personnel. Our clients no longer need database administrators because they share those same specialist resources across the entire client base,” Smith noted. At its core, managed services uses artificial intelligence to reduce the amount of manual effort required to deliver quality service. As a result, banks and other financial institutions can deliver service at a much higher level of quality at a lower operating cost. “Artificial intelligence in managed services is a classic game changer. What managed service is bringing to the table is that the client no longer has to worry about their day-to-day business. Our clients can focus on client-facing activities
that differentiate them and developing revenue streams themselves, because managed services will manage the dayto-day logistics of running the business on their behalf,” Smith added. Driving growth and transformation In Asia, banks are not only looking for solutions to boost revenue; they are also looking for ways to launch products to market more quickly. However, traditional ways of scaling up operations often get in the way of this goal. For instance, one of SmartStream’s clients is a credit card provider targeting retail clients. As the clients sales increased, the client’s hardware was not scalable which had a direct impact upon operating costs, revenue generation and margin. Using SmartStream’s cloud platform provides almost instant scalability and controlled operating costs. Additionally, bringing that scalability to market was significantly quicker using SmartStream’s Software as a Service platform. Another of SmartStream’s managed services clients is a global investment bank. When they became a client of SmartStream, the company was able to reduce their IT application support resources by 50%. “This is simply because we’re not a generalist provider of consultants.” Smith noted. “We have real specialist knowledge in the marketplace that we operate in. And using that specialist knowledge is what enables us to do things at a significantly higher quality level and much more efficiently than other groups operating in this space.” Providing customised specialist knowledge In order to successfully migrate to the cloud, banks need to have a change in mindset about their day-today operations and processes. “What they need to understand is they’re
Nick Smith, Global Head of Managed Services at SmartStream
outsourcing to the process that they give us, so they can focus on more valueadding activities.” Smith notes. A key challenge, however, is that people often struggle to relinquish control. Managers worry that if somebody else is managing their daily operations, then they carry a higher level of risk. This is why SmartStream operates under a policy of complete transparency and clearly defined KPIs. “We provide transparency to the most senior management as to the day-to-day activities of the performance of their business. We can do this because SmartStream knows and understands the space that we’re operating in, and we know how to deliver true value,” Smith said. Moving forward, banks are more likely to re-engineer their processes and adopt managed services in order to boost revenues and deliver better products. “It’s about changing the mindset and the culture, so that people understand that they can step back from worrying about the day-to-day activity, because SmartStream is going to take that to the next level on their behalf,” Smith said.
“Artificial intelligence in managed services is a classic game changer. What managed services brings to the table is the client no longer has to worry about the day-to-day.” ASIAN BANKING AND FINANCE | q2 2020 3
4 ASIAN BANKING AND FINANCE | q2 2020
Visit www.baesystems.com/compliance for more information.
NetReveal Cloud™ for AML Compliance solutions are available as a range of packaged configurations to meet the requirements of different global financial institutions.
This unique service, from a single provider, includes end-to-end solutions for Customer Due Diligence (CDD), Anti Money Laundering (AML) and Watchlist Management (WLM). It covers data preparation and ingestion, configuration, tuning, management and monitoring backed up by BAE Systems’ second –to-none levels of security and service.
NetReveal Cloud™ for AML Compliance is the optimal way to benefit from the unrivalled range of BAE Systems’ Financial Crime Prevention software, services, and ecosystem in a rapidly scalable and inherently secure model. It provides cost predictability in-line with usage and outsources technology monitoring, updates and security to BAE Systems.
On Demand. On Budget. On Time.
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Move from a capital expenditure (CapEx) to an operating expenditure (OpEx) model
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THOUGHT LEADERSHIP ARTICLE
BAE Systems: Cracking down on financial crime through industry collaboration
echnology has certainly come a long way, and AI, analytics and cloud have certainly scaled up banks and other industries that are making the transformation to digital and mobile. In the financial services and banking industry, the same technology can be used by criminals to siphon large amounts of dirty money to banks who bear the risk of facing money laundering sanctions from regulators. From July 2017 to December 2018, the Monetary Authority of Singapore (MAS) reported 16.8 million in financial penalties and compositions to 42 financial institutions, $698,000 in civil penalties in relation to two insider trading cases and one case of unauthorised trading, and 19 prohibition orders banning unfit representatives from re-entering the financial industry. BAE Systems Applied Intelligence, the Financial Crime & Compliance and Cyber Security arm of global defense company BAE Systems, knows very well that banks and financial services should be doing what they’re good at, instead of losing time and resources by tracking these financial crime cases by themselves. To gain valued insight into this spectrum and the complexity of tracking financial criminals, Asian Banking and Finance spoke with Sanjay Samuel, Managing Director,
Financial Services – APAC at BAE Systems Applied Intelligence, as he talked about the challenges in fighting financial crime, how financial services and banks can double up on their defenses, and why a collaborative financial crime intelligence network could make the difference in toppling down financial crime and ensuring compliance with regulations. For banks and financial services, what would be the challenges in tracking and preventing financial crime? Apart from skills shortage, cost, and data, the biggest challenge is, unfortunately, criminals who are forever changing their tactics, and the threat vectors which are always changing. To counter these criminals, we have launched the Financial Crime Intelligence Network (FCIN), which is a free-of-charge community of interest not just for our customers and our partners, but for the entire market, that aims to enhance collaboration between financial service institutions, vendors, and regulators. Can you tell us more about NetReveal Cloud for AML Compliance? When was it launched and how can financial institutions leverage on this technology to manage AML compliance and financial crime risk? NetReveal Cloud has been around for quite
We have launched the Financial Crime Intelligence Network (FCIN), a free-of-charge community of interest, to enhance collaboration between financial service institutions, vendors, and regulators.
Sanjay Samuel, Managing Director, Financial Services – APAC, BAE Systems Applied Intelligence
some time, perhaps over 10 years. It started in the insurance industry in the UK, since NetReveal Cloud has a module that detects insurance fraud, auto insurance fraud, and household insurance fraud. The functionality of the product is identical whether you install it on site, or if you run it in NetReveal Cloud— but the economics is very different. When you run it in the cloud, the costs are lower since you are sharing the infrastructure with many other users. So it’s a different economic proposition, but the functionality is the same. With NetReveal Cloud, we manage the entire environment on behalf of our customers. We have a managed services team who are based in the region and we monitor the system 24/7. It gives customers the flexibility and scalability that they want, so they can go about doing what they’re really good at, which is running a bank or an insurance company. We look after the software platform, manage the entire environment for them, and ensure that it adheres to all the latest ruling from the regulator. What’s the group’s outlook on the AML Compliance industry or financial crime for the next year? I’ve got an industry outlook, which, unfortunately, is not a good one. The UN has estimated that 2-5% of global GDP is lost to financial crime. Somewhere between 500 billion and 2.5 trillion US dollars per annum is unfortunately money that’s laundered globally. So it’s an enormous problem, which leads to all sorts of bad things such as terrorist financing. I believe that, globally, the industry recognizes that this just isn’t going to slow down, which is a terrible thing to say. Fighting financial crime, we call it our noble cause. This is why we don’t think this should be a competitive market. The people in BAE Systems get out of bed and come to work every day because we need to do our best to help the industry suppress those statistics. I’ve mentioned earlier that we’ve launched this Financial Crime Intelligence Network. We also want to encourage all the industry players to get together—even our competitors—into one forum so we can start sharing best practices and sharing experiences to try and reduce those pretty alarming statistics. (The full article “BAE Systems: Cracking down on financial crime through industry collaboration” can be found at https://asianbankingandfinance.net/) ASIAN BANKING AND FINANCE | q2 2020 5
News from asianbankingandfinance.net Daily news from Asia most read
CARDS & PAYMENTS
Credit card revenues threatened as Singaporean travellers shun usage In a report, Transferwise estimates that a typical Singaporean would lose as much as $650 in additional fees and currency exchange losses when using their cards overseas, pushing them to use cash instead.
Indian fintechs bagged $18.6b in deals from 2015-2019 Average deal size ballooned from $32.1m in 2015 to $38.9m (INR2.9b) in 2019. Investments reached an “abnormally high” $8.2b in 2017 with five transactions accounting for 81.2% or $7.3b of the amount.
6 ASIAN BANKING AND FINANCE | q2 2020
Pandemic spurs digital payment take-up in Singapore The ongoing coronavirus pandemic will help drive digital payments’ adoption in Singapore, with non-cash payments expected to take a 54% market share in 2020, a report by GlobalData revealed.
Singapore regulator defers digital bank licence review to H2 The regulator earlier planned to announce the successful applicants in June. The extension will allow MAS to allocate resources to ensure the monetary and financial stability of Singapore.
Korean banks face irreversible headwinds as disruptions persist Four regional banks, namely Busan Bank, Daegu Bank, Jeju Bank, and Kyongnam Bank, are particularly in danger of asset-quality decay due to exposure to coronavirus-hit sectors and regions.
lending & credit
Financial inclusion needs to be more than just about technology Technology alone cannot solve the problem of bringing the underbanked into the finance system. For example, although a third of the Philippine population owns a smartphone, 44 million remain unbanked.
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RETAIL BANKING: DIGITAL BANKS
The Malaysian central bank plans to award up to five digital licences this year.
Malaysia and Singapore’s small banks threatened as digital banks enter the fray Small banks could lose market share as digital newcomers target underserved segments.
mall Malaysian banks are standing on shaky ground as Bank Negara Malaysia prepares to grant up to five digital banking licences this year. The entrance of digital players poses a threat to their market share given their modest franchises, according to a Fitch Ratings report, and digital banks may exploit their size and innovation to concentrate on underserved markets. The overall Malaysian banking sector has been struggling for the past few years, S&P Global Ratings analyst Rujun Duan told Asian Banking and Finance. The country posted slow GDP growth in Q4 2019 that was forestalled by overnight policy rate (OPR) cuts in January and March. The arrival of digital banks would only add more stress especially in terms of profitability, and adverse market trends and heightened competition would likely squeeze small banks, she said. Big fintech players such as ride-hailing company Grab and gaming firm Razer have all expressed interest in applying for a digital licence. Even traditional banks joined in on the fray: local banking giants with large footholds in the market such as Maybank, CIMB Bank, and Hong Leong are also reportedly eyeing a license.
8 ASIAN BANKING AND FINANCE | q2 2020
What makes small banks particularly at risk is their lack of market dominance to effectively defend themselves.
What makes small banks particularly at risk is their lack of market dominance to effectively defend themselves, noted Duan. “What’s more, their limited financial resources also mean that they will likely struggle to shoulder the ongoing heavy IT investments required to stay ahead of the competition,” she added. In addition, digital banks can push lending rates down and use their lack of physical presence to offer higher interest rates and attract deposits, according to S&P analyst Ivan Tan. They will also likely target the retail and SME markets, both of which are underserved and with high risk profiles, Fitch said. Similarly, Singapore’s small foreign-owned lenders are also under threat even if they are already in the process of digitisation, a Moody’s report revealed, due to their insignificant operations in the Lion City which render them unlikely to benefit from the access to new digital investments. On the other hand, the country’s small domestic banks, including Malayan Banking Berhad (Maybank) and Industrial & Commercial Banking of China (ICBC), have been taking advantage of a strong retail and SME customer base to cement their competitiveness, the report added. The Monetary Authority of Singapore (MAS) is
RETAIL BANKING: DIGITAL BANKS
UOB’s TMRW, the lender’s Indonesian digital bank offering.
planning to hand out five digital banking licences in H2 2020, chosen amongst the more than 20 applications submitted last year. But there seems to be quite a silver lining as major domestic ASEAN banks, including Singapore’s biggest banks, are well-positioned to flourish in the digital banking era. “They have two necessary advantages: the required resources to invest in technology and acquire start-ups; and a rich pool of customer data to harness the technology into a commercially viable product or app,” noted Tan. According to Moody’s, Singapore’s big three, namely, DBS, UOB, and OCBC have all proved themselves to be capable of adjusting to the digital era and leveraging technology to offer their own digital banking services, apart from their already-established traditional banking activities. For example, DBS has taken advantage of the country’s high internet and smartphone penetration with its mobile wallet DBS PayLah!. UOB has followed suit with its all-in-one banking app Mighty Pay, whilst OCBC has two separate mobile banking and mobile payment apps. Not to be overshadowed, Malaysia’s major banks such as OCBC, Hong Leong Bank, CIMB, and RHB have all developed their very own mobile banking apps tailored for their clients’ needs. In the Kuala Lumpur leg of Asian Banking & Finance’s 2019 retail banking forum, Standard Chartered Saadiq CEO Mohd Suhaimi Bin Abdul Hamid emphasised that their bank’s digital agenda focuses on making digital transactions easier by reengineering digital at a price to support their plans for mobile and online banking. He stressed that if customers find their digital banking solutions easy to use, then they can also influence others to use it. “These clients are starting to think [more] independently using digital compatibility by mobile and internet banking...and so we also do a lot of campaign digitally to grow client awareness on how to use mobile phones, for example,” he said. But the problem is still there for Singapore’s and Malaysia’s smaller banks. To weather the incoming competition, Fitch sees smaller banks coordinating with digital lenders, with the former providing the balance sheet, capital and
risk management and the latter taking care of the tech aspect. This is a strategy that has been widely accepted in Malaysia and elsewhere in the region, Duan said. However, such partnerships present the potential risk of smaller banks sacrificing their relationships with their customers--as it may see them giving up client ownership to digital lenders. “Big banks usually have better bargaining power to strike a deal to protect their own interests with such startups. The risk of giving up client ownership cannot be overestimated and may lead to marginalisation of those small lenders in the market eventually,” Duan said. As an example, she cited the partnerships forged between Chinese rural commercial banks and tech giants AliPay and Tencent wherein the two Chinese tech giants would refer their clients to the latter for their financial needs relating to wealth management and other value-added services. The problem is that the customers become more attached to AliPay and Tencent than to the banks themselves. “Those small lenders become pure funding channels for fintech companies, and the banks’ deposit customers are probably viewing their banking relationship more embedded in Alipay or Tencent’s own product ecosystem, rather than with that small bank,” she added. Despite this, digital banks don’t seem to pose a long-term threat to domestic banks. As noted by Fitch, whilst Malaysia’s proposed end-point capital funds requirement of $73m (MYR300m) is lower compared to Singapore’s, the $490m (MYR2b) asset size cap per digital bank should contain the risk for now. Bank Negara’s stipulated three-to-five year foundational phase should also limit the growth of the new banks, Duan added. Applicants for a Malaysian digital bank licence are also required to submit a five-year business plan authenticating their profitability, which should weed out unsustainable entrants and lower the risk of value-destructive competition, noted Fitch in a separate report. Meanwhile, ASEAN regulators have taken a “measured approach” to onboarding digital banks. In Singapore, digital wholesale banking licence grantees cannot take individual deposits except for fixed deposits of at least $179,600 (S$250,000), whilst full digital banking licences will be issued in stages, and deposits will be capped at $53,880 (S$75,000) per depositor and $35.9m (S$50m) in aggregate. “Deposit and business restrictions will slowly be relaxed once the digital banks have proven that they can manage the risks involved, and deliver their value proposition,” Tan assured. Other regulators are expected to implement similar restrictions, both on capital and liquidity rules, on full digital banks to ensure an equal playing turf, he added. By Alyssa Divina ASIAN BANKING AND FINANCE | q2 2020 9
Do fintechs need better marketing strategies? FINANCIAL TECHNOLOGY
Caecilia Chu CEO and Co-Founder YouTrip Fintechs can improve their marketing communications by shifting their focus towards personalisation, instead of adopting a one-size fits all strategy. A good strategy can boost consumer trust and lower the barrier of customer acquisition for fintechs. This was extremely valuable for YouTrip during our initial launch where we were able to amass strong initial traction to top the download charts early on. Though we do not have a physical presence like traditional banks, we maintain the personal touch by tailoring our communications to the various user segments. YouTrip caters to different lifestyle needs of our users through thematic events like fitness for travel.
Eric Chan Co-Founder/Managing Director PR Communications In this burgeoning, nascent industry where new fintechs are coming up every day, it is imperative to stay ahead of the curve. This is where marketing communications can help them have an edge over the competition. The power of marketing communications, such as public relations, lies in building brand awareness, corporate reputation as well as reaching out to their desired customer. Marketing communications can help you stretch your dollar because of the earned media and ‘trust-building’ effect that you gain in marcomms.
X.Y. Ng VP Brand & Digital Validus Capital Effective marketing communications go a long way in demystifying the technology in order to establish trust and credibility. In developing better marketing communications, the key is to turn product features into key value propositions focused on the end users or target segment and to humanise communications, particularly when educating the market. At Validus, our business of connecting small business owners to investor funds for growth financing allows us to develop and use the stories of our SMEs to educate and engage all of our stakeholders, enabling us to build a strong brand and become the largest small business financing platform in Singapore.
Manage your investments in less than five minutes DBS has rolled out an analysis tool that can review clients’ investment and churn out personalised reports, all in less than five minutes. Co-developed with wealth technology firm EdgeLab, the Portfolio Advisory Enablement Tool (PAET) can assess investment holdings against risk appetite and aims, yield portfolio and market performance, and indicate risk exposures and asset allocation. PAET hopes to fulfill a gap in traditional client investment reviews where relationship managers scrutinise investment performance using traditional client statements, often omitting information such as comparisons to a wider portfolio and risk exposures. PAET generates reports for one-fifth of the time it takes to compile a manual report, therefore reducing human errors and improving relationship managers’ 10 ASIAN BANKING AND FINANCE | q2 2020
productivity. The integration of PAET into the DBS system highlights the bank’s front, middle and back-end capabilities as well as efforts for scalable public and private cloud solutions. “PAET is a testament to our capabilities in harnessing technology to transform the usual way of doing things, empowering RMs to provide richer, more detailed and contextualised investment advice that benefits clients in the long-term,” said Sim S. Lim, group head of consumer banking and wealth management at DBS. DBS is currently heading to the second phase of PAET development to refine advice and client engagement, which will enable relationship managers to stimulate investments into existing portfolios for clients to understand the potential valueadd, and also build new client portfolios.
The tool indicates risk exposures and asset allocation.
BRANCH WATCH: BPI Makati
How BPI Makati fused history and modernity The branch provides in-demand services such as exotic currencies and meeting spaces for clients.
estled in one of the Philippines’ top financial districts, the Bank of the Philippine Islands’ Makati City Main branch has been upgraded and given a new look to reinforce its status as an all-in-one banking hub. Located in the Makati Stock Exchange Building, the branch is in line with BPI’s commitment to enhance customer experience through face-to-face transactions, a spokesperson told Asian Banking and Finance. Measuring 2,943 sqm, the Philippine bank opened its new location in October. Its simplistic yet modern design sprinkled with BPI’s signature red and white color reflects the marriage of the bank’s 168-year heritage and its ongoing efforts for digitisation. “BPI Makati Main has become a go-to branch
The bank features BPI’s first-ever interactive screen where clients can browse banking products and services.
for transactions that need special handling and arrangements,” the bank explained. The renovated branch features a corporate banking centre, dedicated spaces for preferred clients, and BPI’s first-ever interactive screen where customers can browse and access banking products and online services. Alongside the aforementioned amenities, BPI Makati Main will also provide specialised and indemand services such as “exotic currencies” baht, yen and won, large safety deposit boxes not available in other branches, meeting spaces for retail clients, and a provision for clients with disabilities in the preferred banking section. BPI hopes to expand the branch by another 179 sqm come December this year. By Alyssa Divina ASIAN BANKING AND FINANCE | q2 2020 11
CIMB Singapore plays to its strengths as finance industry turns digital The bank is gearing up its tech and customer-employee experience amidst an increasingly tech-centred industry.
ith the Monetary Authority of Singapore handing out five neobank licenses by June, and with banks amping up their digitalisation initiatives to keep up with the increasingly tech-centred financial and payments industry, CIMB Singapore plans to stand out by playing to its strengths. The bank has outlined a five-year strategy, Forward 23, that will deepen the bank’s foothold in the areas of partnerships and technology, amongst others. Just last month, the bank launched the CIMB Virtual Account, which digitises businesses’ cash flow, allows them to easily track their orders and payments, and gives a way to check their account balances in real time. The new programme is geared towards SMEs, which sees CIMB directly competing with neobanks in this segment. The bank has also launched the CIMB C-19 programme for SMEs in the tourism sector as a relief to counter the negative impact of the COVID-19 outbreak. Asian Banking & Finance caught up with CIMB Singapore’s newly-appointed CEO Victor Lee to learn more about his vision for CIMB’s staff and its customers, and to learn more about the bank’s Forward 23 vision. Could you walk us through your projects and plans geared towards enhancing your customers’ CIMB banking experience? At CIMB, it is vital that we place our customers at the core of everything that we do. My team and I constantly ask ourselves, “What do our customers want? How will their journey be like when they bank with us? How can we improve that experience?” I believe that banking is a people business, which is why we position ourselves as a bank with a heart. Not all banks are created equal, and for a bank of our size, it is all the more crucial that we place utmost importance on what our customers want. We know that we need to be disruptive, and we have demonstrated that—we offer the highest interest rates for our FastSaver and StarSaver Savings accounts with no multiple conditions. We offer the best interest rates and more for SMEs and corporates with our BusinessGo, with no frills. Our products and services can be accessed online, and with only two branches, customers can bank with us on their mobile phones from anywhere that is convenient for them. We need to improve our customer experience and so every two weeks, we intend to roll
12 ASIAN BANKING AND FINANCE | q2 2020
We need to improve our customer experience so every two weeks, we roll out improvements.
Mr. Victor Lee, CEO of CIMB Bank Singapore
out improvements. We are continuously looking at improving our product offerings in order to enhance customer experience. One example was when we revamped our BusinessGo offerings last year. We now offer 1.88%* p.a. on interest rates, which is one of the best in the market. There are free FAST transfers, the best FX rates online, and you can also speak with a relationship manager for personalised services. What programmes do you have in place for the development of your staff? People are always the top of my agenda, especially the staff. Part of the development will include us changing our mindsets to be more nimble and adaptable to change. We are also looking at training, especially in the tech area and offering more flexi work benefits. Internally, we have brand values that we hold close to our hearts. The CHIDA approach allows us to be customer-obsessed, high-performing, have integrity, and at the same time be diverse and all-inclusive, and agile too. I firmly believe that the best ingredient for a successful company will always be the team. We may not always have A-grade players and that’s ok because to
Monetary Authority of Singapore
me, when B-grade players come together to work hard, and they fit like a glove, we will become an A-grade team. I want to build a team of highly motivated professionals of high morale and the utmost integrity standards, with a high-performance culture, and the ability to work together as a team despite our differences. How does CIMB plan to improve its services in partnerships, technology, and sustainability? CIMB has a five-year strategy called Forward 23, and it has five key pillars we focus on: customers, staff, partnerships, technology, and sustainability. Singapore is a financial hub so we need to focus on areas we are strong in, and these are in the Commercial, Consumer, Corporate, Investment and Private banking spaces. I am pleased that our group and local management teams are very youthful in their thinking so it allows us to be aligned in how we achieve our goals. It also allows us to disrupt the market and embrace the digital era. CIMB truly believes in the importance of partnerships, and not many companies see the value in that. We are the first and only bank to offer the SG-MY funds transfer at attractive rates, and if customers find rates that are more affordable at the moneychangers, we refund them the difference. Diversification of our business can only take place when we partner with companies that share the same values as us, and companies that are always placing their customers first as well. We partner different channels to market our products and services, and these include the Singapore Malay Chambers of Commerce & Industry, where we help local business owners with their financing as well as assist them to tap into the Halal market in the region. We also work with companies such as SESAMi-Capital Match and PracBiz to leverage on their e-invoices supply chain financing; Ascent Solutions and 1Citadel for blockchain-based IoT solutions for financing with logistics and security tracking, amongst others.
Diversification of our business can only take place when we partner with companies that share the same values as us, and companies that are always placing their customers first as well.
Another way we are looking to deepen our foothold is to grow the SME business. It is currently underserved, and we believe we are able to step in and fill the gap. Just last week, we launched the CIMB Virtual Account (VA), to eliminate manual and inefficient reconciliation processes that are inherent to businesses with a high number of suppliers and vendors. In the area of sustainability, we have the CIMB Acts: Advancing CIMBians Towards Sustainability, a programme that aims to facilitate the team in CIMB, across the Group, in making an impact for sustainability. This also encourages the team to help raise awareness on the values and practices of sustainability via initiatives led by themselves. We also want to build advocacy that will inspire more CIMBians to play their part and become sustainability champions in their circles of influence. CIMB Group [also] has The Cooler Earth summit platform to inspire business leaders, financiers, investors, policy and decision-makers to change the paradigm of business and finance, and our way of life. Could you expound more on your SME clients? To assist SMEs, we recently launched some COVID-19 financial support schemes for businesses to tide over during this difficult time. Many affected companies will require longer credit terms from their suppliers to conserve cash flow, so at the onset of the outbreak, CIMB increased its e-Supply Chain Financing programme with a limit of up to US$71.44m (S$100m) to make available working capital financing support for the suppliers community on the platform of our e-procurement service provider partner. The CIMB C-19 is catered for businesses in the tourism sector, whilst SMEs across all industries can address their working capital needs with CIMB BizAssist. Separately, we have various products that SME businesses can access for their loans, cash management and solutions, liquidity management, and restructuring facilities for loans where clients do not have to make payments on their loan principal for six months. By Frances Gagua
CIMB Singapore plans to service SMEs to support its growth.
ASIAN BANKING AND FINANCE | q2 2020 13
Mastercard APAC flaunts innovation to stay ahead in the digital era The payments provider has been forging new tech-based products and forging relationships with startups.
astercard is banking on its longstanding innovation and amping up partnerships with digital players to stay ahead of the neo-banks and fintechs that have further tightened the money game in Singapore and Asia. The entrance of digital firms into the banking space is an important evolutionary step for Singapore, Mastercard Asia Pacific executive vice president for services Matthew Driver said, as the increased competition will bolster innovation in the local banking industry. Contenders for the licenses include consortiums made up of e-commerce, telecommunications, and fintech firms. Currently, Mastercard has the upper hand in Singapore. Credit cards continue to make up the lionâ€™s share of the card payments market in the island, at 60% in 2019, reports analytics firm GlobalData. But e-wallets are increasingly closing the gap, with the digital payments segment now making up US$14.27b in 2020 according to data firm Statista. By 2025, this value is expected to rise to $40.38b, a separate report by ResearchAndMarket noted. In an exclusive interview with Asian Banking & Finance, Driver shares how Mastercard has been preparing for the digital onslaught, and how digitisation will affect the domestic and regional banking industry as a whole. How does Mastercard APAC plan to position itself in Singapore and in the region with this dawning era of digital banks? When you think about it, Mastercard itself is one of the original fintech players, which created an international network more than 50 years ago connecting buyers (cardholders) and sellers (merchants), thereby reducing the need for cash. And as a fintech we have continued to innovate throughout our historyâ€”itâ€™s part of our DNA. We started with enabling debit and credit card payments but quickly branched into other payment types as commerce globalized and e-commerce connected consumers to digital marketplaces all over the world. We have grown our payment capabilities extensively to cater for new clients, markets and opportunities, now offering real-time payment solutions and applications, advanced cybersecurity and fraud solutions, and a huge range of data, advisory, loyalty and engagement capabilities. We are also co-creating new services with partners
14 ASIAN BANKING AND FINANCE | q2 2020
Digital banks will significantly accelerate and deepen the use of physical and virtual payments solutions across the region.
Matthew Driver, Executive VP for Services, Mastercard APAC
to help enable commerce and financial inclusion like the Kionect Farmers network whilst advocating for diversity, decency and sustainability. We are the preferred partner of fintechs across the globe because we are global and flexible, we lean into our partnerships to create new solutions and we want to create social impact. We cultivate relationships with startups, have a globally established fintech accelerator programme called StartPath and, at the Singapore Fintech Festival 2019, we launched our Fintech Express programme as part of our global Mastercard Accelerate initiative designed to simplify the way our global payments work with fintechs around the world. How will digital banks affect the card and virtual payments in Singapore and in APAC? Digital banks will significantly accelerate and deepen the use of physical and virtual payments solutions across the region as payments are a great space where they can create relevant and impactful differentiation for their target customers. Neo-banks and fintech players are fast adopters of prepaid and debit cards, both physical and digital, often because prepaid platforms are very flexible and can be used for everything from travel and gifting to per-diem expenses and, in some cases, closed-loop payments. Digital banks like Monzo, N26 and Revolut all
INTERVIEW Card Payment Values in Singapore, 2018-2023
Source: GlobalData (2020)
started using prepaid propositions, and are now actively marketing debit cards linked to checking accounts. Newer fintech players like 2C2P, YouTrip and Matchmove are also bringing new innovative prepaid solutions to market in partnership with banks across the region. A number of the bigger platform players have also moved into credit cards, like Lazada in Thailand and Amazon and Rakuten in Japan, and following the success of Apple Card in the US and Nubank’s purple credit card in Latin America, more will surely follow in the region. Digital banks and fintechs also tend to be immediate users of contactless and QR technology deployed via virtual card form factors securely embedded in mobile banking applications as we have seen with Google Pay in India, AliPay and WeChat Pay in China and LinePay in Thailand and Japan, all of which are transforming the industry. Digital players are also quick to use open banking standards and so-called faster payment applications. Indeed, any payments service that is digital first and seamless will be better able to meet a customer’s needs. The use of virtual cards in business-to-business payments for procurement and expense management purposes, as well as wholesale and B2B payments, are good examples and have proven to be very successful for digital players like WEX and eNett. We also expect that digital banks may choose to use virtual cards to solve consumer use cases as well. Are there opportunities that traditional banks and fintechs can pursue with these digital disruptors? Fintechs and traditional banks often make excellent partners as they have complementary capabilities. Banks provide the fintechs with access to their distribution network, balance sheet strength and trusted reputation with clients. Fintechs provide banks with more nimble technical infrastructure, helping them deliver and continuously upgrade more compelling and innovative client experiences. This is not to say that “fintegration” is an easy process. In particular, traditional banks have to strike a careful balance between keeping pace with the
We also believe that a natural outcome of this digitisation will be an accelerated growth in electronic payments as there is still plenty of room for growth.
nimbleness of new technology whilst protecting the customer’s privacy and personal data. We do believe that in this hyper-connected digital world, no one player can really do everything alone anymore, so having the ability to not only agree but successfully execute ecosystem partnerships where all parties mutually benefit (fintech, bank and customer) is an increasingly important aspect of doing business. These partnerships can range from simply having the bank connect to a fintech application using secure APIs to offer a specific product capability or service—Citi and DBS being great examples of banks leveraging developer zones for this purpose—to the development of a much more elaborate ecosystem model like CBA has done in partnership with Microsoft and KPMG in Australia, or like Chinese players Ping An and Tencent have successfully done. What is your five-year forecast for Singapore’s financial institutions given the rising digitisation of financial services? What we do know from other markets is that rising digitisation and increased competition in financial services will only serve to expand the overall market, create greater customer choice, drive innovation, and deliver increased value for consumers, business and corporates. Singapore already has a high level of digitisation thanks to low-cost data, strong local infrastructure, high smartphone penetration and savvy market participants. We also believe that a natural outcome of this digitisation will be an accelerated growth in electronic payments as there is still plenty of room for growth. Whilst the majority of retail payments in dollar volume terms are electronic, by transaction count they are not, so there is still a huge opportunity for further payments innovation in Singapore. The opportunity is even bigger in the small business and commercial segments, as well as in wealth management where there has been a rapid increase in the number of technology platformenabled wealth management platforms. As Singapore continues to drive greater connectivity as a “smart city”, even more payment flows can be digitised, releasing value by creating greater transparency, security, and efficiency. Rising digitisation of financial services also creates important opportunities around the management, organisation and control of data: thoughtful data privacy policies have to be implemented to protect customer data in the right way. Singapore continues to have a market environment that is conducive to innovation and we are confident that, with continued thoughtful regulation, the ever-resourceful Singapore financial sector will embrace this era of open banking and continue to find new and better ways to serve the financial needs of consumers, small business owners, and corporates. By Alyssa Divina ASIAN BANKING AND FINANCE | q2 2020 15
fintech interview: credolab
The founders of CredoLab
How CredoLab reduces banks’ credit risks with metadata
The platform generates a credit scorecard in just one second, based on 1.3 million features from opt-in smartphone metadata.
hilst working in the credit and loans departments as well as risk management teams of banks in Europe, Peter Barcak saw firsthand the limitations of the banking industry’s retail loan procedures. Banks often base their retail lending decisions on an application form that contains only around two dozen data points. Not only does this procedure eat up time—each application takes up to several days to process—the predictive ability of banks in determining which people can pay back their loans is only at around 62%. Barcak’s search for better loan procedures led him to mobile devices, which offer a plethora of data points that increases the overall predictiveness of a person’s credit behaviour. Armed with insights about the credit risk assessment practices of banks, he founded the digital credit scoring company CredoLab in January 2016. Over 18 million loan applications and more than 63
16 ASIAN BANKING AND FINANCE | q2 2020
lending companies later, the Singapore based startup’s artificial intelligence-based algorithm can now access as much as 1.3 million features to find an individual’s behavioural patterns and produce a credit scorecard. The process takes as fast as only one second to happen, Barcak told Asian Banking & Finance in an exclusive interview. “Usually a scorecard consists of 20 to 25 features with the highest information value and features with the highest predictive power. But we have built a huge pool of 1.3 million features over the last four years to choose from,” he said. Lenders in Asia usually use a scorecard system that has a 0.25-0.30 Gini coefficient—where zero means a 50% accuracy of the decision-making model used, whilst one equates to a 100% accuracy. In the context of scorecards, these meant that banks are usually powered by a system that only has a 62.65% accuracy, leaving a lot of uncertainty in the credit decisions they make.
In contrast, the startup’s scorecards have a Gini coefficient of 0.40-0.50, giving CredoLabpowered banks and financial firms greater predictive power, with an increase of up to 70% in their Gini compared to the traditional scoring model. In total, CredoLab said that its customers have seen a 20% increase in new bank customer approval, a 15% reduction in nonperforming loans, and a 22% dip in fraud rate. CredoLab makes credit risk assessments by looking in clients’ mobile phone behavior: how the client uses their mobile phone, what kind of applications can be found in the phone, the way they receive or send SMS messages. But the company does not read personal messages nor access personal information. “There is no way we can access data without clients consent or without permissions that the operation system requires. CredoLab collects only metadata: zeroes, ones. So no personal information ever leaves the device. CredoLab doesn’t know the clients name or email address or address or phone number,” assured Barcak. Financial institutions in the region have already taken notice of CredoLab. In July 2019, CIMB Philippines partnered with the startup for its digital lending business. The partnership reportedly helped increase the overall predictiveness of the bank’s models by up to 40%. As of January 2020, CredoLab has powered more than $1b in loans issued and has analysed about 1 trillion data points across 25 countries. The company plans to further expand to Latin America, Africa, and India in the next five years. They are also looking to expand to offer their services to non-bank industries: right hailing companies, airtime credit companies, online travel booking companies, insurance, e-commerce, airline payments or retail companies,” concluded Barcak. By Frances Gagua
financial insights: corporate banking
Sustainability and governance take center stage in ASEAN corporate banking Many banks have stopped funding new coal-fired power plants in favor of environment-friendly projects.
hen Greta Thunberg told the world’s elites at Davos that they must stop lending to fossil fuel projects to save the planet, US President Donald Trump dismissed her speech and called for people to reject environment-related warnings. But it seems that sustainability has increasingly come at the forefront of businesses in the past few years, particularly when it comes to getting funding from corporate banks. In a report, Fitch Ratings revealed that global banks have become increasingly sensitive to environment, social, and governance (ESG) factors in their underwriting processes. In 2019, the study found that global banks are outright rejecting dealings with companies suspected of human rights abuses, child labour, or unsafe working conditions.
18 ASIAN BANKING AND FINANCE | q2 2020
Following the 2015 Paris climate deal, a clutch of APAC-based banks—mostly in Australia and Singapore—stopped directly financing new thermal coal-mine or coal-fired power station projects. Chief amongst them is Singapore’s OCBC Bank, the first Southeast Asian bank to announce that it will no longer fund new coal-fired power plants. Before lending out to companies, OCBC said that they study the ESG conformance of the company in a credit and risk evaluation process. “ESG risks may include biodiversity loss, deforestation, water scarcity and pollution. Companies’ pollution prevention measures, relating to air emissions, water effluents and waste, are expected to be adopted in a manner that is consistent with local laws and regulations, at a minimum, as well
as applicable international industry standards. In our risk assessment, we also take into consideration social issues such as child or forced labour, occupational health and safety as well as any resettlement of affected communities,” Mike Ng, OCBC’s head of structured finance and sustainable finance, told Asian Banking & Finance in an exclusive interview. The bank has set out a US$7.02b (S$10b) target for their sustainable finance portfolio by 2022. In 2019 alone OCBC committed US$3.51b (S$5b) in sustainable financing commitments and participated in more than 20 green loans and sustainability-linked loan transactions. Other banks in the Southeast Asian region are not to be left behind. Standard Chartered Asia has committed US$75b towards
financial insights: corporate banking the sustainable development goals (SDGs), with US$35b specifically allocated for clean technology and renewables whilst the remaining US$40b was for sustainable infrastructure. Roshel Mahabeer, StanChart’s head of sustainable finance in Asia, noted the growing collaboration and sustainability of ASEAN banks and governments. For example, central banks of Malaysia, Singapore and Thailand have joined the Network for Greening the Financial System (NGFS)—a network of central banks and supervisors seeking to better integrate climate-related risks into financial stability monitoring. Despite this, APAC and ASEAN banks continue to lag behind their European peers in taking up ESG guidelines, a fact that both Fitch and the World Wildlife Fund (WWF) noted. Of the 35 banks assessed by WWF, only four banks from Singapore and Thailand fulfilled at least half of the 70 criteria and 51% of the banks fulfilled less than a quarter of the criteria. “However, there is still progress as 74% of the banks have improved since 2018. These are meaningful steps in the right direction, though with only a decade left to 2030—we need to be considering E&S risks and financing SDGs at both pace and scale,” Mahabeer further noted. “Over the last 3-5 years we have seen a great increase in the number of banks and institutional investors developing E&S strategies either via a prescribed exclusion of investment activities or to more sophisticated ESG scoring models to encourage investment toward companies that have good ESG practices and support the SDGs,” she added. Economic challenges Adopting ESG principles remains a challenge for banks in the region, especially in countries that continue to be dependent on fossil fuels, a reality highlighted by Bank of the Philippines Island’s (BPI) Jo Ann Eala, BPI’s head of sustainability development finance. “Noting the Philippines’ dependence on fossil fuel which provides almost 80% of its energy,
these realities of our country’s energy demand and supply capabilities compel the government and the private sector to provide support to diversified sources in the interest of making stable and reliable power available throughout the country,” Eala said. The bankability of sustainable projects is also still up in the air, said OCBC’s Ng. “Investments in emerging markets, where many of these infrastructure projects are, entail various forms of risk which are still not being adequately addressed. If a common framework across emerging markets is introduced, that would enhance the bankability of sustainable projects and we would see a rise in sustainable financing,” he said. Moody’s Investors Service financial institutions group vice president and senior credit officer Alka Anbarasu also noted that ASEAN banks are not completely withdrawing from sectors that pose an ESG risk, but are instead striking a balance between such dealings and sustainable financing. “For instance, banks are not just withdrawing from lending to industries that pose climate change risks, such as palm oil producers, coal-fired power projects. This is because such industries have a significant impact on the overall economy or livelihood of people. Also, many countries in the region don’t have universal access to electricity, low per capita income and low shock absorption capacities to withstand a drastic change in banks underwriting policies,” she said. Instead, banks are working with their borrowers to promote sustainability. “At the same time, renewable energy and other green sources of energy are growing in importance. Many countries have pledged to increase green sources in their energy mix. This in itself has led to greater lending to that sector by the banks,” added Anbarasu. BPI, for example, is providing technical assistance to clients to help them comply with SGD-related laws. One example of this is BPI’s employment of experts to evaluate project proposals, shared Eala. For
their activities with the agriculture sector, BPI has a dedicated team of agri-specialists to identify potential technical and environment problems.
Seeds of growth As companies and sovereigns become more environmentally aware in tandem with peoples’ consciousness to climate change, corporate banks are faced with a plethora of opportunities to pursue in the ESG-banking realm. “Companies and cities are transitioning to low carbon and more sustainable economies, so we expect to see more projects addressing the needs for climate change mitigation and adaptation in coming years. These include renewable energy projects, clean transportation and waste management to name a few,” said OCBC’s Ng. StanChart’s Mahabeer also noted the large buzz of activities in the sustainability space. “For example, Singapore is fast becoming a hub for green and sustainable loans with over $10b of sustainable finance-related activity between 2018 and 2019, and the Monetary Authority of Singapore (MAS) has announced setting up a $2b green fund.” BPI’s Eala observed that more and more companies are investing in sustainability to boost their bottomline. “This is evidenced by the increasing number of private sector initiatives around energy efficiency, renewable energy, and climate resilience. Moreover, there are proven live cases of profitable sustainability initiatives, thanks to the quantitative metrics and tools provided by institutions like the IFC-World Bank.” By Frances Gagua
Banks’ funding now goes to environment-friendly projects.
ASIAN BANKING AND FINANCE | q2 2020 19
market REPORT: Hong Kong
Bank of China Tower and Cheung Kong Center
Banks’ asset quality battered by COVID-19 and protests Hong Kong’s banking industry face an exodus of corporate clients, rising mortgage risks, and deteriorating credit and debit card use in 2020.
or Hong Kong, the COVID-19 outbreak couldn’t have come at a worse time. Industry performance and consumer sentiment are already at record lows over the past half year, hampered by the social protests that took the city by storm, and earlier waned by the onslaught of trade tensions and mainland China’s slowing economy. A combination of these factors drove the economy to contract 1.5%—its first annual decline since 2009. Now officials and enterprises are bracing for an extended period of decline as airlines suspend flights and overseas markets tighten their borders. This spells trouble for local banks, who may see their bad debts rise as large corporates and small and medium enterprises (SMEs) struggle to pay back their loans. “Hong Kong is an international city and thrives on people coming and going to do business in Hong Kong. To prevent itself from importing coronavirus means
20 ASIAN BANKING AND FINANCE | q2 2020
How well and how long the economy may endure such drastic measures has yet to be tested.
shutting its borders to visitors from high risk locations. How well and how long the economy may endure such drastic measures has yet to be tested,” Brian Chan, partner, banking & capital markets for Hong Kong at Deloitte, told Hong Kong Business in an exclusive interview. As of end-September 2019, loans related to travel and tourism, hospitality, and entertainment accounted for about 5% of systemwide loans, wholesale and retail trade comprised about 4%, credit cards and other personal
loans about 8%, and propertyrelated loans including mortgages about 30%. The lower economic activity will also dent banks’ revenue for the year. “We would expect revenue and profit estimates to be revised downward given the current situation. In particular revenue will be under pressure: we can expect loan growth to be impacted due to lower economic activity and less demand for lending,” noted Paul McSheaffrey, partner, head of banking & capital markets for Hong Kong at KPMG. McSheaffrey added that the potential impact on global growth from COVID-19 will also make any rise in interest rates unlikely. Disrupted operations Already, banks have closed down stores in an effort to mitigate the spread of the virus. Bank of East Asia temporarily closed 20 physical branches starting 1 February, including those in Causeway Bay and Wanchai Convention Plaza. UOB also shuttered its commercial banking centre in Kwun Tong soon after the outbreak first took hold. A total of 243 bank branches have suspended their services since Chinese New Year, representing 19% of the 1,200 branches operating in the city, according to Deloitte. Some outlets that remained open also restricted their operating hours. The full impact of these closures remains to be seen since most bank-related transactions are
How far bank branches in Hong Kong have been affected
market REPORT: Hong Kong
done electronically, noted Deloitte’s Chan. “[Although] retail branches serve as one of many touch points that banks service their customers [they] are not the major channel for banking business any more. A typical retail bank handles 80-90% of its transactions through electronic means instead of through a bank teller,” he explained. Instead, the exodus of corporate clients, mortgage risks, and dropping credit card use poses the biggest threat on banks’ revenues. With corporates’ profitability and liquidity challenged, banks exposed to retail, restaurants, tourism, education and transportation sectors—the most impacted industries by the outbreak—will see credit deterioration. Of these, SMEs may not weather the economic shock and may go into bankruptcy should the outbreak persist, warned Chan. Meanwhile, although the average loan-to-value (LTV) ratio provides ample cushion for banks, a drastic fall in property prices increases collateral risk. Apart from prices, homebuyer demand will likely be dampened further by the outbreak, which was already strained by the protests, S&P Global Ratings’ stated in a report. The firm warned that transaction volumes during the SARS epidemic hit an all-time low, and history could repeat itself. The length of the outbreak also weighs on workers’ wages and salaries, and any cuts would also
slash credit card usage and push credit quality to deteriorate, Deloitte’s Chan added. Similarly, S&P warned of a negative impact on banks’ credit card receivables should the unemployment rate rise. During the 2003 SARS crisis, Hong Kong’s unemployment rate rose to an all-time high of about 8.5%. The jobless rate was 3.3% at end-2019, according to data from the Labour and Welfare Department. Meanwhile, KPMG’s McSheaffrey sees a rise in bad debts the longer the outbreak persists. “This would probably be most likely to occur in the unsecured personal lending and SME sector as these are the sectors most impacted. We may also see some increase in bad debts for larger corporates, including potentially those with operations in China, although this will depend on the impact of government measures to support business.” But McSheaffrey noted that, in general, the level of bad debts in Hong Kong’s banking sector has been low. “The banking sector is well capitalised and so should be able to absorb the increase in bad debts,” he added. Fitch Ratings also said that Hong Kong banks are still wellpositioned as of now, as less than 1% of mortgage loans were in negative equity compared with the 30% in June 2003 during the SARS crisis. Further, the LTV
ratio for new mortgages was only 53% in December 2019 compared with 65% in June 2003. A short-term outbreak would likely have little effect on their operations, added Fitch, given banks’ sufficient capital and liquidity buffers. But the odds of a short-term outbreak are shrinking every day. By the end of March, close to 800 cases had been recorded in Hong Kong, with the figures continuing to grow, albeit not as fast as those in other markets. Precautionary measures are becoming stricter, and this is likely to have an impact on banks and the wider economy. Analysts agreed that the endresult will depend on how long the government’s measures will continue to take place. Despite the branch closures, KPMG’s McSheaffrey has not seen any significant impact—at least, not yet. “We are not seeing any significant disruption to banking operations within Hong Kong. Banks have implemented their Business Continuity Plans. Teams who operate critical functions, such as remittances and payments, are generally working at alternate BCP sites and/or under split team arrangements to ensure these critical functions can still operate.” Both Deloitte and Fitch agreed that there is still room to recover if the outbreak is contained fast. “In general, if the outbreak is contained within months, certain banking business[es] might be delayed but may catch up later in
COVID-19’s impact on institutional banking
ASIAN BANKING AND FINANCE | q2 2020 21
market REPORT: Hong Kong
Bank of China Headquarters
the year,” said Deloitte’s Chan. “However, if the outbreak sustains, banks may need to adjust itself to any structural changes in the economy to achieve their growth targets,” he concluded. Prices of financial assets are also headed towards declines if disruptions from the outbreak persists, according to Moody’s Investors Service. “This will result in declines in the values of mark-to-market securities held by banks and falls in revenue from financial markets,” they concluded. Protests’ impact lingers The coronavirus upsurge came at the heels of the social protests that crippled Hong Kong’s economy in the second half of 2019 and riveted the rest of the world. This has created a dent in profitability due to increased costs, as banks’ revisited their operating procedures and risk measures. “The recent social unrest greatly affected banks’ operations in two aspects. Most of the banks will review and revisit their Business Continuation Plan (BCP) just in case if their HQ is being compromised by the social unrest. The other major impact is to review and reinforce security measures to protect the branch operation particularly those with Chinese background and affiliation,” noted accounting firm BDO’s managing director of assurance Clement Chan. “The overall results of the social 22 ASIAN BANKING AND FINANCE | q2 2020
If the outbreak sustains, banks may need to adjust itself to any structural changes in the economy to achieve their growth targets.
unrest have created a dent on the profitability because of increased costs incurred for the above-mentioned reaction and the forced closure due to sudden outbreak of movement and demonstration.” BDO’s Chan said that they had noted cases where banks have to incur extra cost to purchase PCs and install appropriate alternative structure for BCP. “We have seen access to branches at the regularly affected area are heavily guarded around the sensitive hours to minimise the chance of being sabotaged,” he added. Any growth that banks’ expected to happen in the second half of the year was stopped and in some cases was turnaround to red, BDO’s Chan further noted. HSBC, for example, increased its provision for expected credit losses by $3.1b (US$400m) in Q3, with which the protests were cited as the driving force for the higher provisions. Despite this, HSBC reported a 7% growth in profits for its Hong Kong operations for the full year of 2019, and its local banking operations recorded growth. In a similar vein, Citibank Hong Kong said in an exclusive correspondence that their business had not been materially impacted in Q4 2019, but noted that client
sentiment remained cautious. Citi Hong Kong’s franchise grew for the 12th consecutive quarter in Q3 2019. Revenues also rose 8% YoY, driven by solid growth in our balance sheet with average deposits up 10% and loans up 6%. “There is a strong pipeline of business not only for Citi but across the market and this will support and underpin Hong Kong’s role as a major financial centre,” said James Griffiths, spokesperson of Citi Hong Kong. “Key Hong Kong corporates remain active and we continue to see good deal flow. Our treasury clients continue to use Hong Kong as a key treasury hub.” M&A volumes in Hong Kong also reportedly remained healthy during the year, with inbound volumes up 50% to $34.12b (US$4.4b) as of November YTD and outbound running at $317.9b (US$41b) over the same period, he added. BDO’s Chan added that banks who are less reliant on retail banking were likely not much affected by the protests. “In general, banks that are less reliant on retail banking business will find the social unrest less disruptive. However, the extent of negative sentiment created by the social movement will drag down the economy through its effect on the retail and property market which ultimately will affect all banks,” he said. He left one piece of advice for banks: “Adopt a conservative strategy to sail through this storm.”
COVID-19’s impact on retail banking
SEGMENT REPORT: MOBILE WALLETS
Crunch time for Malaysia’s e-wallets as firms set fees The biggest e-wallets are charging 0.5% from merchants who use their services as their subscriptions soar.
he year 2020 dawns a new era for cardless transactions in Malaysia, with big players confident enough about their customer footholds. These firms have begun charging a 0.5% commission to the merchants who make use of their services, industry sources say. At the same time, Bank Negara Malaysia will give US$7.25 (RM30) in credit to those who sign up for any of the country’s three biggest players: Touch N’ Go, Grab and Boost. Already, the number of contactless payments via debit cards rose at an annual rate of 288% from 12.8 million in 2017 to 49.7 million in 2018, data analytics and consulting firm GlobalData reported. They noted that the number of contactless point-ofsales terminals in the country rose by 90.3% in 2018 to reach 207,562. Tok Kim Wah, CEO of Mobiedge, an e-wallet aggregator for banks, said that there are as many as half a million POS terminals out there for both credit cards and QR codes.
The share of debit cards in total payments is expected to increase from only 25.8% in 2019 to 41.8% in 2023.
Mobiedge alone has installed over 10,000 terminals across Malaysia for Alipay, which is only usually used for big transactions. “People can use Alipay to purchase a $50,000 watch. But nobody will use it to buy a cup of coffee. So for big items they tend to use Alipay but for an everyday food stall, for example, they will use Touch N’ Go and Boost.,” he shared. This aligns with GlobalData’s report, which says that debit cards are more used for low-value payment transactions. He also confirmed that the average size of a transaction using an e-wallet is around ten dollars. “People actually don’t want more than that because in case you lose your phone, somebody can use the wallet.” The expanding network of POS transactions, coupled with the central bank’s efforts to encourage cashless adoption, is forecast to push the share of debit cards in total card payments from only 25.8% in 2019 to 41.8% in 2023, said GlobalData.
Mom-and-pop troubles It wasn’t all smooth sailing for the e-wallets, however. Whilst big retailers are quick to adapt to the technology, smaller businesses remain reluctant to join the trend. “There is a lack of knowledge and some do not care much for it. But the trend is picking up. The customers are asking the store to accept e-payments and they have been forced to sign wallets up,” Tok said. Mom-and-pop shops are the most resistant to the change. “The smaller ones, the mom and pop shops, find it very hard to understand [the system] and for most of them, if they don’t have a smartphone, they find it hard to understand how it works.” This suggests the need to better educate SMEs on emerging technologies. In a bid to boost e-wallet adoption, the central bank has set aside US$108.75m (RM450m) for new e-wallet users under the e-Tunai Rakyat Initiative. New users who sign up for an e-wallet get US$7.25 (RM30). “It is a big hit—everyone is setting up, everyone is using the money [given by the central bank],” shared Tok. The initiative, launched in January, is offered under Boost, Touch N Go, and Grab, which according to Tok were likely chosen because they are “the most likely to make it.” Between these three players, more than 5 million Malaysians were using e-wallets, even before the launch. “There are about 46 licensees issued—wallet licenses—issued over the years, but only these three guys are active and gradually increasing their users everyday,” he added. It has proven to be a massive success. As of 19 January, the central bank has received 2.9 million e-Tunai Rakyat applications. Of these, 2.2 million have been approved, according to Finance Minister Lim Guan Eng. By 5 February, the number had ballooned to 6 million, with more or less US$43.5m (RM180m) already given out. By Frances Gagua ASIAN BANKING AND FINANCE | q2 2020 23
MARKET REPORT: ASIAn banks
Banks will need to embrace change to avoid dire straits in the near future.
Asian banks face consolidation as fintech, neobanks usurp market space Banks’ hopes for survival lie in the US$100b of new revenue opportunties, reports McKinsey & Co.
sia’s emerging markets have become a major engine of growth in global banking. More than 40 of the world’s 100 largest banks by assets are Asian and account for approximately 50% of the market capitalization of the top 100 banks globally. Asia has been the world’s largest regional banking market for a decade, generating pre-tax Asia has been the largest regional banking market for more than ten years
Source: Global Banking Pools, from Panorama by McKinsey
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profits in excess of US$700b and accounting for 37% of global banking profit pools in 2018. McKinsey estimates that as incomes continue to rise and the middle class grows to include two-thirds of Asian households, personal financial assets in the region will total US$69t by 2025, representing approximately three-quarters of the global total. Not only have Asian banks caught up and begun to surpass their Western peers in scale, but consumers’ tech-savviness has created opportunities for banks to deliver new innovations and leap ahead. Asia’s best-known financial technology (fintech) innovators, including Alipay and WeChat Pay, lead the world in scaling digital payments. According to McKinsey’s Global Payments Map, digital payments in China
account for approximately 99% of the country’s non‑cash transaction volume and 45% of digital payments worldwide. Across Asia, incumbent banks are partnering with fintech startups to promote digital payments. In Thailand, Kasikornbank and Grab have teamed up to launch GrabPay by KBank, a mobile wallet. BRI (Bank Rakyat Indonesia) has partnered with Alipay to expand point-of-sale acceptance of mobile payments for Chinese tourists visiting Indonesia. Asia has also proven to be fertile ground for the development of digital banking, with numerous companies making the transition from technology platform to digital bank. In China, Tencent’s WeChat offers loans through WeBank; in South Korea, Kakao Talk launched a bank—Kakao
MARKET REPORT: ASIAn banks Bank—in 2017; and the Japanese e-commerce group Rakuten has expanded into credit cards, digital banking, investments, and insurance. Not to be outdone by fintech disruptors, traditional banks have launched stand-alone digital banks, (e.g., The State Bank of India’s YONO, BTPN’s Jenius in Indonesia, and DBS digibank in India and Indonesia) as a way to reach new markets and to acquire new customers at lower cost. The rise of ecosystems as a new way of organizing economic activity is another area where Asia is leading. For example, a diversified ecosystem for trade, including banking and payments, has emerged from Alibaba’s platforms for B2B and B2C commerce. Ping An, one of China’s largest financial conglomerates, has reinvented itself as a “tech + fin” ecosystem company, providing loans and investments, as well as insurance, across platforms for healthcare, housing, and more. Banks in diverse markets are also building digital platforms as a way to integrate financial services into the everyday activities of consumers and small and medium-size enterprises (SMEs), e.g., HDFC Bank has broadened services for small farmers in India; DBS Marketplace enables consumers to search for cars, auto loans, and more in Singapore. Asian banking braces for consolidation For most of the past decade, Asia banking has been the darling of the world, but this is no longer the case. Banking industry revenue growth in Asia has slowed from double digits in the early years of the decade to 5% per annum for the period from 2014-2018. And whilst Asia today accounts for more than a third of global banking profit pools, this has shrunk from nearly half in 2010, as banks in developed markets have recovered from the Global Financial Crisis. Margins are also thinning,
as banks in both emerging and developed markets contend with fierce competition from digital attackers and peer banks. Average banking ROE for Asia decreased from 12.4% in 2010 to 10.1% in 2018. In emerging markets, rising capital costs and declining asset quality have also taken their bite out of returns, pushing the average ROE down from 19.5 in 2010 to 11.4% in 2018, converging with the global average. Investors have shown strong support for the region’s fintech and big tech disruptors, but their outlook for Asia’s traditional banks is, on balance, pessimistic, pushing P/B ratios for Asia banking down from 1.4 in 2010 to 0.7 in 2018—trailing the global average of 0.9. If, as forecasts suggest, GDP growth continues to lose steam across emerging Asia, banks will be challenged to find new avenues of growth and will likely have to deal with deteriorating asset quality and rising risk cost. Already in 2018, risk cost provisions for Asia rose to approximately 0.3%, the highest level of loan losses for the region since 2002. Slower GDP growth in China—compounded by ongoing trade friction with the US and the rapid increase in real estate prices relative to household income—could weigh heavily on the country’s trading partners, as the effect of a correction could potentially destabilize banks in neighboring markets. In addition to these headwinds, open banking is taking hold, with diverse markets moving toward broader participation in the banking system. India, for example, allows non-bank service providers direct access to the United Payments Interface; Hong Kong and Singapore have recently introduced new procedures for licensing digitalonly banks. Australia and Singapore—among others—have adopted open banking rules requiring banks to allow qualified third-party service providers to link to banking systems to access account information and
Across Asia, incumbent banks are partnering with fintech startups to promote digital payments.
initiate transactions on behalf of customers. McKinsey expects that as regulators consider ways to promote lower costs and better products for consumers, as well as improved system efficiencies and controls, open banking will likely become the norm in most Asian markets. Most banks, however, will be challenged to increase their returns adequately to win investors over and execute the transformation required to remain competitive. Well-capitalized institutions generating market-leading returns will likely seek to cement their advantage by acquiring smaller (less-well-capitalized) organizations to increase scale inorganically. Weighing these dynamics, Asia’s banks are bracing for consolidation. Reinventing the Future Just as iron sharpens iron, we believe that the region’s banking industry will emerge stronger and leaner than ever. But to remain relevant each bank must reinvent and must balance short-term goals—in particular strengthening the core and capturing pockets of growth—with priorities for the long term. The latter includes articulating anew the bank’s purpose for the digital age, redefining its value proposition, and rebuilding the operating model, amongst others. Increasingly, banks will both acquire new customers and interact with ongoing customers through digital ecosystems, requiring new approaches to branding and relationship management as well as changes
Bank’s price-to-book multiples have declined, reflecting investors’ negative expectations
Source: SNL Banker, Global Banking Pools, from Panorama by McKinsey
ASIAN BANKING AND FINANCE | q2 2020 25
MARKET REPORT: ASIAn banks in business model and technology architecture. Organizations that generate returns below the average cost of capital—approximately twothirds of Asian banks—will face an existential choice: Either reinvent to stay relevant or lag behind and eventually disappear. Asia’s banking leaders have already taken decisive steps to strengthen the core, focusing on productivity, risk, and capital optimization. Many have reduced operating costs by 30-40 % across sales and service, support functions, and back-office operations through extensive digitization. The full potential of this opportunity lies in adopting zero-based budgeting to transform mindsets and redesign processes to achieve radical gains in productivity. For risk management, banks are finding that they can reduce loan losses whilst allowing a broader population to qualify for loans by developing machine learning algorithms to analyze a combination of traditional underwriting data and unstructured data from internal and external sources. Capital allocation is another area where banks can leverage new strengths in data analytics to reduce waste. For example, some banks are able to allocate capital consumption to the level of products and individual accounts, which in turn leads to highly accurate risk weightings at the portfolio level. As a result, these banks have been able to free up between 10 and 20% of capital. To achieve such radical improvements in performance, banks must leverage all the new
DBS Hong Kong branch
Margins are also thinning, as banks in both emerging and developed markets contend with fierce competition from digital attackers and peer banks.
Asia’s banks can leverage strong growth in retail and in small and medium-size enterprise lending
Source: Global Banking Pools, from Panorama by McKinsey
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tools, technologies, and capabilities available today, including digitization, advanced data analytics, robotics, and AI. Banks can deploy these same capabilities in pursuit of strategic growth, focusing on four fast-growing businesses: wealth management, consumer and SME lending, and transaction banking. Together, these businesses hold the potential for US$100b in new revenue for Asia’s banks each year. In wealth management, the key is to strike the right balance between self-guided digital tools and high-touch consultation. Within high- and ultra-high-net-worth segments, this means delivering portfolio offerings tailored to individual client needs. Use of voice recognition and AI can support a high degree of personalization at scale for the mass affluent segment. Consumer and SME lending are also poised for strong growth. Retail lending in Asia, which totaled US$12.8t in 2018, is on track to reach US$21.2t in 2025. The loan book for SMEs—already bigger than retail and corporate lending—is expected to grow 9% each year, totaling US$23t in 2025. Banks can use this strong growth as a foundation for developing new value propositions and multiplying revenue streams. In the consumer lending market, regulators in several countries are wary of mounting consumer debt levels, and banks should use sophisticated risk models to identify the most qualified
customers within segments where product penetration is low relative to GDP. Similarly, by combining traditional and non-traditional data, leading banks and fintech attackers have built risk-scoring engines to speed up loan approvals for SME customers, even those with limited or no credit history. One example is HDFC’s “Milk-toMoney” program in India, which tracks regular ATM deposits to establish a credit profile for dairy farmers, many of whom have only recently opened bank accounts. Finally, transaction banking, which already accounts for approximately a third of all banking revenues in Asia and captures more than half of transaction banking revenues globally, holds significant potential for further growth. Banks can potentially increase transaction banking revenue by 10-20% across four main business lines: cash management, trade services, securities, and cross-border flows. Competition is fierce and margins are thin, making it crucial for banks to combine scale with sophisticated analytics capabilities to eliminate waste, create new products, and deepen relationships. In response, leading banks are using APIs to integrate banking functions more deeply within corporate systems, enabling them to provide a dashboard view, for example, of intraday cash position across multiple currencies, investments, working capital, and payables. What is
MARKET REPORT: ASIAn banks more, advanced data analytical models are helping banks enhance their liquidity management services, optimize netting arrangements for on-us transactions, and implement dynamic pricing. Flexible technology architecture To compete with big tech companies on speed, productivity, and customer experience requires modular platforms, which allow developers continuous integration and interoperability with core systems. Whilst core systems may be transformed gradually, the modular applications or microservices supporting specific use cases can be updated frequently as the market changes and new innovations become available. Beyond architectural and system changes, banks should also learn to adopt new ways of working. This requires not only flexibility in acquiring, upskilling, and integrating new talent profiles, but also shifting to a new operating model and culture in which business and technology competencies are more closely intertwined. Advanced data analytics Advanced data analytics form the cornerstone of superior customer experience, and many banks now focus on data as a core enterprise asset. This entails the articulation of an enterprise-wide data strategy and investment roadmap so that dataand-analytics projects can be tightly linked to value creation. Banks should focus first on advanced analytics use cases with the greatest impact on customer experience and value to the bank. Commonwealth Bank of Australia (CBA), for example, has built a customer engagement engine that analyzes more than 30 billion data points to generate upwards of 40 million offers each month. Developing a top-notch data-and-analytics program requires vision and commitment, and to earn a good return on the investment, it is crucial to give employees the tools and skills they need to formulate their own data queries for strategic planning and day-today management of strategic goals.
This requires a combination of strong governance and autonomy to enable individuals across the entire organization—from sales and service to risk management and digital innovation—to excel in a data-driven environment. Talent management With automation expected to disrupt up to 40% of all banking activity and affecting half of banking jobs by 2030, banks are today evaluating how to combine recruiting, reskilling, and redeployment to build the workforce of the future. Malaysia’s Maybank has launched a learning program to help employees acquire relevant skills for the next phase of their careers, with sessions on coding, algorithm programming, artificial intelligence, and machine learning. Aiming to enhance their appeal to millennials with superior digital skills, many banks are building a reputation for leadership in technological innovation, forging ties with fintech and academic communities, and developing a culture where talented and ambitious employees know they can make a difference. It is critical to understand the shifts required in the bank’s composite talent profile, and to succeed in this transition, top leaders must commit not only to recruiting new talent but also to helping existing employees acquire the skills needed to thrive in the new culture. Partnerships and M&As In this age of open banking and digital ecosystems, many banks are finding that partnerships are critical to success in extending their footprint, delivering superior products, and gaining access both to new customers and to new types of data. As an example, three of Australia’s big four banks—ANZ, NAB, and Westpac—have invested in Data Republic, a data hub through which organizations can store, exchange, and collaborate on aggregated data projects in a secure environment. In Thailand,
Two-thirds of Asian banks will face an existential choice: Either reinvent to stay relevant or lag behind and eventually disappear.
Siam Commercial Bank and Julius Baer have partnered to deliver global investment opportunities to customers. In Indonesia, Bank Central Asia (BCA) has linked with leading e-commerce sites, enabling the bank to expand its lending business whilst keeping risk costs low. And in Singapore, OCBC offers home mortgages through the personal finance portal MoneySmart. Mergers and acquisitions (M&A) are another way to acquire crucial capabilities and extend market reach. DBS, for example, has acquired ANZ operations in five countries. Kotak Bank has extended its footprint into southern India by acquiring ING Vysya and entered the lower end of the market with its acquisition of BSS Microfinance. Given the importance of scale in achieving higher returns carefully executed mergers and acquisitions offer an attractive option for increasing market share and consolidating scale, capabilities, and talent. Now is the time for banks to establish a dedicated group responsible for planning and managing M&A, as well as partnerships. Banks should remember that 90% of the value of a merger is realized within the first two years and establish early on a plan for post-merger integration to ensure that synergies are realized promptly. From McKinsey & Co. 2020 report “Future of Asia: Banking”
Partnerships and M&A are effective
ASIAN BANKING AND FINANCE | q2 2020 27
case study: new ing office
ING’s global headquarters, Cedar
What can Asian banks learn from ING’s new office?
The bank’s CEO and board members no longer have their own offices, but instead work together in one large space.
n January, ING finally unveiled its brand new headquarters, Cedar. Located at Cumulus Park at the southeast section of Amsterdam, the 39,000 sqm development features a modern, all-glass facade with wide, open areas to reflect the bank’s focus on transparency and sustainability. Previously, ING called the Amsterdamse Poort building their home. It was the direct opposite of Cedar with its traditional albeit sustainable build: brown stone walls, low ceilings, narrow stairs, and average-sized rooms and halls. Although a unique and sustainable office, with its glass roofs that let in natural light as well as a plethora of plant life, the old building had become incongruous with the changes that ING has undergone in recent years. “The time had come to change to something different because [the building] didn’t suit our new way of working anymore,” Christophe Linke, ING group investor relations leader, told Asian Banking and Finance. “We have changed to agile
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working, and [this] requires that teams can join easily together and work together on projects. The old building didn’t offer that.” In fact, the executive board no longer has personal offices, but instead share a large hall where they can work together. Linke adds that the CEO does not even have his own room. This is in line with how ING wants to present itself as a global financial company: communitydriven and transparent. “This building [shows] how we would like to cooperate [with the
community],” said Linke. “We would like to present ourselves as open, and transparent. To give you an example, our executive board doesn’t have any more offices. They have a large table where they work together.” Cedar’s architecture also fosters a healthy lifestyle amongst its 2,900 workers. Unlike the narrow staircases of the Amsterdamse Poort building, ING’s new HQ has wide stairs conveniently located at the heart of the two buildings that make up Cedar. Elevators are located at the corners of the building. “The goal is to make people walk and take the stairs, which is much healthier, and by that way, they get to meet new people and they get to see what other people are working on,” said Linke. “So when you walk around the building, you always have the impression that you are part of a larger organization that’s working on a lot of stuff. And you don’t walk in aisles with offices or closed corners on the left and on the right.” Keeping sustainability in mind, ING used concrete and rubble from a demolished office and tried to minimise utilising new materials in building Cedar. The building also uses solar energy to power its electrical needs, with about 3,000 sqft of solar panels in the roof of the development. ING has banned the use of disposable plastic in Cedar’s restaurants and coffee shops. Further, various measures have also been put into place to save as much as 12 million litres of water every year, compared to other offices of the same size. By Frances Gagua
LIEW NAM SOON
Why winning in financial services requires ecosystem thinking
sia is currently in the midst of digital disruption across all sectors including financial services. From digital giants in China, to mega-platforms in Southeast Asia, the trend is clear and present. Historically, banks have believed that their large customer base, relatively strong balance sheets and regulatory expertise would be enough to absorb any impact from insurgents. Emerging markets, however, are proving otherwise as fertile grounds emerge for non-financial services disruptors, covering payments, lending, investments, insurance. In Southeast Asia (ASEAN), disruptive companies are seizing opportunities to tap the huge consumer base who have less access to financial services than their peers in developed markets. The young demographic in ASEAN is also especially receptive to new mobile technologies. The size of the prize is especially attractive in countries with large populations and demographic dividends such as Indonesia and Vietnam. Through the clever use of technology, disruptive companies can bypass the infrastructure that traditional players would require to reach an equally large customer base, and deliver lending, insurance and investment products to the un-banked and underserved. So, what is the path to success for participants in this new world for financial services? Collaborate to compete Collaboration is increasingly the answer to address the pressure that traditional banks are under to digitalize their business model in order to improve customer experience and compete against competition from disruptors. In other words, embracing the need to create or join an ecosystem that can provide digitally enabled access points to multiple services is key. After all, 68% of consumers would be ready to consider a financial product offered by a nonfinancial services company, according to the latest EY Global FinTech Adoption Index. We are already seeing examples where banks are partnering with insurance companies, ride-sharing companies, property and auto marketplaces in the ecosystem to offer a more complete experience for their customers. Through a collaborative approach with others in
the ecosystem, incumbents have the opportunity to essentially introduce banking to everyday life activities and, as a result, capture new revenue streams and grow their customer base. It is also a way for banks to implement what consumer companies have been doing for years and â€œlock inâ€? their customers. For example, you are more likely to stick with your current mobile device maker and spend more with them because you have also subscribed to their music and TV streaming or cloud services. For the disruptors, when they partner with banks, they get access to strong credit risk management and compliance capabilities after all, financial services is a highly regulated industry. Yet, successful partnerships that translate into profitability will require a distinctive service proposition and not just replicating what is already offered in the market. The key fact is that the digital financial services sector in Southeast Asia is fragmented with banks and non-banks including Big Tech and established consumer players carving out their own space. And the lines between these different categories of players are blurring by the day. The right ecosystem for your needs Choosing which ecosystem to be part of, either through collaboration or by being the lead architect, is an important first step. A key consideration would be determining the target markets segments, addressable profit pools and compelling proposition of products and services. Choosing the right technology and operations platform is equally important. That includes not just the product platform, but essential considerations like the AI and data analytics that will make the customer journey personalized and appealing. Ultimately, as financial services becomes an allpeople business, participants must get these four areas right: understanding the needs of customers in the different markets, adapting the value proposition accordingly, choosing the appropriate market segments and knowing where the profit pools lie. While the jury is still out on what will be the winning business models in ASEAN, what is clear is that the players who own the customers and can monetize relationships will emerge as the winners.
LIEW NAM SOON Regional Managing Partner ASEAN Ernst & Young
ASIAN BANKING AND FINANCE | q2 2020 29
The machine learning challenge: Why does it matter to banks in Singapore?
Joseph alfred Head of Policy and Technical ACCA Singapore
nderstanding the intricacies of global best practices and adapting to it will set machine learning (ML) on a successful course; highly skilled accountants are vital to that process—including those in the banking industry. According to a Bloomberg Intelligence analyst, Singapore banks in general are likely to lead their Southeast Asia peers in the adoption of new technology, having spent $1.42b last year—about three times more than Thailand’s four largest banks. This can be largely attributed to Singapore’s supportive regulatory infrastructure and its status as a technology and business hub for institutions with operations in ASEAN. In the near future, the functions and operations of banks will be redefined with the adoption of ML— processes, products as well as customer and employee experiences will be reimagined. ACCA’s recent report ‘Machine learning: more science than fiction’ took a look at not just what ML actually is and how it operates, but it also examines the ethical considerations, taking guidance from the fundamental principles established by the International Ethics Standard Board for Accountants (IESBA). Ethical behaviour and accountability underpin the standard of behaviour expected of a professional accountant and within any organisation, it is the key requirement of the finance function to provide tough yet constructive challenges to ensure business decisions are grounded on sound ethical principles. In seeing ML’s potential, professional accountants in financial services organisations need to think of the potential benefits as well as the long-term sustainable advantages and ethical considerations. Last year, the Personal Data Protection Commission of Singapore published a proposed model for a governance framework that articulates a set of ethical principles for AI. Named the “Model AI Governance Framework (“Model Framework”), it provides guidance on key issues to be considered and measures that can be implemented in organisations. The guiding principles expect decisions based on AI to be explainable, transparent and fair; and that AI solutions be humancentric. To be fair, any bias must be identified and rectified. Dealing with bias is a frequently discussed source of ethical challenge. ML algorithms, both supervised and unsupervised, need to be fully interpreted in order to avoid issues such as confusing correlation with causation. For professional accountants, objectivity may be compromised and they have to consider whether they
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have been biased in favour of assuming the outcomes are valid merely because they are supported by an ML algorithm. Consequently, professional scepticism and a mindset willing to take on new challenges are essential to avoid being afraid to dig deeper if they are pressured to ignore the issue. The most important and non-negotiable requirement for powering the use of ML is data, and organisations must develop a coherent data strategy as meaningful insight with a low likelihood of bias depends on having enough data across all categories. Banking providers are the custodians of vast amount of data and it is this richness of data which enables the algorithm to identify relationships which might not be obvious to a human. As with many important issues, Singapore’s founding Prime Minister, Mr. Lee Kuan Yew, was far ahead of his time in identifying powerful trends and their impact on the world. He knew that there was a great risk of science and technology turning into Frankenstein’s monster and that these must be developed and harnessed without losing touch with people’s core, ethical values. “People must stay abreast of the state-of-the-art technology, but must never lose their core values. Science and technology are decisive in determining future progress. But they should not be allowed to break up families that have to imbue children with a strong sense of social responsibility and the conscience to distinguish between right and wrong.” What matters here is professional competence and due care in recognising the potential for breaches. Accountants must understand the increasing risks to data, the regulatory requirements and the financial implications of breaching these. On a practical level, this could mean instances such as the ability to identify and assess the controls in place around a data lake or background checks on employees contracted into the team. From a risk management standpoint, they may also need to quantify the impact of a data breach on the business and its reputation. In a complex landscape, a business would better confront ethical questions with the help of philosophy. Singaporeans should not be afraid to make deeper, value judgements. The debate about economics should go beyond technicalities of GDP growth and unemployment, and into deeper considerations of values like freedom, equality, justice, and the nature of society. An important principle for ethically sound ML solutions is that they should be designed in a way that does not alter the pattern of accountability established.
Accelerating Indonesian microfinance with high tech and high touch
conomic inclusion can seem like a faraway goal for many, if not most, countries around the world. Achieving it would mean being able to lift people out of poverty, create equality between genders and socio-economic backgrounds, and build socially inclusive futures for our children. According to the World Economic Forum’s Inclusive Development Index 2018, the top-ranking countries for economic inclusion are Scandinavian, Nordic, and European countries. These are small countries, with populations of 8.57 million people or less—there are only 362,860 people in Iceland. In comparison, countries with far more dense populations find it harder to foster economic inclusion. Indonesia sits at 36th place on the index under ‘Emerging Economies’—below fellow Southeast Asian countries Malaysia, Thailand, and Vietnam, but above the Philippines and Laos. However, this position is nothing to get too wound up about, because despite Indonesia’s incredibly dense population of 264 million and an archipelago terrain, we are still considered a slowly advancing economy. The report notes that Indonesia lacks progress on inclusion indicators such as income and wealth inequality. In order to combat this, the country needs to take big leaps forward in terms of technology and financial inclusion. But to do this, it is imperative that plenty of attention, effort, and investment be paid to developing people, streamlining the training process, and deploying offline assets. MFIs as agents of change Modern microfinance institutions (MFIs) are in the best position to help, and by using the agent network model, they can be highly successful in spreading more financial inclusion and literacy to more Indonesians. In this manner, high-tech and innovative systems must be well-synced with high-touch and welltrained manpower to run like clockwork. Agents established in rural areas are absolutely crucial to creating touch points needed for the local community to get educated and involved. These agents need to foster a strong sense of trust between the banks they represent and the people to whom we are trying to give basic financial service access.
As a case study, Baobab Madagascar (formerly Microcred Banque Madagascar) equipped its agents with a nano-loan product based on automated credit scoring. By 2017, agents accounted for more than half of the bank’s business, leading to a restructuring exercise to make agents its primary consumer channel. Madagascar’s case study proves that focusing on empowering agents with better tools to provide more services is deeply rewarding. But this is not to say that keeping agents up-todate is an easy task. It’s far from easy to keep every agent’s mobile software current, especially those in truly hard-to-reach places. For this reason, modern MFIs should look into using satellites as a way of instantly keeping their agents’ apps relevant, functioning, and up-to-date. In other words, the Goldeneye-like satellite beams wifi access straight down from space—no cellular towers needed. For us, it acts as a practical backbone for network stability. This, in turn, creates a financial ecosystem that connects and unites the entire country. It’s a big reason why we’ve been able to make progress in recent years. In 2019, our agent network known as BRILink produced a transaction volume of approximately $44.8b. Thinking outside the vault Simple, yet innovative thinking is also key for MFIs to meet their target customers wherever they are. Another example from our own bag of tricks is the first-ever ‘floating bank’ initiative, aimed at reaching people in the coastal areas and remote islands in Indonesia (with more than 17,000 islands, there are a lot of these areas afoot). A floating bank is exactly what it sounds like: a Bank BRI-owned ship that acts as a fully functioning bank branch at sea. To date, we have four of them on the water. Starting collaborations and partnerships with companies that are making efforts to improve agent network models can also be a great way to strive for impact. By putting emphasis on creating a system in which high tech and high touch approaches work hand-in-hand, Indonesia can start to make significantly bigger leaps toward economic inclusion through financial literacy. Whilst Indonesia has already reached 75% financial inclusion, OJK surveys show that only 38% of Indonesians are financially literate. This means there is still much work to be done.
KASPAR SITUMORANG Executive Vice President Bank BRI
ASIAN BANKING AND FINANCE | q2 2020 31
The New Normal: How digital forces will upend banking in Asia
n the past 12 months, we witnessed a range of companies racing to qualify for a spot among Singapore’s first digital banks, mirroring what happened with Hong Kong’s virtual bank licenses the year before. The sense of urgency is understandable— the nature of what it means to be a bank is changing, and this shift is opening a gap in which newer operators can assert themselves. The importance of this is underscored by the fact that the Asia Pacific region has an astonishing share of the world’s digitally native population; in markets like India, Vietnam and Thailand, it’s common to become “digitally banked” without having had a credit card—or even a bank account. While Asia Pacific is diverse in its financial systems, there are some unifying factors which are going to change the face of banking across the region. Here’s what we see as the most important ones.
RUPERT NAYLOR Senior Vice President, APAC Mastercard
Keeping an open mind: Financial institutions take a contemporary approach to open banking Open banking is catalyzing systemic and far-reaching change across the global financial services industry. Banks have responded by shifting away from the traditional approach to innovation that starts with the legacy technology stack, to a consumer-focused approach based on design thinking that enables more rapid innovation—failing fast where necessary. In Asia, where speed-to-market is absolutely critical, we’re also seeing a greater willingness amongst banks to partner with industry players to accelerate innovation. DBS’s Developers API Hub is a prime example of how Singapore is leading the way. In addition to stimulating innovation and competition, open banking is also building a collaborative ecosystem in which consumer consent drives the sharing of data between financial institutions and fintechs, while enabling benefits for those consumers. And this is where we see a monumental shift taking place. The most successful players will be those who deliver the greatest value to consumers in the form of superior products, services and by using their personal data responsibly. For consumers, technology has transformed their expectations across multiple dimensions ranging from bespoke offers and rewards, to the convenience of digital experiences, to how products and services should be tailored to their personal preferences. is these ever-higher standards and increasing expectations that are driving the innovation race in Southeast Asia and across the world.
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Cat and mouse game: How banks are keeping hardworking cybercriminals at bay More than half of the companies in Asia Pacific have experienced a cybersecurity breach or are unaware if one has taken place at all—leading to potential economic losses of US$1.745t across the region. With most parts of Asia being mobile-first markets, banks are racing to make superior digital banking solutions. The proliferation of wallets and the introduction of open banking in various formats will accelerate this trend. While these devices open up a huge vector for cyberattacks, banks need to invest in cutting-edge technologies that include device binding and behavioral biometrics to keep their consumer interactions safe and secure. As risks mount, banks are developing comprehensive cybersecurity strategies that proactively protect consumer. In Southeast Asia, where one data breach can cost an average of US$2.62m, failure to act can cause longterm damage to a bank’s finances and reputation. Efficient and effective cybersecurity strategies should be contextually embedded at every level of an institution and at the outset of any new offering. Cashless is king? How going cashless drives financial inclusion and inclusive growth In Southeast Asia, nearly three-quarters of adults don’t have a formal bank account, while 33% of businesses in the region lack proper financing to grow their businesses and plan for the future. At the same time, Asia Pacific’s payments market is on track to grow to twice the size of any other regional payments market in the world, with digital banks and fintechs helping to lower the barriers to financial inclusion and mobile payments becoming more accessible. Victory in the digital banking/fintech battle will ultimately be decided by players’ ability to foster financial inclusion, rather than continuous technological advancement. Once these businesses have captured large portions of more technologically sophisticated consumers, they will have to expand outwards, rather than upwards, and that will mean gaining a greater understanding of the needs of populations who are far removed from any kind of formal banking system. The incentives need to be clear for these prospective customers to make the jump into a truly foreign ecosystem, but for those companies that are able to connect these dots, the potential payoffs are substantial—both for the businesses themselves, and for the broader economy.
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