Technology, Regulation

Eating each other’s lunch

Strategic adviser and fintech partner, or reactive follower? As technology and regulatory changes upend the transaction banking landscape, cross-functional teams rather than islands of expertise are the way forward, argues Boon Hiong Chan

In Asia, the rapid convergence of market needs, technology and evolving regulations have rearranged the banking industry’s goalposts, regardless of whether its incumbents are ready or not.

New roles, growth and challenges that present themselves from creatively-applied advanced technologies continue to raise the bar for banking model differentiators and competitiveness. In the payments area, the surge of ubiquitous “pay anywhere, anytime” fintech payments − the hallmark of today’s e-commerce and retail lifestyle activities − exemplifies this dynamism. It has led to new scope for managing corporate treasury in real time and brought additional areas of competitive advantage for treasurers. Wholesalers can now connect directly with their markets and solve supply chain demand forecasting, using transaction data to get a much more accurate picture of what is needed when and where.

At a macro level, ASEAN World Economic Forums1, the “Digital ASEAN”2 working group and the ASEAN central banks’ work on cross-border instant payment3, as well as the attractive prospects of a more consistent regional compliance policies should pave the way for further developments and adoption.

In the face of these and other external changes, to future-proof their strategies banks should address the following transformative drivers – examples of which are outlined below:

  • Business model revisions by fintechs;
  • Once-in-a-lifetime events; and
  • Regulatory changes.
Fiona Gallagher

Boon-Hiong Chan

Global Head of Market Advocacy, Securities Services at Deutsche Bank

Business model pivot – competitor, partner or both?

In September 2018 JD Finance - one of the largest online financing platforms in China - changed its name to JD Data Science and introduced a new corporate slogan stating that it is now a “data sciences company servicing financial institutions. Originally, JD Finance was a B2C company that provided financial services directly to consumers; it has now pivoted to a B2B2C model.

This change follows the repositioning by several technology giants of their internet financing profiles. For example, in 2018 Baidu Finance was rebranded as “Du Xiao Man” while Ant Financial Cloud became Ant Financial Technology4 to emphasise its technology services.

Other fintechs are not repositioning, but instead adopting a more multi-dimensional role made up of client, partner and competitor. For example, Ant Financial remains highly active in internet-based asset management, also credit lending via popular brands such as “Yu’e Bao”, Huabei and Jiebei, which is a consumer loan service. Ant Financial (“Ant”) also operates a private wholly-digital virtual bank called “MY Bank” in China, and pursues an international agenda in payment services − with stakes in PAYMT, the largest payment service provider in India and HelloPay in ASEAN among others. Although Ant can be seen as competing for the same type of flows, it aggregates volume to allow scalable processing by banks that are still required to clear funds. This makes Ant a highly attractive client.

Smart banks are adapting to new regulations and positioning themselves with internet finance disrupters as partners, and the decision on whether to use these service providers as their own provider or to refer such former “disrupters” to their clients should provoke some thoughtful discussion.

 

“Today’s credit data companies can boast an extensive partner network that ranges from financial institutions to travel booking and shopping platforms.”

In the related area of credit data, improved profiling capabilities and automated decision processes brought by technological advancement is lowering operational costs.

Today’s credit data companies can boast an extensive partner network that ranges from financial institutions to travel booking and shopping platforms. This allows them to leverage a multitude of non-traditional financial data sources to extract, transfer and load these data for financial loan origination. Categories such as e-commerce transaction data, logistics data and online business turnover data are also increasingly utilised to capture the borrower’s business dynamics and to mitigate fraud risks.

GPS now makes it possible to locate, learn and verify business, payment and other locations; thus circumventing cumbersome and time-consuming physical verifications. This has resulted in a bank’s assessment of SME corporate borrowers’ liquidity position taking as little as 20 minutes.

Technology, the network of data sources used for risks analysis and the bank/non-bank partnership entrenches a network-based competitive model with the element of time as one of its differentiators. It is an attractive competitive strength and one that will demand superior execution skills.

 

China’s digital money

“The People’s Bank of China’s (PBOC) anticipated central bank digital currency promises to intersect with some of the greatest developments in internet finance, digital data-based financing and mass adoption of mobile and online payments in China.”

The People’s Bank of China’s (PBOC) anticipated central bank digital currency promises to intersect with some of the greatest developments in internet finance, digital data-based financing and mass adoption of mobile and online payments in China.

The PBOC digital currency is said to be a substitute for M0 Money Supply or coins and notes in circulation, and will introduce the central bank’s “digitised” trust into China’s massive digital economy. The 50-plus patents filed in the name of Digital Currency Research Lab of the PBOC and recruitment drives underline the determined and remarkable work that has been undertaken in recent years.

When it is launched, the PBOC digital currency will mark another milestone for China’s advances in digitised banking and finance. In Asia, together with Singapore and Thailand – also with digital representation of their currencies and expected applications in the banking and capital markets − they would represent a major milestone in the development of central banks’ digital currencies.

In the long term, exactly how central bank digital currencies and their applications can alter market behaviour, impact payments and transform market structure – and indeed impact many other areas – remains to be seen. For the time being, they have revived the question of the trade-off between financial system integrity and confidentiality. Whatever the answer, they will permanently change banking and finance.

 

The roles of laws and regulations in shaping the future

New laws and regulations therefore have the potential to create future avenues of growth, costs and risks when it comes to addressing personal privacy, transaction confidentiality and the growing digitalisation of the payments and financing ecosystem.

For example, financial services in China are being influenced by laws, rules and related documents that include the important 2016 Cybersecurity Law; the 2018 Personal Information Security Specification; and the 2019 Data Security Administrative Measures, which supplements the Cybersecurity Law with legally binding operating requirements. New legislations covering appropriate uses of data, reporting of abuses and data analytics firms have either came into effect or are being discussed.

In India, there is a growing momentum to localise financial data while Indonesia is reviewing its stances on the 2012 PP82 data localisation law and proposing a new personal data privacy law. In addition to the focus on data, across Asia regulatory interests continue to grow and consider responsible applications of artificial intelligence, the emergence of digital assets, outsourcing and the deployment of cloud computing, as well as consumer protection, dispute resolution, and fair-and-equitable competition. In Singapore and Hong Kong, virtual digital banks are expected soon.

 

Where is the silver bullet to address these changes?

The fast-changing nature of technology-driven competition and implications of legislations demand that banks be responsive and forward looking. At the same time, the uncertainties of the future, limited resources, competing choices, intersecting influences and “red-herring” trends can divert valuable resources away from preparing for the future.

Waiting until the trend or change is firmly established can be a strategy, but is one that loses the advantages of being first-mover – and in new areas, sustainable speed is one way for a participant to establish clear competitive leadership and significant market share. However, premature steps and venture risks that can spend scare resources are the potential downside to the first-mover stance – always an inherent risk for any company acting as the pioneer. Hence, the issue to respond to trends and changes is not necessarily about being the first move or second follower, but whether the market participant is prepared.

This can mean moving away from silo-bound expertise to an interdisciplinary team approach where team members have an in-depth knowledge and experience of technology; finance and banking; processes; clients; laws and regulations; economics and game theory.

Then, with a shared vision for what each trend can mean for day-to-day business, a meaningful short and long-term strategy can be better developed.

Boon-Hiong Chan is Global Head of Market Advocacy, Securities Services at Deutsche Bank

With thanks to Megan Li, a Deutsche Bank Corporate Bank management trainee, for the research on China

 

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Sources

1 See 'What is ASEAN?' at https://bit.ly/2qsGRhF, weforum.org
2 See 'Digital ASEAN' at https://bit.ly/2KKK6aR, weforum.org
3 See 'BOT Press Release No. 20/2019' at https://bit.ly/2s92Nih, bot.or.th
4 See https://bit.ly/2O8VxLE at antfin.com

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