Asian Banking & Finance (January - March 2020)

DISPLAY TO 31 MARCH 2020 Issue No. 98 Asian Banking & Finance

HONG LEONG’S DIGITAL CHARM OFFENSIVE ON KBZ BANK’S FINANCIAL INCLUSION DRIVE IN MYANMAR SINGAPORE’S CREDIT CARD REVENUES UNDER THREAT INDONESIA’S SHADOW LENDERS FACE CLOSURES IN 2020 FOREIGN FINTECHS TO BUOY TOKYO’S FINANCIAL INDUSTRY DOMENIC FUDA GROUP MANAGING DIRECTOR AND CEO, HONG LEONG BANK

FROM THE EDITOR PUBLISHER & EDITOR-IN-CHIEF PRODUCTION TEAM

In our first issue of the decade, we caught up with Domenic Fuda, group managing director and CEO of Hong Leong Bank, to find out how they are beefing up their tech investments as Malaysia prepares to hand out digital bank licenses. Head over to page 14 to learn more.

Tim Charlton Frances Jade Gagua Alyssa Divina Sandra Sendingan Shaina Teope Giullian Navarra

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KBZ Bank further pushes its financial inclusions drive and believes that they have found a way to crack through Myanmar’s heavy cash-based society.

Curious? Go to page 12 and learn more through Soe Ko Ko, KBZ’s head of agent banking. Still in the topic of financial inclusion, our event coverage of SFF x Switch on page 22, sees experts discuss updates about the financial inclusion movements of various Asian markets.

Tokyo’s leaders have also identified financial technology as the key to their dreams of getting back to its former glory of Asia’s top financial centre. Now, they are looking to tap into foreign fintech firms to drive this goal. Read more on page 24.

This edition also explores a burgeoning threat to credit card issuers’ revenues in Singapore, located on page 20.

Enjoy the issue!

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

ASIAN BANKING AND FINANCE | MARCH 2020 1

CONTENTS

10 24

EVENT COVERAGE TOKYO IS BANKING ON FOREIGN FINTECHS TO INTERVIEW REINVIGORATE ITS FINANCIAL SECTOR SWIFT

15

INTERVIEW INSIDE HONG LEONG BANK’S DIGITALISATION JOURNEY

18

REPORT DATA AND AUTOMATION WILL BUOY HONG KONG BANKS TO SURVIVE UNTIL 2030

REPORT

FIRST

OPINION

06 Indonesia’s non-bank financial

20 Why Singaporeans snub credit

26 Closing the trade finance gap

together

firms could face closures in 2020

cards when shopping abroad

07 Singapore crowned as APAC’s

28 Why digital banks are the future

fintech leader

08 Chinese banks risk losing $61b

markets

30 What you must know about

revenue in payments by 2025

INTERVIEW

EVENT COVERAGE

of financial inclusion in emerging

sustainable banking activities in

Bangladesh

12 How KBZ Bank is striding towards

22 Financial inclusion needs to be

32 The future of consumer credit

100% financial inclusion in

more than just technology

is in AI

Myanmar

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

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News from asianbankingandfinance.net Daily news from Asia MOST READ

FINANCIAL TECHNOLOGY

RETAIL BANKING

Australian fintech firms raise over $1.45b in the past four years

Credit costs will weigh on Singapore banks in 2020: analyst Earnings of Singapore’s banks are Investments in Australian fintech expected to remain flat in 2020F as companies multiplied at a higher credit costs and the continued compound annual growth rate (CAGR) of 59.5% to $1.45b (A$2.11b) compression of net interest margins (NIM) weigh in, reports UOB across 38 deals in 2019 compared Kay Hian. But recovery could be to 2015. Deals over $100m (A$45m) made up 41.9% of the capital raised. underway as the economy stabilises.

CASH MANAGEMENT

1 in 3 senior financial officers worried about global recession risks A third (30%) of chief financial officers (CFOs) and group treasurers in Asia Pacific flagged the possibility of a global recession as the biggest risk for their business in the next six to 12 months, according to a survey conducted by J.P. Morgan & Chase.

CARDS & PAYMENTS

Nearly 1 in 3 Singapore millennials prefer cashback cards: survey Almost a third (32%) of respondents said they used cashback cards the most, whilst 26% use airmiles cards.

Instant benefits (35%) was cited as the number one reason for using cashbacks, followed by ease of use and availability of options.

ISLAMIC BANKING

Regulatory uncertainty fails to cripple Bangladesh’s Islamic banks Demand for Islamic banking in Bangladesh will receive a boost from the country’s robust economic growth and rising population, reports Moody’s. The CAGR of Islamic financing between 2008 and 2018 hit more than 20%.

LENDING & CREDIT

$50b capital shortage may hit Indian banks in case of NBFC stress: report Under a stress test that assumes a third of banks’ NBFC and property exposure becomes non-performing, credit profiles of the state banks are expected to come under significant pressure, with the weakest players are expected to face solvency risks.

FIRST INVESTMENT BANKING FEES IN SINGAPORE HIT $868.1M IN 2019 SINGAPORE

Source: Refinitiv

S

ingapore investment banking activities generated more than $868.1m (S$1.17b) in fees during 2019, up 22.1% YoY from the previous year and the country’s strongest annual period since records began in 2000, reports Refinitiv.

Advisory fees for completed mergers and acquisitions (M&A) totalled a record-high $261.4m (S$354.29m) in 2019, up 14.6% YoY compared from 2018.

ECM underwriting fees skyrocketed 90.3% YoY from a year ago to a nine-year high of $208.6m (S$282.73m) whilst fees from DCM underwriting edged up 2.7% YoY to $175m (S$238.14m).

Syndicated lending fees also expanded 10.2% YoY to totaling $222.4m (S$301.43m).

Of the three major banks, DBS Group Holdings earned the most in investment banking fees for the year and topped the fee league table with a total of $102.4m (S$138.79m) to clinch 11.8% share of the total fee pool in Singapore.

By industry, financials and real estate tied for the first spot, each making up approximately 27% of the market share.

Government and agencies followed, taking up 16% of the share; whilst industrials, as as well as media and entertainment made up 11% and 9%, respectively.

6 ASIAN BANKING AND FINANCE | MARCH 2020

Bank Indonesia

a 2018 default of a local mid-sized company amidst allegations of fraud, Purnomo explained.

In contrast, large finance and leasing companies have been less affected by the funding crunch due to their stronger franchises and access to offshore financing and joint-financing from banks, the latter typically extended to bank-owned finance companies.

Small firms are most vulnerable to the oncoming challenges in the operating environment whilst large firms are well-positioned to handle headwinds in the industry, he added.

“The largest finance and leasing companies appear well placed to face headwinds, thanks to satisfactory earnings buffers from wide margins, low leverage, and, in many cases, funding and liquidity profiles that benefit from ordinary support from higher-rated bank or automotive affiliates,” he said.

Slower growth in the sector due to falling automotive sales is also likely to intensify competition amongst smaller players as well as put pressure on profitability and asset quality, Purnomo noted.

This protracted competition could tempt companies to loosen underwriting standards to maintain NBFI’s business growth and defend market share.

Relaxed macro-prudential measures models will since 2018 could also lead companies come under to take on greater credit risk. pressure if “Many have sought to offset lower banks continue new-vehicle financing by boosting to restrict funding, which used-vehicle financing in their asset mix,” noted Purnomo. may result “Any asset-quality weakening is in industry likely to be manageable for the largest consolidation. finance and leasing companies, due to better underwriting standards and risk controls,” he added.

Indonesia’s non-bank financial firms face getting axed in 2020 INDONESIA

I

ndonesia’s smallest non-bank financial and leasing companies may be forced to sell, merge, or cease operations altogether in 2020 as regulators move to require these firms to maintain a minimum capital of $7.1m (Rp100b), according to a report by Fitch Ratings.

Analyst Roy Purnomo noted that independent companies’ business models are likely to come under pressure if banks continue to restrict funding, which may result in industry consolidation and an increased market share for the largest players.

Non-bank financial and lending companies face funding challenges as domestic banks, the largest source of debt financing for local finance and leasing companies, are expected to remain cautious in extending credit to small and mid-sized independent companies that are not affiliated with banks or automotive entities.

The banking sector’s confidence in NBFIs remains weak following

NBFIs face reduced access to domestic funding

Source: Fitch Solutions, Financial Services Authority (OJK)

FIRST Financial wealth is no guarantee of a city’s status as a fintech hub.

You might call this the rise of nontraditional finance.

Singapore’s fintech ecosystem is among the best in the region.

Singapore crowned as APAC’s fintech leader SINGAPORE

S

ingapore led its Asia-Pacific peers as a world leader for fintech and took fourth place amongst cities globally, according to the inaugural Global Fintech Index City Rankings 2020 report by ranking analytics company Findexable.

The San Francisco Bay Area edged past more than 400 cities worldwide to take the top spot, followed by London and New York. Bangalore

and Mumbai in India were the only other Asian cities in the top 10, finishing in 7th and 10th place, respectively.

Meanwhile, Hong Kong finished just one point shy of the top 10, at 11th place.

Singapore as a country and as a city was evaluated based on the size of its fintech ecosystem and supporting structures like coworking spaces and accelerators;

the growth of fintechs in relation to the number of unicorns, events, and international collaboration, as well as the size of investments and their website ranking; and finally, the fintech environment in the country, which is measured through the ease of doing business in the city as well as the regulator environment, amongst other factors.

“The rankings are evidence of a worldwide de-coupling between the financial strength and the commercial domination of traditional financial centres.

Financial wealth is no guarantee of a city’s status as a fintech hub. You might call this the rise of nontraditional finance,” noted Simon Hardie, CEO of Findexable.

The study further noted that winning fintech hubs’ all carry a couple of common features.

“Fintech-friendly regulations incentivise entrepreneurship and encourage investment. A strong talent pool is also key to fintech success together with an ecosystem where people can connect easily.”

Where the funding is going in ASEAN, 2018-2019

Source: PwC, UOB, SFA

THE CHARTIST: SINGAPORE FINTECHS NAB 51% OF FUNDING IN ASEAN IN 9M 2019 Singapore’s financial technology (fintech) firms attracted the lion’s share of fintech funding in Southeast Asia at 51% of the $1.14b (S$1.54b) funds garnered by the region’s countries by end-Q3 2019, a report

by United Overseas Bank (UOB), aPwC, and the Singapore Fintech Association (SFA) revealed.

Amongst SEA countries, Singapore exhbited the most variety in terms of solutions focus. Payment solutions companies garnered a quarter of the deals throughout the first nine months of 2019, whilst the highest amount of funding went to Insurtech solutions, driven by two deals, Singapore Life at $110.3m (S$150.39m) and CXA Group at $25m (S$34.09m).

Proportion of total investment deals by fintech category in 2019

ASEAN continues to draw funding

Source: PwC, UOB, SFA

Source: PwC, UOB, SFA

ASIAN BANKING AND FINANCE | MARCH 2020 7

FIRST CARD PAYMENTS GAIN TRACTION IN CASH-HEAVY JAPAN JAPAN

Chinese banks risk losing $61b revenue in payments by 2025 CHINA

A payment terminal in Japan

C

ash might still be king in Japan, but its share of cash payments is expected to drop from 76.2% in 2018 to 71.4% in 2022 as the country makes progress on its cashless ambitions, according to GlobalData.

Total card payments value is poised to hit $752.6b (¥82.6t) from only $428.1b (¥47.0t) in 2014 to $587.6b (¥64.5t) in 2018.

“Expanding payment infrastructure, rising card acceptance among SMEs, and the government’s focus on non-cash transactions are expected to support the growth of the payment cards market,” said GlobalData Payments Analayst Nikhil Reddy.

Japan aims to achieve a cashless payment ratio of at least 40% by 2025. To achieve this, the government has embarked on a series of initiatives, including standardising QR code payments and introducing cashless payments at self-service kiosks.

The government also devised a nine-month digital rebate program as a way to both offset the increased consumption tax and encourage more cashless transactions. The rebate rates are 5% at mom and pop stores and 2% at major chains.

Further, restaurants, souvenir shops and popular tourist spots are gradually embracing point-of-sale (POS) terminals. For example, retail chain Aeon also announced plans to install 100,000 contactless POS terminals by 2020.

Many ATMs are also being installed at locations with high footfalls, such as tourist attractions and supermarkets.

8 ASIAN BANKING AND FINANCE | MARCH 2020

A

s much as 13% of banks’ payments revenue in China, or $61b, is likely to be displaced by the growth of digital payments and competition from non-banks, reported professional services firm Accenture.

Over the next six years, fee payments put 5.2% of banks’ payments revenue at risk in mainland China and 23.9% in Hong Kong, according to the report.

Competition from non-banks in invisible payments, where payments are completed in a ‘virtual wallet’ on a mobile app or device, also puts 4% and 2.6% of revenues at risk in the mainland and in Hong Kong, respectively.

Furthermore, card displacement by instant payments, where funds are transferred in real time and from which banks make little to no interest, will put an additional 3.6% and 2% of payment revenues at risk in China and Hong Kong, respectively.

These are expected to further weigh in on banks from mainland China and Hong Kong, which are already dealing with global revenue pressures from declining card transactions. Between 2015 and 2018, revenue from business

People’s Bank of China

customer credit card transactions dropped 33% globally, revenue from consumer debit card transactions dropped nearly 15%, and revenue from credit cards dropped almost 12%, the report stated.

“The digital transformation underway in payments will have a deep impact on all industry players and banks will have to fundamentally change how they think about their revenue in this area,” said The billions Albert Chan, financial services practice of dollars lead for Accenture in Greater China. banks “The billions of dollars banks previously previously earned from some of these channels earned will dry up, so they’ll need to develop from some new digital business models to compete of these in this new era. Banks lagging behind channels will risk being relegated to the plumbing of dry up, so payments.” they’ll need In contrast, payments revenue of to develop non-bank financial services in Mainland new digital China are projected to skyrocket to business $494b in 2025 at an annual rate of models to 9.1%, from only about $292b in 2019. compete in Meanwhile, revenue in Hong Kong is set this new era. to rise 2.1% to $10.7b from $9.5b.

Which credit card got the most love from Singaporeans?

SINGAPORE

Amongst the card issuers that Singaporeans are subscribed to, American Express (AMEX) recorded the highest satisfaction rate with an overall score of 755, followed by DBS Bank with a score of 737 and PSOB at third with 721, a report by J.D. Power Singapore found.

Overall satisfaction rates amongst credit card providers have steadily dropped, with the average score dipping by 6 points to 712 in 2019. Lofty transaction fees and forex rates incurred for overseas transactions drove the dislike. Fears relating to the possibility of fraud also emerged to undermine credit card payments. Cash still accounts for 50% of Singaporeans’ total spending abroad.

On average, Singaporeans shell out an estimated $3,542.3 (S$4,800) every year for their overseas travel activities.

Credit Card Customer Satisfaction, 2019

Source: J.D. Power

2019

FINANCIAL INCLUSION INITIATIVE OF THE YEAR - MALAYSIA

How Alliance Bank is propelling SME growth Alliance Bank is developing innovative solutions to help its SME customers manage their business better.

“OUR APPROACH IS EMPATHETIC AND CENTRED ON MEETING SMES’ DIFFERENT BUSINESS NEEDS.”

The Bank’s relationship managers help clients improve their financial health using various online tools.

T

he Malaysian economy is largely powered by small and medium enterprises (SMEs), which accounts for 98.5% of all business establishments in Malaysia. They provide 5.7 million jobs or 70% to total employment rate in the country, and contribute 38.3% (RM521.7 billion) to Malaysia’s gross domestic product in 2018.

A 2018 survey conducted by Malaysia’s central bank shows younger firms tend to rely on their own cash, family and friends to finance their business. Such behavioural pattern can be attributed to information opacity, lack of collateral or credit record that leads to difficulty in accessing financing, and high transactional costs.

In line with Alliance Bank’s mission of Building Alliances to Improve Lives, the bank continuously develops innovative solutions to help its SME customers manage their business better and accelerate growth.

“Our approach is empathetic and centred on meeting their different business needs. We do this by using digitisation to bring about faster and more responsive customer experience,” said Joel Kornreich, Group Chief Executive Officer of Alliance Bank Malaysia Berhad.

One of such innovation is the Branch-inTablet solution, a digital account opening 10 ASIAN BANKING AND FINANCE | MARCH 2020

for individuals and businesses where, using a tablet, customers are able to open a savings account and activate their debit card, Internet and mobile banking in as little as 15 minutes. For business owners, they can open their business account within a day, instead of two weeks.

Understanding that what takes businesses further is access to ready funding, Alliance Bank launched Alliance Origination System (AOS), a re-engineered automated loan origination system that disburses funds with best-in-class turnaround time.

“With AOS, we have significantly improved turnaround time for SME loan approvals to nine days, from up to 20 days previously,” explained Kornreich. He added that these digital innovations help to free up their relationship managers so they can spend more time with their SME clients to understand their needs. In doing so, they are uniquely positioned to offer the right financial solutions to their clients.

Complementing the bank’s advisory service, Kornreich announced that the bank will soon launch new diagnostic tools such as the financial health calculator and sectoral benchmarking analysis, enabling SME clients to improve their business finance health.

The Alliance@Work solution meets business owner needs by offering seamless business solutions such as BizSmart® Online Banking, cash management system, and mass onsite account opening and activation for employees using biometric facial recognition and optical character recognition. One of the propositions include Alliance Cash2Home, a mobile remittance app for foreign workers that provides competitive remittance rates and prepaid reload services.

“We support the next generation of young entrepreneurs who often need help in growing their business. Launched in 2013, BizSmart® Challenge combines business education, mentoring, and funding of more than RM1.5 million in cash, product sponsorship and media coverage prizes, as well as up to RM5 million in collateral-free financing, for young businesses to help them succeed.

The programme has received over 1,700 submissions and empowered over 130 finalists in their entrepreneurial journey,” noted Kornreich.

In 1HFY20, Alliance Bank grew SME loans by 10% year-on-year, surpassing the RM9 billion mark, and growing faster than the industry.

For championing the cause of the underserved SME community in Malaysia, the bank was recognised with its most recent accolade, Financial Inclusion Initiative of the Year - Malaysia Award, at the regional Asian Banking & Finance Retail Banking Awards 2019.

CONTACT Name: Agnes Ong Position: Vice President, Group Communications Contact Number: +603 2604 3333 Company: Alliance Bank Malaysia Berhad Address: Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur, Malaysia

Alliance BizSmartÂŽ SME Solution

“It allows me to pay multiple suppliers and manage receivables at one go. I love how RESPONSIVE it is."

Get started at alliancebank.com.my

Alliance Bank Malaysia

AllianceBankMalaysia

Terms and Conditions apply. Alliance Bank Malaysia Berhad 198201008390 (88103-W)

INTERVIEW

How KBZ Bank strides towards financial inclusion in Myanmar They are banking on the country’s high smartphone penetration to improve financial connectivity.

W

ith only 10% of Myanmar’s population possessing a bank account and 90 % having a smartphone it made sense for KBZ, the country’s largest private bank, to launch a digital wallet in 2018. Fast forward to a year later and the bank had signed up 3.5 million customers and already processed $1.8b in transactions, and it now has further plans for digital inclusion in this market of 70 million people with an economy growing at 6%.

Asian Banking & Finance interviewed Soe Ko Ko, head of agent banking at KBZ Bank, to find out what the bank’s plans are for 2020 with a focus digitalisation and financial connectivity.

The bank is championing 100% financial inclusion in Myanmar despite data showing that roughly 10% of the population is in possession of a bank account. How do you plan to achieve this goal and what programmes do you have in place to support this?

KBZ Bank recognised that whilst only 10% of the population is banked, 90% of people in Myanmar own a smartphone. Even as the bank with the widest branch network, this made it clear that the future of banking is not in building more branches, but in introducing financial services to wider townships and communities through mobile technology.

In October 2018, we launched KBZPay, a mobile wallet that makes purchasing everyday products and managing funds more convenient and secure. With just a smartphone, the app allows customers to carry out everyday transactions that until this point were only provided at a physical branch, such as sending and receiving money from friends and family and paying for bills.

As a heavily cash-based economy, what are the challenges in bringing the whole country into the financial system?

Going cashless is a lot of work, both for consumers and for businesses, slowing the adoption of cashless platforms and digital payments. This is especially hard as cash is still seen as being more convenient for everyday purchases and paying for services.

Digital payments is now working to prove it can be more convenient and trusted than cash. Our aim is simple—make the KBZPay experience better than using cash.

Since the introduction of KBZPay, we have

12 ASIAN BANKING AND FINANCE | MARCH 2020

The future of banking is not in building more branches, but in introducing financial services to wider townships and communities through mobile technology.

Soe Ko Ko

expanded its features from connecting friends, family and communities through peer-to-peer transfers, to now connecting them with the digital economy. We have launched QR code payments at over 230,000 merchants, in-app purchases of airtime top-ups, bus tickets, and mobile gaming tokens, and cardless withdrawals from our network of agents, merchants and ATMs. With KBZPay, people no longer need to carry huge denominations of cash and travel hours to their nearest retailers to purchase everyday essentials. Our growth attests to how customers are truly seeing the benefits of this. In just its first year of launch, KBZPay has already grown to over 3.5 million users, onboarded with full e-KYC, with transactions topping US$1.8b in volume. The Central Bank of Myanmar has actively promoted the development of modern and equitable financial industry. This includes the creation of the Financial Inclusion Roadmap and leading a digital services working group. KBZ Bank is executing on this same vision with their support in making financial services more accessible to remote communities.

KBZPay is core to this effort as it overcomes the physical and infrastructural limitations, and helps

INTERVIEW Loans and deposits as a percent of Myanmar’s GDP

Source: GIZ (2016), IMF (2015)

friends, family, and communities connect to one another and the digital economy.

What education initiatives have you done?

We recognised that to deepen financial inclusion, mobile technology alone is not enough. In a country where digital infrastructure and financial services are new and unfamiliar to most, these services need to be introduced with digital and financial literacy embedded every step of the way.

To address this, we turned our 18,000 employees into an on-the-ground force for financial inclusion.

We developed sophisticated mapping of customers, merchants, and agents and tasked our branch teams with onboarding them to the KBZPay network in all townships and wider communities.

With this approach, our staff have the critical opportunity to meet with customers, merchants, and small businesses face-to-face. We guide them through KYC processes and navigating the app to ensure millions in Myanmar are comfortable and well-equipped to use digital financial services safely and securely.

We also educate customers and the wider community on using these services safely through programmes and content. This includes organising a series of financial literacy seminars at over 30 universities across the country. Conducted by the KBZ Bank staff, the education series covers topics on more effective ways to save and protect digital identity over financial transactions, amongst others.

To date, the seminars have reached more than 10,000 students. This gives the future leaders of our country more confidence and familiarity with digital environments. It equips them with more skills and knowledge, and the ability to understand how it shapes their behavior and opportunities in this digital economy.

The bank’s mobile wallet application, KBZPay, has facilitated one million transactions as of April 2019, a significant milestone for an app that’s just over a year old.

With KBZPay’s successful launch, both KBZ Bank’s digital retail customer base has grown by 366% and its digital penetration of our customer base more than doubled from 10% to 28% in 2018.

What are the functionalities available in the app and how was it received after its launch?

KBZPay is Myanmar’s fastest growing mobile wallet, giving millions of people a way to access everyday financial and digital services at the touch of a finger.

With one app, one can: send and receive money to friends and family with the swipe of a finger; make purchases at favourite shops and restaurants through QR Code stickers; withdraw physical cash through our network of agents and cardless ATMs across the country; pay for bills like broadband services, loan repayments, and tuition fees through Quickpay; purchase everyday essentials including airtime top-ups, bus tickets, and gaming tokens; [and] protect yourself with digital life insurance based on the balance of your KBZPay wallet.

This is revolutionary for a country that has an insurance penetration of less than 1%, offering millions in the country access to protection for the first time.

With KBZPay’s successful launch, both KBZ Bank’s digital retail customer base has grown by 366% and its digital penetration of our customer base more than doubled from 10% to 28% in 2018.

What are your forecasts for the growth of KBZPay? Our aim is to reach 30 million KBZPay customers by 2028 or half the Myanmar population.

Future plans for KBZPay include: collaboration with more travel and ticket booking platforms; facilitating e-commerce purchases for online businesses; working with education and e-learning platforms; introducing payroll services for a futureready workforce; providing an innovative payments platform for start-ups to scale; building a futureproof financial ecosystem with KYC and security embedded every step of the way; and equipping citizens with financial and digital literacy.

Through KBZPay, we will continue to drive secure financial connectivity in the country, equipping the nation with world-class skills, tools, and experience to help Myanmar leap to a mobilefirst economy.

By Sandra Sendingan and Frances Gagua.

Bank account ownership, 2014 (% population age 15+)

Source: World Bank Global Financial Inclusion Database

ASIAN BANKING AND FINANCE | MARCH 2020 13

INTERVIEW

Hong Leong Bank beefs up its tech investments as digital banks emerge The lender has set aside as much as 20% of its FY19 operating expenses to invest on technology.

A

s Malaysia prepares to hand out digital banking licenses by 2020, Hong Leong Bank is banking on proactive tech investments to stay ahead of new and agile competitors which have the natural advantage in keeping costs down. Fintech-powered lending businesses are generally able to keep their cost-to-income ratio at slightly above 30% versus 47% for the Malaysian banking sector, data from S&P show.

Faced with formidable rivals that already command a significant share in the domestic e-payments market, HLB is no longer implementing digitalisation as a stand-alone initiative but enforcing the its digital-first ethos across all business lines to retain its lead even as it explores opportunities for collaboration.

“The emergence of pure-play digital banks in Malaysia is an exciting development that will not only see the emergence of new players but also allow the current digital banking services offered by existing financial institutions to be even more efficient and seamless, especially in KYC,” said Domenic Fuda, group managing director and CEO of Hong Leong Bank. “Being driven by our Digital-at-theCore ethos,[we] would naturally be keen to explore the regulatory changes and opportunities that might came about because of the virtual banks licencing.”

In an interview with Asian Banking & Finance, Fuda shares milestones in the bank’s digitalisation journey and opportunities it is pursuing to stay relevant against a dismal economic outlook.

Banks in Malaysia are underspending on tech, according to a report from S&P, raising the concern that the looming arrival of virtual banks may potentially pose a threat to incumbent lenders. How would you assess Hong Leong Bank’s digitalisation journey so far?

The fact is at HLB we have been investing in tech and digitalisation for over a period of time. For FY2019, approximately 15-20% of our operating expenses went to tech and digitalisation, whether it is back-end, products and services as well as talent development and training modules such as Design Thinking Programmes and Hackathons, in line with some of the leading banks in the region according to the S&P report.

At the end of the day, we should not focus solely on total tech spend, but also look at the strategic and discretionary spend in creating new products and service, how fast we deploy to customers and whether or not we expand the market.

For example, by deploying enterprise-grade open source solutions, we have managed to attain rapid development

14 ASIAN BANKING AND FINANCE | MARCH 2020

For FY2019, about 1520% of our operating expenses went to tech and digitalisation.

Domenic Fuda

capabilities and maintain the journey of ‘fail fast, fail cheaply, quick to market, and build your own’. This has helped to lower our capital expenditure by at least 40% over traditional bought and deployed solutions. This has enabled us to deliver more tailored digital services to our internal and external stakeholders – services which are either developed in-house or through close collaboration with third-parties and can help improve our customers’ lives – all at a sustainable cost.

The truth is, the line between a ‘traditional’ and ‘digital’ or ‘virtual’ bank has been blurring for some time now, as the use of technology and the provision of digital solutions have increasingly become a necessary feature in banking operations.

Digitalisation is journey and to make it sustainable, our approach to digitise began not with the technology, but a cultural shift driven by a digital-first value as our guiding principle. We no longer view digitalisation and investment in technology as initiatives; instead, across our retail and business banking as well as in human resource, talent and sustainability areas, raising our customers, employees and stakeholders’ engagement with technology has become “business-as-usual” for the Bank.

What are the full suite of digital initiatives that you have for retail customers?

Broadly speaking, our digital innovation offerings are

INTERVIEW

A local batik shop. 98.5% of Malaysia’s businesses are SMEs, making it a key sector for banks.

based on the following pillars: (1) Attract: Leverage on digital and social media platforms, search engine optimisation and partnerships with online marketplaces to attract customers; (2) Acquire: Leverage on digital technologies to acquire customers efficiently e.g. we continuously digitalise our product application journeys – both front and back end, and we continuously forge new fintech and ecosystem partnerships like WeChat or the bundling of digital SME banking solutions with HR, accounting & marketplace start-ups; (3) Transact: Allow customers to transact anytime and anywhere instantly and digitally. e.g., our 3-word banking mobile application has been very well adopted by our customers and we continue to enrich its functionalities on an on-going basis. We have launched our in-Branch tablet to provide a ‘counterless’ branch experience, and we are continuously enhancing our business internet banking (Hong Leong ConnectFirst) for our SME and corporate customers where we just recently introduced the first-in-market facial recognition eToken to improve security and efficiency in cash management and transaction banking for these customers; (4) Engage: Improve customer stickiness and income per customer through contextual offers and analytics. e.g. we continue to build up our big data and analytics capabilities to be able to identify and deliver personalised digital sales, servicing and marketing customer experiences.

As banks rethink the role of the bank branch amidst the high cost of maintaining them, how has Hong Leong Bank revamped its branch formats in order to maximise the transactions within the physical set-up?

By strengthening our digital offerings and banking operations, we can enable our customers to do much of their banking transactions virtually, which allow us to focus on providing our customers with the experiential aspect of banking where we take the time to listen to their needs and offer personalised services and products that they actually need.

As we work towards personalising our branch banking experience, our vision is to have a single person to manage the customer relationship throughout the branch visit – sales, servicing & marketing; and shift the sales-tooperations staff ratio for more effective use of resources.

We are starting to revamp our branches to have more customer facing floor areas while reducing our back-office space.

This vision is now made possible with the deployment of our branch sales-and-service tablet solution developed in-house.

This tablet powered solution provides 360 customer view that integrates with our backend infrastructure to enable seamless servicing of walk-in customers. This new experience has been extremely well received by our customers as it has created a ‘zero’ queue experience and we plan to roll this out to the rest of our branch network in 2019. On top of this, we have also introduced new Teller Assisted Units (TAU) which are able to accept, recycle, and dispense notes and are placed in open areas instead of traditional spaces behind banking counters. This allows for more transparent and secure management of cash deposits and withdrawals.

With these new capabilities, we can now reduce the need for high counters and we are starting to revamp our branches to have more customer facing floor areas while reducing our back-office space so that we can make our customers’ branch banking experience more comfortable. As for the processes, we are seeing more transactions like account enquiries, over-the-counter withdrawals and passbook updates getting migrated over to our digital channels.

Against dismal economic conditions, what pockets of growth is Hong Leong Bank turning to in order to ensure its growth?

With 98.5% of Malaysian’s businesses being SMEs, it is naturally a key market segment for the Bank. Since refocusing the HLB SME Banking approach in mid 2017, we have made significant strides to provide personalised products and services to best serve the SME Segment, which includes building a 200-strong team of SME Community Banking team nationwide to serve the local SME communities; the results of this refocusing was a robust 40% YoY loan growth for our financial year that ended 30 June 2019.

For the financial year 2019/2020, we are targeting to approve RM5b worth of loan funding to Malaysian SMEs while helping our SME clients thrive with seamless, relevant, personalised and fair banking to empower them with the best opportunities to realise their full potential. By Sandra Sendingan.

Hong Leong Bank’s net interest margin continues to recover

Source: UOB Kay Hian

ASIAN BANKING AND FINANCE | MARCH 2020 15

FINTECH WATCH

Singapore-based GoBear expands beyond financial comparison

Adrian Chng

S

ingapore-based fintech GoBear started out as a meta search engine where users can compare and select insurance plans and financial products.

Four years later, the fintech startup has helped at least 40 million users search for over 1,800 personal finance products and the company is taking this one step further as it delves directly into developing actual products.

“Choosing financial products used to be complicated and dull. We didn’t think that it was fair, and wanted comparing these products to be simple and easy,”

said GoBear CEO Adrian Chng.

Founded in 2015, GoBear has since expanded its services to credit cards, loans, banking products and financial products, and is now active in Hong Kong, Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

GoBear receives an undisclosed token sum from its partners when a successful purchase is made and when they directs consumers to the providers’ webpage, depending on the agreement established with their partners.

Beyond financial comparison, the firm provides its partners with access to analytics. Chng cited an instance with a Thai travel insurance firm which commissioned their team to analyse preferences amongst their Thai users on destination, price, coverage and the like. This allowed the insurer to grow its digital sales as well as their digital market share in travel insurance.

In October 2018, GoBear partnered with digital scorecard firm CredoLab to roll out Easy Apply, which collects and assesses anonymised data from mobile phones to develop an alternative credit scoring for loan and credit card applications. By Clarist Zablan

YouTrip takes away the pain of overseas payments

Caecilia Chu

Getting hit by unreasonable currency transaction charges whilst travelling is a major problem for holiday makers, but startup YouTrip thinks they have found a solution. YouTrip provides a multicurrency mobile wallet that comes with a prepaid Mastercard issued by contactless smart card brand EZ-Link. It allows for the exchange and storage of 10 selected currencies in advance through its inapp exchange feature and lets the user pay fees in more than 150 currencies at wholesale exchange rates with no additional fees.

Caecilia Chu, co-founder and CEO of 16 ASIAN BANKING AND FINANCE | MARCH 2020

YouTrip, said that their platform helps their customers save up to 3.5% on transaction fees and even goes as high as 5%. YouTrip only takes commissions of each purchase from the merchant.

“Both Arthur and I travel across Asia frequently and have experienced hefty card transaction fees firsthand— a result of restrictions imposed by traditional financial institutions,” said Chu, referring to her business partner Arthur Mak, the firm’s chairman.

She also added that because of this, they wanted to address how travellers in the ASEAN region experience more currency conversions.

The app now boasts of 400,000 downloads and launched in Thailand in November 2019 through a tie-up with Kasikornbank. Kasikornbank’s 11.6 million online customers are eligible to register for YouTrip through the K Plus app. By Nathanielle Punay

How soCash breaks the cashless mold

Hari Sivan

Fintech startup soCash believes that cash will still play a critical role even as Singapore moves ahead in its cashless journey.

“It sounds contradictory, but it works when taking into account the cash in circulation,” said soCash CEO and cofounder Hari Sivan. “When your economy goes cashless it means that more and more liquidity stays within the bank, and the average cash withdrawal transactions shift from high value to low value.”

Less reliance on using physical money for big purchases meant more low-value withdrawals, which aligns with soCash’ platform. Established in 2016 by a group of ex-bankers, including Sivan and his wife Rekha, it enables consumers to access physical denomination in a place where there are no ATMs. They only need to locate a nearby merchant partner through the app.

“The idea was that as you increase the access to cash, people will withdraw less money but increase the number of their withdrawals,” said Sivan.

“Normally in an ATM, average withdrawals are approximately at $147.6 (S$200) whereas in our system, it’s only around 22 to 30 dollars (S$30-40).”

As Singapore moves forward on its cashless ambitions, soCash’s edge in the banking world doesn’t just rely on this expectation. Rather, it’s the fact that virtual banks will need to rely on platforms such as soCash to offer a taken-forgranted service: access to physical cash.

“Virtual banks are not allowed ATMs. They’re only allowed to work with EFTPOS, and in Singapore there are only two available in the market. One is NETS, which is owned by the big three banks. The other is soCash. So we are the de facto platform for digital banks,” stated Sivan.

“Digital banks need a platform to sell products and services relating to the use of money, and we are well-positioned to enable that. We have all the licenses to take care of.” soCash has also entered several markets overseas. The startup partnered with payments firm JCB in October to offer cardless withdrawals and foreign currency to Japanese tourists using its mobile app, eliminating the hefty international withdrawal fees that force tourists to withdraw and carry large amounts of money. By Frances Gagua

REPORT: HONG KONG

Banks in Hong Kong

Data and automation will help Hong Kong banks survive until the next decade Emerging technology and customer data will help banks weather low interest rates and new competition.

A

midst a time of muted loan growth, rising competition and recent business disruptions, 2020 has become more crucial for Hong Kong’s banking institutions to focus on cost and operational efficiency, improve credit processes, and leverage data to maintain competitiveness, according to a report by KPMG China.

The banking industry is expected to report muted financial results driven by the ongoing market uncertainty around US/China trade disputes as well as the low interest rate environment. Recent events and business disruption in Hong Kong have also impacted retail investor confidence, said Paul McSheaffrey, Partner, Head of Banking & Capital Markets, Hong Kong at KPMG China.

With margins continually squeezed and global

18 ASIAN BANKING AND FINANCE | MARCH 2020

Paul McSheaffrey

Isabel Zisselsberger

macroeconomic uncertainty set to carry over into 2020, shifting to automation, improving competitiveness, and introducing more personalised products will be the deciding factor for the survival of Hong Kong’s banks not just through the year but until the next decade.

Invest to save Whilst some banks may be tempted to make quick cuts to costs in order to ease pressures on their margins, the more successful banks are likely to realise that they need to invest more in order to save more in the longer term, according to Isabel Zisselsberger, Partner, Head of Customer & Industrial Markets, Hong Kong at KPMG China.

Long-term savings will be these banks’ goal, and in order to achieve this, successful banks are likely to

embrace emerging technologies, such as artificial intelligence (AI) and related digital solutions, and may even invest in fintech.

“These banks will work on more proofs of concept using complex technologies to generate greater returns and to solve labour-intensive and difficult processes—for example, the research-intensive parts of the onboarding process, or complex product due diligence procedures. Some will continue to invest in fintech to find innovative and cost-effective solutions to legacy problem,” said Zisselsberger.

Many banks will continue to explore the use of cloud technology to increase efficiency, but the complex regulatory requirements and security implications that come with implementing a cloud programme will remain a significant challenge. The city’s banks may

REPORT: HONG KONG also begin consolidating various automation projects scattered around their organisation to gain a comprehensive and strategic view of their automation programmes.

Banks are also expected to continue working on data projects that improve banks’ cost reporting.

In particular, leaders will invest further in using data and different sources of information in order to create more transparency around how costs are generated and allocated. Procurement teams will play greater roles in driving cost improvement through implementing more leading practices as well as utilising specialist cloud-enabled tools.

Financial institutions may also seek to partner with technology and consulting firms to build their own AI-enabled solutions. This option gives banks a new revenue stream and also presents them with a potentially-lucrative opportunity to tap into a solution that can provide long-term cost savings whilst generating return on investment.

Local banks will also continue to look at their overall organisational design to optimise their local and regional structure and footprint, added Zisselsberger.

Faster credit processing Hong Kong banks enjoyed a credit boom in the previous years due to low interest rates. However, the slowing macroeconomic environment coupled with about US$4t in corporate bonds due to mature in the coming years meant that banks now face the threat of a rise in non-performing assets (NPAs) or even defaults.

As a result, credit risk is expected to rise in 2020, which would lead to the emergence of new ways of managing this. Key to this would be the development of faster and automated credit approval processes, said Michael Monteforte and Gemini Yang, Partner and Director of Financial Risk Management at KPMG China, respectively.

“There are currently varying levels of maturity amongst banks in Hong Kong in this space, and

in 2020 the banks that adopt new technologies and integrate them into their credit origination processes to create a real-time credit approval engine will maintain a competitive advantage. 2020 may be the year where we see industry leaders start to apply machine learning models for credit approvals,” they noted, The development of automated credit approval engines will also give traditional banks an edge against the new virtual banks that are set to launch in Hong Kong in the next few months.

Chinese banks operating in Hong Kong will also join in the fray and seek to optimise their credit approval processes. However, unlike their peers operating in Hong Kong, the extent of their lending may be impacted by developments related to the Belt and Road initiative as well as the ongoing trade tensions, since most of these banks service Chinese corporates that are investing offshore.

Data is key to survival Those that can leverage data to drive personalised outcomes will earn the right to survive, says Neil Macdonald, Head of Wealth & Asset Management Centre of Excellence at KPMG China.

“Creating a ‘seamless experience to achieve optimal customer outcomes’ is the grand ambition espoused by many banks.

Hyperbole aside, what will industry leaders do in 2020 to improve the lives of their customers? Put simply, they will seek to use the vast swathes of data they have on our lives and our real, expressed preferences and nudge us, as individuals, towards improved financial health,” he said.

By bringing past and present together, leveraging data analytics at scale, leading banks can predict the products and services customers will benefit most from. Banks can then encourage customers, using the skills of behavioural economists, to take a financial decision in a fiscally responsible way. Mis-selling could become a thing of the past as the algorithm becomes the new financial guardian.

Michael Monteforte

Gemini Yang

Neil Macdonald

“The recent rise of credible (and scalable) challenger and digital banks whose business models are centred around customer outcomes has sharpened the minds and loosened the wallets of senior banking teams around the globe.

The proliferation of technologies that can free banks from the encumbrance of their legacy infrastructure and finally open up their customer data sets is making a reality of the ambition to offer more personalised products and services,” said Macdonald.

In particular, virtual banks don’t have a treasure trove of historical data that is locked up in traditional banks’ current systems.

This year may also see an increased focus on customer intimacy in the corporate market.

For example, leading banks could use their knowledge of one corporate customer and link them with another, harnessing the information they have on the expressed preferences of both to drive a friction-free transaction.

“In an age where loyalty to financial services providers is declining—if indeed it ever existed beyond the gravitational pull of inertia—banks that are able to leverage the data they are sitting on to predict behaviour and create personalised experiences for their customers—personal and corporate—will give themselves a chance of long-term survival.

Getting serious about achieving that in 2020 should be on the agenda of every bank that wants to still be in business in 2030,” said Macdonald.

From KPMG’s Hong Kong Banking Outlook 2020.

Interest in opening a virtual bank account

Source: PwC

ASIAN BANKING AND FINANCE | MARCH 2020 19

ANALYSIS: CREDIT CARDS

Being front of the wallet is key, according to J.D. Power.

Credit card revenues threatened as Singaporean travellers shun usage Card users turn to cash as they steer clear of lofty transaction fees and poor exchange rates.

B

anks may have to rethink their reliance on credit card fees as a driver of revenues as technology savvy travellers are resorting to cash or alternate payment apps to avoid being slugged with high foreign transaction fees and usurious exchange rates.

In a report that should disturb all banks relying on overseas charges as a growing source of revenue, Transferwise said that using a credit card to pay for overseas purchases could cost an average Singaporean as much in fees as a one day holiday in Bangkok. The firm estimates a typical Singaporean would lose as much as $650 in additional fees and currency exchange losses.

One way Singaporeans are avoiding hefty credit card fees is to simply use cash, notes a separate

20 ASIAN BANKING AND FINANCE | MARCH 2020

Using a credit card to pay for overseas purchases could cost an average Singaporean as much in fees as a one day holiday in Bangkok.

study by J.D. Power.

Seventy percent of Singaporeans still prefer to use cold hard cash when making purchases abroad, 50% of the total overseas spending

by Singaporeans are still cashbased, the report added.

Lofty transaction fees and poor foreign exchange rates were cited as the two main reasons why they avoid using cards. Singaporeans also fear fraudulent transactions overseas.

Such pain points manifested in the staggering $810m (S$1.1b) lost yearly to fees associated with overseas card expenditure, or 4% of the $20.3b (S$27.3b) estimated total overseas expenditure that Singaporeans make via cash and cards, a study commissioned by tech company TransferWise revealed.

“Singaporeans are avid travellers, but banks have not provided an affordable, transparent card option for spending abroad, either to individuals or businesses,” says Surendra Chaplot, Transferwise’s head of APAC card product. He noted that banks could still do better in the area of transparency.

“When you book a flight or a room, the airline or hotel tells you how much you are charged, but when you spend your card overseas, banks somehow believe they have the right to hide what they charge by putting their fees in the exchange rate mark-up.

This may have been acceptable in another century or decade, but consumers in an age of transparency should and will reject it,” Chaplot added.

If cards don’t respond to

ANALYSIS: CREDIT CARDS consumers’ cries, there’s a missed opportunity for credit card issuers to fully capture overseas spending, according to Anthony Chiam, regional practice leader, Asia andAustralia, global business intelligence at J.D Power.

“According to SingStat, Singapore residents on average travel twice a year. Our study shows they spend approximately $3,542.3 (S$4,800) annually during these trips, and that’s a missed opportunity for credit card issuers to fully capture overseas spending,” said Chiam.

“It should be a cause for concern, given the rapid availability of other payment choices in the market.”

Right now, issuers are banking on their various rewards benefits programs in the hopes of raising card usage numbers. These include air miles, cashback, rewards points, and shopping discounts, amongst others.

Just offering more benefits or higher reward points on overseas spending will not equal more usage, however.Whilst 89% of cardholders are aware of the plethora of benefits that come with their cards, 72% use three or fewer of those offered. But it remains key to attract users: 64% of cardholders have used discounts or special privileges offered by issuers’ partners.

With benefits programs a critical aspect of customer acquisition and engagement, issuers must ensure they remain relevant by keeping up with the changing preferences of cardholders, said J.D. Power.

First choice is king Keeping their benefits relevant to the preferences of the public will also help card issuers remain in the front of their wallet. Seventy seven percent of total credit card spending by Singaporeans are done through their primary card, reported J.D. Power. Further, 44% of surveyed card subscribers have only used their primary card in the past year. The number is even higher amongst millennials, with

48% transacting solely using their primary card.

Which is why ensuring customer satisfaction has become a major battlefield amongst Singapore’s eight major credit card issuers. In particular, overall brand satisfaction was noted to strongly correlate to whether customers perceive that their primary card issuer is customerdriven, with results revealing that the top-ranked brands are also topping this metric.

American Express (AMEX), who led J.D. Power’s customer satisfaction survey, shared that enhancement of current credit card offerings and constant communication with customers remain their strategies to be consumers’ top pick.

“We consistently talk to our customers in the process of designing our products and services to make sure we’re giving them what they want, and this applies to all customer segments, including the younger customers,” a spokesperson from AMEX said.

“We have a benefits programme which enables our card members to receive savings and incentives for shopping, dining and travel, and can be received in the form of discounts, statement credits, and bonus points. We regularly communicate with our card members to remind them of such benefits and notify them of new offers and promotions.”

OCBC, who ranked fourth in the survey, couples its rewards programme with financing flexibility and fraud protection.

“We grant our credit card holders with benefits ranging from air miles, cashback, rewards points, airport transfers, lounge access, complimentary travel insurance, shopping discounts, concierge services, and special deals with various merchants,” added Vincent Tan, head of credit cards at OCBC Bank.

An impending collapse?

Gearing up their credit card offerings becomes more important now more than ever

Overall brand satisfaction was noted to strongly correlate to whether customers perceive that their primary card issuer is customerdriven

for banks to avoid downturn predictions sighted in the turn of the century.

Payment solutions firm Worldpay forecasted the collapse of credit card usage in Singapore this year, with its use slated to drop of 24 percentage points.

In a separate report, an analyst from Euromonitor International noted that the growing animosity against cards could be because certain demographics were not able to quickly adapt to alternative digital payment methods, reversing brands’ expectations for a 100% adoption in cashless payment schemes.

“Amidst the high penetration of smartphone usage in Singapore, the projected uptake of alternative payments and mobile wallets is not as quick as expected. There are still various sectors and demographics that are resisting adopting alternative digital payment methods as they still prefer cash,” the analyst noted.

Alternatively, although adoption did not materialise as expected, Euromonitor remains optimistc for growth of Singapore’s cashless market and sees credit card transactions in Singapore to demonstrate an upward trend.

Total card transactions, which accounts for all card payment types such as charge cards, debit cards, prepaid cards, and store cards, is projected to increase to $179.08m (S$132.3m) this year from $174.21m (S$128.7m) in 2019. Similarly, total credit card transactions are expected to rise from $70.48m (S$95.4m) in 2019 to $73.5m (S$99.5m) by 2020. By Shaina Teope

What makes up the US$810m in lost card fees?

Source: Transferwise

ASIAN BANKING AND FINANCE | MARCH 2020 21

EVENT COVERAGE: SFF X SWITCH

Ravi Menon, SFF x SWITCH Managing Director

Financial inclusion needs to be more than just technology Products need to be sustainable and scalable to meet the needs of the unbanked.

Y

ou can build the fintech industry, but will they come?

Technology alone cannot solve the problem of bringing the underbanked into the finance system, argues BDO Unibank chief executive officer Nestor Tan. He cited the Philippines as an example where even though a third of the population had a smartphone in 2019, 44 million people were still unbanked. So if financial inclusion is not just a matter of owning a smartphone and signing up for a banking app, what does it take?

According to Tan, this requires several things. “Number one, which most people overlook, is trust.

Remember, people are parting with their money so they have to trust these institutions. Second is access.

Are you there? Can they see you?

Can they feel you? Third is the credit process because the flipside of them parting with their money is we’re parting with our money. The fourth, which is probably the most important part of financial inclusion in the private sector, is sustainability.

22 ASIAN BANKING AND FINANCE | MARCH 2020

Number one, which most people overlook, is trust.

Remember, people are parting with their money so they have to trust these institutions.

And that means cost efficiency, scale, and the ability to expand into other areas.”

“Fintech is in all of those, but not one of those. Technology on its own is agnostic. It’s how we use technology in one of those four things that will make financial inclusion effective.”

Naureen Hyat, co-founder of Pakistan-based mobile financial startup Tez Financial services, believes that financial institutions must also learn how to scale their products in order to reach the unbanked. She cited the case in her native Pakistan where over 150 million people - more than half of its population - do not have access to financial services. The country’s underprivileged, which also comprise the nation’s unbanked, also lack credit histories, which Hyat argued is something only the upper classes can afford to have. Banks are also not leveraging the country’s smartphone penetration, something which almost one-fifth of the population have.

In promoting what she called “sustainable scalability”, Hyat stated that financial inclusion must be centered on developing solutions that will help the poor and unbanked realise their financial dreams.

Institutions may offer products such as credit, conventional forms of savings, insurance, investments, pension plans and mutual funds. For their part, Tez Financial Services has products such as Tez Advance which offers nano-loans to people wanting to build credit histories. With over 100,000 users per year, it provides one to four-week instant loans between $6.46 (PKR1,000) to $32.30 (PKR5,000) in 15 minutes.

Technology is helpful in achieving financial inclusion but it has to understand how human behavior works and not just scratch the surface, added Hyat.

“When I talk about human behavior, it’s not only how humans interact, but also what their needs are. Anything that could actually understand and mimic that would be the focus. And that not only trickles down the customer’s journey but also the type of products that need to be served to them,” she said.

As consumers will dictate financial inclusion, regulators and institutions must take advantage of the tech disruption to develop new financial products, said Bank ABC Group’s deputy group chief executive officer Sael Al Waary. The Middle East, he explained, has leveraged the high mobile and internet usage in the region especially to reach unbanked refugees, expatriates, and small and medium enterprises (SMEs).

For example, in Bahrain, a national electronic wallet payment system called BenefitPay was launched in 2017 to allow merchants and consumers to transact using apps to either send or accept payments, therefore helping the country’s 400,000 low-income expatriates to receive their salaries electronically.

Waary is optimistic about the state of financial inclusion in the Middle East, but the challenge of financial literacy still remains, as the unbanked has yet to realise what to do with their hard-earned money, he added. By Alyssa Divina

EVENT COVERAGE: TOKYO FINTECH SHOWCASE

Tokyo is banking on foreign fintechs to reinvigorate its financial sector Fintechs may tap into US$9.07t (¥984t) of individual cash sitting in banks, according to Tokyo officials.

T

okyo’s leaders are looking at overseas fintech to help buoy not just their dreams of becoming Asia’s leading global financial city, but also to help reanimate Japan’s banking sector.

The country’s banks have been beset with profitability issues given the low interest rate environment, with the short-term interest rate currently at -0.1% as of November 2019. Further adding to the pressure is the tight competition amongst dozens of regional and foreign banks present in the market. As a result, banks are investing abroad for higher returns and lending towards smaller firms that may be carrying higher credit risk. Others are adding charges for their services--for example, the Mitsubishi UFJ Financial Group is considering fees on dormant accounts, a spokeswoman revealed last December.

Tokyo Governor Yuriko Koike

24 ASIAN BANKING AND FINANCE | MARCH 2020

Amidst this environment, The Tokyo Metropolitan Government (TMG) outlined an initiative to boost itself as Asia’s leading financial hub.

Central to this ambition is the fintech industry, which TMG is banking on to tap into the US$16.8t (¥1,860t) of individual financial assets in Japan, US$9.07t (¥984t) of which are kept in underperforming cash and bank deposits, official data revealed.

Banks’ saving grace Foreign fintechs are expected to help solve the failing profitability of banks by guiding them to shift away from traditional business models, according Hiroshi Nakaso, former deputy governor of the Bank of Japan and chairman of FinCity.Tokyo.

The traditional model saw local banks rely on deposit rates for profits, but with interest rates close to zero and further easing of the fiscal policy

One way to address the [banking] situation is to invite more fintech companies which will introduce highly new business. models.

expected, this model has become insufficient for banks to survive.

“I believe one way to address this situation is to invite more fintech companies which will introduce highly new business models. This is what is happening in any major market, which allows fintech companies to directly access the banks’ platform. I think a collaboration of fintech companies with the banking sector will open new frontiers for the banking business,” Nakaso said during a media conference hosted by the TMG. The entry of overseas fintechs into the market is also expected to help solve the problem of overcapacity, according to Nakaso. Midscale banks notably survived the financial crisis two decades ago that saw 20 big banks consolidate to three mega banks and smaller credit cooperatives

EVENT COVERAGE: TOKYO FINTECH SHOWCASE Six overseas fintech firms have received subsidies amounting to about $27,642 (¥3m) on average.

Gov. Koike met with international media to talk about Tokyo’s various projects as part of its bid to become Asia’s leading financial hub.

go bust. But their number is now putting pressure on the interest rate market, causing rates to shrink.

The entry of fintechs, as well as Tokyo’s bid to become a leading financial hub, will open up the global market to regional banks as well as undiscovered small and medium enterprises (SMEs), added Nakaso, who after his departure from BoJ joined FinCity.Tokyo, a TMGfounded organisation that aims to promote Tokyo as an international financial institution and help upgrade the city’s financial ecosystem.

A cashless city But the industry faces one huge wall: despite its reputation as a global technology leader, Japan remains heavily reliant on cash. Today, four out of five payment transactions in Tokyo alone are still cash-based.

Further, private asset accumulation also remains slow compared to other markets such as the US and in Europe, Nakaso noted.

The cashless movement was also identified as an important area of development by Yoshinao Ogawa, senior director for strategic project at TMG. “We are not on par with most nations in the cashless movement,” he noted. “What is preventing cashless opportunities everywhere in Japan is on issues regarding the application and the systems.” These include problems of terminals for cashless payments, particularly for smaller stores, as well as handling fees.

But whilst Tokyo Governor Yuriko Koike admitted that Japan is slow

to transform its cash-based society partly due to paper bills carrying “a lot of trust” amongst citizens, she sees it as a proof of the soundness of Japan’s financial sector.

For Koike, the cash heavy market should not be seen as a barrier, but as an opportunity. “If [we] can can attract or recruit more foreign players to Tokyo, we think that this will further support Tokyo’s financial market,” she added.

In order to encourage more cashless transactions, Koike iterated TMG’s full commitment to help build 5G infrastructure. The introduction of mobile communications that operate at a speed a hundred times faster than that of existing wireless communications will help speed up the change, she said.

Further, Japan’s Financial Services Agency (FSA) is implementing various policies and initiatives to encourage the aging society to diversify their assets, with the goal of promoting sustainable economic growth.

These include the promotion of household investment in tax-exemption schemes such as the Nippon Individual Saving Account (NISA). As of June 2019 NISA accounts having grown to 17.1 million from only 4.9 million in 2014, according to Yasumasa Tahara, director of FSA’s strategy development division.

Global Financial Hub TMG isn’t just banking on fintechs to reanimate its financial sector—it has also identified overseas fintech firms along with asset management (AM) companies as central to restoring Tokyo’s position as Asia’s leading financial hub.

In order to expand and raise the

quality of the local fintech and AM industries, TMG is recruiting experts from abroad and encouraging foreign firms to set up in Tokyo.

Gov. Koike has set a target of attracting 50 foreign companies to Tokyo by 2020, complemented by various initiatives. These include startup subsidies of up to $64,490 (¥7m) to cover half of outsourcing costs; free consulting services; matching opportunity services with local financial firms and investors; and incentives for fintech and AM companies in the area of legal, and accounting professional services.

These initiatives have already attracted 20 foreign fintech and AM companies between 2017-2018. Six are overseas fintech firms which have received subsidies amounting to about $27,642 (¥3m) on average.

TMG is also looking to establish or ease regulation procedure for setting up businesses in Tokyo, such as in finance licensing and expat quality of life. “When we ask foreign fintech companies or startup companies about Japan, they say that the market is attractive but they have difficulty understanding Japanese business customs.,” said Koike. “We are providing support in the startup scene by [developing] the living environment of expats. For example, being able to send their kids to schools that speak English,” she added.

Tokyo’s development as a financial hub could also help support local economies.

“The manning of funds in the local economies are different, so there are areas in surplus and other areas in shortage because of the demographic strategy or culture. Tokyo can function as a hub in the domestic perspective: channel surplus funds into Tokyo and then redistribute to local regions that are in shortage,” said Nakaso.

Regional banks can also help support this role, he added. “Because [local banks] have a wide network in local economies, the collaboration of local banks with these economies can help make the hub happen. This is also the kind of domestic role that Tokyo as a financial hub can function,” he said. By Frances Gagua ASIAN BANKING AND FINANCE | MARCH 2020 25

OPINION

JOON KIM AND ARNON GOLDSTEIN

Collaborating and coordinating to close the trade finance gap

T

he trade finance gap is a serious issue that is impacting the health of global trade and business development in many countries across the world.

Trade finance is the fuel of global trade, upon which 80 to 90% of world trade relies, and if access to trade finance is compromised for certain companies, global trade will be unable to reach its full potential.

The businesses most likely to be affected are those in emerging markets, particularly inAsia. In a survey by the Asian Development Bank (ADB), the APAC region accounted for the highest number of trade finance rejections, shouldering approximately 40% of the entire global deficit in unmet demand for trade finance .

Furthermore, with Asia’s economy accounting for 62% of global GDP growth, any slowdown in regional trade in Asia caused by reduced access to trade finance will likely have far-reaching consequences for the world economy.

Whilst the trade gap is not new, it has grown to an astonishing $1.5t—and could be increasing. A BNY Mellon global survey revealed that trade finance rejection rates were rising in a third of institutions that participated, and 58% of respondents in the ADB’s latest survey about gap said they expected it to rise over the next two years. This worrying trend makes the task of narrowing the gap all the more pressing. But with the chasm so vast, how can the industry best approach such a challenge?

JOON KIM BNY Mellon Treasury Services ARNON GOLDSTEIN BNY Mellon Treasury Services

Addressing compliance challenges Research about the gap has shown a key contributor to be increased compliance costs, which have resulted in a reluctance by many banks to undertake know your customer (KYC) procedures for lower-value or “riskier” transactions. Finding ways to tackle this issue could result in a substantial step towards reducing the gap.

This was reflected in the survey where the approaches identified directly linked with addressing compliance challenges. There were two solutions that industry participants believed could help bridge it: technological innovation and regulatory revision. Diigital innovations could have significant implications for trade finance, ultimately helping to facilitate operational efficiency, as well as boosting trade finance activity and, in turn, economic growth. In particular, sharing data through centralised KYC databases was identified by participants as the technology solution holding the most value. These

26 ASIAN BANKING AND FINANCE | MARCH 2020

platforms may remove the need for banks to undertake similar due diligence processes, potentially resulting in a far more efficient, streamlined and standardised approach to KYC. But such solutions need widespread support if they are to make a meaningful impact on the size of the gap.

Regulatory revision – engaging with regulators to address the issue at the source instead of investing in new technologies to meet compliance demands–was an equally favoured solution. By actively engaging with regulators, banks can act as advocates for the industry and communicate the needs of the market.

The survey highlights banks’ value in promoting change, as well as the ongoing value of local-global bank partnerships. Risk sharing capabilities amongst banks ranked as the most effective way to encourage additional financing opportunities, and were regarded as key to delivering trade finance solutions and facilitating trade growth.

Coordination, cooperation, collaboration Effective regulatory revision will not be achieved without proactive, meaningful dialogue between the wider industry and regulators; equally, the extent of the benefits of digital solutions will not be realised without buy-in from the global market. Working together to decide upon and carry out effective courses of action is therefore fundamental to delivering enhancements to trade on a global scale. This applies to narrowing the trade finance gap.

Asia is an engine for economic growth, with the rapid expansion of its consumer base (previously viewed primarily as a producer base) driving extraordinary prospects for trade across the region, and exciting trading companies in Asia and the wider world. Yet, taking advantage of this significant shift will require trade finance support – at the very moment such support has become constrained.

The trade finance gap continues to negatively affect global trade and will not be resolved unless the industry – banks, alternative providers, corporates, regulators, and industry and governmental bodies – comes together to implement standardised solutions that optimise trade finance support. By focusing efforts on methods judged to have the most value, we can maximise the benefits of those solutions and bring about change effectively and efficiently, and enable trade to reach its full potential.

OPINION

INDRA UTOYO

Why digital banks are the future of financial inclusion in emerging markets

A

s digital banking proliferates through the developed world, its adoption in emerging markets in Southeast Asia continues to lag.

A McKinsey study in 2018 noted that whilst digital banking penetration has grown by as much as 300% in certain emerging Asian countries, the median level is only around 52%.

Nowhere is this difference more evident than in Indonesia, where about 66% of its more than 260 million population remains fully unbanked, or nearly 180 million Indonesians not owning a bank account.

That is not to say Indonesians aren’t virtually-savvy.

A 2018 study by Polling Indonesia and the Indonesian Internet Providers Association found that 171 million locals, or 64.8%of the population were already connected to the internet. Indonesians have been drawn online in recent years due to the tech startup boom in the country, which has in turn birthed so-called “super apps” like GoJek and Grab. Whilst millions of Indonesians use these apps for ride-hailing, food delivery, and grocery shopping, many of their transactions remain cash-based via online-to-offline (O2O) intermediaries, particularly in rural areas. A 2017 Google survey also discovered that only 11% of e-money app users are daily users.

So why the disconnect? Whilst other SEA countries such as Thailand and Malaysia are concentrated in one or two landmasses, Indonesia is an archipelago made up of more than 17,000 islands across 1.9 million sqkm.

Its geographic distribution has been a major stumbling block to the expansion of traditional banking activities nationwide.

Today’s “super-apps” have helped soften the initial hesitation to go digital whilst O2O intermediaries have bridged the human gap where needed. It’s fair to say that current conditions have helped pave the way for banks to retake the mantle and offer digital banking services to drive higher financial inclusion in the country.

INDRA UTOYO Managing Director of Digital Banking and IT Bank BRI

Rise of the super-apps In the battle of the super-apps, Ovo within GrabPay and GoPay within GoJek have taken slightly different routes to expand. GoPay bolstered its payments dominance in 2018 by acquiring three major financial services companies. Meanwhile, GrabPay partnered with Mastercard to issue prepaid cards, as well as Japan’s Credit Saison to offer loans to the unbanked based on consumer behavior data. Grab acquired O2O player Kudo in 2017 with a network of more than 400,000 agents across more than 500 towns to help people without internet access shop online. This head-to-

28 ASIAN BANKING AND FINANCE | MARCH 2020

head competition amongst the super-apps have made more Indonesians comfortable with going digital.

However, there remains gaps to fill outside of Java Island (where around 140 million Indonesians reside), with connectivity between rural towns and islands hindering digital adoption.

The role of O2O This is where O2O comes in. Whilst Kudo’s human agents place orders on behalf of their offline customers and take commissions, a company called Kioson boasts 50,000 “cash point kiosks” in 384 cities and the app’s fintech arm offers collateral-free loans to aid its 3,000 kiosk partners in expanding their own businesses.

In Indonesia and other SEA countries, O2O is now seen as a necessary feature for many tech startups, and learnings from O2O players have quickly bled through the processes of traditional banking players as well as financial regulators.

Bridging the trust gap The widespread use of O2O players indicates there remains trust issues, particularly in rural places and smaller cities outside Jakarta. A 2018 PwC survey of digital banking in Indonesia found that physical branches still provide the best experience. The Google survey also found that both banked and unbanked users have concerns about personal data loss and phone theft.

Full financial inclusion remains out of reach so long as brick-and-mortar banks with legacy names—and the inherent brand trust—do not participate in the country’s digital revolution.

Recognizing this, the financial authority of Indonesia (OJK) launched the Laku Pandai or ‘Smart Practice’ initiative amongst local financial firms that sought to promote branchless banking throughout Indonesia.

Between June 2015 and March 2019, the number of participating banks and financial firms went from six to 30. The number of agents grew from 3,734 to beyond 1 million and the number of accounts jumped from 36,000 to 23.3 million. The success of the Laku Pandai initiative in just four years paints a blueprint for digital banking in emerging markets. With the backing of heavyweight brand-name banks and human interaction at the local level, digital branchless banking has spread to almost every town in Indonesia.

Financial inclusion requires the marriage of trust in local solutions and the ease of going digital — all regulators and bankers need to do is find the correct mix for their markets.

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OPINION

MD. TOUHIDUL ALAM KHAN What you must know about sustainable banking activities in Bangladesh

S

ustainable banking is getting momentum in developing countries and Bangladesh has been one step ahead by initiating particular sustainable banking activities in various fields. The country has many success stories surrounding corporate governance, corporate social responsibility, social awareness of stakeholders, preparing sustainability reporting under globally accepted method-GRI (Global Reporting Initiative) and leadership with green banking being one of the most notable initiatives. In 2011, Bangladesh Bank (BB), the regulatory authority of commercial banks in Bangladesh, issued “Policy Guidelines for Green Banking” to implement and promote green banking activities across the country in three phases.

Sustainable banking is a key driver to confirm the world’s overall wellbeing in accordance with the United Nations Sustainable Development Goals (SDGs) which are to be achieved by 2030. As an integral part of sustainable banking, sustainable development is directly associated with the economic, environmental, and social aspects and has its focus on the environmental, economic, and social returns emphasizing the transition from the existing narrow shareholder model to the framework of a large volume of stakeholders and aiming at adding long-term value to the broader community. In 2010, Bangladesh Bank announced a financial scheme of an estimated BDT2b to encourage commercial banks to finance bio-gas plant, HHK (Hybrid Hoffman Kiln) in different brick fields, solar energy, and Effluent Treatment Plant (ETP) across the country. The BB scheme allows banks and other financial institutions (FIs) to seek refinance facilities at lower interest rates in favour of their individual finance in these specific sectors. During the fiscal year 2018 (FY2018), 31 out of 57 commercial banks and 8 out of 33 FIs received BDT71.35m as direct green finances.

MD. TOUHIDUL ALAM KHAN Deputy Managing Director and Chief Business Officer Prime Bank, Bangladesh

Sector-wise green finance in Bangladesh Around half of the green finances went directly to the ‘waste management’ sector with the green establishment and brick manufacturing being in the second and third position in terms of the total finances received. BB has a plan to provide midsize manufacturing firms, exporters, small and medium-sized enterprises (SMEs), and other private sector companies with an estimated US$292.5m in long-term finances partnering with the International Development Association (IDA) under the Financial Sector Support Project (FSSP) with the goal to facilitate economic development and ensure development

30 ASIAN BANKING AND FINANCE | MARCH 2020

outcomes that are environmentally and socially sustainable. BB’s share of the financing is US$38.50m and IDA’s is US$254m (FY2018).

The Environment and Social Management Framework (ESMF) has already been developed to ensure that the mentioned financing is sustainable. The facility is available to the mentioned business avenues on both refinancing and on-lending terms and will extend opportunities for importing capital equipment and machinery for up-gradation (following health and safety compliance), supporting start-up manufacturing industries, relocating factories or industries to designated industrial zones, purchasing ocean vessels, and specialized delivery vehicles to facilitate the transportation of manufactured goods across the country.

‘10 Taka Special Account’ In 2014, BB gave a guideline to encourage the ‘10 Taka Special Account’ for working children with a view to safeguarding their hard-earned cash, securing their future, and making them financially independent. At least 19 banks came to terms with different registered NGOs under a bilateral agreement to offer these services. As of June 2018, a total of 4,684 accounts were created and reached $39,967 (BDT39m).

‘Agent Banking’ BB has taken initiatives to promote a financial inclusion tool for the underprivileged section of the population mostly from remote locations. In 2013, BB created ‘Agent Banking’ guidelines to accelerate a safe, hasslefree, and secured alternative channel to deliver financial services to the unbanked population which marks a significant initiative to promote sustainable banking in Bangladesh. The total number of agents and their account numbers reached 4,866 and 2,906,655 in Q1 2019. During the previous quarter, the numbers were 4,493 and 2,456,982 respectively. Similarly, the number of agent banking outlets reached 7,838 during Q1 2019, which was a total of 6,933 during the previous quarter.

Conclusion In Bangladesh, the concept of sustainable banking is on agricultural financing, financial inclusion drives, corporate social responsibility, green banking, micro and small enterprise financing along with many steps for financial inclusion activities. All of these activities and programs are clearly linked with the UN’s SDGs which Bangladesh is working to achieve by 2030.

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OPINION

GRACE CHIA

The future of consumer credit is in AI

C

redit cards have long been a key source of unsecured credit for consumers in developed markets. Many regard credit cards as a convenient payment mechanism to finance bigticket purchases and emergency expenses. Although Singapore enjoys a high credit card penetration of 1.5 cards per capita, penetration remains low across Southeast Asia’s emerging economies, averaging at only 0.1 credit cards per capita in Indonesia and Vietnam.

Traditional credit risk assessment models employed by mainstream financial institutions have limited incumbents’ risk appetite for lending. Risk scoring models often rely on consumers’ income and credit history. As the large majority of consumers in the region do not meet the minimum income threshold or lack credit history, consumers are either not eligible for a credit card or are charged a very high price to compensate for the high default risk. Hence, traditional credit risk assessment models have limited consumers’ access to affordable credit. However, the emergence of artificial intelligence (AI) and data analytics is expected to democratise access to credit in Southeast Asia.

Redefining credit risk scoring through the inclusion of dynamic data points The data points used in existing credit scoring models are often limited and static in nature, relying heavily on consumers’ income and credit history. AI is set to redefine credit risk assessment. The inclusion of dynamic data points like customer purchasing and payment behaviour will provide lenders with a more holistic view of consumers. Besides the identification of new customer profit pools amongst the underbanked, AI will also enable lenders to price risk more appropriately. The success of Ant Financial’s ‘buy now, pay later’ service, Huabei, is largely attributed to its in-house credit scoring system, Sesame Credit.

The scoring system leverages on purchases made on Alibaba Group’s ecosystem, data from external agencies and social media interactions to assess an individual’s creditworthiness. This has enabled the unbanked and underbanked in China to gain access to credit that was previously limited to traditional financial institutions.

GRACE CHIA Senior Analyst Euromonitor International

Consumer technology platforms are best positioned to offer ‘buy now, pay later’ services Buy now, pay later’ or deferred payment services like Afterpay and Affirm have won over the hearts of many in the West. However, unlike in the West where pure-play fintechs are the key providers of these digital

32 ASIAN BANKING AND FINANCE | MARCH 2020

credit services, ‘buy now, pay later’ services will be best served by consumer technology platforms in Southeast Asia. Consumer technology players like super apps and e-commerce platforms have seen explosive growth in recent years, amassing a critical mass of customers from both the banked and underbanked. Whilst banks have found it difficult and expensive to reach these customer segments, technology platforms on the other hand, are well-positioned to provide digital credit services to their wide user base.

Consumer technology players have access to customer behavioural data like usage frequency and transaction history, enabling them to leverage on AI to assess the creditworthiness of customers. The seamless integration of ‘buy now, pay later’ services into the core offering will provide a strong use case for instant financing at the point-of-sale. Offering deferred interest-free payments or instalment purchase plans for e-commerce purchases, ride-hailing and food delivery services will value-add to consumers. Gojek’s digital credit service, PayLater, was first made available for Gojek’s services like ride-hailing and food delivery in Indonesia. The super app has since enabked consumers to use PayLater at both online and offline merchant partners.

Lenders can offer more affordable consumer credit by embracing a different revenue model Asians are known to have an aversion to debt due to high interest rates and fees on credit cards. To overcome this, disruptors can offer affordable credit solutions by adopting a different revenue model from traditional lenders. As digital credit services will enable consumers to make big-ticket purchases that they otherwise could not afford in one payment, lenders can charge merchants a higher margin on every successful purchase. Merchants stand to benefit from an increased order value and a lower likelihood of cart abandonment.

‘Buy now, pay later’ solutions that operate under an AI-driven risk scoring model will give the underbanked access to credit. The average consumer may now be able to purchase a home appliance that he otherwise could not have afforded in a single payment.

Whilst the initial adoption and usage of digital consumer credit is expected to first gain traction for online purchases, we may soon witness spillover effects into the offline environment. The democratisation of credit through AI will help to pave the way for financial inclusion in Southeast Asia.

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