Asian Banking & Finance (April-June 2022)

Issue No. 106

DISPLAY TO 30 JUNE 2022

SCB’S REGIONAL PUSH Asian Banking & Finance

WITH ITS REORGANISATION TO SCBX, SCB PLANS TO EXPAND TO A CUSTOMER BASE OF 200 MILLION

BRI EMPLOYS AI ‘BRAIN’ TO MERGE ITS DIGITAL AND PHYSICAL PRESENCE BAKONG COULD PAVE THE WAY FOR DIGITAL CURRENCY IN CAMBODIA MAYBANK ISLAMIC HELPS HALAL SMES TAP INTO A $2.6T GLOBAL INDUSTRY

Arthid Nanthawithaya, Siam Commercial Bank CEO

CITIBANK CONSUMER ASSETS SNAPPED UP BY UOB, UBP, AND DBS

FROM THE EDITOR PUBLISHER & EDITOR-IN-CHIEF

Tim Charlton

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n this issue, we shine a light on the impact of the Russia-Ukraine conflict on the banking and finance sector in Asia-Pacific. Whilst banks in Asia face only limited impact from the sanctions imposed on Russia, effects on financial markets may snowball in the long run.

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Alternative payment methods are increasingly becoming the norm amongst consumers, a move spurred by the pandemic, as more people seek to avoid physical contact. Southeast Asian banks looking to dab in crypto may face operational, reputational, and legal risks. Maybank Islamic is helping Halal SMEs tap into a $2.6t global industry.

We sat down with Arthid Nanthawithaya, CEO and Chairman of the Executive Committee of Siam Commercial Bank to discuss the bank’s rebranding to SCBX and plans to expand to a customer base of 200 million. Read the exclusive interview on page 20. We also chatted with Munir Nanji, the newly appointed Central Europe Cluster Head and Citi Country Officer for Citibank Czech Republic to discuss his strategies on tapping Central Europe’s growth to boost Citi’s profits. See the full interview on page 24.

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

ASIAN BANKING & FINANCE | Q2 2022 1

CONTENTS

CEO INTERVIEW SCB IS TRANSFORMING INTO A FINTECH GROUP 16 WHY

FIRST 06 Relaxed policies boost China’s new lending

08 Thai banks bad loans will soar to highest since GFC

10 Pressure is still on for Indonesia’s ‘big four’ banks

12 SG bolsters digital banking security 13 Some respite for PH banks with credit costs sighted to decline

RETAIL BANKING 28 Negative impact on APAC banks bubbles up as Russia’s invasion carries on

BANKING TECHNOLOGY 18 BRI employs AI ‘brain’ to merge its digital and physical presence

38

ANALYSIS BREAKING THE MOULD: TRANSFORMING WEALTH MANAGEMENT THROUGH ANALYTICS

CASE STUDY 32 DBS Digital Exchange as a key player in digital asset space

34 ‘HalMap’ helps Halal SMEs tap into

INTERVIEW 20 Talent & Tech at the heart of Munir Nanji’s mission

FINANCIAL INSIGHT 22 Bakong could pave the way for digital currency in Cambodia

SECTOR REPORT 24 Will Request To Pay displace card payments in the future?

26 Southeast Asian banks’ growing crypto exposure threatens earnings

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36

COUNTRY REPORT PHILIPPINE CENTRAL BANK TAKES A SWING AT SUSTAINABILITY IN THE BANKING SECTOR

a $2.6t global industry

42 Citi consumer assets snapped up by United Overseas Bank, UnionBank, DBS

OPINION 44 Cryptocurrency in Hong Kong – why regulation and enforcement are needed

46 Where Bangladesh stands in its journey towards financial inclusion

48 Managing the financial risk of aiming for net zero carbon emissions

For the latest banking news from Asia visit the website

www.asianbankingandfinance.net

Thank you for your continued trust in us UOB Malaysia is the winner of Asian Banking & Finance Retail Banking Awards 2021

2021 International Retail Bank of the year

United Overseas Bank (Malaysia) Bhd (199301017069 (271809-K))

Digital Banking Initiative of the year

MALAYSIA

MALAYSIA

2021

2021

Member of PIDM

ASIAN BANKING & FINANCE | Q2 2022 3

News from asianbankingandfinance.net Daily news from Asia MOST READ

FINANCIAL SERVICES

BANKING TECHNOLOGY

DBS, OCBC, UOB: Who performed best in Q4 2021?

Why Indonesia’s Bank Raya seeks to service the gig economy Bank BRI Agro has shed its roots as an Amongst the three, UOB achieved agribusiness-focused finance platform the highest loan growth of 10.5% year-on-year (YoY), followed by DBS and rebranded as Bank Raya, looking at 9.9% YoY, and OCBC at 8.4% YoY. to take flight as a fully-fledged digitalNet interest margins across the three only bank able to service the 46 million banks were “mostly stable” quarter Indonesians who count themselves part of the local gig economy. on quarter.

RETAIL BANKING

BSP Deputy Governor Tangonan on PH’s digital finance ambitions The Philippines has less than two years to achieve its goal of getting 70% of Filipinos banked by 2023 and 50% of its financial transactions done digitally. But as of 2020, more than one in seven Filipinos still remain unbanked.

4 ASIAN BANKING AND & FINANCE FINANCE | Q2 | Q3 2022 2021

MARKETS

China’s new foreign-friendly financial market brimming with opportunities China opening up its trillion-dollar financial market to foreign firms is cause for much celebration, but that not everything is smooth sailing. More foreign firms may be taking a waitand-see approach following China’s ongoing regulator crackdown.

CARDS & PAYMENTS

What do SMEs expect from modern payment solutions?

As everyone goes ga-ga over digital wallets, businesses are also ramping up means to cater to the increasing demand for digital payment options.

But many small and medium enterprises are finding it a challenge to make the leap.

ISLAMIC BANKING

Why Islamic Banks will be the biggest winners post-COVID Southeast Asia’s Islamic banking sector is poised to enjoy longterm growth prospects thanks to a young, growing population demanding Shariah-based products, services, and government support, analysts said.

THOUGHT LEADERSHIP ARTICLE

Addressing operational challenges in financial institutions through effective managed services SmartStream Head of Business Development, Managed Services Mark Morris provided insights on the need to upgrade systems and create efficiencies to reduce costs and risks.

Mark Morris, Head of Business Development, Managed Services at SmartStream

W

ith the hastening of digital adoption and automation, many financial firms had to think quickly about their strategies and how new work setups would affect various aspects of the trade lifecycle. Whilst innovations in the financial services industry have been consistent, those who would want to thrive amidst the harsh economic environment had to rapidly rise to the occasion and adapt new approaches and solutions.

The key drivers for firms looking at SaaS solutions are a combination of lower cost of ownership, creating efficiencies by leveraging the expertise of vendors, and their experience in serving multiple institutions in this specialised space, by staying on the latest system version and benefiting from enhancements without being stymied by costly upgrade projects.

They want to focus on initiatives that drive their revenue growth and not have to focus on commoditised functions and processes in the shared services space which can be delivered by SaaS vendors or utility service offerings. Also with cloud technology and services, financial institutions realise operational resilience, enhanced performance are future proof against accelerated business growth.

Firms also reduce the risk & burden of maintaining trained resources to manage vendor platforms.

Despite the impacts of the pandemic, it was still business as usual for SmartStream, having maintained uninterrupted service to customers. Mark Morris explained that managed services for Asian banks who are looking to reduce their total cost of ownership and where they can leverage

their expertise.

“Clients likes the fact that SmartStream takes care of upgrades on their system for them, and that transformation are typically run by seasoned, experienced SMEs,” Morris said. He mentioned that managed services can benefit the industry in many ways. Firstly, they benefit from all the latest enhancements by staying on technologies’ latest versions. Firms are not bogged down by costly multi-year transformation projects and can conduct change at pace.

“Leveraging the cloud technology, and all the services that come with that, it gives them some cost reduction. It gives them real operational resiliency. It allows them to be scalable. It’s very easy for us to provide additional enhanced processing capability in the cloud. It’s much quicker than doing it in an actual physical data centre,” Morris added.

With the rise of digital transformation, there is also an increase in digital banking services in Asia. For Morris, this occurrence complements the managed services industries as firms get away from the old regime to the more automated digital processing one.

As innovations in the banking and finance scene further progress, there is now a recurring premise of eradicating data centres as they are “old versions of technology and they’ve benefited massively from upgrading” in terms of processing. This is where SmartStream sees a lot of traction today.

Morris noted that clients today are now demanding innovation. They conduct weekly meetings with cloud providers and infrastructure providers, as well as regular monthly client key performance indicator (KPI) meetings. This means listening to customers and finding out what their issues are.

“I think it’s the constant drive for innovation and efficiency then it’s a good challenge that keeps you on your A-game,” he said. We have helped clients with Pan APAC SaaS solutions, by adopting a “Hub & Spoke” model where they can leverage their prime site in Singapore and service 6 other centres from there.

Choosing the right managed services provider Morris emphasised that there is no shortcut to choosing the right provider, as companies could introduce operational risk. Companies need to do a detailed request for information (RFI) and make a good shortlist of potential providers. They should also have real stringent scoring methodologies and act impartially.

“Make sure it’s clear to the customer the costs of the implementations and the duration, how much elapsed time and resourcing the project is going to take. Some of these projects are very complex,” Morris said. Choosing SmartStream as a provider means customers will get experts who understand the company’s solutions, and who will immediately start looking at their day-to-day operations to understand how efficiencies can be driven.

SmartStream has trusted service provision and produces KPI packs for clients. It also offers best-in-class security and all the right regulatory accreditations and external audits, all of which are key aspects of its managed services business.

Moreover, for firms that are faced with a heavy amount of manual processes, SmartStream has introduced its SmartStream Air (Artificial Intelligence Reconciliations) solution to help them automate and incorporate machine learning capabilities into their processes.

With SmartStream Air, loading information is straightforward and quick.

The AI will cleverly read, analyse, learn and identify what needs to be compared, and then present a list of unmatched records or disputes for investigation.

Burdensome tasks become easier.

SmartStream’s capabilities have certainly made their mark, making firms realise there’s a better way to manage their data and streamline their processes. “They’re just getting to the stage where they need to invest in some technology, which we want to help them with fruitful leadership and leveraging our expertise, you know, to say we can help you,” Morris said.

ASIAN BANKS WHO ARE LOOKING TO UPGRADE THEIR TECHNOLOGY TURN TO MANAGED SERVICES PROVIDERS, TO REDUCE THEIR TOTAL COST OF OWNERSHIP, AND DERIVE IMMEDIATE BENEFITS ASIAN BANKING & FINANCE | Q2 2022 5

FIRST SG FREEZES ASSETS OF RUSSIAN FINANCIAL INSTITUTIONS PAYMENTS

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he Monetary Authority of Singapore (MAS) has prohibited financial institutions (FIs) in its jurisdiction to do business or offer financial services to four Russian entities, the Russian government, the Central Bank of the Russian Federation, and Ukraine’s breakaway regions of Donetsk or Luhansk.

Financial entities sanctioned include VTB Bank Public Joint Stock Company, Promsvyazbank Public Joint Stock Company, Bank Rossiya, and Vnesheconombank (The Corporation Bank for Development and Foreign Economic Affairs).

Singapore-Russia transactions FIs in Singapore are also barred from doing business with the Russian government and the Central Bank of the Russian Federation. This includes purchasing, selling, providing financial services for, assisting in the issuance of, or dealing with securities or certificates of deposit issued by Russia’s government or central bank.

Banks are also ordered not to enter into financial transactions or provide financial services to Donetsk and Luhansk.

Singapore FIs are further prohibited from establishing any new business relations, undertaking or entering any financial transaction, providing financial assistance, or transferring financial assets as well as “other assets or resources” with the four banks.

FIs who have possession, custody, or control in Singapore of any funds or assets owned or controlled directly or indirectly by the four banks were ordered to immediately freeze them.

They are also asked to ensure that such funds, financial assets, or economic resources are not made available to the sanctioned banks.

6 ASIAN BANKING & FINANCE | Q2 2022

New bank lending in China fell “more than expected” with aggregate finance dropping to CNY2.37t

Relaxed policies boost China’s new lending LENDING & CREDIT

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elaxing monetary policies gave a little boost to new lending in China as banks remained cautious over concerns regarding credit quality–and any further cuts may not be enough to alleviate concerns, according to a report by the financial institution ING. New bank lending in China fell “more than expected” in December 2021, with aggregate finance dropping to CNY2.37t from CNY2.61t in November of the same year, according to the report.

New yuan loans also fell to a total of CNY1.13t from CNY1.27t in November.

The fall happened despite the central bank cutting reserve requirement ratios (RRR) by 0.5 percentage points (ppt) and interest rates by 5 basis points around the same period.

The small growth in credits shows that despite cuts to RRR and interest rates, banks are reluctant to lend as their concern is more about credit quality, according to ING’s Iris Pang, chief economist, Greater China.

“This is because several big

A loosening monetary policy may not boost economic activity

corporations have recently defaulted.

Though the default entities are mostly real estate developers, the risk is increasing to the suppliers, mostly in the industry of construction materials,” Pang said.

Demand for loans is mostly affected by real estate. The sector is likely bracing for more woes to come their way in the next few months, with the deleveraging for real estate developers likely to remain in force over the year.

ING believes that this will end up as a merger and acquisition activity to reduce debt ratios for the most heavily indebted real estate developers. Stateowned enterprises (SOEs) will replace some private-owned enterprises across the industry.

If loans continue to experience a monthly decrease, Pang noted that the government may need to send out “a clearer message” to banks.

“If risk awareness is on the top of the list of banks’ concerns, then further RRR and interest rate cuts may not yield a result of more credits. That means that even a loosening monetary policy may not boost economic activity,” Pang said.

We may also see a return to the old days when banks lent to SOEs, which are supposed to be better in terms of repayment ability, Pang added.

On the upside, the economy is expected to extend its growth streak in 2022, which should give banks some relief from any unexpected pandemicrelated drawbacks. China’s economy grew 8.1% for the full year 2021, partly due to the low base growth of only 2.2% in 2020. It is forecasted to grow another 5.4% for the full year of 2022 on the back of stronger industrial production and the rise of retail sales. Both exports and imports also grew by around 21%, and ING expects trade to keep its momentum in 2022 as global growth is expected to be better this year.

A hidden gem amongst industries, is the investment in advanced technology, according to ING. This is partly the result of the land-mine that is the USChina relationship.

“As the US is restricting technology exports to China that can find a dual-use for military and commercial purposes, China has had to invest to build up its own capacity in advanced technology. This is an arena that has the potential for very high growth,” ING said.

BRANCH INNOVATION OF THE YEAR - GOLD DOMESTIC RETAIL BANK OF THE YEAR - SINGAPORE INVESTMENT PRODUCT INNOVATION OF THE YEAR - SINGAPORE BANKING FOR WOMEN INITIATIVE OF THE YEAR – SINGAPORE

UOB’s customer-centric, digitally innovative strategies honoured at the ABF Retail Banking Awards UOB has been recognised as Domestic Retail Bank of the Year and Best Retail Bank.

G

uided by values of customercentricity and its ‘Right by You’ motto, UOB was awarded multiple wins at the 2021 ABF Retail Banking Awards, including Domestic Retail Bank of the Year in Singapore, due to its unwavering commitment to supporting its customers through the pandemic.

The bank rolled out a series of digitalcentric strategies to ensure that customers face minimal banking disruption and maximum convenience. One key focus was on providing seamless digital onboarding and navigation for new digital natives.

To continue engaging wealth customers, the bank quickly executed its first digital ‘Privilege Conversations’ webinar to discuss the latest market insights and the way forward in a post-COVID world. Cards usage offers also pivoted towards the supermarkets and e-commerce segments, as they empowered customers with the best daily essential deals in the comfort of their homes, resulting in over 50% surge in billings in those categories. The success of its digital-centric strategies was clearly reflected in the 45% soar in digital financial transactions, with PayNow and QRPay transactions further doubling in 2020.

The bank also recognised the importance of innovation, being the World’s 1st Bank to leverage VISA’s API for card-on-file provisioning, providing greater convenience for customers. Additionally, the bank’s forward thinking allowed them to reap the fruits of its past digital investments which better positioned the bank to serve customers’ banking needs amidst the pandemic. UOB’s success in its digitalised banking application and digital car & home loans ecosystems contributed to the bank’s record-high new mortgage sales in postTSDR y-o-y of 27% despite branch closures.

The bank did not rest on its laurels and continued to enhance its digital offerings to maximise rewards to customers. Recently, UOB launched the UOB TMRW banking application, which boasts the highest ratings amongst all banking applications in Singapore, and Rewards+, Singapore’s largest rewards programme with over 1000 deals across 20,000 locations islandwide.

By placing customers’ needs at the heart of its business, UOB continuously innovated

and enhanced customer journeys with great success, contributing to its Best Retail Bank win.

Best Investment Product Innovation – Simplenvest UOB recognised the fervent interest in investments and the need to keep up with trends in digital transformation.

SimpleInvest was designed specifically to offer every investor a simple and easy way to take the first step towards fulfilling their investment and financial objectives of 1) Liquidity, 2) Income, and 3) Growth.

SimpleInvest is a testament to UOB’s commitment to serving PFS Singapore Leadership Team customers with simple and innovative solutions that empower them to achieve their financial goals. Customers can access money market in an 8x lift in the number of customers funds and funds of funds with just $100 upgraded and a 4x lift in product via the UOB TMRW application – making it conversions, an affirmation for the team accessible and easy for customers to start to continue its efforts to enhance its their investing journey. branch journeys for customers.

Best Branch Innovation of the Year – Branch Profiler In UOB’s pursuit of an omnichannel

SimpleInvest is a testament to UOB’s commitment to serving customers with simple and innovative solutions that empower them to achieve their financial goals engagement strategy, the bank has also put forth an AI-powered experience for customers at its high-street wealth centres.

Aiming to better identify and profile customers to serve them better and equip its bankers with relevant insights to better engage customers, the team developed and curated a differentiated, personalised customer journey at the branch by leveraging advanced analytics and technology. These personalised branch journeys have resulted

Best Banking for Women Initiative – Ladies Account UOB’s Lady’s Savings Account is also an industry-first female-only savings account that protects customers as they save. Combining both elements of Deposit and Insurance into one, it provides customers with higher coverage values the more they save. In an environment of declining interest rates amidst a competitive landscape, the Lady’s Savings Account leverages the perceived value and relevancy of critical illness insurance, shifting customers’ mindset to one beyond interest rates.

This innovative and first-in-market solution offers peace of mind for women and is on track to achieve 30,000 new account acquisitions and $600m in savings end-balances by end-2021.

The product has also been successfully launched across UOB Malaysia, Thailand and Indonesia and paved the way for the evolution of future deposit products of what savings can offer beyond earning interest rates.

ASIAN BANKING ASIAN ASIANBANKING BANKING AND FINANCE AND FINANCE FINANCE | DECEMBER || Q2 Q3 2022 2021 2020 7

FIRST FOUR IN FIVE SINGAPOREAN GEN Z TRY TO GO CASHLESS THAILAND

Thai banks bad loans will soar to highest since GFC THAILAND

S O

ver four in five Gen Z Singaporeans have tried going fully cashless for payments during the pandemic, according to Visa’s latest Consumer Payment Attitudes Study.

A total of 82% of Gen Z consumers surveyed said that they have attempted going cashless, higher than the nearly three in four (74%) of Gen Y consumers who tried to do the same.

This is influencing the way they shop. Seven in 10 (70%) Gen Z consumers indicated that they are comfortable going to stores with self-checkout lines, and 70% of them are comfortable with biometric-authenticated payments.

As a whole, three in five Singaporean consumers have tried going fully cashless, the study found further reported.

Amongst the reasons driving Singaporeans to go cashless is its greater speed and efficiency (47%), convenience (47%), and ease of tracking financial records (43%).

Types of transactions that Singaporeans are most likely to go cashless include bill payments, with over 6 in 10 (62%) indicating this.

Almost the same (59%) said that they will most likely go cashless for public transportation-related transactions, and for taxi and ridesharing payments (56%).

Nearly three-quarters of Singapore consumers (74%) now use contactless cards, Visa found. Eightyfour percent of those who currently use the payment method use it at least once a week. Other digital payment methods that are widely used in the city include online card payments (81%), mobile contactless payments (49%), and swiping or inserting a card (48%).

8 ASIAN BANKING & FINANCE | Q2 2022

ingapore banks’ risks are expected to rise over the next 24 months, with the banking sector’s nonperforming loan (NPL) ratio expected to climb to 5%–its highest since the 2008 global financial crisis.

Ratings agency S&P Global Ratings said that there is a one-in-three possibility that economic risks will rise for Thai banks, although its rated banks in the country still carry stable outlooks in the same period thanks to good capitalisation and healthy provision of coverage ratios.

Whilst recent steps taken by the government and central bank–through their relief programmes–will reduce risks for the country’s banks, it won’t eliminate them, S&P warned.

“There is an increasing divergence in economic reality and reported asset quality ratios,” the ratings agency said in a report, noting that the banking sector’s reported [NPL] ratio has remained stable at about 3% due to supported by ongoing relief measures.

“In our opinion, regulatory forbearance is just prolonging the pain of underlying problem loans. At 14%, the high proportion of banks’ loan books under relief measures points

There is a divergence in economic reality and reported asset quality ratios

Regulatory forbearance is just prolonging the pain of underlying problem loans

to incipient problems in the system,” S&P warned.

The restructuring would provide a temporary lifeline to the borrowers and slow NPL growth, but will not resolve the structural problems in the system, the ratings agency further warned in the report.

“In the absence of any effective measures to reduce the high household debt burden, borrowers will remain dependent on better economic conditions and low-interest rates to service their obligations on time,” it said.

The crisis in Ukraine could also further delay the normalization of international tourist arrivals in Thailand, S&P said.

Singapore bank chiefs’ salaries rise SINGAPORE

S

ingapore banking chiefs enjoyed bigger take homes in the past fiscal year, with their salaries rising by double-digits in percentages.

DBS’ CEO Piyush Gupta saw his salary rise a whopping 47.8% in 2021 for a total of US$9.98m (S$13.57m), the bank’s annual report shared. This is over S$4m higher than his 2020 pay of S$9.18m in total.

Gupta’s cash bonus in 2021 totalled S$5.16m, over 51% higher than in 2020, when he received just S$3.41m.

The rise came on the back of DBS posting a record high profit for the fiscal year of 2021. DBS reported a net profit of S$6.8b during the year, 44% higher than in 2020. This was partly driven by loans growing to the bank’s highest in seven years, with DBS reporting a total of 9% rise to S$409b in loans.

Local rival UOB also saw its CEO Wee Ee DBS CEO Piyush Gupta Cheong’s salary climb to about US$8.03m.

FIRST

ASIAN BANKING & FINANCE | Q2 2022 9

FIRST Compared to its peers, BRI has strong capital buffers to absorb moderate risks from tough macroeconomic conditions

Bank BNI’s capital position could provide adequate cushion against high credit losses

Pressure is still on for Indonesia’s ‘big four’ banks

I

CONSUMER CREDIT

ndonesia’s four biggest financial institutions—PT Bank Negara Indonesia (BNI), PT Bank Rakyat Indonesia (BRI), PT Bank Mandiri, and PT Bank Perusahaan Pengelola Aset (PPA)—are expected to remain under pressure over the next 12 to 18 months due to the ongoing pandemic-related strains, according to S&P Global Ratings.

Bank BNI’s capital position is expected to provide an adequate

cushion against high credit losses.

Bank Mandiri’s credit costs, meanwhile, are expected to stay elevated in 2022 as the pandemic weighs on its earnings.

The bank also faces an elevated, although declining, level of nonperforming assets. But its strong capital buffers and good liquidity cushions should meet short-term obligations, S&P said.

Of the four banks, BRI benefits

from superior earnings compared to its peers, thanks to its sizeable exposure in the high-yielding microfinance segment. The bank also reportedly has strong capital buffers to absorb moderate risks from tough macroeconomic conditions, according to S&P. However, BRI’s higher credit costs relative to its peers will exert pressure over the next 12 months as COVID-19 continues to be prevalent in Indonesia.

Bank PPA’s advantage is that it has a high likelihood of receiving government support should it face financial distress, thanks to being a government-related entity.

On the other hand, Indonesia’s outlook souring also affected Bank PPA, especially given its role as a distressed state-owned enterprise (SOE) manager.

“We expect [Bank] PPA to expand its balance sheet and funding sources as part of its transformation into a more diversified financial services firm, whilst maintaining adequate capitalisation over the next 12 to 18 months,” S&P said.

This transformation comes with risks too. PPA could face further strains should its management make significant strategic or execution missteps during PPA’s transformation phase, which in turn could lead to lapses in risk management or unexpected losses.

THE CHARTIST: INDIA’S MOBILE WALLET PAYMENTS BECOMING MAINSTREAM

T

he segment is expected to grow at a compound annual growth rate (CAGR) of 42.7% between 2021 and 2025 and reach US$4.1t (INR305.6t) by the middle of the decade, according to forecasts by data and analytics company GlobalData.

In 2022 alone, payments using mobile wallets are expected to equal a total of US$1.7t in India, a 69.8% growth compared to the previous year.

The availability of high-speed internet facility at low cost, coupled with the rise in smartphone penetration has provided the foundation for mobile payments to thrive in India, according to Sowmya Kulkarni, senior payments analyst at GlobalData.

“Mobile wallets have now become an integral part of Indian consumers payments and

10 ASIAN BANKING & FINANCE | Q2 2022

are also preferred by merchants of all sizes, from big supermarkets to neighbourhood ‘kirana’ shops,” Kulkarni said. “This growth has been largely driven by state-backed instant payment system UPI, which enables users to make payments directly from their bank accounts using recipients’ mobile number or scanning QR code.”

The significant growth in mobile wallet transactions has seen the proliferation of mobile wallet brands, with each competing to get a pie of this market. Some of the popular brands are PhonePe, Google Pay, and Paytm.

“Mobile wallets market in India is in high growth phase. Government’s push and improving mobile payment acceptance infrastructure will further drive the mobile wallets usage, thereby helping the government’s broader objectives to become a less cash economy,” Kulkarni said.

India: Mobile Payments Value (INRT)

Source: GlobalData

PERSONAL LOAN CONSUMER DURABLE LOAN

TWO WHEELER LOAN CREDIT CARD TERM DEPOSIT

CERTIFICATE OF DEPOSIT

www.fecredit.com.vn www.facebook.com/FECREDIT.VN/ ASIAN BANKING & FINANCE | Q2 2022 11

FIRST arising from scams, after OCBC fully shouldered customer losses.

In particular, the financial regulator described OCBC’s goodwill payouts as “a one-off gesture” and said that it does not set a general precedent for future cases. The proportion of losses that each party bears will depend on whether and how the party has fallen short of its responsibilities, MAS wrote in its announcement.

A new framework, created by The Payments Council, is also set to be released for public consultation in the next three months. Other than the sharing of losses, the consultation will also cover the responsibilities of other key parties in the ecosystem.

FIS KEY FOR GREEN ENERGY INVESTMENTS FINTECH

D

ecisions on green finance now will lock in emissions trajectories for decades.

Financial institutions have a vital role in guiding investment flows from brown to green activities and facilitating low-carbon transition, according to a new report by PwC released at the World Economic Forum.

“To capitalise on the increasing global appetite for green assets, the financial sector will play a vital role in channeling investment flows towards green energy and transportation projects,” said Raymund Chao, Asia Pacific chairman, China chairman and CEO, PwC. Banks, insurers, asset owners, and asset managers are reportedly coalescing around frameworks, such as the recommendations of the Task Force on Climate-related Financial Disclosures to measure, manage, and disclose their climate risks, PwC said in its report “Advancing the Green Development of the Belt and Road Initiative: Harnessing Finance and Technology to Scale Up Low-Carbon Infrastructure.”

Increasing green financing Financial institutions have also set targets to reduce their exposure to carbon-intensive sectors and increase green financing activities. This is often done in collaboration with initiatives such as the Green Investment Principles under the Belt and Road Initiative, and the Glasgow Financial Alliance for Net Zero, to name a few.

Making decisions on green finance is important as it will lock in emissions trajectories for decades, and could reportedly make or break the world’s abilities to achieve the Paris Agreement objective and limit rising global temperatures, the report said.

Amongst markets, emerging and developing economies are notedly facing the most challenges as they continue to grapple with having to implement green energy initiatives whilst meeting the rising demand for energy and mobility as they expand, industrialise, and urbanise.

12 ASIAN BANKING & FINANCE | Q2 2022

MAS clarified rules on coverage of losses arising from scams, after OCBC fully shouldered customer losses

SG bolsters digital banking security BANKING TECHNOLOGY

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he Monetary Authority of Singapore (MAS) hit the ground running in the first two months of the year as they unveiled new methodologies for responsible artificial intelligence (AI) use and dealt with losses arising from recent phishing scams that befell bank customers in the Lion City.

MAS, along with the Association of Banks in Singapore (ABS), first implemented a plethora of additional measures to bolster the security of digital banking following a phishing scam that affected customers of OCBC. Following this, banks in Singapore were immediately asked to remove clickable links in emails and SMSs sent to retail customers; to set up a system of sending notifications to customers regarding funds transfer at a threshold of $100 or even lower; and to delay activation of the new soft token on a mobile device for at least 12 hours.

Clients will also now be informed via text message whenever there is a change in their mobile numbers and email addresses registered.

A couple of weeks later, MAS clarified rules on coverage of losses

MAS described OCBC’s goodwill payouts as “a one-off gesture” and that it does not set a general precedent for future phishing cases

AI fair-use in financial institutions MAS also released five whitepapers that detail assessment methodologies for the fairness, ethics, accountability, and transparency principles, meant to guide the use of AI by FIs. The whitepapers were published by the Veritas Consortium, which comprises 27 industry players.

Alongside the release of the whitepapers, the Veritas Consortium also released an open-source toolkit meant to help FIs adopt the methodology. The toolkit reportedly enables the automation of the fairness metrics assessment and allows for visualisation of the interface for fairness assessment and for the plug-ins to integrate with FI’s IT systems.

The white papers reportedly provide a comprehensive FEAT checklist for FIs to adopt during their Artificial Intelligence and Data Analytics (AIDA) software development lifecycles; and an enhanced Fairness Assessment Methodology to enable FIs to define their AIDA system’s fairness objectives, identify personal attributes of individuals and any unintentional bias.

It also has a new Ethics and Accountability Assessment Methodology, which provides a framework for FIs to carry out quantifiable measurement of ethical quantifiable measurement of ethical practices, in addition to the qualitative practices currently adopted.

Singapore’s financial regulator is also collaborating with the Infocomm Media Development Authority and the Personal Data Protection Commission to include the Toolkit in PDPC’s Trustworthy AI testing framework.

FIRST Philippine banks’ profits are expected to strengthen in 2022, as the economy recovers with an expected GDP growth of 7.2%

Compared to regional peers such as Indonesia, Malaysia, and Thailand, the Philippines’ ratio of restructured loans is noted to be significantly lower

Some respite for PH banks with credit costs sighted to decline LENDING & CREDIT

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hilippine banks’ credit costs are expected to decline in 2022 as most stressed loans are already recognised or restructured, S&P Global Ratings reported.

Credit costs are forecast to drop further to 0.6% to 0.8% of loans, following a steep decline to about 1% throughout 2021.

The sector’s nonperforming loans (NPLs) of 4% and restructured, performing loans–which is at 2.2% of total loans–are at manageable levels, the ratings agency added.

Some slippage is possible from the restructured pool, especially from the services sector and from stretched consumers, S&P warned. However, Philippine banks are well placed to absorb this residual stress given their improved capitalisation and adequate provisioning coverage.

“Overall, we believe the banking sector’s NPL ratio has peaked and is likely to gradually decline supported by recoveries and write-offs,” S&P wrote.

Compared to regional peers such as Indonesia, Malaysia, and Thailand, the

Philippines’ ratio of restructured loans is noted to be significantly lower.

Along with lower credit costs, Philippine banks’ profits are expected to strengthen in 2022, as the economy recovers with an expected gross domestic product growth of 7.2% in the current year.

The banking sector’s return on average assets is expected to return to the pre-pandemic level of 1.2%, compared with 1.1% in 2021, on the back of higher credit growth, increase in fee income as business activity picks up, and lower credit costs.

Banks can also look forward to an uptick in demand for loans, with S&P forecasting credit growth of between 5% and 7% throughout the year.

“Any reduction in banks’ regulatory reserve requirement can push credit growth toward the higher end of our forecast,” S&P said.

YOY net loans growth at the largest Philippines banks (%)

Source: S&P Global Market Intelligence

Tech failures plague banks ASIA PACIFIC

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ome of Asia’s biggest banks have had a rough few months due to technical difficulties.

Japan’s Mizuho Bank faced a new set of disruptions, this time in its corporate banking services, last 11 January, an official spokesperson said. This is just the latest in a line of technical failures that the bank has suffered from over the past year.

From February to March 2021, Mizuho suffered several system failures that caused thousands of its ATMs to stop working in the days between February and March. Notably, the bank suffered four glitches in a span of two weeks, with over 4,300 of the bank’s ATMs in Japan affected.

As a result, Mizuho Bank submitted a business improvement plan to Japan’s Financial Services Agency (FSA), as ordered by the FSA.

Singapore’s DBS Bank also suffered a major IT outage in November 2021, resulting in customers being unable to access the mobile and even PayNow accounts.

Following this, the Monetary Authority of Singapore (MAS) ordered DBS on 7 February to set aside over US$690 (S$930m) in additional regulatory capital to guard against operational risks.

MAS has also directed DBS to appoint an independent expert to conduct a comprehensive review of the incident, including the bank’s recovery actions. An independent review is also required to assess how a similar incident can be prevented in the future.

The additional capital requirement will be reviewed when MAS is satisfied that DBS Bank has addressed the identified shortcomings, the financial regulator said.

Mizuho suffered several system failures that caused thousands of its ATMs to stop working

ASIAN BANKING & FINANCE | Q2 2022 13

THOUGHT LEADERSHIP ARTICLE

The ISO 20022 Journey: Connected, MarketReady and Native Banks need to embrace a three-part journey to truly deploy ISO 20022 and reap the detailed data and digital modernisation rewards.

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SO 20022 finally got your attention.

The payments industry across the globe has done a very effective job to educate and persuade financial institutions about the benefits of a more robust messaging standard.

And we have also made a compelling case that it is a touchstone of digital transformation and the ability to compete.

Still, we cannot declare “mission accomplished” yet. There is a lot more to do in terms of meeting deadlines and some banks are under a lot of pressure to adopt ISO and adapt to the changes it will create. Banks know this is not a one-time exercise. With that in mind, it is important to set some signposts on the ISO journey. Specifically, banks need to embrace a three-part journey to truly deploy the standard and reap the detailed data and digital modernisation rewards it will extend to them, corporates and consumers.

That journey goes from ‘connected’, to ‘market-ready,’ to ‘ISO native’.

ISO connected is the minimum, and whilst it will leave a lot of work to do later on, banks have to start here. Connectivity in the ISO context is a two-part program. There is a technical connectivity part and there is a messaging business data 14 ASIAN BANKING & FINANCE | Q2 2022

part. Understand that neither one of these is a banking, payments, or cash management project. This is about messaging, data, and compliance.

The technical connectivity will require adaptations of core systems and payment gateways to accommodate ISO standards, and IT teams will also need to adjust architecture to change reconciliation, sanction screening, fraud, and liquidity. ISO connected is your ticket to the game, but you cannot play yet.

Then there is part two of the ISO connected phase—messaging data. This is more complicated because it is where banks have to change the information they are sending and receiving. ISO’s messaging architecture has thousands of fields covering payments, securities, trade services, cards, and foreign exchange. This stage of connectivity gets you into the game.

On to phase two: market-ready.

In this stage, you get into the game, but you do not have ‘ring-side’ seats yet. The technology part is done, but there is more work to be done in the background. Some gaps that need to be addressed in this phase include introducing new network providers, new API options, new payment rails like instant payments and overlay

services like Request to Pay. You can send and receive ISO messages at this point, which is a huge step up in the digital migration that is so urgent for banks. But market-ready ISO does not mean you are automatically ready for instant payments. What you do get is a more automated operation and an opportunity to think about payments as transactions leading to new products and services.

Phase Three: ISO native. Now you are in the game with the best seats in the house. All systems have the right architecture, the right data, and the right format. Accessible elements for ISO Native include real-time payments and real-time settlements, lower costs via straight-through processing, better tracking of transactions, transparency to meet current and new regulations, payments-system stability improvements, and better payment processing monitoring.

The Bottomline: The testing window for SWIFT is now open, as well as those for MEPS+, RENTAS & BahtNet. It is vital that banks and FIs ensure that they meet the deadlines for November 2022 to receive and process ISO 20022 messaging. If not, they risk losing visibility of messages being sent from SWIFT and also risk reputational damage from having not processed critical payment information. But the reasons to take this three-part journey go beyond rules and regulations. There is the enhanced customer experience resulting from the data generated by the ISO format, which will also make it easier for parties receiving payments to achieve higher levels of automation and provide more services to their customers. There is also the competitive and innovative necessity of the ISO format. The universal rollout will lead to enhanced interoperability and standardisation between countries as the region migrates to a single messaging standard. It will be nearly impossible to compete in 2022 and beyond without ISO 20022.

To find out more, visit: https://www. bottomline.com/apac/products/iso20022

ASIAN BANKING & FINANCE | Q2 2022 15

CEO INTERVIEW

Why SCB is transforming into a fintech group With its reorganisation to SCBX, it plans to expand to a customer base of 200 million.

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iam Commercial Bank has kickstarted its biggest overhaul in its over 100-year history, a reorganisation that will see one of Thailand’s biggest banks transform itself beyond being a traditional financial institution, and into a comprehensive financial technology group.

“The role of the bank as an ‘intermediary’ will change to that of a platform,” Arthid Nanthawithaya, Siam Commercial Bank CEO and Chairman of the Executive Committee, told Asian Banking & Finance in an interview.

“We will expand our customer base from 16 million customers to more than 200 million. Our geographical coverage will shift from ‘local’ to ‘regional’ through a growth strategy featuring [mergers and acquisitions (M&A)] and partnerships with market leaders.”

All of these underline SCBX’s new vision: to be the most admired financial technology group in ASEAN. The step to change their business model from a traditional bank to something more akin to trailblazing fintech company started SCBX five years ago. Apart from upgrading the bank’s tech foundation, SCB had also set-up a number of tech-driven startups under the SCB Transformation Project.

Amongst their hit technology firms include SCB 10X, which received $400m in technology investments to date; and Purple Ventures, whose “Robinhood” food-delivery app so far has over 2 million users and is even expanding into non-food services.

Asian Banking & Finance chatted with SCB’s CEO to learn more about the planned SCB restructuring.

What pushed SCB to transform into a fintech group?

The increasing adoption of digital technology has rapidly changed consumer behaviour. At the same time, industry competition has intensified, industry boundaries have blurred, and macroeconomic conditions have become volatile and fragile. These events led us to rethink, or rather to re-imagine, how to sustain growth and profitability through what has become ‘the new normal’.

We decided to set up SCBX as a mothership to direct the fintech group’s strategic direction toward more efficient resource allocation to take advantage of synergy across the fintech group in order to unlock value. We also moved innovative change elements outside the bank to leave the traditional bank as a cash-cow business.

Many have asked us whether the new structure will allow us to ring-fence strict banking regulations. In fact, regulation was not a key driver for this change. SCBX will still be under close supervision by the Bank of Thailand. To us, what makes a difference under the new structure is governance, a risk-return mindset, and a new incentive structure.

16 ASIAN BANKING & FINANCE | Q2 2022

Arthid Nanthawithaya, CEO and Chairman of the Executive Committee, Siam Commercial Bank

Under the new structure, the CEO of each subsidiary will be accountable to his or her board of directors and not to me as a Group CEO. We will govern new growth subsidiaries through a board of directors that will have the specific industry expertise to enable them to make timely decisions. In terms of a risk-return mindset, each subsidiary will be able to adopt risk-return criteria that is the norm for its industry, rather than rely on the traditional bank’s rigid risk-return standard.

We will also be able to attract the right talent under the new structure with a new value-based performance measurement system.

Our new vision is to become the most admired fintech group in ASEAN

How different will SCBX be structurally, and in terms of propositions offered, from what SCB has offered for the past one hundred years?

Our new vision is to become the most admired financial technology group in ASEAN. The role of the bank as an ‘intermediary’ will change to that of a platform. We will expand our customer base from 16 million customers to more than 200 million. Our geographical coverage will shift from ‘local’ to ‘regional’ through a growth strategy featuring M&A and partnerships with market leaders.

We will reorganise our businesses into two groups.

Banking operations will remain as a cash-cow business.

CEO INTERVIEW We will no longer impose disruptive changes on SCB banking functions, and the bank will continue to operate in a relatively low-risk, low return environment. We are working on business portfolio optimisation and creating a lean operation with increased digitalisation in our work processes and services to lower service costs.

Another group consists of subsidiaries in high growth, high return businesses. Under this group, we have two types of subsidiaries: digital lending and consumer finance businesses and tech platform-driven businesses. We believe digital lending and consumer finance businesses in Thailand are still blue ocean.

Key subsidiaries under this group are Card X (an SCB Bank spin-off operating credit card and unsecured personal loan businesses), Auto X (a newly set up subsidiary operating a title loan business), and AISCB (a new jointventure company with one of the largest telecom operators focusing on personal loan business). In the tech platform business, key subsidiaries are Robinhood (our one-year-old food delivery platform which is to be transformed into a super app), and SCB10X and SCBS (spin-off subsidiaries from SCB Bank focusing on digital asset investment and a digital ecosystem).

We also set up SCB Tech X and Data X to provide IT infrastructure solutions as well as data AI to subsidiaries within the group. This will ensure cost efficiency and data capabilities across the group. There are also a number of other subsidiaries that we did not mention here, and we continue to look for growth opportunities traditional elsewhere in the region.

To achieve this restructuring plan, we will redeploy excess capital from the bank to SCBX in the form of a one-off dividend totaling ฿70b. After the capital release, the bank will still operate at healthy and sustainable capital levels, whilst redeployed capital should generate much higher returns in the long run.

We have set a target of achieving high-teen ROE in five years’ time from the current single-digit ROE. The bank will generate more-or-less stable earnings whilst the adjacent lending subsidiaries should be earnings accretive almost immediately as the key business is a spun-off entity with

SCBX will expand its customer base from 16 million clients to more than 200 million

With enhanced tech and data capabilities, SCB can provide better financial services and products to a larger customer base

expected improved efficiencies. The profit signature of the tech platform subsidiaries may come at a later stage but will be able to contribute high double-digit return on equity (ROE) once we scale up.

How do you plan to continue to support your traditional bank clients whilst evolving into a fintech company?

One key reason for changing the group structure is to reduce disruption to the bank business. We have learned from our digital transformation that it is very challenging to ask bank executives to make transformative changes whilst expecting them to continue maintaining quality services and delivering core profits. We found that creating a separate team to focus on building new things is more effective. This approach also allows the bank management team to focus on improving the quality and efficiency of the existing banking business.

This group restructuring does not affect bank operations, and customers should not be impacted by the group restructuring itself. Bank customers should be able to continue making transactions, deposits, payments, and other services just as they did before. The branch network, SCB EASY, and other service channels will remain available to our customers.

Going forward, with enhanced technology and data capabilities, our group should be able to provide better financial services and products to a larger customer base with speed, simplicity, and affordable prices whilst being able to drive better growth and returns to our shareholders, as well. As each of our subsidiaries will expand based on digital technology-led strategies, the group should enjoy access to enhanced and complementary big data. With such data capabilities, the group should then be able to continuously improve the quality of its services with improved speed and pricing.

Existing bank customers will find the overall customer experience more fulfilling, with complementary services from new growth businesses outside the bank. A case in point here is that our small merchant customers have fully benefited from the Robinhood platform from the beginning of our launch last year with our zero GP model.

In the future, they should find their increasingly diverse financial needs will be more conveniently met.

SCBX has outlined its goal of achieving a network of 200 million customers by 2025. What drives your optimism that you can achieve this goal in less than four years?

Our plan is to expand our customer base via a digital ecosystem and technology platforms to enjoy network effects. We will partner with leaders in various industries to enlarge our customer base, and M&A will be key to achieving this target. This strategy will not be limited to Thailand, but also apply to our regional expansion.

We will adopt an asset-light strategy to ensure efficient capital usage. We have continued to build our technology and innovation capabilities to drive our customer base.

Domestically, we have already announced our partnership with leading telecom operator AIS. These are our initial steps and there will be many more to follow.

ASIAN BANKING & FINANCE | Q2 2022 17

BANKING TECHNOLOGY: BANK BRI

BRIBrain stores, processes, and consolidates all information from various sources. It is the brain behind BRI’s ‘phygital’ strategy

BRI employs AI ‘brain’ to merge its digital and physical presence BRIBrain has helped the bank reduce loan application times from 2 weeks to 2 minutes.

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fter brilliantly closing 2021 with a $2.2b (IDR 32.22t) net profit, translating to a 75.53% year-on-year growth, Bank Rakyat Indonesia (BRI) can say that it has formulated an ideal strategy to remain prominent in the midst of challenges and trends in the banking world that continues to develop. The answer is in its artificial intelligence (AI) system called BRIBrain.

BRIBrain was developed to store, process, and consolidate all information from various sources.

It is the brain behind the bank’s ‘phygital’ strategy.

“Combining physical and digital presence is BRI’s answer to meet the expectations of the public, some of whom prefer to transact digitally and others feel more comfortable and safe to meet face-to-face with bank officers,” said BRI’s Director of Digital and Information Technology, Indra Utoyo, in an

18 ASIAN BANKING & FINANCE | Q2 2022

exclusive interview with Asian Banking & Finance.

Big data for a hybrid bank To maintain performance and modernise its services, BRI allocates 3% of revenue for technology investment or 5% to 7% of costs.

“Currently we are entering an era where data analytics, software, design, cyber security, and user interface/user experience play very important roles,” Indra said. “We, as an old bank, need technology that is truly a game-changer in this competition, such as artificial intelligence, blockchain, and cloud.”

This is the reason why the bank integrated BRIBrain particularly in four of the bank’s processes that boost both of the bank’s physical and digital capabilities.

First is in the BRILink Score, the scoring system for the assessment of the BRILink Agents. Through

BRI, as an old bank, needs tech that is truly a gamechanger in this competition

this system, the 504,000 BRILink Agents throughout Indonesia are encouraged to help in improving the bank’s O2O or Online-to-Offline services, especially for people in the regions, through financial inclusion and literacy.

BRILink Agents’ transaction volumes reached a total of $76.74b (IDR 1,143.81t) in 2021. They were also able to raise low-cost funds (CASA) of $1.3b (IDR 19.38t) and fee-based income (FBI) of $89.9m (IDR 1.34t).

Second, BRIBrain makes the credit scoring process for loans faster and more accurate. The machine learning approach makes the creditworthiness of prospective debtors faster, with minimal risk, so that approval and disbursement of loans can be done instantly, and the risk of bad credit can be minimised.

“In terms of loan financing, where, previously, the process could

BANKING TECHNOLOGY: BANK BRI

take up to two weeks, decreased to two days, and finally only two minutes for approval,” said Indra.

The journey of “two weeks to two minutes” itself began in 2018 when the bank started to digitalise and automate. But before 2018, banks operated on a very paper-based, manual, and complex basis so that the average financing settlement took up to two weeks.

Third, BRIBrain helps with the bank’s Customer Profiling Score. It maps customer profiles appropriately so that the communication approach with customers is fast and accurate​ . BRI continues to improve their Customer Relationship Management and Electronic Direct Mails, as well as its e-channels, such as Automated Teller Machines (ATMs), with units currently at 220,000 e-channels and the number of its outlet reach 9,200 outlets.

Finally, BRIBrain adds a system to the Fraud Score. It enables BRI to quickly spot and address banking crimes, such as fraud, and realise anomalies and crimes in transactions quickly.

“The presence of BRIBrain will facilitate business decision making with a measurable level of risk and provide wider information input in a prudent, secure, and reliable business management process. In the end, it can increase customer and stakeholder trust in BRI,” Director Indra said.

Other efforts Another way of shifting people’s behaviour to transact digitally is turning bank officers into advisors. Currently, BRI has 37,000 experienced financial advisors, who follow the journey of the customers to give them a more personalised banking experience.

BRI has also entered into digital ecosystems, such as Agri Tech, Health Tech, and Food Tech to facilitate the value chain within the ecosystem as embedded finance.

Indra explained that BRI entered open banking with very large transactions, reaching a total of $12.34b (IDR 184t).

For investment in human resources, Indra said that BRI allocates 5% of the cost for training.

“Especially when the development and competition in the financial industry are currently very fast, BRI also needs talents who are adaptive, agile, customer-centric.”

Throughout BRI’s digital transformation, Indra observed that banking regulations in Indonesia are very supportive. He cited as an example the payment system blueprint through the Bank Indonesia (BI) for 2025. “This encourages the digital payment system to continue to improve financial inclusion, so that the movement of money takes place faster and more efficiently, such as by using an e-wallet, Quick Response Code Indonesian

Another way of shifting people’s behaviour to transact digitally is turning bank officers into advisors

Standard, and fast payment,” said Director Indra.

The Financial Services Authority (OJK), with its OJK Regulations (POJK) No. 12 and 13, also expressly supports the licensing of new products from what was originally rule-based, now changing to principal-based. “In it, we see that the provision of services has also emerged, which is called a digital bank so that we no longer add KPIs for additional branch offices,” said Director Indra.

However, Indra also said that there are things that need to be followed up immediately from a regulatory perspective, namely the urgency for the immediate enactment of a law on personal data protection. “Otherwise, in doing transactions people will be completely uncomfortable and trusting,” he added.

As we know, the foundation of this digital economy is telecommunications. Telco, itself, is under the Ministry of Communication and Information, whilst the payment and financial systems are regulated by BI and the Ministry of Finance. So, according to Indra, there is no regulation regarding fraud. “There needs to be cross-sector regulation, so we can improve this digital economy even faster and overcome existing weak points,” concluded Indra.

(As of press time, Indra is transitioning to a new role in BRI)

BRI’s Director of Digital and Information Technology, Indra Utoyo

ASIAN BANKING & FINANCE | Q2 2022 19

INTERVIEW

Talent & Tech at the heart of Munir Nanji’s mission He is tasked on tapping Central Europe’s growth to boost Citi’s profits.

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iti believes that it has cracked the code on how to tap into Europe’s areas of growth in order to boost the bank’s profits, capital, and workplace dynamics—all enclosed in its “New” Europe Strategy.

“Our strategy is going to be around ensuring that we leverage capital from the firm and allocate it to companies that are growing much faster,” said Munir Nanji, newly appointed Central Europe Cluster Head and Citi Country Officer for the bank’s Czech Republic franchise.

The key to the strategy is talent allocation: making sure that Citi’s highly skilled workforce is distributed amongst its clusters that support Citi’s global operations and business.

This is done by creating Centers of Excellence, Nanji told Asian Banking & Finance in an exclusive interview.

Nanji has his work cut out for him: he’s taking the helm at a critical time for Citi. Central Europe is expected to post strong growth of 4% in 2022, before slowing to 2.8% the following year. Nanji is tasked with ensuring that the bank reaps the full benefits of this growth by integrating the strategy. It’s a challenge he’s keenly aware of and eager to scale.

“If you look at the growth of Europe and Central Europe, the growth in GDP per capita is faster in central areas in Europe. So that’s one proxy. The other proxy, if you look at the age dynamics, demographics, you got more younger people, the millennials, in Central Europe than in Europe.

Then if you look at our businesses in central Europe, its contribution to the European P&L [profit and loss] continues to grow steadily fast,” Nanji said, on why they adopted the “New” Europe Strategy.

The ‘New’ Europe Strategy “So how do we make those markets the bedrock from an infrastructure standpoint? The ‘New’ Europe Strategy is about getting a bigger footprint within Europe, getting a bigger voice in the organisation, ensuring we get the mobility of talent, we get the acceleration of fund flow, and we then we support our clients to succeed around Europe and the rest of the world,” he said.

It’s a job that Nanji is more-than-equipped to take on. Prior to his new role as Central Europe Cluster Head and Czech Republic’s new country officer, he was head of Citi’s Global Subsidiaries Group (GSG) for the Asia Pacific. The GSG business provides institutional banking to the subsidiaries of the bank’s top-tier multinational clients.

As head of GSG APAC, the largest multinational business for Citi globally and the leading bank in Asia covering multinational clients, Nanji spearheaded a major talent allocation project: applying a differentiated coverage model.

Nanji led the GSG APAC to set up teams in three big

20 ASIAN BANKING & FINANCE | Q2 2022

Munir Nanji, Central Europe Cluster Head and Citi Country Officer for Czech Republic

The ‘New’ Europe Strategy is about getting a bigger footprint within Europe

hubs—Shanghai, Hong Kong, and Singapore—in order to more effectively manage its clients that have regional buying and decision-making capabilities. The three hubs were chosen as these were the places where C-suite organisations are based at.

A key point of the model is to put bankers and support teams in markets where Citi’s clients, both the multinational and large Asian firms, have manufacturing operations or are perhaps looking to scale into countries such as India, Thailand, and Vietnam.

Small and medium-sized clients were not left behind in the model. Citi and Nanji, in particular, looked into how they can industrialise their coverage model so that they can service them more efficiently.

The solution they arrived at was by leveraging technology and assigning a team of bankers who, through tech, accessed clients to provide them with the relevant service.

Regulation, network Asian companies are investing a lot in the European Union (EU), especially in the industrial and automotive space.

Munir would like to use his experience to support the Asian supply chains to connect with producers and buyers in Europe and as a two-way street channelling the European investors to the Asian region.

Talking about the differences between the two regions Munir said that the EU, as an economic entity, is a more regulated area compared to Asia which means some processes and the decision-making process could be slower sometimes. On the other hand, this regulation gives very clear guidance in many topics like open banking, which is important for the development of the banking sector.

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ASIAN BANKING & FINANCE | Q2 2022 21

FINANCIAL INSIGHT: BAKONG

Bakong could pave the way for digital currency in Cambodia

Similar to its namesake, it is now the backbone of the country’s digital payments.

H.E. Serey Chea, National Bank of Cambodia

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n October 2020, the National Bank of Cambodia (NBC) unveiled Bakong, its national mobile payment and banking platform aimed at strengthening the use of the Khmer riel and curbing dollar dependency. But beyond this goal, Bakong—named after one of the ancient Khmer state temples—makes use of distributed ledger technology (DLT) and blockchain technology, prompting questions over whether the platform could serve as a stepping stone for Cambodia to join the digital currency race in the region.

As of now, however, there are no plans for it.

“From the NBC perspective we don’t see a good use case of a full-fledged [central bank digital currencies] yet,” H.E. Serey Chea, the official spokesperson of the NBC, told Asian Banking & Finance in an exclusive correspondence. “It doesn’t matter if Bakong is CBDC or not, as long as it can perform the main functions it intended.”

Bakong can be configured in such a way that it becomes a full

22 ASIAN BANKING & FINANCE | Q2 2022

It doesn’t matter whether Bakong is CBDC, as long as it can perform the main functions as intended

CBDC, according to NBC, but right now their focus is to promote and implement financial inclusion.

“The introduction of Bakong is to address the issue of connectivity and interoperability, attain efficiency in payment system, promote financial inclusion and ease of KHR cash payment. Bakong [will] serve as a backbone payment system,” NBC’s Chea explained.

The adoption of Bakong has been steady: over 8.3 million transactions have been logged since it launched in late 2020. The platform also now has over 7,500 merchants and 58 banking and financial institutions that are participating.

One of the goals mentioned in launching the Bakong system or platform is to curb dollar dependency and boost the use of the riel. How has Bakong helped in moving away from dollar dependency?

Cambodia is still considered a highly dollarised economy whilst most of the transactions are still cash-based. This could hinder

the effective implementation of monetary policy, as well as payment system development. Thus, the NBC, as the monetary and payment system authority, has developed the Bakong aiming at promoting and implementing the use of local currency and electronic, cashless payment in Cambodia.

The Bakong is developed with a feature that allows for realtime fund transfer and instant payment transaction, and given its interconnectedness and interoperability amongst different payment service providers and the adoption of QR code payment, it provides greater convenience and is a more widely-accepted channel for mobile banking or wallet users to make electronic payment at any merchant regardless of their acquiring bank. In addition, with the possibility to link with bank accounts, customers are able to make fund transfers from Bakong accounts to their bank accounts and vice versa. With our younger demography, the introduction of a modern payment system via QR code has been adopted without much hesitation, therefore, encouraging more instances of electronic payment in place of cash.

In addition, the development of Bakong is expected to encourage the use of local currency in the sense that it facilitates the payment of highvalue transactions in KHR more conveniently. Bakong could also be utilised as a tool in promoting and implementing the use of local currency in such a way that NBC can introduce rules incentivising the use of KHR within Bakong.

Since the introduction of Bakong, the transaction in local currency via Bakong has been increasing from month to month.

Tell us more about the journey of Bakong’s development and launch.

In 2016, NBC established a

FINANCIAL INSIGHT: BAKONG working group to explore the use of blockchain and DLT in payment systems. By early 2017, the group developed use cases under the auspices of Project Bakong, whilst prototypes were developed in the second half of the same year.

By mid-2018, a call for expression of interest from the banking and financial institutions to participate in the project was announced for the first time. Several financial institutions participated in the demonstration and discussion of the project. The first pilot testing of the Bakong system started on 18 July 2019, and on 28 October 2020, [we] announced the launch of the Bakong Payment System.

Looking ahead, NBC had started to explore several alternative technologies including DLT and blockchain. Hyperledger Iroha was selected as the platform for DLT to run on the project. The project is undertaken with the collaboration of SORAMITSU. How has the launch of Bakong pushed the modernisation of Cambodia’s payments and finance infrastructure?

The adoption of Bakong allows the public to enjoy value-added benefits at reduced costs. When customers transfer funds from their own banking account to Bakong account or vice versa, they bear no costs as the transactions would be free of charge. Electronic and cashless payment and fund transfer have also been made more convenient as Bakong connects many service providers with each other allowing

customers to perform electronic fund transfer and make seamless payment whether the beneficiary is using the same bank or not, a situation that is not possible previously.

Furthermore, the Bakong clearing system reduces the processing cost and time compared to other retail payment systems that require a clearing process between banks. For instance, in retail payments, there is a need to establish a clearing process between banks, and it is inevitable to incur expenses related to the establishment of a separate clearing house and pledging collateral for risk management in the clearing process.

Bakong doesn’t require this since there is a connection linked to a peer-to-peer network by both payer and payee due to its decentralised nature that enables transactions from participants be processed P2P and the platform proves resilient to cyberattacks. Since banks and individual users are now brought into one DLT platform both banks and users no longer must face interconnectivity and interoperability problems.

What are financial authorities in Cambodia’s official stance in regards to issuing their own central bank digital currency?

From NBC’s perspective, currently, we don’t have any policy direction to introduce CBDC. Central banks in China, Indonesia, and Singapore have recently made moves to actively discourage, or even seek to ban, cryptocurrencies.

What is Cambodia’s stance on decentralised finance/non-bank

The main goal of Bakong is to address the issue of interconnectivity and interoperability across platforms of payment operators

digital currencies?

In Cambodia, cryptocurrencies are not defined or regulated under the law. The NBC, the Securities and Exchange Commission of Cambodia, and the General Commissariat of National Police in Cambodia released a joint statement on 11 May 2018, aimed at warning individuals on the risk of such activities whilst restricting financial institutions to deal directly or indirectly with any cryptocurrency activities and exchange.

Our main concern was consumer protection. Cryptocurrency is a sophisticated asset class and could be difficult to regulate given the volatile nature of its value as well as the KYC challenges. Not many people in Cambodia understand what it is, but for those who have invested in crypto, it seems that most are driven by hype and possibly false promises by some introducers.

The general commissariat has received a lot of fraudulent activities complaints and this was the reason we acted in such a way. We don’t see the immediate benefit of cryptocurrency to our economy and therefore would not want to divert our limited resources to design regulation and enforcement of it.

What future services do you plan to offer within the system?

The NBC will study the possibility to expand the functioning of Bakong as a payment hub; as an open banking platform to promote innovative products and services, and enhance payment efficiency, and use in cross-border payment and remittance.

Could you share with us your goals with Bakong?

The main goals of Bakong are to address the issue of interconnectivity and interoperability across platforms of payment operators; to attain efficiency (lower cost, faster speed, and more secure) in payment systems and promote financial inclusion; and to ease the Khmer Riel cash payment. We also aim to enact peer-to-peer cross-border settlement with other countries with similar systems in place.

ASIAN BANKING & FINANCE | Q2 2022 23

SECTOR REPORT: CARDS & PAYMENTS

Will Request To Pay displace card payments in the future?

The potential is there, but tech roadblocks prevent wider adoption.

A

lternative payment methods are increasingly becoming the norm amongst consumers, a move spurred by the pandemic, as health-minded individuals seek to avoid physical contact. According to Mastercard’s New Payments Index in 2021, 94% of consumers in the Asia Pacific region say they will consider using at least one emerging payment technology in the next year.

Whilst most physical payment service providers (PSP) in the region are zoning in on emerging payment methods such as buy now, pay later— which is expected to represent 12% of all e-commerce sales in APAC by 2023, according to Boston Consulting Group—and QR code payments, there is another emerging solution that is sighted to directly challenge debit card use: Request To Pay or R2P. A global study by payments solution provider, Icon Solutions, found that over eight in 10 (87%) of the 50 financial industry stakeholders it surveyed globally believe that R2P is a good alternative to direct debit.

Over seven in 10 (71%) of the stakeholders also believe that it will reduce merchants’ dependency on debit cards. Almost the same number of respondents (73%) indicated that there is a demand for the service from large corporations. As a result,

Existing infrastructure does not have the flexibility to bring differentiated services to market quickly and safely

respondents shared that they are planning to leverage R2P to diversify product roadmaps.

Request To Pay RTP refers to a payment solution wherein a payee can initiate a request for a payment from another person using a digital app or through any mobile device, according to a definition by real-time payments provider, ACI Worldwide. The payer then either approves or rejects the request, and if approved, initiates a real-time credit transfer to the payee.

It is said to be the next upgrade in real-time digital payments where merchants, billers, corporates, and even consumers can pull payments from end payers and customers.

“Consumer banks can drive revenue through interchange income in markets that have a regulated pricing structure; government incentives in markets where regulators and government incentivise banks to drive adoption; and alternative revenue streams arising from partnerships with fintech, big techs, and social giants,” ACI Worldwide wrote in a report.

Invoicing, payments reconciliation, and the digitalisation and integration of processes and systems identified as the leading emerging use-cases,

Request To Pay is an emerging solution that is sighted to directly challenge debit card use

24 ASIAN BANKING & FINANCE | Q2 2022

Icon Solutions found.

Corporates are reportedly particularly keen to adopt the service as they believe it will lead to reduced cost of reconciliation (73%) and better visibility of real-time cash flow (63%), according to Icon Solutions.

For merchants, RTP not just reduces their dependence on cards, but could possibly reduce costs for reconciliation, and improve payment choices for customers, it said.

Limited action Yet despite the observed increase in demand for its services, banks and payment services providers have taken limited action to roll out R2P services.

Fewer than one in five respondents, or only 18%, of banks surveyed already offer R2P services, Icon Solutions found. Of the banks, only 12% have plans to launch R2P services within the next 6 months and 15% within the next year.

In the Asia Pacific region, few markets see financial players offering R2P overlay services to merchants and corporates, amongst them are India, Thailand, Malaysia, Hong Kong, and Sri Lanka. One of the financial centers in the region, Singapore, is notably not on the list.

The adoption of R2P was likewise dismal amongst global players.

As for why adoption has been slow, bank readiness was named as the top challenge by 67% of respondents.

“Despite the undoubted potential of Request to Pay, technology transformation programmes remain notoriously difficult,” explained Toine van Beusekom, strategy director at Icon Solutions.

In fact, one in two (54%) of surveyed banks and payment service providers identified the limitations of existing technology platforms and systems as a key challenge.

“This reflects the fact that existing infrastructure simply does not have the flexibility to bring differentiated services to market quickly and safely.

Successfully launching Request to Pay services will require a transformation of the underlying technology, as well as a broader cultural shift to embrace agility,” Van Beusekom said.

Fraud is a particularly pertinent consideration for Request to Pay

SECTOR REPORT: CARDS & PAYMENTS Contactless payments snare Singapore’s boomers

services. “The payments industry is already facing a well-publicised battle with authorised push payment fraud. Poorly executed Request to Pay services could compound this challenge.”

Another key industry challenge is the lack of standardisation.

Standardisation is important in enabling Request to Pay services between banks and specialist R2P providers to ensure that it can work cross-bank and even across foreign markets, he added. “For example, in providing a consistent business-user experience and process for businesses operating internationally, and in enabling banks to align channel and platform systems for efficiency across operations in different markets.”

Regulation is another key challenge, requiring huge technological and strategic capacity from banks.

“The reality is that demand-led propositions such as Request to Pay are non-discretionary and a ‘niceto-have’. This will inevitably lead to trade-offs between opportunity and urgency,” Van Beusekom noted.

In R2P, banks will likely face the usual consideration of whether to buy,

build, or partner, he added. Amongst the bank and PSP respondents, 31% of bank and PSP respondents anticipate an in-house build. A higher percentage, or 37%, indicated they do not know what approach to take. The remaining 29% said that they would consider partnering with an existing or new provider.

Summing up, ensuring a seamless and secure customer experience will be critical to driving the adoption of R2P at a point of scale, explained Van Beusekom.

“Merchants have been trying unsuccessfully for many years to circumvent card rails to reduce costs. The combination of instant payments rails, open banking APIs and Request to Pay services presents a huge opportunity for merchants to drive customers towards cheaper account-to-account-based payment options,” he said.

“Is the demand there from a cost reduction perspective and providing options? Absolutely. But the concern will be creating a customer journey that is comparable, if not better, than physical payment cards and digital wallets,” he added.

Singaporeans are the most open to using new technologies in payments

D

igital and contactless payment methods are becoming the norm in Singapore, with four out of five Singaporeans finding it a more convenient means of paying.

Even older generations are turning digital, with the same proportion of boomers sharing the sentiment, according to the latest Worldpay from FIS’ 2021 Generation Pay research.

Of the 805 Singaporean consumers surveyed, 81% of the boomer respondents—those over 57 years old—said that they prefer and find it easier to pay using contactless payment methods.

“Not only are Singaporean consumers using contactless payments more frequently than ever before, but evolving payment technologies—such as smart commands, in-car integrations, and biometrics—are also driving a new era of commerce throughout the country,” FIS wrote in the report.

Singaporean consumers emerged as the most open to using new technologies in payments. For example, over six in 10 local respondents expressed eagerness to experience check-out free technology.

One way that contactless payment platforms and even just stores can attract Singaporean users is to introduce loyalty programmes. FIS’ study found that four in five, or 80% of both Millennials and Boomers in the city rated having loyalty programmes as “important” and “very important” in all categories: from groceries to home decoration and improvement, to health, to travel, and even in gambling.

Consumers in Singapore were also found to be amongst the world’s most demanding when it comes to programme features. Half of the Singaporean respondents want the flexibility of spending their points across multiple retailers.

Baby boomers, in particular, want the ease of use: non-expiring points and automatic rewards.

ASIAN BANKING & FINANCE | Q2 2022 25

SECTOR REPORT: CRYPTOCURRENCY IN BANKING

Southeast Asian banks’ growing crypto exposure threatens earnings

Banks looking to dabble in crypto face operational, reputational, and legal risks.

T

he interest of banks in Southeast Asia (SEA) to develop cryptocurrency financial services are unlikely to affect banks’ credit profiles in the near term, but earnings opportunities and risks could grow over time depending on developments in their markets, particularly regulation-wise.

In a report, Fitch Ratings notes that more banks in the region will likely make moves to establish a foothold in the crypto sector in 2022.

Most recently, the UnionBank of the Philippines reportedly planned to offer trading and custodial services for cryptocurrencies. UnionBank also recently joined a sandbox to develop use cases for central bank digital currencies (CBDC).

Other banks have also begun dabbling in cryptocurrency outside their main banking businesses.

Singapore’s DBS Bank has, for example, established a wholly-owned cryptocurrency digital exchange platform called DDEx. Meanwhile, Thailand’s Siam Commercial Bank, through its SCB Securities unit, has acquired a 51% stake in a Thai cryptocurrency trader, BitKub, in November 2021.

These banks are expected to try to curb risks through a series of measures, such as limiting access to accredited institutional investors, dealing only in better-established digital assets, and clearly segregating custodian accounts from trading wallets, the ratings agency noted in a recent report.

It is not just banks that are interested in the potential surrounding crypto.

A recent survey by EY found that one in four fund managers expect their exposure to cryptocurrencies to increase in the coming year.

“Digital assets, for example, have become a mainstream trend, with their rise in popularity attracting the attention of both alternative fund managers and investors,” said Christine Lin, EY Greater China 26 ASIAN BANKING & FINANCE | Q2 2022

DBS Bank launched a cryptocurrency digital exchange platform in 2021

Wealth & Asset Management Leader.

It comes as no surprise, then, that banks will follow suit given that cryptocurrency is now very much in the eyes of investors.

Christine Lin

Crypto trading and custodial fees can boost and diversify income

Income gains Crypto trading and custodial fees can boost and diversify income, according to Fitch report.

“Banks may be able to develop competitive advantages in emerging financial service fields or engage with new customer segments, depending on their risk appetite,” Fitch said.

They may also be able to protect their market positions against competitive threats posed by cryptocurrency-focused entities and technologies in segments, such as wholesale clearing and settlement, and cross-border payments.

Higher costs on the horizon However, regulators’ growing

antagonism against cryptocurrencies and crypto-focused entities is developing quickly and may most likely raise costs.

“Changes could raise compliance costs or curb existing or planned business activity, even as tighter regulation helps to contain financial and operating risks, providing greater assurance to potential crypto investors and users,” Fitch said.

Cryptocurrency engagement may also likely expose banks to more legal risks, such as money laundering and terrorism financing.

Banks’ reputations are also at stake should they offer crypto services, even from activity that is legal, warned Fitch. For example, if customers perceive banks have tacitly endorsed crypto trades that subsequently turn sour, this could most likely impact lenders’ reputations.

The higher capital and operational requirements related

SECTOR REPORT: CRYPTOCURRENCY IN BANKING Central banks ramp digital banking, currency plans

One risk to consider is the volatility of cryptocurrencies, which could be seen by the steep rise and fall of many cryptos’ market values

to cryptocurrency could hinder wide-scale adoption by banks, which would most likely hold these assets as custodians and not on balance sheets.

“The punitive treatment of cryptocurrencies and their derivatives will likely discourage trading of cryptocurrency, or at least restrict banks to client transactions where exposure is kept neutral,” Fitch said.

Lack of stability Banks also face operation risks once they get into the crypto sector.

“The sector’s nascent nature means few crypto firms have developed a track record of stability for their systems and platforms. We view cybersecurity threats, such as scams and hacks involving exchanges, as another prominent risk,” Fitch wrote.

The rating agency also warned of possible issues around ESG exposures, given the energy-intensive nature of some cryptocurrency mining and verification operations.

Another risk to consider is the volatility of cryptocurrencies, which could be seen by the steep rise and fall of many cryptos’ market values. This could lead to a growth in the earnings instability of bank revenues, said Fitch.

In an earlier report, Fitch had warned that the rapid development of the asset class and the fast growth of cryptocurrencies that are not stabilised increases material risks for banks with cryptocurrency exposure.

“The extreme price volatility of some of these assets and an unproven track record of liquidity will make it challenging to hedge positions when providing derivative instruments

to institutional clients or when manufacturing investment products that reference crypto assets. Allowing less sophisticated retail and private customers access to this asset class also entails substantial reputation and legal risk,” the report read.

CBDC Intermediaries As for when central bank digital currencies (CBDCs) transform into being the norm in the financial space, banks have nothing to fear for their roles. S&P Global Ratings credit analyst Gavin Gunning sees central banks leaning toward a model where banks and other financial intermediaries continue to play a strong intermediation role, rather than one where central banks alone manage their digital currencies.

Commercial banks play a key role in intermediating between savers and borrowers, and they work closely with central banks in the process, S&P said, and any CBDC models that cut out their middleman roles would weaken existing banks’ business models.

“Depending on the direction that public authorities take, and the direction that the technology allows, CBDCs could potentially have a profound effect on banks’ business models,” said Gunning. “While too early to tell, their evolution may yet change our view of competitive dynamics on the banking landscape or our view of individual banks’ business positions or other rating factors.”

Risk of banks being disintermediated in the next one to two years seems unlikely.

Asian banks plan to launch digital currency and digital banks in Q1 2022

M

ore central banks in Asia ramped up plans in considering the launch of digital currency and digital banks in the first quarter of 2022.

The Bank of Korea (BOK) completed the first phase of its two-step mock test regarding the feasibility of a central bank digital currency (CBDC).

The first phase was launched in August 2021 and completed in December, South Korea’s financial regulator said in a press release. It further shared that the Bank of Korea’s digital currency showed “normal operations” in a cloud-based environment.

Bank of Korea is carrying out the second phase of the test until 22 June 2022.

Down south, the Bank of Thailand (BOT) shared that it is preparing to issue rules for setting up virtual banks by June, according to Assistant Governor Roong Mallikamas said in a virtual briefing on 1 February.

Should it push through, existing and new entities will be allowed to apply for a license.

Bank of Thailand’s assistant governor said that she expects to see more competition and innovations by allowing digital banks.

Mallikamas also shared that BOT is mulling scrapping limitations imposed on commercial banks, which will allow them to invest in financial technology (fintech) companies. This excludes digital assets.

Thailand and South Korea follow in the footsteps of their regional peers Singapore and China, both who are amongst Asia’s leaders when it comes to virtual banking and developing CBDCs. In a conference held in late 2021, the Monetary Authority of Singapore (MAS) managing director Ravi Menon shared that the Lion City is keener to try wholesale CBDCs than retail CBDCs. Retail CBDCs refer to digital currency issued by a central bank that can be used by the general public, whilst wholesale CBDCs are restricted for use within the banking system.

Menon warned that the issuance of a retail CBDC may pose significant risks to Singapore’s banking sector by possibly reducing banks’ capacity to give out loans and making money flight easier. The latter could lead to more instability in the banking system during stress periods.

ASIAN BANKING & FINANCE | Q2 2022 27

RETAIL BANKING: UKRAINE CRISIS

Removing Russian financial institutions from SWIFT or impacting Russian secondary trading are the biggest risks to APAC’s banking industry

Negative impact on APAC banks bubbles up as Russia’s invasion carries on

Financial impact may be larger than expected, especially for China, if secondary sanctions come into play.

W

hilst banks in Asia face only limited impact from the sanctions imposed on Russia, effects on financial markets may snowball in the long run, given the shrinking chances for a quick deescalation of the war.

Following Russia’s invasion of Ukraine in late February, various markets–including the US, the European Union, the UK, Japan, and even Singapore–announced sanctions on Russia’s energy exports, financial institutions (FIs), and foreign assets of Russian billionaires.

Notably, foreign markets have cut off a number of Russian banks and curbed financial transactions related to Russia.

Chief amongst these sanctions are seven Russian banks being cut off from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the global messaging network for cross28 ASIAN BANKING & FINANCE | Q2 2022

border payments, as of 3 March. The US, EU, and the UK have also frozen the Central Bank of Russia’s (CBR) more than US$600b in foreign currency reserves and barred them from moving funds outside of its territorial borders.

The effect on Russian FIs was swift. Sberbank, Russia’s largest lender, exited the European market after experiencing “abnormal cash outflows” and announced that they cannot provide liquidity due to the EU ban to move funds abroad–all within a week of the invasion.

“With regards to the financial linkages between Asia and Russia, the direct exposure from the three channels–equities, syndicated loans, and bonds–is quite limited,” said Alicia Garcia Herrero, chief economist for the Asia Pacific, and Gary Ng, economist at Natixis, a French corporate and investment bank. “Asia only accounts to 1%

One Asian market remains a key focus following the announcement of sanctions in Russia: China

of equity and bond financing by Russian entities.”

On equities, only one major Russian firm is listed in Asia– RUSAL, the world’s second largest aluminum company, which is listed in Hong Kong. Most of Russia’s offshore financing remains in London and the EU. However, if uncertainties extend over time, it could have a negative impact even on banks’ asset quality.

Beyond the direct financial exposure, Asian markets are already being affected by the ongoing very negative sentiment, according to Garcia Herrero and Ng. “The good news is the impact is so far small when compared to the rest of the world,” they said.

Speaking to Asian Banking & Finance, Natixis’ Garcia Herrero named sanctions removing Russian financial institutions from SWIFT or impacting Russian secondary

RETAIL BANKING: UKRAINE CRISIS trading as the biggest risks to the region’s banking industry.

“If the uncertainty extends over time, it might have some negative impact on banks’ asset quality, all the more so to those countries with close ties with Russia. The most obvious will be in Singapore since Russian energy companies are present there,” Garcia Herrero said.

White Knight China?

One Asian market remains a key focus following the announcement of sanctions in Russia: China. Early into the invasion, the country’s local banking and insurance regulator said that it will not pass any financial sanctions on Russia.

China has financial ties to Russia, the most notable being the over US$23.7b (RMB150b) swap line between the People’s Bank of China (PBOC) and the CBR. China also presents a few other financial avenues that Russia may consider clinging to as foreign markets shut down other methods of obtaining financing: China’s Cross-Border Interbank Payment System (CIPS), and even the recently launched central bank digital currency, called the e-CNY. But according to Garcia Herrero, China only offers a respite and not a long-term solution for Russia’s financial woes. “Our take is that the space is limited in the short run,” the chief economistnoted.

Should the world shut its doors on Russia and the country decides to pivot all its financial resources, its foreign reserves on the PBOC could likely be depleted within a year.

In this scenario, the CBR could choose to use its around US$90b RMB deposits at PBOC to finance imports from China.

Depletion of Russia’s RMB reserves can even come earlier since Russia will clearly opt for increasing imports from China settled in RMB as opposed to those from EU, Russia’s largest trading partner by far, Garcia Herrero said in a report.

The possibility of using PBOC’s digital currency, the e-CNY, is also likely a no-go for Russia. Whilst the centralised ledger could allow crossborder transactions that bypass SWIFT, its reach and use remain limited. The use of e-CNY might also damage demand for the Ruble.

There is also the question of whether Russia can use the CIPS to bypass SWIFT sanctions, according to a report by Natixis.

CIPS is a payment system which offers clearing and settlement services for cross-border transactions in renminbi. However, it is currently illiquid, Natixis reports, with only 13 thousand transactions processed per day.

This is only 5% of the over 240,000 processed by the Clearing House Interbank Payments System, the most widely used international payment system currently.

Notably, CIPS itself is still included in the SWIFT ecosystem, as it runs on the SWIFT messaging system. Whilst work is reportedly in progress to develop an alternative messaging system to SWIFT, it is not yet fully operational, Natixis’ Garcia Herrero said.

“Over time, the ban on selected

Russia-Ukraine foreign lender

Source: Bank of International Settlements, foreign claims statistics

Singapore on the lookout for Russia-related risks

S

ingapore’s financial industry has turned vigilant to any risks arising from sanctions imposed on Russia due to its invasion of Ukraine.

The Monetary Authority of Singapore, the local financial regulator, said that local FIs are aware of the heightened risks, and “are taking appropriate measures to manage any legal, reputational and operational risks arising from the sanctions that have been imposed by various jurisdictions.”

“MAS has sent a circular to all financial institutions (FIs) in Singapore, reminding them to manage any risks associated with the situation in Ukraine and the sanctions imposed by major jurisdictions,” a MAS spokesperson told Asian Banking & Finance in response to queries. told “FIs should also continue to stay vigilant to any suspicious transactions or flow of funds, and apply enhanced customer due diligence in higher-risk situations,” the spokesperson added.

Asian financial institutions and issuers are generally not very exposed to Russia or Ukraine, according to separate comments from Moody’s and Natixis. Despite this, local banks in Singapore are taking measures to curb any risk that could possibly arise from transactions and connections to the affected markets.

United Overseas Bank (UOB), one of Singapore’s biggest banks, told Asian Banking & Finance that they do not have direct exposure to Russian banks, but have advised clients on possible exposure to risks.

“We have earlier advised a handful of our clients with trade flows affected by potential sanctions to manage down their exposure accordingly,” UOB explained in an emailed correspondence.

In a statement published on its website, UOB stated that it will comply with any sanctions that will be passed by Singapore, relevant entities, and in jurisdictions in which the bank operates.

ASIAN BANKING & FINANCE | Q2 2022 29

RETAIL BANKING: UKRAINE CRISIS Russian banks in using SWIFT may also have implications on the approach Western regulators take on CIPS, including a potential regulatory backlash given that CIPS will potentially include those entities sanctioned under SWIFT, especially if transaction data is not shared,” the chief economist added.

China’s biggest risk in offering support to Russia is that it may damage its own financial sector. “[It] is increasingly unlikely that Western economies will continue to engage wholeheartedly in China’s financial sector if Russia jumps on it as a solution to its sanctions,” Garcia Herrero said.

Negligible risks to China, HK China continuing to open its doors to Russia presents a new set of dangers for local banks, who may risk getting hit by secondary sanctions—sanctions imposed on entities who deal with assets that fall under the primary sanctions.

In this case, on Chinese banks may 1 PRB_Ad ABF_2022MAR-3.pdf face being sanctioned by other

markets should they continue to engage with Russian assets.

“We believe there is no immediate risk for secondary sanctions on banks operating in Russia or dealing with Russian entities at this stage,” an OCBC Investment Research (IR) report read. However, it warned that the situation remains highly fluid.

Outside of this risk, currently, Hong Kong and Chinese banks’ direct exposure to Russia is noted to be relatively small and are also not expected to be hit by ill-effects arising from the sanctions.

Even two Chinese banks who have disclosed subsidiaries operating in Russia–Industrial and Commercial Bank of China and China Construction Bank—has their exposure to Russia accounting for less than 0.05% of their total assets of the first half of 2021. These subsidiaries’ business scope focuses mainly on facilitating Sino-Russia bilateral trade, according to data compiled by OCBC IR. Large3:28 state-owned enterprise 7/3/22 PM banks also have been reducing

Alicia Garcia Herrero

Gary Ng

Chinese banks may face sanctions by other markets if they continue to engage with Russian assets

financing exposure to Russian commodities owing to credit-risk concerns even before the RussiaUkraine war, and should further limit Chinese banks’ exposure to Russia, OCBC IR said.

Hong Kong banks credit exposure to Russia is also negligible and is estimated to be about 0.01% of the industry-wide assets.

The future Whilst manageable impact is expected in the near term, analysts called for banks to remain vigilant, especially with the unlikely quick de-escalation of the conflict.

China’s decision to not impose sanctions on Russia and seemingly extend economic support to their neighbour could further deteriorate US-China relations, for one. “[The] US-China strategic competition, which is more obvious than ever in the financial sector, will not get any better after China’s ambiguous position on Russia’s Ukraine invasion and the criticism from the US,” Natixis reported.

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CREDIT CARD INITIATIVE OF THE YEAR - SINGAPORE WEALTH MANAGEMENT PLATFORM OF THE YEAR - SINGAPORE

Trust is the basis of banking The pandemic has reminded society that trust is the most crucial element that is needed from banks. How can the industry go to greater heights?

T

he ABS-commissioned Banking Trust Index for Singapore (BTIS) report found that there is high trust in banks in Singapore. In fact, the banking industry is trusted more than businesses and NGOs.1 The survey also reinforces that trust requires constant nurturing. Indeed, customers said they would trust banks more if greater accountability, transparency and customer and community focus was shown. So what else can banks do to maintain and build trust?

Embedding a customer-centric culture Customers’ best interests should be at the heart of everything we do. And there are several ways to achieve that.

1. Shift from a product-focused mindset to one that’s customer-focused.

2. Blend technology with empathy. We need to meet people where they are by providing digital or “human touch” servicing options based on their preferences.

3. Constant training and upskilling of our people to ensure they have the knowledge and confidence to guide customers on their financial needs.

4. Remunerate our people for demonstrating the right values and behaviours, instead of simply being focused on performance alone.

At HSBC, we have worked hard to improve on these key areas over the years.

Our incentive scheme for our sales teams around the world is holistic and centred around meeting customer needs, without a product bias.

HSBC employees are assessed not only for performance, but also values and positive behaviours. The aim is to ensure each employee remains open, dependable and connected to our customers whilst in pursuit of performance excellence.

Banking with a purpose The pandemic has highlighted how truly connected we are, and that everyone has to play their part to help make the world a better place. Societies around the world now expect banks to help address social and environmental issues like gender inequality 1 2 3

Anurag Mathur, Head, Wealth and Personal Banking, HSBC Bank (Singapore)

and climate change, and rightfully so.

As major engines of growth in the global economy, banks hold a variety of roles: asset owners, employers, financial market intermediaries and investors. This means that the industry as a whole can not only allocate financing to activities that can bring about positive change to societies, they can also help to encourage positive behaviours amongst their counterparts and customers.

One area that banks can help shape the future is on sustainability.

We now have the opportunity to build back better and help reboot our economies by transitioning to green, moving away from high-emission pathways and changing the behaviour of businesses and people. HSBC has proposed several new climate resolutions, including phasing-out the financing of coal and publishing annual progress reports.2 Our efforts to develop partnerships and products that will bring finance at scale to create a

more sustainable and resilient planet has similarly gained industry recognition.

We have also taken concrete steps to help reduce our environmental footprint – over 85% of our customers in Singapore use e-statements rather than paper statements. We have started to replace both credit and debit cards with recycled plastic cards3 and significantly expanded the range of ESG-themed funds for our customers to invest in.

The BTIS report also highlighted that governments’ regulations contribute to the Trust perception of the banking industry. This highlights the importance of working with regulators to protect customers and encourage confidence in the financial industry. It has been a privilege for HSBC to chair the BTIS Taskforce and also contribute actively to the wider agenda for the ABS Culture and Conduct Steering Group.

HSBC is a member of the Veritas consortium sponsored by the MAS where we are one of the co-lead of the Fairness and Transparency work streams. The methodology and metrics developed would help the industry address challenges in the responsible use of Artificial Intelligence (AI) and Data Analytics (DA) as part of their business operations.

Putting it together The world is constantly evolving, and banks have to adapt; not only with their customers changing needs, but also society’s expectations.

That is why for banks to stay relevant, we cannot lose sight of their core purpose: to safeguard and responsibly look after other people’s money, and to continue to contribute to society in positive ways.

By Anurag Mathur, Head, Wealth and Personal Banking, HSBC Bank (Singapore)

We now have the opportunity to build back better and help reboot our economies by transitioning to green, moving away from highemission pathways and changing the behaviour of businesses and people

https://abs.org.sg/docs/library/btis-2020-report.pdf https://www.hsbc.com/who-we-are/our-climate-strategy/hsbc-climate-plan-explained https://www.about.hsbc.com.sg/news-and-media/hsbc-switches-to-recycled-plastic-credit-and-debit-cards

ASIAN BANKING ASIAN ASIANBANKING BANKING AND FINANCE AND FINANCE FINANCE | DECEMBER || Q2 Q3 2022 2021 2020 31

CASE STUDY: DBS DDEX

What sets DBS Digital Exchange apart is that it is a members-only exchange

DBS Digital Exchange as a key player in digital asset space The members-only exchange is one of the world’s first bank-backed digital exchanges and offers a regulated platform for the digital asset economy.

D

igital assets and cryptocurrency are all the rage now, and investors are eagerly jumping in this novel means of getting higher returns. Singaporean investors, of course, are not to be left behind in this craze. Interest in investing in cryptocurrency, for example, is on an upward trajectory.

According to a study by consumer insights company Milieu, nine in 10 Singapore investors plan to increase their crypto investments in 2022, with almost one-third of the 1,000 investors surveyed already holding crypto-related investments.

It’s a reality reflected in the success enjoyed by DBS Digital Exchange (DDEx), which reported a whopping S$1.1b in trading value just a year after it debuted, and only six months after the exchange went fully operational.

The members-only exchange is one of the world’s first bank-backed digital exchanges. Through DDEx, DBS offers corporate and institutional investors, accredited investors, and family offices who bank with DBS a regulated platform to tap into the growing digital asset economy.

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Lionel Lim

Interest is strongest in DDEx’s integrated fiat trading capabilities for more seamless buying and selling of cryptocurrencies

Interest is strongest in DDEx’s integrated fiat trading capabilities for more seamless buying and selling of cryptocurrencies, as well as the institutional-grade digital custody solutions offered through the DBS Bank, according to Lionel Lim, CEO of DBS Digital Exchange.

Momentum notedly picked up significantly after DDEx went operational 24/7 in August 2021, with trading values in the fourth quarter coming in at close to S$800m–five times higher than that in the previous quarter, according to data released by DBS Digital Exchange.

What sets DDEx apart is that it is a members-only exchange.

“DDEx has set itself apart from the competition with its membershiponly business model, where it provides other brokerages and asset houses with a safe and secure solution to access the cryptocurrency and digital payment tokens market,” DBS said in a statement.

Innovation is another key to its success. Just this past year, DDEx did not just onboard other established banking and financial institutions, but even other digital asset exchanges.

Regulating the decentralised Despite the high interest, digital assets space still is incredibly volatile, lending to its reputation as being “high-risk, high-reward.” For example, it is common to see the value of cryptocurrencies, such as Bitcoin, dramatically rise and fall.

In mid-April 2021, Bitcoin prices reached an all-time high of $60,000 in crypto exchange platforms, according to data compiled by Blockchain.com Just a couple of months later, its price plummet over 50%, falling as low as $29,795 in July.

It’s a risk recognised by central banks around the world. In Singapore, local regulator MAS recently issued public guidelines banking the public marketing of cryptocurrency to discourage its trade. This reportedly caused crypto ATMs around the city to close down.

It’s a move that DBS and DBS Digital Exchange welcomed.

“As Singapore deepens its expertise and stature as a global hub for digital assets, it is imperative that clear guardrails are established to encourage sustainable growth in the digital asset industry,” the DBS spokesperson told Asian Banking & Finance in an exclusive correspondence.

The spokesperson added that MAS’ guidelines around the responsible promotion of digital payment services will help promote investor confidence and lay the foundation for a robust and credible digital asset industry in Singapore.

In a separate media note, DDEx CEO Lionel Lim stated that DDEx operates under strong regulatory frameworks and in full compliance with prevailing licensing regimes.

This provides DDEx customers with further assurance and confidence when they trade with the platform, the DDEx CEO said.

As for the future of DDEx? Naturally, there’s only one way for the exchange to go: up. “[In] the coming year, we will be scaling our business to serve a larger target pool of customers, leveraging DBS’ digital asset ecosystem and deep investor base,” Lim said. “We also aim to list more digital payment tokens and STOs for trading.”

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CASE STUDY: MAYBANK HALMAP

‘HalMap’ helps Halal SMEs tap into a $2.6t global industry Over 50 products of Malaysian SMEs are now being sold in Singapore.

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t the start of 2021, Malaysian small and medium enterprises (SMEs) producing halal products could only dream of leaving a sizeable dent in the estimated $2.6t global halal market–an industry set to grow to $5t by 2030, according to the Malaysian government. By the end of the year, ten Malaysian SMEs now have 50 of their halal products combined sold at supermarkets in Singapore–all under Maybank Islamic’s Halal To Roadmap programme (HalMap).

Launched in August 2021, HalMap aims to enhance awareness of the halal industry, increase the number of new halal-certified companies, and ultimately assist said companies to expand operations into the overseas halal markets.

“We found that Malaysian SMEs in the [Fast Moving Consumer Goods (FMCG)] segment have difficulties accessing big name hypermarket and retail outlets, therefore we focused on these clients

Norzulkarnien Nor Mohamad

HalMap will not limit operations to just Singapore given a huge demand for halal products globally

for a start,” said Norzulkarnien Nor Mohamad, head of Islamic Banking, Maybank Singapore.

“With the current challenges faced by SMEs due to the COVID-19 pandemic, HalMap can be a new channel to provide Maybank’s SME customers with additional opportunities to expand their operations,” he further told Asian Banking & Finance in an exclusive interview.

The programme kicked off with a selection of 10 Malaysian SMEs to venture into Singapore’s halal food market. The 50 new-to-market products are now available at Eccellente by HAO Mart located in Kinex Shopping Mall.

Apart from providing Shariahcompliant financing to the selected SMEs, they were provided with a distribution platform, service advisory, and training to market their products and services in the FMCG market segment.

In choosing which businesses to partner with, Maybank Islamic

HalMap can be a new channel to provide Maybank’s SME customers with additional opportunities to expand their operations

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considered small and medium enterprises who are at least three years old; are halal certified and Makanan Selamat Tanggungjawab Industri (MeSTI) certified; have products whose shelf life has a minimum of one year; have professional product packaging; have products with a barcode; and have a production capacity of at least 5,000 units per annum.

Performance is encouraging and indicative of demand. “It has only been a few months since the launch in November 2021, and there is about S$25,000 in sales of products so far. We can see that the demand for halal products is there and we hope their products will continue to gain traction,” Norzulkarnien said.

Expanding SME reach Since launching less than half a year ago, SME interest in the programme has grown. “We have received about 70 applications in Malaysia,” Norzulkarnien shared.

Currently, Maybank Islamic focuses on existing Maybank SME customers who are in the food and beverage trade within the FMCG sector, Norzulkarnien said. Other Halal industries, such as pharmaceutical, fashion and tourism, will be explored by the bank in the future.

“We are constantly looking to expand this initiative and will definitely not limit it to just Singapore. There’s a huge demand for halal products globally,” Norzulkarnien said.

“We will embark on the second phase of this programme soon, including assistance for market access into local hypermarkets across Malaysia, Singapore, and Indonesia.”

Apart from that, Maybank Islamic plans to expand the list of companies onboarded in the initiative. For 2022, they are targeting at least 20 companies.

“We will [also] look at facilitating suitable platforms for Singapore SME clients with halal businesses to reach other countries, such as those in halal healthcare and financial technology for halal sector,” Norzulkarnien concluded.

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COUNTRY REPORT: PHILIPPINES

Philippine central bank takes a swing at sustainability in the banking sector

The BSP aims to help banks win in embedding sustainability principles into their operations.

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ith Asia suffering from $72b catastrophe-related losses in 2021, the Bangko Sentral ng Pilipinas (BSP) is helping banks score a home run in the sustainability principles with the Sustainable Finance Framework.

Approved in 2020, the Sustainable Finance Framework outlines the expectations of the BSP on the integration of sustainability principles, including those covering environment and social risk areas in the corporate governance and risk management frameworks, as well as in strategic objectives and operations of banks.

Under the sustainability framework, the BSP said it recognised the risk of climate change and other environmental and social risks that could pose financial stability concerns considering their significant and protracted implications on the bank’s operations and financial interests.

Before the framework was released, however, the Philippines

had no formal definition of sustainable finance. International and national definitions describe sustainable finance as strategies to mainstream climate and environmental factors as a financial and strategic imperative and mobilise private finance for clean and resilient growth; or the process of taking due account of environmental, social, and governance (ESG) considerations when making investment decisions in the financial sector, leading to increased longer-term investments into sustainable economic activities and projects.

The BSP’s Sustainable Finance Framework defines sustainable finance as any form of financial product or service which integrates environmental, social and governance criteria into business decisions that supports economic growth and provides lasting benefit for both clients and society while reducing pressures on the environment. This also covers green finance which is designed to facilitate

There is no rush.

The Philippine economy is on solid recovery momentum

Another thing that prompted BSP to rein in drastic monetary policies is the huge lead in foreign direct investments

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the flow of funds towards green economic activities and projects and climate change mitigation and adaptation projects.

In a recent international press chat, the BSP said it is particularly concerned about physical and transitional risks arising from climate change that could result in significant societal, economic, and financial risks affecting banks and their stakeholders. With this in mind, the BSP ordered banks to embed sustainability principles, including those covering environmental and societal risk areas, in their corporate governance framework, risk management, and strategic objectives consistent with their size, risk profile, and complexity of operations.

BSP Governor Benjamin Diokno reported that as of their last tally 101 banks or around 20% of the 503 banks supervised by the BSP now have transition plans to more sustainable operations.

The BSP however, isn’t stopping there. It plans to work with

COUNTRY REPORT: PHILIPPINES We will try to be patient to make sure that we are really on our way to recovery

The Philippines’ unemployment rate dropped to 6.5% in November 2021, from a peak of 17.6% in April 2020

development partners to offer capacity building activities for the banks in the country that have yet to adhere to the central bank’s directive.

For the first phase of its ESG regulations in April 2020, the BSP gave broad supervisory expectations on the integration of sustainability principles across the operations of banks. The second phase, issued in October 2021, gave granular expectations to the banks’ board of directors to set strategic environmental and social (E&S) objectives for the bank’s credit operations.

Diokno said, without revealing an exact date, that the third phase is coming soon. This will include guidelines on the management of E&S risks in relation to the activities of banks. Additionally, the third phase will also cover the incentives that may be given to banks that will adhere to the sustainability framework.

Recovery Aside from its sustainability plans, Governor Diokno reported that the country is currently in recovery.

In 2021, the country’s gross domestic product (GDP) grew at 5.6%, exceeding the government’s target of 5% to 5.5%. GDP growth in the fourth quarter was measured at 7.7%. The Philippines also saw its unemployment rate drop to 6.5% in November last year, the lowest for 2021 from a peak of 17.6% in April 2020.

However, what most wanted to know is: will there be tighter

monetary policies?

In which Diokno replied: “There is no rush.”

Diokno enumerated several reasons why the central bank is keeping a calm hand on the steering wheel.

Weighing both economic factors and uncertainties remaining given the risk of COVID-19 variants, Diokno said, “We need to maintain some flexibility in case conditions do not evolve as expected.”

Another thing that prompted the central bank to reign in any drastic measures or at least just keep watch as the situation develops is the huge lead in foreign direct investments (FDIs). FDIs leapt 48.1% to $8.1b from January to October 2021, which according to Diokno, are currently in line with the pre-pandemic levels.

Diokno added that they expect a huge leap in FDIs in the country, hinting that sectors, such as telecommunications, air, and marine, may see a huge increase in foreign investments in the country.

The BSP also said that inflation settled at 3% in January, the midpoint between its target rates of 2% and 4%.

“All these indicators point to improving external and domestic demand accompanied by within target inflation. Clearly, the Philippine economy is on solid recovery momentum,” Diokno said, adding not only that the Philippine economy is poised to make a full recovery this year, but is also under transition from lower to optimal middle income.

Looming threat Despite the BSP clearly stating that it will keep a patient hand on its policy levers, there is still a cause for alarm as the US Federal Reserve may push through its rate increase, which may affect BSP’s decision on tightening monetary measures.

The World Bank’s Philippine office said that even though the inflation rate stayed in the middle of the government’s projected expectations, rising US inflation and forthcoming monetary policy tightening are developments for policymakers to watch out for.

The Philippines’ central bank said it already acknowledged the risk from the US Fed rate increase and added that a gradual adjustment in US interest rates could help arrest a possible rise in financial vulnerabilities from the unprecedented policy support amid the global pandemic.

However, Diokno said the BSP does not necessarily have to move in tandem with the US Fed. “We will try to be patient to make sure that we are really on our way to recovery. Because I don’t like to be changing course in the middle of the recovery,” Diokno said, citing that it will affect the credibility of the central bank.

Not remaining idle Determined to help SMEs during the recovery period, BSP allowed new loans to them in compliance with the reserve requirements.

In January, the BSP had already lent SMEs $4.60b coming from a base of $170m before the pandemic.

BSP does not necessarily have to move in tandem with the US Fed (Photo: Benjamin Diokno)

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ANALYSIS: WEALTH MANAGEMENT

Breaking the mould: Transforming wealth management through analytics

Meeting customers’ needs requires a business model that is efficient yet adaptable to individual clients.

The wealth management industry is typically seen as embodying old-fashioned values

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midst increasing technological advancement, rising competition, and a highly-connected world, wealth managers will need to keep pace with new offerings whilst retaining values in order to serve their modern clients more effectively.

McKinsey & Co.’s report, “Analytics transformation in wealth management” was penned

by McKinsey partners, Anutosh Banerjee of Singapore, Fumiaki Katsuki of Hanoi; associate partners, Vishal Kaushik, Aditya Saxena, and Sanchit Suneja ; and senior partner, Renny Thomas. It delved deep into the modern wealth management industry and the means by which traditional managers can keep up with their customers’ increasingly modern needs.

The wealth management industry is typically seen as embodying old-fashioned values and providing discrete, tailored services, the report 38 ASIAN BANKING & FINANCE | Q2 2022

Wealth managers are unlikely to be able to serve modern clients effectively without a digitised operating model

said. Whilst these attributes remain valuable parts of the business, for many clients, these approaches are no longer sufficient.

“Wealth managers are unlikely to be able to serve modern clients effectively without a digitised operating model. This will support advisory and non-advisory activities and service everchanging investment preferences,” McKinsey said.

Wealth managers are not blind to this fact. Some leading managers are reportedly building modular data and IT architectures, which enable smart decision-making, personalisation at scale, and more extensive product offerings, as McKinsey first reported in its article “Building the AI bank of the future.”

The changes already have a marked advantage on the wealth managers, helping them meet their regulatory obligations, boosting the productivity of relationship managers (RMs), as well as helping

lift compressed margins.

According to McKinsey, meeting the needs of today’s customers requires a business model that is at the same time efficient and adaptable to individual clients. They noted that wealth managers are finding success with two approaches: • The first is by serving clients across the wealth continuum on a flat-fee advisory basis.

“Instead of the still-prevalent product-focused model, wealth managers need to build in pricing flexibility aligned to clients’ needs at every stage of their lives,” McKinsey wrote. “An increasingly common pricing model is for clients to negotiate a flat fee based on the value of their investments. To maintain revenues with this model, wealth managers need to create new efficiencies and ensure RMs are more productive, which means spending more

ANALYSIS: WEALTH MANAGEMENT •

time with clients.”

The second is to embrace personalisation aligned to the clients’ life stages and goals. “Today’s customers are increasingly dissatisfied with a one-size-fits-all service model, so wealth managers should consider transitioning to needs-based personalisation. This requires RMs to get comfortable with a wider range of solutions, from the simplest products to complex higher-yielding investments (private markets, venture capital, pre-IPO, and structured products).

In addition, RMs must be equipped to help clients make complex investment decisions, supported by analytics,” McKinsey said.

Fixing the system to generate more gains Modernisation can be gamechanging when it targets the role of RMs, the report posits.

According to McKinsey’s study, RMs waste an estimated 60% to 70% of their work time on non-revenue generating activities, to meet rising regulator and compliance obligations. This is a result of their organisation not having the most up to date technology, which in turn forces RMs to use legacy IT systems or even spreadsheets.

“Only a few leading wealth managers are using technology to provide RMs with the tools to serve clients more efficiently and effectively,” the report read. “Some have taken a zero-based approach, rebuilding their tech stacks and embracing advanced analytics to inform more personalised services.

By providing targeted solutions, these firms and companies have been able to boost revenues and reduce operational costs.”

Transformation in Asia In Asia, it is estimated that ITbased transformations could create some $40b to $45b of incremental value for wealth managers that are serving high net worth individuals in the region.

An analyticsbased transformation requires crossfunctional teams

Source: McKinsey analysis

The potential is especially strong in the region as wealth managers in Asia have not yet fully leveraged digitisation to achieve a significant performance uplift, according to McKinsey & Co. McKinsey, in particular, sees benefits in three key areas: acquisition and onboarding, engagement and deepening of client relationships, and servicing and retention.

• Acquisition and onboarding.

“Basic acquisition and onboarding applications include client discovery, risk profiling, account opening, and onboarding. RMs and investment teams can use analytics for lead generation, share-of-wallet modeling, and automated proposals.

There are also multiple applications in investment management, risk, and compliance, including social-profile checking, antimoney-laundering and know your customer, and fraud protection applications.”

• Engagement and deepening.

“Client-focused applications include personalised research, portfolio management, and notifications. RMs and investment teams can implement client clustering, propensity modeling, recommendation engines, and digital performance management. In investment management, risk, and compliance, there are opportunities to de-bias

•

Anutosh Banerjee

Fumiaki Katsuki

Renny Thomas

investment decisions, data analysis, and trade execution.”

Servicing and retention.

“Client-related applications include portfolio simulations and optimisation, as well as self-execution of trades. RMs can leverage applications such as churn predictors and work planners, whilst investment management, risk management, and compliance can scale up portfolio planning and trade surveillance.”

Exception, not rule Early success stories are encouraging, but wealth managers who succeed in their transformation are the exception rather than the rule, according to McKinsey.

“More often, firms have started the transformation journey but have faltered along the way. Common reasons include a lack of ownership at senior levels and budgetary or strategic restraints that prevent project teams from executing effectively,” the report noted.

But whilst the challenges of transforming service models are significant, they are not insurmountable yet.

In particular, McKinsey identified five key ingredients of an analyticsbased transformation: strong leadership, a rigorous focus on outcomes, and a willingness to embrace new ways of working.

Indeed, managers who execute effectively will get ahead of the competition and be much more adept at meeting client needs.

ASIAN BANKING & FINANCE | Q2 2022 39

ANALYSIS: WEALTH MANAGEMENT An analytics-based transformation for wealth managers has five key elements

Source: McKinsey analysis

(1) Strong leadership Analytics-driven transformations are often restricted to narrow silos occupied by a few committed experts, McKinsey noted.

“As a result, applications fail to pick up enough momentum to make a real difference to performance.

Conversely, if support for change programmes comes from the top and is guided by an outcomes-driven approach, the business can break away from entrenched operating norms and reset for structural change,” it said.

Executive teams are called to communicate a vision that can be cascaded through the business; and they should also create a safe environment, or sandbox, for business lines to experiment before development of scaling.

impact, scalability, and availability of funds,” McKinsey added.

One common impediment to scaling is the lack of a single metric to describe the impact, according to McKinsey. This reportedly makes it hard for technology teams to communicate benefits.

“Still, there are workarounds.

Financial key performance indicators (KPIs) can show flows across key mandates or volumes of advisory, rather than execution-driven assets under management. Nonfinancial metrics can focus on cross-sell ratios, increased client retention, number of RMs trained, or adoption rates for solutions,” McKinsey & Co noted.

Other helpful evaluations include customer satisfaction scores, new trust-based RM-client relationships, time to market, and cultural shifts.

(2) Plot the change journey Wealth managers have reportedly applied advanced analytics to achieve different objectives.

“Some have found that the application of advanced analytics to business problems delivers significant value and enables them to make better decisions faster and more consistently. Others are using data and advanced analytics to improve sales and marketing, inform investment decision-making, and boost RM productivity,” McKinsey & Co noted.

“Any plan for data-driven change must fit the organisation’s business model. Implementation will vary based on the technical feasibility, data accuracy and accessibility, time to

(3) Build a strong and informed foundation with technology A strong analytics backbone requires a rigorous standard of data management, coupled with informed decisions about the IT applications and systems to employ, according to McKinsey.

“Wealth managers are routinely in touch with their clients offline.

These interactions elicit significant information about client preferences and requirements, but the information is often stored on paper or in RMs’ heads,” the report noted, “To mine this knowledge fully, wealth managers must capture it digitally and convert it into a structured format that can be processed to create insights and

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Analytics-driven transformations are often restricted to narrow silos occupied by a few committed experts

personalised services. In doing so, they need to put systems in place to ingest, store, and organise the data in line with regulatory obligations whilst ensuring the data are accurate, available, and accessible,” it added.

On the technological side, some leading wealth managers are reportedly using natural-language processing to analyse text and voice data and to identify personalised triggers and insights.

Others are building feedback loops across channels to train artificial intelligence algorithms.

Technologies can also be applied to processes: robotic process automation, for example, can replace routine manual labour and mental processing in regulatory compliance, risk assessment, reporting, and query management, according to McKinsey & Co. “Deployment of data-driven decision-making requires scalable, adaptable, and resilient core technology components—a unified data and technology stack that connects across IT activities. This will enable managers to adopt a tech-first approach to designing customer journeys,” the report said.

In building data and IT architecture, wealth managers require a basic tool kit with four key components: 1. a rationalised IT stack to create a common front-and back-end platform and a unified resource for mobile and web applications 2. a scalable data platform with modular data pipelines and application-programminginterface (API)-based microservices for building and deploying data analytics solutions at scale 3. a semi-autonomous lab environment to enable experimentation, coupled with an at-scale factory environment for the production of data analytics solutions 4. a highly scalable distributed network on the cloud to respond to variable demand for data storage and processing Apart from these, banks must also consolidate data from across

ANALYSIS: WEALTH MANAGEMENT Technology and analytics adoption rates in wealth management are low overall in Asia

Analytics-driven transformation should adopt the agile approach

¹Straight-through processing Source: McKinsey interviews with industry experts

geographies and business lines, according to McKinsey.

(4) Build the team and prioritise change management RMs must be front and centre of the transformation process, and for this to happen, organisations need effective team building and even change management.

Team building. A productive approach to team building is to create cross-functional squads with a range of talents, according to McKinsey.

A core objective should be to explore analytics and AI use cases that boost RM productivity. To that end, the squad should embed business and channel management teams so that ideas are aligned with RM client services. Several firms have found that involving RMs and other domain experts in squads leads to significant improvements in data interpretation and modeling.

In many cases, assembling productive squads will require new talent. Banks will need data scientists to be responsible for building analytics software and data engineers to scope and build data pipelines and data architecture. Translators, who act as conduits between the business and technology teams, will be critical for ensuring that squads understand business needs.

Finally, squads need IT skill sets to ensure that analytics and digital solutions are compatible with core data and technology stacks, the report further explained.

Change management. Change management strategies can help encourage relationship managers to embrace analytics and convince them that new applications lead to better services and higher levels of performance, the report said.

“Examples include creating teams of ‘influencers,’ running capabilitybuilding sessions, developing change narratives that generate widespread excitement, redefining roles, and aligning performance with financial or nonfinancial awards.”

(5) Institutionalise new ways of working and productivity Analytics-driven transformation should adopt the agile approach: scale should be predicated on collaboration, team self-steering, and an iterative approach to problem-solving.

And in running agile sprints, it pays to keep business needs in sight, accepting that failure is part of the process. Two-week sprints are usually sufficient to get pilots

up and running, and the aim should be to produce an MVP with every sprint, McKinsey reminded.

Wealth managers can reportedly apply these basic principles via four process disciplines: 1. Inspect and adapt. Daily check-ins will ensure that teams identify roadblocks, such as product backlogs, and maintain their focus on goals.

2. Engage end-users. Sprint reviews with end-users, stakeholders, and sponsors enable teams to gather feedback and bake in recommendations.

3. Embed a sense of unity and purpose. Teams should hold retrospectives to incorporate and apply learnings.

4. Institutionalise support infrastructure. Agile tooling (for example, Confluence, Jira, and Zeplin) will facilitate experimentation and support remote working where and when necessary.

5. Embrace flexible learning.

This is a departure from traditional waterfall-based approaches, in which decision-making occurs at the beginning of each project.

In agile, capability building and a relentless focus on change management will be vital elements of optimising the programme. To cement the relationship between innovation and growth, leading firms also assign KPIs to application rollouts, and they reward decision-makers based on the value created.

Relationship managers spend 60 to 70 per cent of their time on non-advisory activities

Source: McKinsey interviews with private banking RMs, 2021

ASIAN BANKING & FINANCE | Q2 2022 41

CASE STUDY: CITI ASSET SALE

Citi consumer assets snapped up by United Overseas Bank, UnionBank, DBS

Analysts weigh in on who won—and who may have bitten off more than they can chew.

C

iti’s bombshell announcement that it is rolling back its retail operations across 10 markets in Asia and 13 markets globally sent banks in the region abuzz with acquisition talks.

Almost a year later, three banks have won out so far: United Overseas Bank (UOB), which snatched up Citi’s consumer banking franchises in four markets; UnionBank of the Philippines has agreed to purchase the Citi retail assets in the country; and DBS is buying Citi’s consumer banking business in Taiwan.

But whilst the banks purchased the assets in the hopes of strengthening their profits, customer base, and portfolios, their possible futures following this purchase vastly differ from one another.

Below, Asian Banking & Finance has compiled expert opinions on UOB, UnionBank, and DBS following their acquisition of Citi’s assets.

No way but up UOB was the biggest acquirer in Southeast Asia thus far, snatching up Citi’s retail business assets in Indonesia, Malaysia, Thailand and Vietnam, excluding the American bank’s institutional businesses in the four countries.

Analysts said that this is a big win for the Singaporean lender, as it reportedly enhances UOB’s longterm growth prospects and improves its profitability, whilst having a manageable capital impact.

In a report, RHB approximates that the new assets will add over US$735m (S$1b) in UOB’s annual revenue, against around US$515m (S$700m) in one-off transactions that UOB will shoulder over the first couple of years. The deal earnings are expected to be reflected beginning end-2023.

Moody’s Investors Service Vice President Eugene Tarzimanov also

42 ASIAN BANKING & FINANCE | Q2 2022

Following Citi’s decision to roll back retail operations in Asia, three banks swooped in to take the assets

UOB snatched up Citi’s retail business assets in Indonesia, Malaysia, Thailand and Vietnam

believed that the deal is positive for UOB Group.

“UOB’s announced acquisition of Citigroup’s consumer finance businesses in four ASEAN markets will strengthen its market franchise and retail customer reach, and lead to improved profitability,” Tarzimanov said.

“Whilst UOB’s core capital ratio will decrease modestly because of the acquisition, the bank is committed to strengthen its capital buffer in the medium term,” Tarzimanov added.

RHB is of the same opinion, saying that the acquisition is of the “right strategic fit” as the two banks have little overlap in customer base and product offerings.

The estimated 80% expansion in UOB’s ASEAN-4 customer base arising from the deal also reportedly accelerates UOB’s retail banking’s ambition to double its customer base

by five years, the report added.

However, RHB warned of risks related to system integration, as well as staff and customer retention.

On the upside, Citi and UOB both operate on a common IT system across the region, which the UOB management believes should reduce the complexity for integration.

Despite the advantages to UOB Group in general, Moody’s warned that the bank’s Thailand franchise may suffer a more negative impact, and gave it a negative outlook in a separate report.

“The negative outlook is driven by the material decrease of UOB’s core capital ratio after the acquisition is completed in 2022,” the ratings agency said.

According to Moody’s, UOB Thailand’s tangible common equity (TCE) to adjusted risk-weighted assets ratio (TCE ratio) will decline materially to below 10%, from a

CASE STUDY: CITI ASSET SALE

Eugene Tarzimanov

UPB’s acquisition of Citi’s retail assets will reduce its capital, and it will take multiple years to rebuild its capital buffer Krishna Guha

strong level of 14.2% as of 30 June 2021 because of goodwill and additional assets, before rebounding to around 11% over the course of three years.

Regarding client retention, RHB believes that the minimal overlap in product offerings reduces the risk of customer attrition.

Gloomier tidings Unfortunately, Moody’s could not share the same confidence it has on UOB with its outlook for UnionBank of the Philippines following the latter’s announced acquisition of Citibank’s retail assets in the Philippines.

The purchase weakens the bank’s capital buffers amidst heightened risks due to the still-raging pandemic, the ratings agency said.

“The acquisition will reduce UnionBank’s capital, and the bank will take multiple years to rebuild its capital buffer,” warned Moody’s, regarding the purchase.

On the upside, the acquisition will improve UBP’s core profitability due to an increase in the share of higheryielding retail loans.

But the extent and sustainability of the potential earnings boost from this acquisition is uncertain, as it is highly dependent on a successful post-acquisition retention of Citibank’s clients.

“The negative outlook reflects Moody’s view that UBP’s solvency will weaken after the acquisition is completed, a result of a significant reduction in UBP’s post-acquisition capital buffers amid heightened asset

risks due to the ongoing pandemic,” the ratings agency wrote.

Moody’s regards the bank’s acquisition strategy as a supposed governance risk under its environmental, social, and governance (ESG) framework, given the implications for the Philippine bank’s capital, financial strategy, and risk management.

UnionBank’s assets are also under pressure given ongoing COVID-19 disruptions in the country.

UnionBank’s gross non-performing loan ratio increased significantly to 4.9% as of the end of September 2021 from 3.3% as of the end of 2019, reported Moody’s.

One step, double the clients For DBS, its acquisition of Citi’s consumer business in the market will make it the largest foreign bank in Taiwan by assets.

Citi Taiwan will accelerate DBS’ growth in the market by at least 10 years (Photo by Edgar Su)

The acquisition of Citi’s consumer business in the market will make DBS the largest foreign bank in Taiwan by assets

“The transaction makes strategic rationale, given the increased scale and expanded high quality customer base, which will propel DBS to be the largest foreign bank by assets in Taiwan,” OCBC Investment Research reports.

In particular, DBS’ purchase nearly doubles the high net worth and mass affluent clients the bank has in Taiwan, according to Jefferies equity analyst Krishna Guha.

“The deal checks all the right boxes: no capital raise, maintains dividend policy, EPS accretive and a good-looking price,” Guha said. “Whilst Taiwan is not a core market, the acquisition should help to capture growth in wealth management and Asian technology sectors. It helps to build scale and deepens presence in the one of the region’s wealthiest and a top private banking market.”

This marks DBS’ third big asset acquisition in a span of just a year and a half, following Lakshmi Vilas Bank (LVB) in late 2020 and a stake at Shenzhen Rural Commercial Bank in April 2021.

“The group has done three deals LVB in India, SZCB in China, and Citi Taiwan in quick succession. As such, it may stretch the management bandwidth,” noted Guha. “However, given that it is a single country deal and DBS has acquired and integrated businesses in Taiwan earlier–Bowa Bank in 2008, ANZ Taiwan in 2016–it is unlikely to pose major challenges, in our view.”

Guha and Jefferies did note, however, that the net asset value hasn’t been disclosed.

Acquiring Citi Taiwan will also accelerate DBS’ growth in the market by at least 10 years. Citi’s consumer business in the market is noted as a high-returns business, generating an average annual net profit of over US$183.9m (S$250m) in the two years before the pandemic hit.

In terms of accounts and branches, DBS is adding 2.7 million credit cards and unsecured accounts, 500,000 deposit and wealth customers, and 45 branches to its retail business in Taiwan once Citi’s assets were fully integrated.

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OPINION

PATRICK CHAN

Cryptocurrency in Hong Kong – why regulation and enforcement are needed

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ith the second-highest engagement after the United States, Hong Kong continues to be a significant market for cryptocurrency.

Last month the financial services industry breathed a sigh of relief when the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority issued a joint circular which gave them the green light to do crypto business. The new guidance essentially allows banks and brokers to offer digital-asset trading services to professional investors.

However, it is important to note that the circular did not address the fate of retail customers. Up until now, cryptocurrency has largely been regulated by existing AML and KYC rules. The Legislative Council is expected to pass legislation later this year in relation to retail investors, but at present, there is no specific legislation relating to cryptocurrency in Hong Kong.

Why is regulation and enforcement needed?

The murky world of money laundering and cryptocurrency has recently made the headlines with the US Department of Justice charging a married couple for allegedly laundering US$4.5 billion worth of stolen Bitcoins. This represents the biggest theft in US history and the largest seizure by authorities.

Money laundering has also made the headlines in Hong Kong, with the first reported money laundering case involving cryptocurrency in July last year. At the time, Hong Kong Customs arrested four individuals in relation to a suspected money-laundering syndicate involving HK$2.2 billion through a virtual currency exchange trading platform.

The need for regulation and enforcement is clear but given the constantly evolving nature of cryptoassets it is difficult to predict exactly how this will evolve in the short term. The United States Federal Bureau of Investigation (FBI) recently announced the establishment of a new unit to stop cybercriminals that abuse digital currencies. Many are now wondering to what extent Hong Kong will also develop its enforcement and regulation.

PATRICK CHAN Partner, Charles Russell Speechlys

How are the courts approaching cryptocurrency?

In Yan Yu Ying v Leong Wing Hei [2021] HKCFI 3160 the court granted a temporary proprietary injunction over 999.9900261 Bitcoins worth HK$328,363,760. In this case the Plaintiff alleged that the Defendant had misappropriated the Bitcoin, an allegation denied by the Defendant. This case shows how the courts may

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Hong Kong is likely to continue to be a significant market for cryptocurrency, given its status as a global financial hub

apply their discretion when granting interim-interim injunctions in cryptocurrency disputes in Hong Kong and their willingness to treat Bitcoin cryptocurrency as a form of property or cryptoasset.

Similarly, the English High Court has held that cryptoassets can be treated as property and as such the owner of cryptoassets can avail themselves of the proprietary remedies that a court is able to grant (AA v Persons Unknown [2019] EWHC 3556).

However, it is important to exercise caution when considering judgements involving cryptocurrency disputes due to the highly fact-sensitive nature of judgements and the diverse and fast-evolving nature of cryptoassets. With more judgements related to cryptocurrency expected in the future, legal commentators and investors alike will be closely watching to see how the law develops in this area.

Summary For some time, there has been a great deal of uncertainty in Hong Kong surrounding cryptocurrency and what regulation might be forthcoming. Whilst the recent circular by the Hong Kong Securities and Futures Commission and the Hong Kong Monetary Authority is welcome news by many, it still leaves questions unanswered, particularly in relation to retail investment.

Hong Kong is likely to continue to be a significant market for cryptocurrency, particularly given its status as a global financial hub, but much will depend on future regulatory changes and what approach other jurisdictions take. For now, it’s a case of watching the cryptocurrency and cryptoassets space.

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OPINION

TOUHIDUL ALAM KHAN

Where Bangladesh stands in its journey towards financial inclusion

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angladesh has established its position as a pioneering country to have made significant strides towards financial inclusion and its vision ‘Digital Bangladesh’. The country’s recent development in its financial sector, varied heritage in credit and microfinance, widespread adoption of digital finance and mobile financial services (MFS) are recognised at a global level. The government’s effort to consider financial services as drivers of shared prosperity and inclusive growth. Access to financial services and their usage have significantly positive impacts on the socioeconomic outcomes that are perceived by businesses and households. Moreover, this access and usage are considered as essential factors to the eradication of poverty.

On the other hand, financial exclusion being persistent has negatively affected inclusive growth, shared prosperity, social cohesion, financial stability, and income equality. Bangladesh’s development strategies suggest that national development be undermined without the availability of financial services in an expanded manner among the population. As the country has the aim to build an enlightened, happy, and prosperous Bangladesh where people will not suffer from corruption, hunger, illiteracy, inequality, and poverty, and they will have complete rights to their country, easy access to financial products/ services is a prerequisite to inclusive development.

TOUHIDUL ALAM KHAN Additional Managing Director, Standard Bank Limited, Bangladesh

Financial inclusion – where Bangladesh stands The rapid growth of Bangladesh’s economy is one of its powerful drivers to facilitate financial inclusion. With an annual GDP growth of more than 6% over the last decade, Bangladesh has seen a wider distribution of gains where agricultural modernisation and migration have contributed to growth in a relatively even pattern along with persistent income inequality represented by the Gini Index or Coefficient which was marginally rising in the 2000s. New employment opportunities in the export industries like RMGs and foreign remittances from Bangladeshi immigrants and migrants have fostered development which has helped reduce the size of the population below the national and extreme poverty line, causing the proportion to decline from 49% (2000) to about 21% (2018).

In Bangladesh, occupational relationships keep changing which create demands for financial products

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that are new. According to the Labour Force Surveys (2006-2017), a remarkable increase has been noticed in the available employment opportunities in different sectors including the industrial sector (rising from 15% to 20%) and the service sector (from 37% to 39%) where the agricultural sector is an exception to see a decline from 48% to 40% of employment. The proportion of salaried manufacturing jobs has grown enough to provide higher and more stable earnings which bring employees an incentive to look for formal financial products/services to manage their cash flows.

Among 24 million paid adult employees in 2017, 57% received salaries in monthly installments, and 34% received daily payments. Of all paid labourers in the agricultural sector, 61% got paid on a daily basis. In addition, a large portion of this labour force is still selfemployed, and they carry out work without payments.

The size of this particular group keeps declining relative to paid labour, but their financial needs are evolving, particularly the self-employed individuals and small business owners. This population will surely increase the need for new financial services in the coming years.

In Bangladesh, behind financial inclusion are three major factors: (i) localities that are difficult to access: remotely located and sparsely populated hilly areas; char, haor, and similar other areas with tough terrain; and areas with underdeveloped infrastructure; (ii) impediments that are induced by demands: poor income, lack or unavailability of financial education and awareness, social segregation or exclusion along with other constraints that restrict economic opportunities; and (iii) bottlenecks that are led by the supply system: distantly positioned bank branches, inappropriate timings, time-consuming documentation, cumbersome requirements and prolonged procedures, inconvenient delivery methods, unsuitable products, unfriendly staff, etc. that exclude specific groups. There are other factors such as limited or no access to the ownership of land, limited financial capability, and collateral for the female population and persistent lack of formal identification.

Bangladesh has become a leader in MFIs across the globe alongside its private and state-owned commercial and specialised banks, non-bank financial institutions, and insurance companies. Banks can develop alternative banking and financial channels by including ATMs and multibank switches namely Q-Cash, Cash Link, and Omnibus.

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OPINION

KAR WEE ANG

Managing the financial risk of aiming for net zero carbon emissions

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nd there are Asian countries with steeper hills to climb. Indonesia, which is the world’s biggest exporter of thermal coal, wants its own energy to be fully renewable by 2060. At the minute, coal provides over half of Indonesia’s energy. Weening Indonesian businesses off coal and levying a carbon tax that really bites will involve hard economic choices.

Not everyone agrees the burdens Asia faces are equitable. As the Prime Minister of Vietnam, Pham Minh Chinh, pointed out at the COP26 summit in Glasgow, Vietnam only began industrialisation around 30 years ago, and hence it has not been a major driver of climate change in Asia.

But that doesn’t mean countries in the region are immune to climate risk. Nor does it mean they don’t need to reduce their own greenhouse gas emissions.

Thailand, for example, is one of the 20 countries most affected by atmospheric degradation.

Tough choices too for banks – and opportunities The financial sector might appear more sheltered from climate risk than energy firms or manufacturers.

The reality, however, is that they are on the front line of climate change, as a recent webinar from the London Institute of Banking & Finance explained.

They will have to tackle a new set of risk management requirements as they fund green investment. At the same time, they must manage the risks that climate change poses to their firms.

But going green also offers endless opportunities for longevity. For example, Open Development Thailand says taking a green approach to growth would not only protect Thailand’s natural resources – including mangroves and coral reefs – it would also boost the economy. And it’s estimated that the boost could be as much as 7.8% compared to ‘business as usual’.

Thailand is not alone in that. The consultancy group Bain points out that Southeast Asia “has some of the world’s most valuable investable carbon stock”.

KAR WEE ANG Business Development Director, London Institute of Banking & Finance (LIBF) for Asia

Taxonomies will help find green assets But how can financial services firms know what investments are green? Thailand, like its neighbours Vietnam, Malaysia and Singapore, is producing a sustainable finance taxonomy. That will help its financial institutions to pinpoint what is green and what is not. It should also encourage investment – both domestic and foreign.

That investment will be needed. Thailand, for

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example, recently announced that it would pay out nearly US$5 billion to farmers who have been affected by floods, droughts and Covid. Without climate change that payout would, arguably, not have been so high.

Getting the risk/reward balance right Reaching net zero will mean a lot of work for banks.

Consulting firm Oliver Wyman, for example, estimates that around US$50 trillion in investments is needed to transition the global economy to net zero.

Regulators are putting in place rules to get banks to boost green investment and to manage the risks involved. That is both the transition risk and the physical risks that come with climate change.

Transition risks are generated by moving away from unsustainable assets, like investments in fossil fuels, to green investments. Those risks could include struggling to raise capital, or having to divest lucrative assets.

Physical risks to banks come from the challenges that countries like Thailand are already grappling with – the costs incurred by extreme and unusual weather events and changes to environment.

What are regulators doing to change the way banks work? The Thai government requires its banks to adopt “robust risk management frameworks that properly monitor, report, and verify ESG (Environmental, Social, and Governance) risks and opportunities.” Vietnam’s regulator has a similar approach.

The banks themselves also have a say in how risk management will develop. The Thai Bankers Association, for example, is a member of the Sustainable Banking and Finance Network (SBFN), which includes 66 institutions – both banks and regulators – from 44 countries and covers 86% of the total banking assets in emerging markets. Those combined assets are worth a total of US$43 trillion.

The Sustainable Banking and Finance’s latest report looks at its members’ overall progress on implementing ESG risk management. Not all member countries of the SBFN include ESG risk management responsibilities in their national corporate governance codes, but it’s a growing trend amongst them.

The report notes that none of the SBFN members have been able to mainstream ESG practices yet because they don’t have robust data on how banks are changing their ESG risk management and performance.

That should be a wakeup call to all bankers in the region: the regulators are coming and they will want to know how you are managing ESG risk.

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