How financial firms can take climate action beyond CSR campaigns

EVENT COVERAGE: SAP VIRTUAL ROUNDTABLE How financial firms can take climate action beyond CSR campaigns

52% of banks now view climate change as a key emerging risk in the next five years, higher than 37% in the previous year SAP outlines three strategic imperatives for managing the climate crisis.

The worsening climate crisis is undoubtedly being felt across the globe. Sustainability drives are being thrown left and right by governments and businesses in every industry, even finance, to pitch in mitigating climate change.

In a virtual roundtable, hosted by Asian Banking & Finance, SAP gave a closer look at how climate-related challenges hit financial institutions, as well as shared its expertise in managing climate risks with its technology and environmental, social, and governance (ESG) solutions.

Hadi Wijaya, financial services industry leader, South East Asia, SAP, said that for the first time the top five global risks are all related to climate change.

Hadi said that the growing concern amongst banks is evident as 52% now view climate change as a key emerging risk in the next five years, much higher than 37% in the previous year. Banks are also increasingly responding to demands around sustainability through corporate purposes.

Managing Climate Risk

In light of this, Hadi outlined three strategic imperatives for managing the climate crisis, identified by SAP – safeguarding the business from uncertainty, financing a green agenda, and focusing on the enablers.

He explained the first one is concerned about managing the financial exposure and protecting and preserving their business value.

The second look into ways in which financial institutions can tap into the opportunities in the green market; whilst the third is about building enablers, a key role of SAP.

“As digital solution providers for close to 50 years, we’ve been running the most critical business processes across the supply chain and industries,” he said.

“We enable them from the front-office operation, like in sales, marketing, customer experience, to middle-office, product management, and core banking, and also to the back-office operation like accounting, finance, risk, human resources, and procurement.”

Over 16,000 financial services companies, run with SAP and 97% of banks named in Forbes 2000 used the SAP in their system, as well.

SAP uses a holistic strategy, which it calls the Intelligent Banking Enterprise, to advise its clients. The strategy seeks to help companies digitise and integrate cross-company business processes, and address complex challenges in business, social, and environment.

It also provides a business technology platform for integration, innovation, and extensibility, and cloud infrastructure that allows banks to scale the system landscape.

“So overall, this holistic strategy helps our banking customers not only to manage climate risk today, or in the next 10 years, but also to deal with a broader disruption in the industry,” Hadi said.

Walking the talk

But this is just one of SAP key roles, as he had highlighted, the company is not just an enabler, it is also an exemplar.

He noted that SAP’s push towards sustainability started a decade ago, during which it launched greed cloud to power data centres, and zero waste initiatives amongst others.

Andrew Chan, PwC’s South East Asia Consulting Services Sustainability & Climate Change leader, observed “We’re seeing commitments from businesses’ realisation that we need to take more of a lead on climate change and societal issues. And what we’ve seen in the region in particular, are paradigm shifts,” he said during the roundtable discussion.

As a value integrator, PwC’s Sustainability practise helps organisations plan, source, deliver, finance and measure the wider impact of products and services. PwC uses a spectrum that scales the sustainability ambition of financial institutions in their ESG journey, beginning with sceptics, pragmatists, strategists and idealists.

For the first time, the top five global risks are all related to climate change

CHING-FONG (CF) ONG

Managing Director and Senior Partner, SEA Leader for DigitalBCG Boston Consulting Group

SUMIT KUMAR

Managing Director and Partner Boston Consulting Group

ONG, KUMAR

The next pedestal of the payments war for banks and FIs: Buy now pay later

There have been significant moves in this space in recent years, with major BNPL provider Klarna recently valued at over US$45b, Australia’s Afterpay purchased for US$29b by Square, and major FinTech firm PayPal also entering the space. BNPL is expected to represent 12% of all e-commerce sales across Asia Pacific (APAC), North America, Europe, and Australia by 2023, up from 2% today. 80% of all BNPL transactions will be completed online in mature markets, with a doubling of growth for in-store BNPL purchases. With low penetration today due to lack of customer awareness and limited availability of financial providers, APAC is expected to be the next growth story with a remarkable 145% CAGR projected to 2023. Banks are being left behind by fast-moving FinTechs, and it’s critical they prepare for the second war on payments—BNPL.

Buying in to BNPL in Southeast Asia

The region’s retail sales market is expected to expand from US$374b to US$457b by 2023, with online sales increasing 44% annually to represent 20% of total sales by 2023.

With attractive market demographics and early signs of accelerating adoption it’s expected that Southeast Asia’s addressable market will be as high as US$27b by 2023, with a projected BNPL net revenue of ~US$1.5b. Market penetration of 6% is projected to be double that of the wider APAC region. In countries like Indonesia, surveys show a whopping 78% of respondents expressed familiarity with BNPL and its advantages.

Funding in Southeast Asia is already outpacing APAC, driven by investments in Singapore and Indonesia. Southeast Asian BNPL FinTech companies attracted 30% of total APAC BNPL funding between 2016-2020, 10% of the global total. That investor confidence is seen in companies such as Akulaku, FinAccel, and Redivo.

Mature BNPL markets such as Australia offer valuable insight into Southeast Asia’s potential. Rapid market growth has seen an estimated 20% of Australians using BNPL, and approximately 60% of merchants offering the service.

The regional landscape is relatively fresh in Southeast Asia, but FinTechs such as Atome and Hoolah are expanding to target both offline and online merchants, enjoying rapid growth in transaction values. Open ecosystem players such as Akulaku and a Traveloka-Bank BRI partnership are exploiting BNPL services as part of evolving ecosystem offers. E-commerce players like Shopee are introducing BNPL as part of standard features. Meanwhile, credit card companies and banks are exploring partnerships with winners from other markets such as Pine Labs.

Key areas of BNPL to watch

Establishing the right model will require a strategy that reflects the local landscape and rapidly evolving market conditions.

Offline sales still represent the majority of sales volume, thus scaling together with offline merchants is key. Challenges such as integration hurdles, secure customer information, educating customers in-store, and maintaining positive user experience during lengthy application processes must also be overcome.

Regulation is also likely to tighten, as early plays by technology companies increasingly come under the review of financial authorities. Consumer groups in Europe and Australia are already pushing for greater oversight of unregulated BNPL lenders around AML, KYC checks and fraud protection.

In addition, BNPL players will have to develop sustainable methods for revenue generation—while merchant-linked fees are a good way to start, we believe such fees will reduce over time. Players need to build consumer financing leveraging BNPL transaction data, coupled with value-added services such as advertising or bill payments, for a long-term model.

The success of BNPL in India offers some interesting lessons on this evolution, with four broad operating models emerging in the market.

Pureplay FinTech players such as Zest are targeting underbanked segments, serving customers without credit cards with rapid-turnaround approvals. Customers opt in at online or offline checkout pages, with credit risk analysis undertaken by lending partners.

Consumers opt in to BNPL through the inecosystem checkout page. Point-of-sale (POS) aggregators such as Pine Labs leverage in-store POS systems to drive BNPL growth. Pine Labs operates on over 450,000 POS systems across 150,000 merchants, backed by 35 banking partners. Customers can conveniently sign up to BNPL at the point-of-sale, with credit risk undertaken by partner banks.

IRENE XU

Open banking set to transform the finance sector

IRENE XU

Director of Banking Practice, SAS There is a revolution going on today in the banking industry. Those bastions of privacy and money management are doing the unthinkable - with consent, they are sharing their customer data with approved third parties. In the past, banks jealously safeguarded their clients’ information. That is what clients expected of them, as well as it being a regulatory obligation. Today, they are making this information available to other players in the financial services arena, creating an unprecedented financial ecosystem built around making their Application Programming Interfaces (APIs) available to approved third parties.

Known as “Open Banking”, this is a global movement, supported by governments and regulators worldwide. This huge, transformative shift is radically changing the way banks approach business models for continued growth, customer’s choice and convenience, and financial inclusion under the digital economy.

Open banking enhances customer service

The collaboration brought by Open Banking allows banks and financial institutions to gain more insights by securely sharing customer account or transaction data with third-party stakeholders – with customers’ permission. This can be used to provide more personalised recommendations to customers based on real-time, data-based insights. For consumers, it provides more options in making payments with improved convenience and benefits – for instance, by enabling them to easily keep track of their balances and outgoings.

There’s added value for third parties too. For example, as merchants process the transactions there will be no interchange or scheme fees, or chargebacks. Not only does this make the processing seamless and quicker, but it also lowers the overall operational cost for the business. Some of these savings can be translated to better pricing for consumers too, so it’s Win-Win-Win for all in this new ecosystem.

The third-party service providers accessing the customer’s data with their permission could include insurance companies, utilities, retailers, e-commerce marketplaces or even travel firms and food delivery services. Consumers can easily check how much they spend on groceries, make a comparison of health insurance costs, and review their car loan or mortgage payments. They can personalise price comparison websites and easily make direct payments from their bank account.

Benefits for SMEs

Open banking enables businesses to improve and speed up their operations. Small and medium enterprises (SMEs), for example, traditionally face extreme difficulty in accessing finances. SMEs are often associated with higher risks, insufficient credit history, lack of collateral, and higher transaction costs — about 50% of small business loans get rejected. Not only that, the lending process is rather laborious and time consuming, thus it is a lower priority for the bank but a huge pain to the SMEs.

Now, the AI that powers open banking will bring significant changes that deliver distinctive customer experiences. Together with the use of APIs and automation, banks can aggregate all the information that exists on the applicant’s banking history, from all sources, and improve their credit assessment. The turnaround time will shorten from two to three weeks under the legacy process to as little as two to three days. An example is the “Mizuho Smart Business Loan” services for SMEs, the first of its kind in Japan market.

Advantages to banks

For banks, Open Banking means gaining access to incremental data about their customers and working in partnership with players in this new ecosystem. This will tremendously improve their ability to deliver accurate credit assessments, offer more risk-based pricing at a personalised level, design better products and services, reduce false positives in fraud detection and deliver frictionless customer experience. The key is analytics and AI.

The trend is global, but it is being activated in different ways. In the EU, UK, Korea, Australia and India governments are looking to stimulate competition by mandating banks to open up their troves of account data to other companies. In the US and China, the movement is market-led, with companies setting up open banking relationships among themselves.

Singapore is following a blend of these two models, under the regulation of the Monetary Authority of Singapore (MAS). MAS is encouraging banks to open up and expand their data and services through APIX, an API guidance and collaboration platform. This is intended to pave the way for more openness in the financial services sector. Singapore banks are eagerly embracing the opportunities, actively using APIs to become an integral member of third party ecosystems or building their own marketplaces.

BRENDAN CARNEY

Accelerate the digital banking evolution and move ahead of the curve

BRENDAN CARNEY

CEO, Citibank Singapore The roadmap to success for many organisations has been defined by digital transformation. Since the COVID-19 crisis started, organisations across many industries had to accelerate and redefine their plans to keep pace with the dramatic changes in the business landscape.

In a recent KPMG report, a global survey of 780 leaders across 12 sectors showed that 67% of leaders had accelerated their digital transformation strategy, and 63% had increased their digital transformation budget.

The pandemic not only converted many non-digital natives to digital users, it also spurred existing digital users to deepen their engagement with e-commerce, mobile banking, and super apps or ‘lifestyle platforms’.

In banking, the digital revolution is not coming, it is already here. At Citibank Singapore each day, for every customer who visits one of our physical locations, we see 250 customers visit our mobile app. And less than 1% of our financial transactions take place in branches today. The dominant channel for customer interaction today is mobile banking, period.

Leveraging data to hyper-personalise the mobile banking experience for our customers, offering services and solutions in an intuitive, contextual, and secure manner, is a key ongoing challenge for all banks.

Future of banking

So, what is the future of banking? One proposition is that embedded finance is the future. Embedded finance is the increasing trend where non-banks, say telcos or e-commerce companies, provide financial services (payments, lending and insurance) to their customers through apps with which they already actively engage.

Fintechs and big techs through their superapps are creating “sticky” platforms that hold customers’ time and attention and have the power to integrate products that benefit its community as well as its core business. The big question here is that of trust: it’s one thing to fund a small amount of money to a digital wallet for convenience, but it’s quite another to hand over your life savings to an unproven digital player with no track record. One option banks have is developing Banking-as-aService (BaaS) business lines. This means either white labelling or co-branding financial products that can be bundled for non-banks to embed and distribute in their apps.

In response to embedded finance, some banks may choose to continue leveraging on fintechs that have reached a ubiquitous status in the lives of consumers to offer more financial products and services. To stay ahead of the curve, financial institutions must look deeper into the behaviour of the new digital customer, and adapt quickly to cater to their needs. According to McKinsey, highly personalised customer experiences drive up both customer loyalty and the top line. In their May 2021 report on “Building an AI Bank of the Future”, it showed that Artificial Intelligence (AI) and analytics could provide up to $1 trillion dollars in added value a year for banks.

‘Staying ahead of the curve’

Customer behaviour has consistently shown us that integration into ecosystems or platforms continues to be one of the enablers to riding the next digital wave. The pervasive use of Application Programming Interfaces or APIs, which allows various applications to communicate with each other, is another enabler of change. Banks with developer portals, tap on the greater developer community to consume their APIs and improve on products and services. But the ecosystem play doesn’t end there. A robust API strategy coupled with open microservices architecture will help banks evolve into more agile organisations that are able to respond to customers’ pain points with speed and simplicity.

In line with this, delivering best-in-class products and services through partnership ecosystems and a mobile-first strategy became an integral part of Citibank Singapore’s digital transformation effort. Many years ago, the bank pioneered card partnerships with SMRT, Lazada and M1, and today, we continue to curate meaningful experiences for customers particularly in the payments, lending and investments space. With the Citi Mobile® App, we ensure that offers are tailored to the individual’s needs based on their product holdings and profiles; providing customised information on investments, AUM top up, insurance, cards or payments by instalment. Currently, about 75% of our customers engage with us on the mobile app and our overall digital net promoter score increased by close to 10% compared to the previous year.

For banks to win in a new world that is being shaped by consumers who want financial services to be simpler, smarter, and more personal, they need to operate at the speed of their customers’ increasingly digital lives.