Asian Banking & Finance (July-Sept 2016)

DISPLAY TO SEPTEMBER 30, 2016

Philippines In Focus:

Domestic vs foreign banks foreign entrants now account for 8.2% of system-wide assets. should local banks be worried?

+

how can your bank prevent the next bangladesh-like cyber heist? p22

which bank is getting one in five card signups online? p26

beyond apple pay: which new digital wallets are gaining ground in asia? p28

Gilda e. Pico CEO Land bank of the philippines

Amando m.

Tetangco, Jr. Governor Bangko Sentral ng pilipinas

I want solutions that aren’t so one-size-fits-all.

Try this on for size.

Every consumer has different preferences. Every financial institution has different business objectives. That’s why Diebold believes in FITbankingTM — providing services nimble enough to FIT your vision and experiences flexible enough to FIT your consumer’s aspirations.

Regardless of the circumstance, we can help you find the right FIT.

WHAT DOES IT TAKE TO CREATE FULLY INTEGRATED AND TRANSFORMATIVE BANKING EXPERIENCES? FIND OUT AT DIEBOLD.COM/FITbanking.

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In this issue, we put a spotlight on the Philippine banking sector. We interviewed Amando M. Tetangco, Jr., Governor of the Bangko Sentral ng Pilipinas (BSP), and he shared valuable insights on the country’s struggle with financial inclusion, as well as his achievements, future plans, and the philosophies he lives by as he helms the BSP.

Tim Charlton

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Gilda E. Pico, CEO of Land Bank of the Philippines, also talked about the recent projects they have undertaken to address financial inclusion in the country. She also highlighted her achievements after being with the bank for 35 years.

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Philippine banks have been engaging in numerous mergers and acquisitions, and consolidation will play a major role in shaping the Philippine banking sector in the coming years, according to analysts, which leads to questions on whether it can also alleviate the country’s poor financial inclusion. Thought leaders from EY also gave their take on the country’s digital challenge.

In the retail banking sector, we learned that personalised customer experience is becoming a vital concern for banks, and they are turning to emerging fintech firms to gain an upper hand. Instead of substituting branch experience, digital banking and fintech are expected to complement the nature of branch interactions.

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

ASIAN BANKING AND FINANCE | SEPTEMBER 2016 1

CONTENTS

20

country report Domestic vs international banks: Who’s winning in the Philippines?

FIRST 08 Will Brexit force banks to relocate their HQs

09 ​Which fintech companies are

striking deals with Asian banks?

10 Divergent policies threaten ASEAN banks

EVENT COVERAGE 24 Will Indonesia’s massive digital banking appetite trigger branch closures?

Published Quarterly on the Second week of the Month by Charlton Media Group Pte Ltd, 101 Cecil St. #17-09 Tong Eng Building Singapore 069533

2 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

30 Wincor Nixdorf puts a spotlight on the future of cash and digitalisation

22

vendor view How can your bank prevent the next Bangladesh-like cyber heist?

26

sector report As digital channels rise, bank branches pivot in purpose

SECTOR REPORT 28 Is Asia at the dawn of a digital wallet age?

CEO INTERVIEW 12 Eight philosophies that Governor Amando Tetangco, Jr. lived by during his 12-year term

16 Land Bank CEO Gilda Pico aims to boost financial inclusion in the Philippines

COMMENTARY 32 The digital challenge from a Philippines banking perspective

For the latest banking news from Asia visit the website

www.asianbankingandfinance.net

News from asianbankingandfinance.net Daily news from Asia most read

LENDING & CREDIT

Risks mount for Chinese banks on back of rising investments in loans and receivables Chinese banks have developed a strong appetite for investments in loans and receivables, which boost earnings and capital generation in the short-term, according to Moody’s Investors Service.

RETAIL BANKING

India’s bank consolidation bid presents more risks than benefits The Indian Government has recently rolled out a proposal to consolidate the country’s public sector banks in a bid to cut costs and improve corporate governance across the banking system.

4 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

LENDING & CREDIT

Hong Kong banking system weighed down by steep borrowing costs Hong Kong’s banks will face deteriorating operating conditions over the next 12-18 months on back of higher borrowing costs and the steady increase in nonperforming loans, according to a report by Moody’s.

LENDING & CREDIT

Indonesia to inject another USD750m in micro-loan subsidy programme With an additional IDR10trn (USD750m) allotted for the programme, Fitch Ratings says that the initiative will help support loan growth in the face of weaker consumer and business confidence.

FINANCIAL TECHNOLOGY

DBS pilots cloud-based productivity tool for employees DBS will adopt Office 365, Microsoft’s cloud-based productivity tool. The bank is targeting for its entire workforce to make a shift to cloud over the course of the year, when all 22,000 employees across 18 markets will be equipped with Office 365.

RETAIL BANKING

Will Singapore banks survive another global economic crisis?

Singapore’s banking system will stay resilient even in light of escalating economic turbulence, Minister for Trade and Industry Lim Hng Kiang said in a speech to the Association of Banks in Singapore (ABS).

from a local bank to a regional powerhouse

2007

Launching the new identity and announcing the expansion plan

1977

Inception

1997 Kuwait Projects Company (KIPCO) the largest shareholder

For more information call (+965) 1804080, or visit www.burgan.com

Burgan Bank Group: Kuwait - Turkey - Algeria - Iraq - Tunisia - Lebanon

Burgan Bank, driven by you.

Presence

Number of branches

Burgan Bank Group Subsidiaries

28

Burgan Bank Kuwait

Entering the Iraqi Market

2009

Entering the Lebanese Market

Entering the Tunisian Market

Entering the Algerian Market

2009

2010

2010

56

Burgan Bank Turkey

51

Gulf Bank Algeria

Entering the Turkish Market

2012

Regional Financial Powerhouse in 6 countries with more than 180 branches

2016

42

Bank of Baghdad

3

Tunis International Bank

a journey of achievements

Aligned with Burgan Bank’s vision for leadership in the banking industry both locally and regionally, and through a focused execution of its strategy of diversifying into faster growth markets, the Group enjoys a strong presence in 6 countries with a robust network of more than 180 branches in Kuwait, Turkey, Algeria, Iraq, Tunisia and Lebanon.

local bank

Burgan Bank

regional group

Thought leadership article

Graduate from omnichannel theory to REAL business benefits with HTML5

With the VISTA™ multi-vendor terminal software, financial institutions can create a seamless omnichannel experience for clients. is good news for those FIs as they can leverage existing resources to integrate the ATM channel into more coordinated crosschannel experiences using HTML5.

Frank Cooke, product manager

Diebold, Incorporated

T

o many in fintech, omnichannel is their “white whale.” It must be obtained at all costs, but for many financial institutions (FIs) it’s an abstract futuristic vision – not something they can currently deliver to realize tangible business benefits. Hyper Text Markup Language (HTML) 5 is a building block that can enable omnichannel experiences TODAY. HTML5 is the global standard for presenting on-screen content because it is a language that can be shared across platforms – online, mobile apps, ATMs, etc. And let’s face it, our society is heavily laden with screens. They are everywhere.

For FIs, screens are often the “face” of their brand and are their most valuable real estate where they succeed or fail on meeting consumer expectations for a consistent, intuitive and productive experience.

There has been a strong focus from FIs on web and mobile banking for years so there is a good chance they already have resources within their organization using HTML5 for those digital channels. This

6 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

Build Omnichannel Assets… And Do It All While Reducing Costs Historically, one of the greatest barriers to delivering a consistent and persistent user experience across various delivery channels is the challenge of integrating the various disconnected software platforms and technology standards. The selfservice channel has traditionally been the most isolated from branding and tactical updates applied to online and/or mobile platforms.

In the past, if an FI wanted to recreate the look of, say, a mobile interface on the ATM channel, they would have to first build the mobile channel and then start all over again to do it on the ATM. And all that building and rebuilding took up time and ate up budgets. Let’s discuss how a FI can leverage HTML5 to drive efficiency and take tangible and realistic steps towards creating a true omnichannel consumer experience – both improving the ability to manage the channel in a cost-effective manner and providing consumers with advanced self-service interactions.

With HTML5 FIs can build an asset once and share it across channels. That delivers tangible benefits to operational efficiency and to the consumer experience TODAY.

graphically-rich experiences like touch gesturing and drag-and-drop capabilities.

HTML5 empowers consumers to seamlessly switch from channel to channel with a common UX. This will help move more transactions to the self-service channel – ultimately allowing consumers to start a transaction on their mobile and finish it at the ATM though simplified pre-staging steps on web and mobile channels.

Simply put, from an ATM operations perspective, HTML5 is a launch pad to create content and maintain a uniform brand – across a variety of channels – and it’s more efficient, costs less and enables faster updates.

But … How? If you’re ready to leverage HTML5 to deliver a consistent, omnichannel user experience while reducing costs at your self-service channel, you need the software to enable these improvements.

VISTA™ multi-vendor terminal software has always been designed around openness, flexibility and interoperability— even before HTML5 existed.

Additionally, VISTA provides full flexibility in terms of hardware platforms and messaging protocol so that transactions can be moved off the traditional switches, bypass that switch and go back to the core systems, enabling more integrated transactional capabilities while reducing per-transaction costs.

Achieve Cross-Channel Consistency to With HTML5, the question is no longer Enhance the Self-Service Experience if we can create omnichannel experiences, With the building blocks of shared, but how much advanced UX “VISTA provides full more efficient can components in flexibility in terms of we make those place, FIs can now meet the hardware platforms experiences.

Whether you want consumer’s vision and messaging to talk HTML5 or of omnichannel. protocol.” want an overview Consumers don’t of what Diebold’s software portfolio view their FI in channels — they expect offers your business, let’s talk. From selfconsistency across the board whether at service application software to marketing the ATM, online or on their phone. software, we have the solutions to meet Use HTML5 to create a fresher, smarter, the evolving demands of today’s selfmore engaging experience at the selfservice network. service device with a tablet-like interface

By Frank Cooke, product manager that consumers expect today. This includes

Thought leadership article

Improve visibility and uptime throughout your multi-vendor ATM network Diebold’s hardware-agnostic, plug-and-play software solutions allow banks to control their ATM network.

R

emember life before the internet and smartphones? We looked up phone numbers in phone books, and had to rely on paper maps and gas station attendants when we got lost on trips.

Connectivity has changed our lives in many ways, most noticeably in bringing information to our fingertips. It’s as if the world has become a smaller place and we have access to vast amounts of information to make even trivial decisions, like where to eat or which socks to buy. Now think about your ATM channel. Is it still kind of … sort of … stuck in the pre-internet, pre-smartphone era?

• Do you have clear visibility into your entire ATM network? What’s out there? What’s going wrong?

• Can you connect your ATM channel, mobile, digital, in-branch and back-end processes?

• Are you able to reach the right consumers at the right time through the ATM, and do it in a smart, personalized way?

Your consumers are visiting an ATM an average of seven times each month.

It’s a critical touchpoint you can harness to grow revenue and drive efficiencies – if you have the visibility and capability to do so.

Of course, that’s a big challenge, right?

The ATM channel was complicated to start with. And now, your network has probably gotten way more complex, and you’re operating legacy equipment, varying software platforms, mixed fleets and myriad vendor

relationships. There are many moving parts and you find yourself constantly surprised by what’s out there.

Our perspective at Diebold is that you can’t fix what you can’t see, and you can’t change what you don’t control. That’s why our multivendor, hardware-agnostic software solutions are designed to give you the access you need to see your network more clearly, and the ability you need to control your network more efficiently.

If you could easily do more with your ATM network, what would you do first?

Consumers have already expressed their wish list: Most popular transactions/integrations desired by consumers: • 61% Bill pay at ATM • 56% Cash withdrawals in multiple denomination • 46% Real-time transactions (e.g. instant credit to account on deposits) • 42% Check cashing at the ATM You probably have your own wish list too; it might include things like …

• Limiting withdrawal amounts at ATMs during high-traffic time periods to reduce the chance of running out of cash.

• Changing the messaging at just a few ATMs for just a few days.

• Seeing a real-time view of how much hard-drive space is available on a subset of your self-service terminals before you make software updates.

•Marketing to select consumers – including off-us visitors – in an environment where they’re already in a banking mindset.

•More consistency across your platform.

If you were able to activate on just a few, prioritized items on these wish lists, how would it differentiate your brand, improve the consumer experience and drive efficiencies in your back-end operations? Rather than a cost, your ATM network may start to become a valuable tool in generating revenue for your organization.

And the fact of the matter is, you don’t have to make huge changes to implement some of this functionality. With just incremental adjustments or new applications, you can create real change and enhanced omnichannel connectivity in your ATM network.

Diebold’s COMMANDER™ software suite offers a modular approach that easily integrates into a long-term retail banking strategy; it consists of a series of plugand-play tools that give you immediate, understandable access to ATM marketing capabilities and operational information.

By Cijal Raj, software product manager

“With just incremental adjustments, you can create enhanced omnichannel connectivity.”

ASIAN BANKING AND FINANCE | SEPTEMBER 2016 7

FIRST Meeting the IFRS9

Banks in Asia Pacific are starting to feel the pressure as the global deadline set for IFRS9 implementation draws near, but a recent survey reveals that there is still a lot of work to be done. According to FICO, IFRS9 is the new International Financial Reporting Standard that will require banks to adopt a forwardlooking loss model on either a one-year or lifetime horizon for all accounts.

IFRS9 will replace International Accounting Standard 39, which recognises loan losses only when the credit loss has already happened. Under IFRS9, credit losses will have to be estimated.

Are the banks ready yet?

According to a survey of risk officers from leading APAC banks at the 2016 FICO CRO Forum, only 56% of respondents believed banks in the region will meet the January 1, 2018 deadline.

FICO notes that countries such as Singapore, Hong Kong, and Australia have indicated clear intentions to meet the deadline and full implementation by 2018.

Moreover, despite pressure to meet the deadline, only 50% of respondents have implemented models that are compatible with the requirements of IFRS9. The banks identified the most challenging part of IFRS implementation as the need to better align risk and finance data.

In a separate study, Deloitte reported that banks require three years to implement IFRS9, on average.

The survey further reveals that 88% of respondents anticipated that IFRS9’s prescribed calculation of impairments could result in up to 30% of their retained earnings being set aside for future losses. FICO surveyed 32 risk officers from 21 leading APAC banks at the CRO Forum.

8 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

Where to next?

Will Brexit force banks to relocate their HQs?

I

f HSBC and Standard Chartered had previously sealed the possibility of moving their headquarters out of London, then the recent shockwave from the Brexit vote – the United Kingdom’s referendum vote to leave the European Union (EU) – may have swung open those ironclad doors, according to some analysts.

“In February this year Douglas Flint, the chairman of HSBC, shot down the possibility of relocating the bank’s headquarters back to Hong Kong under the assumption that the United Kingdom (UK) would vote to remain in the EU in the June 2016 Brexit referendum,” recounts Arnie Cho, senior analyst at Verdict Financial.

“Additionally, Standard Chartered, another bank with a strong presence in Asia Pacific, had previously quelled rumors of its relocating away from the UK back in August 2015. However, with the result of the Brexit referendum, things may take a different direction,” he adds.

Cho reckons that HSBC and Standard Chartered might consider relocating their headquarters, especially if share prices fail to recover from the recent nosedive resulting from the Brexit vote.

But for Chua Han Teng, Asia analyst at BMI Research, the

HSBC and Standard Chartered might consider relocating their headquarters, especially if share prices fail to recover.

possibility of HSBC or Standard Chartered relocating their headquarters to Asia Pacific is “unlikely” despite both banks having a strong presence in the region, as he expects London to show resilience.

“London is likely to remain a top tier global financial centre. The United Kingdom will continue to have one of the most competitive business environments in Europe, and indeed the world, despite the Brexit fallout,” says Chua.

Chua warns though that Brexit will likely act as an additional drag to the future profitability of HSBC and Standard Chartered, which are already limping due to the slowdown in China. This gloomy profit forecast comes despite the fact that Europe, including the UK, accounted for a smaller share of their assets and their operating income than their Asian operations in 2015.

There is also a question on whether the Brexit result will hurt not only UK banks but also Asia-Pacific (APAC) banks, but Fitch Ratings reckons that Brexit has no immediate direct ratings impact on APAC banks.

“Asian market reaction has been far more muted than in Europe,” according to the credit ratings agency, further noting that direct financial linkages are limited as well, and so the risks are more indirect with respect to Asia’s banking systems.

“Singapore and Hong Kong, as offshore financial centres, are more significantly exposed relative to the size of their economies, but these are mainly local and regional claims from UK subsidiaries and unlikely to see significant withdrawal as a result of Brexit,” says Fitch Ratings.

Standard Chartered’s 2015 exposure by categories (% of total)

Source: BMI, HSBC & Standard Chartered 2015 Annual Reports

FIRST Fintech investment in Asia reached a new high of US$2.6b in the first quarter of 2016.

Banks now partnering with fintechs

Which fintech companies are striking deals with Asian banks?

T

he dogged rivalry between banks and fintech firms seems to be losing steam in favor of a flourishing friendship. As fintech investment in Asia reached a new high of US$2.6b in the first quarter of 2016, analysts attribute the surge to elevated levels of mutual attraction as banks choose to collaborate rather than compete with fintech firms.

Earlier this year, Standard Chartered Private Equity and Goldman Sachs invested US$28m in Vietnam-based fintech startup Momo, which is an e-wallet and payments app that allows users to pay online and transfer money to

each other digitally. “In Hong Kong, we have launched the SuperCharger FinTech Accelerator Programme, in partnership with Baidu and TusPark Global Network, with the aim of helping fintech companies grow in Asia,” notes Chris de Bruin, global head of retail products and digital for Standard Chartered.

Meanwhile, Citi created a new unit called Citi FinTech, which leads the bank’s collaboration with fintech startups through the Citi Mobile Challenge, a hackathon series scouring the world for ideas to incorporate into Citi’s mobile banking apps. “Since its inception

just over 18 months ago, the Citi Mobile Challenge has visited four continents, including Asia. The program has attracted entries from over 6,500 innovators,” adds Felimy Greene, Citi’s MD and regional head of customer franchise.

Turkish Economy Bank is also collaborating with local fintech firm Metamorfoz for the integration of contactless payment services.

“The reality is the banks generally have three options when it comes to fintech: build their own proprietary technology, acquire a relevant fintech company in order to gain access to their technology, or partner with a fintech company to identify and achieve synergies,” according to a report by KPMG. For fintech firms that choose to compete with banks head on, their digital expertise and advanced technology have helped them carve out a niche, but it is a stretch to think that fintech will be able to completely displace banks, says Moody’s.

Quarterly global fintech financing trend VC-backed fintech companies vs. overall fintech investment* Q1’15 - Q1’16

Source: The Pulse of Fintech, Q1 2016, Global Analysis of Fintech Venture Funding, KPMG International and CB Insights (data provided by CB Insights) May 25th, 2016.

The Chartist: Hong Kong banks’ asset quality feared to deteriorate The next 12-18 months will be challenging for Hong Kong banks, given the risks from rising delinquencies, according to Moody’s Investors Service. “Special mention loans are loans that are less than 90 days overdue, and face a high probability of turning into non-performing loans, based on historical patterns.”

“Leading indicators support our view that the banks’ asset quality will deteriorate. Most of the forwardlooking indicators that we track— including: 1) the residential property price index; 2) the office price index; 3) the export volume index; and 4) the purchasing managers’ index, are pointing towards higher NPLs.”

Housing price index and mortgage delinquencies

Source: Rating and evaluation department Hong Kong monetary authority

Office price index and overall loan ratio

Source: Census and statistic department Hong Kong monetary authority

ASIAN BANKING AND FINANCE | SEPTEMBER 2016 9

FIRST

Divergent policies threaten ASEAN banks

Online hiring rises in the Philippines

T

he word “normal” has starkly different meanings for the world’s two largest economies, and ASEAN banks will bear the brunt of divergent policies from the United States and China. “ASEAN countries are caught between divergent normalisations of bipolar extremes between the US and China. Higher US interest rates would trigger capital outflows and put further strain on asset quality. Slower but sustainable growth in China’s ‘new normal’ would drag GDP growth of ASEAN countries lower by up to 1ppt,” according to UOB Kay Hian.

The report notes that the divergence between US and China will result in net interest margin (NIM) compression for regional banks, as financial institutions grapple with shrinking loan demand and deteriorating asset quality. “We expect NIM to compress by a severe 10bp for Malaysian banks in 2016 due to competition for deposits. In Thailand, banks have cut lending rates by 25bp since mid-Mar 16 to ease the pressure on the corporate sector, which would result in NIM compression of 10bp this year. The Indonesian government has demanded that banks lower

China’s ‘new normal’ drags ASEAN countries’ growth

lending rates to the single digits and NIM is expected to erode by 100150bp over the next three years. NIM compression would result in lacklustre growth for net interest income in Malaysia, Thailand and Indonesia,” says UOB Kay Hian.

In terms of individual countries, UOB Kay Hian expects Singapore banks to benefit from higher US interest rates and a recovery in Chinese trade loan demand.

Meanwhile, Malaysian banks will grapple with rising credit costs on the back of mounting bad loans, while Thai banks will struggle with weak domestic consumption and lower lending rates.

ASEAN countries are caught between divergent normalisations of bipolar extremes between the US and China.

Bank Watch

Siam Commercial Bank targets first branch in China At a time when other Asian lenders are keeping a lid on their regional growth plans, Siam Commercial Bank is firing up its expansion engines and is targeting to open a branch in China by 2017.

Kamalkant Agarwal, head of international banking at SCB, told Asian Banking and Finance that the bank is in discussion with the China Banking Regulatory Commission (CBRC) in its bid to open its first branch in the country.

“We believe that China does have some issues but they are fully capable of dealing with them,” Agarwal said. “While growth has slowed down, it is still growing over 6.5% which is considered very good.” The bank will target outward foreign direct investment (FDI) from China into Thailand and the Greater Mekong Subregion (GMS). He added that the bank is also keen to expand into other ASEAN markets, including Myanmar.

10 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

Kamalkant Agarwal, head of international banking at SCB

If there is one market that remained unfazed by the current economic climate, that would be the Philippine banking, financial services and insurance (BFSI) industry. The country reported the strongest growth in the online hiring of banking and finance professionals between May 2015 and 2016, according to the latest Monster Employment Index (MEI) report.

The Philippines registered a 28% year-over-year growth in BFSI online hiring, up from the 19% year-over-year growth in April. The industry is also among the sectors seeing the strongest growth in the country.

On the other hand, Singapore reported an -8% year-over-year decline in online hiring, falling further from the -3% year-overyear recorded in April. The sector is the worst performing sector in the market.

Steepest demand growth The MEI measures online job hiring activity monthly, recording the industries and occupations that show the highest and lowest growth in recruitment activity across Singapore, Malaysia and Philippines. Hiring trends are also reflected in the overall demand for Finance and Accounts employees in the Southeast Asia region.

“The Philippines reported the steepest growth in demand, at 19% year-over-year.

“The Philippines’ growth in online hiring in the BFSI sector alone is a testament of its resilience towards economic threats. This is further supported by strong remittances from locals working abroad and a wellcapitalised banking sector,” says Sanjay Modi, managing director, Monster.com – APAC and Middle East.

Co-published corporate profile

The banking and payments potential of wearable devices

With wearable technology on a growth trajectory, financial institutions need to carefully consider the right approach to make the most of this innovation.

W

ith mobile penetration reaching critical mass in many markets, wearable technology is now on a growth trajectory. Wearables are becoming an integral part of how people live their lives, from how they exercise, to how they shop, to how they bank.

As wearable technology becomes more commonplace, extending feature-rich and easily accessible mobile banking and payment services to these devices is a natural evolution for financial institutions.

Approaching wearable technology While some financial institutions that place a heavy emphasis on technology may choose to invest in a standalone app for a specific wearable device, financial institutions should carefully consider if this is the right approach due to the required investment in time and resources. A more practical choice for many financial institutions may be to make a start by extending the existing functionality and convenience of the mobile channel to wearables – e.g. by enabling existing alerts to be delivered to these devices.

To better understand the potential of wearables for financial services, one must consider the unique attributes of the devices. Notably, more than 80 percent of today’s wearables are worn on the wrist.

An example of such a device is Apple Watch, which offers broad functionality, allowing users to check e-mail, load a boarding pass or even monitor their

account balance.

The small size of wearable devices can make it difficult to input information, which is why functionality delivered via wearables should focus on quick and simple actions. Wearables are an ideal conduit for actionable alerts, which enable the recipient to reply to trigger an action, such as replying “pay” in response to a bill notification alert.

This eliminates the need to input information on a tiny device and makes transactions from wearables much more practical. Voice commands are another way to make transactions from a small wearable more practical, although users, in public settings, have shown hesitation at using voice commands related to financial transactions. Wearables also have the potential to enhance the security of mobile transactions by using the device’s proximity to a specific mobile phone as a second form of authentication.

banking market, focusing on the mobile channel. Amid the launch of a series of mobile banking functionality, the bank made its Bualuang mBanking mobile application available on the Apple Watch.

Just as many individuals now access banking information on their smartphones, we expect the mainstream adoption of wearables to lead to similar types of usage. In addition, wearables have the potential to drive incremental usage of mobile payments. The more mobile-payment-enabled devices a consumer owns, and the more convenient they are, the more likely that the consumer will actually make a mobile payment. Wearables can also simplify the payment experience itself, as no complex instructions are required after the initial set up, enabling a more seamless payment experience that fits into people’s fast moving lives.

The Asia Pacific wearable technology market was estimated to account for 34.2 percent of global market share by Cisco. Based on this and the expanded functionality of wearables, we can expect that incorporating wearable technology as part of the mobile strategy will become an important consideration for many more banks in the very near future. By Rajiv Madane, Director, Product & Strategy, Core Banking, Risk & Compliance and Payment Networks, ASPAC at Fiserv

Wearable banking in practice The Asia Pacific market is making swift progress in developing the customer experience through this new channel. One such example is Bangkok Bank. The bank is taking a customer-centric approach to transform its digital banking products and services and drive innovation in Thailand’s

“The more convenient they are, the more likely that the consumer will actually make a mobile payment.”

ASIAN BANKING AND FINANCE | SEPTEMBER 2016 11

Amando M. Tetangco, Jr. Governor Bangko Sentral ng Pilipinas

Predee Daochai President Kasikornbank 12 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

CEO INTERVIEW

Eight philosophies that Governor Amando Tetangco, Jr. lived by during his 12-year term He also reveals three key achievements of the Bangko Sentral ng Pilipinas under his supervision.

B

eing the only person to have been appointed to serve for two terms, Amando M. Tetangco, Jr. has been the governor of Bangko Sentral ng Pilipinas (BSP) since 2005. Over the course of his career, Tetangco has managed to work towards delivering mandates of manageable inflation, a stable banking system, and inroads to financial inclusion. He has been recognized internationally as one of the best central bankers.

His term will conclude on July 2017, and on his last year as the governor, Asian Banking and Finance interviewed him to know more about his take on the latest trends and challenges in the country’s banking industry, his achievements, future plans, and the philosophies he lives by as he helms the BSP. ABF: What are the latest and most pertinent trends and challenges in the Philippine banking sector?

Despite the challenges, the Philippines’ banking system capped 2015 with increased resources, improved asset quality, and strong capitalisation, as it focussed on expanding its market reach to boost deposit-taking activities as well as enhancing corporate governance and risk management standards.

Some of the pertinent trends in banking include: (1) uneven economic growth and normalisation by the US Federal Reserve, (2) advancements in financial technology and cybersecurity requirements, (3) and changing market behavior.

On the uneven economic growth and US Fed’s normalisation, these have the potential to induce volatility in financial markets across jurisdictions.

Robust growth in some emerging markets, on one hand, and bleak prospects in some advanced economies, on the other, send mixed signals as to where the global economy is headed and, therefore, toward where monetary and other policy decisions in various economies are directed. Uncertainties, such as those created by uneven growth rates, are usual sources of financial market volatility.

Advancements in financial technology and cybersecurity enhance the efficiency and speed of delivery of financial products and services. Also, technology can be a catalyst for financial inclusion, as it helps extend the reach of financial products and services to unbanked or underbanked areas.

Nevertheless, the goal of accelerating financial inclusion through technology has to be carefully balanced with the need to uphold consumer protection.

With regard to changing market behavior, this is best exemplified by the demands of consumers, more so the millennials, to quickly access financial information, as well as to avail themselves of financial

products and services.

This trend has pushed banks to heighten their ICT capability in delivering products and services. Also, this has called on regulators to update policies imposed on banks and other financial institutions.

In the case of the BSP, the biggest achievement is its development into a good governancebased institution delivering the mandates of manageable inflation, stable banking system, and inroads to financial inclusion.

ABF: How can banks help increase the levels of financial inclusion in order to better serve the underbanked and the unbanked?

Banks play an important role in financial inclusion especially in countries like the Philippines where the financial system is primarily bank-based. Compared to other financial institutions that can only provide limited financial services (e.g., credit or money transfers only), banks can offer a wider range of financial products and services such as deposit, credit, insurance, investment, payment and remittance.

In fact, banks, particularly those situated in the countryside, are natural agents of financial inclusion considering their extensive physical reach. In the case of Philippines, banks can take advantage of their 10,710 offices and 17,314 automated teller machine (ATMs) in order to deliver financial services and to better serve the underbanked and unbanked segments of the population.

Banks can also partner with non-bank players to further increase access to financial services, especially in areas where it is not economically feasible to establish a banking office. For instance, banks can offer e-money and mobile banking services by partnering with a licensed e-money issuer or e-money network service provider. The BSP has been formulating market-based solutions and policies that will broaden the products and services that can be delivered in unserved/underserved areas and encourage financial service providers to serve these markets. Moreover, banking regulations are being enhanced to better serve the public and promote consumer protection.

ABF: What do you consider as your biggest achievements so far as the BSP Governor?

The biggest achievement for any agency head is to see the agency effectively fulfil its mandate. In the case of the BSP, the biggest achievement is its development into a good governance-based institution delivering the mandates of manageable inflation, stable banking system, and inroads to financial inclusion.

Keeping inflation manageable. The BSP has strengthened the inflation targeting (IT) framework of monetary policy, which entails thoughtful econometric modelling and forecasting, grounded market surveillance, and sound judgement. Since we’ve become more adept at IT, we have also become more effective in keeping prices low and stable.

ASIAN BANKING AND FINANCE | SEPTEMBER 2016 13

CEO INTERVIEW Making the financial system more inclusive.

Allowing more Filipinos to save, invest, and borrow for productive uses, as well as send and receive payments in a secure and efficient manner is a major goal for the BSP. And so in 2000, microfinance became a flagship program of the BSP. Banks were made to adopt appropriate credit risk management practices commensurate to their size, scale, and complexity.

At the same time, we reduced documentary requirements and allowed cash flow- and characterbased lending, as well as high-frequency amortisations to improve credit access. We balanced those with demanding timely loan reviews and loss provisioning, as well as with a mechanism for unregulated microfinance institutions to formalise into banks.

Now, over 170 banks deliver microfinance services to nearly 1.5 million micro entrepreneurs. Outstanding loans to these micro entrepreneurs are at P11.3 billion, a 333% increase from the 2002 levels of P2.6 billion.

Also, micro entrepreneurs have accumulated savings, which now stand at around P4.5 billion.

Inflation target band and headline CPI - Philippines

Source: Bangko Sentral ng Pilipinas

Following the global oil crisis in 2008, inflation has consistently been kept below the official ceiling set by the BSP even as economic growth rates stayed robust, averaging 6.2% from 2010–2015.

The BSP continues to improve the conduct of monetary policy. In June of this year, we launched the Interest Rate Corridor (IRC) system, under which the key policy rate and the rates imposed on other liquidity facilities of the BSP were tweaked so that the gap between the ceiling and the floor becomes narrower. The tighter “corridor” is seen to better influence money market rates to move closer to the BSP policy rate, thereby making the BSP more effective at managing liquidity in the economy.

Helping ensure stability of the banking system.

The BSP has adopted a risk-based approach to bank supervision. With it, the BSP does not only look at headline compliance with capitalisation requirements, but also at how banks conduct business. The idea is to give banks the freedom to engage in more lending and investment activities, but make sure they have the tools to keep their risk exposures manageable.

We have separate guidelines for managing operational, credit, information technology, liquidity, and market risks. Also, we have issued rules on good corporate governance, such as fit-and-proper rules for hiring bank executives, transparency rules in relation to products offered to customers, and rules covering DOSRI (directors, officers, stockholders, and related interests).

The BSP likewise has strengthened its ties with other financial regulators to ensure there are no regulatory gaps in the country’s financial system. We chair the Financial Sector Forum (FSF) and the Financial Stability Coordination Council (FSCC), which are also composed of other financial regulators in the country.

We are pleased to note that the Philippine banking sector has developed into one of the most resilient in the world. Capitalisation of our banks has stayed well above the 10% minimum regulatory requirement, settling at an average of 16.4% on consolidated basis for universal and commercial banks (UKBs) as of September 2015.

Loans continue to be healthy, with the outstanding loans of UKBs growing by 14.8% year-on-year to P5.15 trillion, even as their exposure to bad debts are kept minimal at a mere 1.7% as of end-March 2016.

14 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

Capitalisation of our banks has stayed well above the 10% minimum regulatory requirement, settling at an average of 16.4% on consolidated basis for universal and commercial banks (UKBs) as of September 2015.

ABF: What are your key business philosophies?

There are quite a number of business philosophies that I find useful as “captain” of the “ship” that is the BSP. But for the purposes of this interview, I can cite eight that are closest to heart.

First is commitment to mandate. In the case of the BSP, staying committed to its mandates sometimes entails execution of tough and unpopular initiatives and policies. We go through such difficulties, nonetheless, inspired by the fact that the realisation of our mandates ultimately benefits average Filipinos.

Second is expertise in the tools of trade. The BSP’s tasks of maintaining price and financial stability, as well as putting in place an efficient payments and settlement system, are complex. These tasks require proper and timely use of equally complex yet potent tools. In the effective delivery of the BSP’s mandates, in-depth familiarity with and expertise in the use of available tools, for me, are indispensable.

Third is delegation and trust in co-workers. I believe in the saying that two heads are better than one. Teamwork is always the best strategy for situations that call for solving complex problems. The BSP is fortunate to have a great pool of talent, aided in part by its training programs and knowledge management system. Given its crucial role in the economy, the BSP ought to maximise its rich human resources as it navigates toward its mandates.

Fourth is human resource development. How well an organisation performs is dictated by the individual performances of its people. And so in the BSP, we invest in the development of our people such as through various training programs and scholarships.

Fifth is internal communication and external coordination. Internally, a strong knowledge management system and enterprise-wide communication policy are being implemented and continually refined in the bank.

The BSP constantly engages its domestic

CEO INTERVIEW stakeholders, such as through conduct of industry surveys and consultations, gathering of feedback and issuance of reports on matters concerning central banking.

We also actively engage in policy dialogue with our counterparts in other jurisdictions as well as multilateral agencies like the IMF, BIS and the WB. Such activities have allowed the BSP to enhance the conduct of monetary policy, to issue relevant banking regulations, and to gather support from other institutions in pursuit of its objectives.

Sixth is compliance with laws and regulations.

Given the fiduciary role of banks, they are expected to observe extraordinary diligence in the delivery of their service, such as by complying with rules and regulations governing their industry. And the BSP, as their regulator, has to exemplify the highest standards of governance. Part of this is compliance with the letter and the spirit of pertinent laws and regulations.

Seventh is inclusivity. The BSP does not operate in a vacuum. To be a truly relevant institution, its work should have concrete benefits for the majority. As such, its conduct of monetary policy and bank supervision should not remain abstract, but should be meaningful for ordinary Filipinos.

Last is having a strong moral and internal compass, essentially integrity. As one goes through his day-today tasks, I believe that listening to and being guided by sound principles bring about meaning to the accomplishment of one’s goals.

ABF: What three goals are you focused on this year?

The BSP has its hands full this year with a wide range of initiatives, but to name just three, I will cite the following: (1) ensuring that the BSP’s mechanisms for surveillance of banks and other supervised institutions are up to date, (2) ensuring that the BSP effectively engages stakeholders, and (3) that the BSP, as an organisation, is well positioned to overcome challenges.

Ensuring up-to-date surveillance mechanism: This allows the BSP to effectively address risks to the stability of the financial system, even with unpredictable and complex challenges. For instance, the BSP has developed liquidity forecasting models that feed into the newly launched Monetary Operations System (MOS). The MOS is a web-based electronic platform that enables counterparties to participate in the BSP’s new auction-type deposit facilities under our newly-adopted open market operations framework, the Interest Rate Corridor System.

With its liquidity-forecasting tools, complemented by the MOS, the BSP is able to better manage liquidity in the economy, consistent with its mandate of price stability. The BSP likewise has various tools to better supervise the banking sector, consistent with its financial-system stability mandate. We already have a suite of stress tests to cover the traditional market and credit risks; we also developed the Real Estate Stress Test (REST), which measures the banks’ ability to absorb shocks from write-offs in their real estate

With its wide range of initiatives on surveillance, stakeholder engagement, and human resource development, the BSP is well positioned to continue effectively carrying its mandates of price stability and financial system stability.

exposures.

To help us better appreciate the movements of prices in the real estate sector, we also just recently released the Residential Real Estate Price Index (RREPI). The RREPI is one more tool that BSP can use to help flag to us potential packets of asset bubble formation.

The BSP has several other tools for surveillance.

Other examples include (1) the Early Warning Systems (EWS) on currency crisis, which uses select macroeconomic indicators to determine probability of a currency crisis; (2) the Philippine Financial Stress Index (PFSI), which uses data on bonds, foreign exchange, and equities market to determine stress in the financial system; (3) the Confidence Indices (CIs) for the business sector and for consumers, which show the level of confidence on the economy of households and enterprises; (4) the Senior Loan Officers Survey, which tracks bank lending trends; and (5) the Business Cycle Analysis, which indicates turning points of economic activity from expansion to contraction and vice versa.

Effective engagement of stakeholders: The BSP continues to strengthen ties with stakeholders. On the domestic front, our bank supervision committee regularly meets with 15 industry organisations. This allows the BSP to solicit inputs for rationalisation, if needed, of existing regulations and for crafting of new policies. We are reaching out to more Filipino households and overseas-Filipinos through the conduct of more financial literacy programs by the BSP’s Economic and Financial Learning Center and the Financial Consumer Protection Department.

On the external front, the BSP actively participates and holds chairmanship positions in international fora, such as the Steering Committee of the Alliance for Financial Inclusion, Bank for International Settlements’ Asian Consultative Council, Financial Stability Board Regional Consultative Group for Asia, and the BIS Meeting of Governors from Small Open Economies.

Ensuring the BSP is well-positioned to overcome challenges: The BSP invests in staff development. We have just rolled out a knowledge management portal, which allows easier knowledge sharing within the organisation. Also, we continue to offer development opportunities to our staff, such as in-house and external training, as well as scholarships.

The BSP aims to develop the management skills of its employees to go hand-in-hand with their technical skills. Our staff development programs address a common problem among technical institutions like any central bank, that of overlooking the need for management skills development.

With its wide range of initiatives on surveillance, stakeholder engagement, and human resource development, the BSP is well positioned to continue effectively carrying its mandates of price stability and financial system stability, as well as achieving a more efficient payments and settlements system.

For a full version of the interview, you may visit http://asianbankingandfinance.net/ ASIAN BANKING AND FINANCE | SEPTEMBER 2016 15

Gilda Pico CEO LANDBANK 16 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

CEO INTERVIEW

Land Bank CEO Gilda Pico aims to boost financial inclusion in the Philippines The bank invests heavily in alternative banking channels to better reach out to underserved areas.

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espite showing a laudable performance with a steady growth in assets, loans, deposits, and improved asset quality, Philippine banks are still facing the challenge of financial inclusion. The country’s geographic make-up and the persistence of infrastructure gaps hinder the accessibility and usage of bank financial products and services especially in the far-flung areas of the country, according to Gilda Pico, CEO of Land Bank of the Philippines, the fourth largest bank in the country by total assets.

“While financial inclusion has been institutionalized by the Bangko Sentral ng Pilipinas, bigger banks are not so keen in extending credit to the unbanked and underbanked sectors of the economy despite ample liquidity in the system. As a government financial institution, Land Bank is actively pursuing financial inclusion as a means to achieve an inclusive and broadbased growth.”

In an exclusive interview with Asian Banking and Finance, Pico reveals her philosophies, goals, and what the bank is doing to boost financial inclusion.

ABF: Please tell us more about your recent projects.

Financial inclusion will continue to be a priority initiative for Land Bank this 2016. In line with this, we have launched a nationwide Financial Inclusion Caravan, the first leg of which was held last June in nine third- and fourth-class municipalities across the country. We were able to reach out to around 500 participants per area, or a total of 4,500 unbanked and unserved members of communities.

We also continue to aggressively invest in alternative banking channels and customer touch points to better reach out to underserved areas, especially in the countryside. One such channel is the Point-of-Sale (POS) Cash Out, which extends the functions of a bank branch to various cash-out partner institutions by allowing peso withdrawal transactions from certified POS terminals.

Moving forward, we are looking to partner with more institutions as we recognize the vital role of strategic alliances in making strides towards our financial inclusion thrust. We remain on the lookout for ways to leverage technology to achieve our vision to improve the quality of lives in the countryside.

ABF: What three goals are you focussed on this year?

As in every year, our goals for this year will be anchored on Land Bank’s three business goals: pursuit of mandate, institutional viability, and customer service. In the pursuit of our countryside development mandate, we will further grow our loan portfolio to the Bank’s mandated sectors and continue expanding financial assistance in support of the government’s

priority programs.

Sustaining our financial viability is a continuing challenge. This year, we will further grow our private deposit base and increase revenue from core business segments as well as non-traditional sources.

In improving our customer service, our efforts are directed at making the bank’s clients satisfied. We are putting greater emphasis on developing pioneering products that are especially designed to anticipate and address the needs of our clients.

ABF: You’ve been with LANDBANK for 35 years now. What do you consider as your biggest achievement so far?

What I consider as one of my biggest achievements is being able to steadily grow and fortify the Bank’s commercial operations while ensuring faithful pursuit of the institution’s social mandate.

From 65% in 2005, loans to priority sectors now make up at least 85% of the bank’s total loans to all sectors. From US$1.7b (PHP80.2b) in 2005, our loans to priority sectors reached US$8.2b (PHP387.4b) in 2015. This, even as we continue to achieve record net income year after year, allowing LANDBANK to retain its rank among the best performing banks in the country.

LANDBANK’s assets also crossed the trillion mark for the first time in 2014 while in 2015, we hit a recordbreaking US$22.4b (PHP1.05t) in total deposits.

We also ended 2015 with net income at US$284m (PHP 13.b), the fourth largest among 42 universal banks in the country. This allowed us to remit US$140m (PHP6.6b) in cash dividends to the national government, making Land Bank the highest cash dividend remitter among the country’s governmentowned and controlled corporations.

The Point-ofSale (POS) Cash Out extends the functions of a bank branch to various cashout partner institutions by allowing peso withdrawal transactions from certified POS terminals.

ABF: What are your key business philosophies?

First, value your people. No business can operate without employees and Land Bank would not have been where it is now, if not for the thousands of Landbankers who made every small and big accomplishment possible.

Second, build customer focus. At Land Bank, we often say, “service is the heartbeat of Land Bank” – because service excellence has never been more crucial in this age of automation, innovation, and evergrowing connectedness, where an unhappy customer can easily spread negative opinion about a company.

And third, innovate and embrace change. Business conditions constantly change and a successful business not only adapts to change but actively looks for opportunities to innovate and expand.

For a full version of the interview, you may visit http:// ASIAN BANKING AND FINANCE | SEPTEMBER 2016 17

Co-published corporate profile

Here’s how banks can stay ahead of the pack as digital competition heats up Financial institutions need to roll out forward-thinking solutions in order to capture Asia’s increasing tech-savvy clients.

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sian banks are spending millions on digitising their services, but some financial institutions are savvier than others when it comes to rolling out digital solutions. Asian Banking and Finance caught up with Marc Mathenz, senior vice president and managing director, Asia Pacific at Fiserv, to discuss the latest trends in the mobile and digital banking space and discover how financial institutions can stay ahead of the curve as more clients clamour for digital services.

What are the innovations in the mobile and digital banking space affecting and influencing retail banking in Asia Pacific now? What key trends do you see arising?

The adoption of digital technologies in Asia Pacific is growing at an unprecedented rate. In particular the use of mobile phones and tablet devices has increased exponentially in recent years.

24/7 access to these new channels has allowed consumers to quickly and easily

18 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

transact, shop, and communicate. This shift in the way we live and work has driven demand for a plethora of services to be delivered via digital channels, including banking.

There is an increased focus on digital transformation, as banks compete for success in a dynamic market place that places diminishing focus on cash and the branch. Retail banks undergo digital transformation projects, continuously rolling out new digital led offerings in order to step up to satisfy consumer demand for financial services on-the-go.

Some of the most significant trends emerging in the region include: The mobile ID identifier New technology such as mobile identifiers will remove the need to share bank

account numbers for transactions, and instead allow customers to use email addresses and phone numbers to verify payments. Thailand’s PromptPay will utilise a 13-digit ID number for money transfers, bill payments and other transactions.

It is in line with the country’s national e-payment infrastructure to move the economy towards a digital future with less reliance on cash.

Singapore has also launched a new initiative - Mobile Digital ID – to better facilitate secure online transactions, which includes banking services.

Mobile-only banks Digital-only banks will increase in number, as exemplified by the launch of India’s first mobile-only bank, digibank, by DBS earlier this year. These banks require no physical

“The evolution of digital banking will be driven both by new technologies, changes in bank strategies and by the pace at which consumers move. ”

Co-published corporate profile infrastructure, are completely paperless, and can leverage on the efficient cost structure to offer better client value and expanding their customer base.

Real-time payments Australia’s New Payments Platform (NPP) which will launch at the end of 2017 will enable data rich payments in real-time.

The NPP infrastructure will support various independently developed ‘overlay’ services to provide innovative payment experiences to consumers.

Bangkok Bank is another good example of a forward-thinking financial institution committed to improving customer experience by introducing mobile P2P payments, alert notifications on mobile and on the Apple watch app, making life easier for customers. This reflects the growing mobile penetration in Thailand, with Nielsen figures showing that 90% of people in greater Bangkok have a mobile phone, while the numbers in smaller urban and rural areas are 84% and 78%, respectively.

What are your thoughts on the “mobile first” strategy? How effective is it for the Asia Pacific market? Are the banks ready for it?

Mobile technology is ubiquitous, and to serve the modern consumer, financial institutions need to make sure that the delivery of capabilities via mobile devices is at the heart of their business strategies.

Mobile user interface (UI) and user experience (UX) therefore become important design considerations in development and implementations.

Improving mobile service capabilities is a continuous journey that requires ongoing investment. This can take the form of new technologies to improve customer experience, such as voice and facial recognition, which can increase the speed and security of logins. The improved capabilities can also include support for more in-depth functionality, i.e ANZ Bank’s mobile app - ANZ Grow allows customers to buy insurance and invest on the go.

How do you see digital banking evolving in Asia Pacific in the near future? What are the pros and cons of using it as an expansion strategy?

The evolution of digital banking will be driven by new technologies, changes in bank strategies and by the pace at which consumers move. As a direct response to this shift to digital, banks are rethinking

their branch strategy. Rather than acting as a transaction hub, branches can now focus on more complex, higher-value interactions with customers, cross-selling and up-selling products, providing consultative insurance and investment advice and wealth management.

The value of digital banking as an expansion strategy is seen in increased levels of engagement with customers, enhanced customer experience, cost savings in infrastructure, and the ability to reach out to the un-banked and underbanked communities. In addition, the digital banking channel will move from a channel for information and transacting to a more active customer acquisition channel.

As with any rapid roll out of new technology, banks must be very aware of security. Customers value security across all digital properties, but this is magnified where finance is at stake. It’s imperative that banks meet or exceed all compliance requirements when pursuing a digital expansion plan.

In light of the recent bank heists and AML issues, how do you think should banks manage risks more efficiently?

Financial institutions and corporations of every size can help protect themselves in a number of ways from the types of fraudulent activity noted recently. Key steps to consider include:

• Ensuring any transaction with the potential to impact their business is monitored in real-time and that alerts for anomalies are in place.

• Deploying technology and advanced analytic models that are designed specifically to detect fraudulent activity and anomalies to ensure the accuracy and veracity of the messages being initiated.

• Leveraging data to inform the analytics, looking at previous payment activity and the outcome of potential frauds. The data is key and can help in high value/low volume payments as well as high volume/low value payments.

Is there anything else you’d like our readers at ABF to know?

New technologies and the digital wave are fundamentally changing the way we live and work in Asia. Innovation is facilitating an ever faster speed of life and evolving our expectations of financial service providers. Whether it is making a secure payment via a wearable device, making instant payments utilising a faster payments network or receiving relevant actionable alerts to a mobile banking app, banks will need to deliver financial services capabilities at the speed of life today.

This is a time of exciting change and opportunity and Fiserv is proud to be helping our clients improve their customers’ experiences in Asia Pacific and beyond.

“Financial institutions need to make sure that the delivery of capabilities via mobile devices is at the heart of their business strategies.”

Marc Mathenz, Senior Vice President and Managing Director, Asia Pacific, Fiserv

ASIAN BANKING AND FINANCE | SEPTEMBER 2016 19

Country report: Philippines

The main office of the Bangko Sentral ng Pilipinas

Domestic vs international banks: Who’s winning in the Philippines?

There is concern that the entry of more foreign banks will threaten local banks, but optimists view their arrival as a long-term boon since it could lead to adoption of cutting-edge banking technology.

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hen the Bangko Sentral ng Pilipinas (BSP) liberalised the provision of banking services in the Philippines, the central bank triggered a wave of industry consolidation and foreign investment that, at first glance, seems like it could do no wrong. But even as local players gather strength and foreign banks make their splashy arrivals, there remains a struggle to bring basic banking services to millions of Filipinos.

Philippine banks have been engaging in numerous mergers and acquisitions, and consolidation will play a major role in shaping the Philippine banking sector in the coming years, according to analysts, which leads to questions on whether it can also alleviate the country’s poor financial inclusion.

“Banks that were active in mergers, acquisition and consolidation were universal banks, commercial banks 20 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

As of end 2015, there were 543 closures registered in the rural banking sector, and that the total number of banks decreased by 2.5% to 632 head offices from 648 in 2014.

and rural banks. This is indicative of local banks scaling up and competing against larger foreign banks that will gain entry into the banking system due to the liberalised entry requirements,” says Nestor A. Espenilla, Jr., deputy governor of the Bangko Sentral ng Pilipinas.

The number of banking offices and foreign bank branches are growing.

As of September 2015, there were 635 operating banks with a network of 9,980 branches and other offices, up from 9,555 the previous year.

Espenilla notes that key market players in the Philippines continue to be domestic banks with 615 head offices composed of 17 private domestic banks, 3 government banks, 66 thrift banks, and 529 rural and cooperative banks. But there are now 20 foreign bank branches and subsidiaries operating in the Philippines and accounting for 8.2% of total system-wide assets,

including Sumitomo Mitsui Banking Corporation, Cathay United Bank Co. Ltd., Shinhan Bank Co. Ltd. and Industrial Bank of Korea, which all started operations last year.

There will be more mergers and acquisitions specifically among small rural lenders such as rural banks and cooperative rural banks in the face of ongoing integration in the Association of Southeast Asian Nations, the powerful 10-nation economic regional bloc of which the Philippines is a member nation, says Gilda E. Pico, president and CEO at Landbank.

“This is a significant trend that will reduce the banking industry’s structural weaknesses, strengthen balance sheets, improve operational efficiencies and encourage innovation while being conscious of risk exposures,” says Pico.

The ASEAN regional integration will present two immense

Country report: Philippines opportunities for Philippine banks, concurs Benel D. Lagua, executive vice president and chief development officer at Development Bank of the Philippines.

Regional integration First, Philippine banks would gain greater access to the ASEAN financial market which has an estimated population of 600 million individuals.

Second, there is an opportunity to capture the high amount of savings in the ASEAN region, which boasts a relatively high savings rate of 31%, but currently a significant portion of these savings is placed outside the region.

“A more organised ASEAN financial market through the regional integration would therefore provide an opportunity for the country’s banking industry to grow,” says Lagua.

There is concern that the entry of more foreign banks will threaten local banks, but optimists view their arrival as a long-term boon since it could lead to adoption of cutting-edge banking technology and the emergence of stronger local players – a must for competing in the regional arena.

“Competition combined with the increase in the minimum capital requirement for banks could usher in a period of further consolidation of the banking industry and the creation of bigger banks that can compete with the region’s leaders, not necessarily asset for asset, but in terms of the levels of safety and soundness that come with a bank’s size,” says Espenilla.

“For Philippine banks, the technological innovations to be introduced by the new entrants could provide them with the impetus to further develop the technology, especially in the area of mobile banking where they have competitive advantage,” says Espenilla.

For Patrick Cheng, head of trust group at Chinabank, while the entry of big, well capitalised regional players will introduce new technologies and best practices to Philippine banks, domestic players should work double time to reach the millions of Filipinos which still do not have full access to banking services. “As competition intensifies, we would likely see the domestic players push towards underbanked and underserved

markets in order to seek new areas of growth,” says Cheng.

Financial inclusion Despite the potential payoffs in the long term, many Philippine banks continue to err on the side of caution when it comes to expanding their banking services to rural and low-income areas, leaving it to microfinance institutions and rural banks with microfinance operations.

“A great challenge for the Philippine banking industry is financial inclusion,” says Pico.

“While financial inclusion has been institutionalised by the BSP, bigger banks are not so keen in extending credit to the unbanked and underbanked sectors of the economy despite ample liquidity in the system.”

A large segment of the population has relatively low access to deposit services, as well as low access to loans from formal institutions, according to Gilberto Llanto, president of the think tank, Philippine Institute for Development in his working paper “Financial Inclusion, Education, and Regulation in the Philippines.”

Citing data from the 2011 Global Findex Report, the Philippines – together with the Lao People’s Democratic Republic, Cambodia, Indonesia, and Vietnam – have access to financial services that are lower than those of East Asia and the Pacific and the world.

World Bank data also showed that only 10.5% of adults in the Philippines had a loan from a formal financial institution in 2010. “Microentrepreneurs and small enterprises also suffer from limited access to a range of financial services despite the mandatory credit allocation imposed by law,” says Llanto.

The Magna Carta for Micro, Small, and Medium Enterprises, a law passed by the Philippine Congress mandated that from June 2008 to June 2018, banks must allocate at least 8% of their loan portfolio for micro and small enterprises, and at least 2% for medium enterprises. But Llanto laments that only the rural banks consistently complied with the required 8% from 2008 to 2014, while compliance for universal and commercial banks dipped below the required rate and declined over the

Alka Anbarasu

Benel Lagua

Nestor Espenilla, Jr

Patrick Cheng

period.

If there is a bright spot in efforts to improve financial inclusion, it is in the mobile space. Already the banks are expanding their branch networks to areas outside Metro Manila, in outer cities and provincial areas, often through the aid of mobile and digital banking technology, says Alka Anbarasu, VP-senior analyst at Moody’s Investors Service.

But Lagua says Philippine banks looking to roll out mobile banking services may find their efforts blunted by painfully slow internet connections. The country currently has one of the slowest internet connections in Asia and the world.

In 2015, a study of consumer internet speed by Ookla revealed the Philippines had an average speed of 3.64 megabits per second, ranking 21st out of 22 Asian countries, and 176th out of 202 countries worldwide.

Lagua warned the slow internet speed may impede the timely provision of mobile banking services, blunting their intended reach and bottom line impact.

Moreover, BSP’s Espenilla suggests that banks can either create linkages with e-money service providers like telecommunication companies or become e-money issuers either directly or through outsourcing arrangements. “These options present an enormous opportunity for banks to create their own local agent network in partnership with merchant customers as extended touch points thereby, expanding their virtual reach to underbanked communities by leveraging on available fintechs such as e-wallet and electronic fund transfer point-of-sale,” adds Espenilla.

Contributions to loan growth by economic sector

Sources: BSP and Moody’s Investor Service

ASIAN BANKING AND FINANCE | SEPTEMBER 2016 21

Vendor View: big data, analytics, and fraud

Cyber fraud becomes one of the banks’ scariest enemies

How can your bank prevent the next Bangladesh-like cyber heist?

Advanced analytics and security systems keys to detect and reduce damage from fraudulent activities.

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arlier this year, when hackers stole $81 million from the Bangladesh Bank by breaching its systems and also fooling the Federal Reserve Bank of New York, Asian banks unmasked one of its scariest enemies: Cyber fraud.

“There’s one recurring characteristic for bank robberies of modern days – they’re shifting from the physical realm to the cyber environment, where a huge amount of information resides,” says Alex Tay, director, identity and data protection, ASEAN region at Gemalto. “As a hacker, if you’re adroit enough, you can manipulate computer algorithms or software to conduct illegitimate money transactions,” he adds.

While the Bangladesh Bank heist highlighted to the public the vulnerabilities of banks to cyber threats, the industry has known this already for quite some time and are tapping into big data, analytics and 22 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

security programs to try and mount a defense.

Specifically, Asian banks are now waging an intense war against online and mobile fraud, which have only intensified in recent years and has led to notable losses in customer revenue and trust.

Tay cites the Nilson Report 2015 which reveals that in AsiaPacific, card-not-present (CNP) fraud, including online and mobile transactions, accounted for more than 70% of all fraud-induced losses in that year due to rapid growth in CNP sales.

“With the banking industry rapidly pacing towards digitalization, banks are increasingly facing the issue of fraud that is not only resulting in revenue loss but also causing reputational damages to the financial institutions,” says Stanimira Koleva, chief operating officer, Asia Pacific & Japan at Software AG. “In the day-to-day scenarios, banks

Alex Tay

Stanimira Koleva

Tai Thanh Vo

usually have only few seconds to detect and stop potential fraudulent transactions. Having to process millions of customer transactions daily, banks in Asia are facing a major challenge of detecting fraud across multiple channels,” adds Koleva.Mounting complexity and volume Asian banks are finding it harder to cope with fraud because the data they are handling have become increasingly more complex and unstructured, says Tai Thanh Vo, practice manager, professional services at Asia ACL. “The traditional techniques of using sampling methodology, periodic reviews or excel-based analysis are no longer sufficient to keep up with the sheer amount data that reside in multiple systems and across various locations,” says Vo. Many Asian banks continue to employ these traditional techniques of fraud prevention and detection, but Vo insists that they cannot

Vendor View: big data, analytics, and fraud produce the real-time information that customers need and demand.

Nor can they provide sufficient coverage or assurance of material risk areas and processes to regulators and other stakeholders. This is where realtime analytics and automated systems focusing on sifting through big data can step in to do the critical work that traditional techniques simply cannot.

Andrew Davies, vice president, global market strategy, financial & risk management solutions at Fiserv, believes Asian banks should focus on customer payment data because it can hold crucial information about ongoing and impending fraud.

“Customer payment data is vital when it comes to detecting fraud patterns,” says Davies. “If a particular transaction falls outside what is deemed a normal behaviour pattern, alerts can be generated and forwarded to fraud analysts in real-time for further investigation.”

Asian banks must also invest heavily in new systems and technology beyond credit card fraud detection, or risk falling prey to the new breed of cyber thieves.

“Using analytics to fight fraud is not new in financial industries,” says Tim Liu, chief technology officer at Hillstone Networks. “With ecommerce, mobile transactions and payments becoming increasing prevalent, and cybercriminals are finding new ways to game the system for monetary gains. Therefore, new fraud detection systems will need to be developed for different transactions and on different levels,” says Liu. He explains that in helping Asian banks fight fraud, they now track

How can banks leverage big data?

Andrew Davies

Tim Liu

Alex Kwiatkowski

Yashesh Kampani

Chrisol Correia

David Jones

not only a user’s transaction and history data, but also important parameters such as social identity, the target device used, and compute environment. Tapping the services of partner technology companies is also crucial because banks no longer have the in-house capabilities to push out measures in response to threats detected by big data and analytics.

Already, many institutions in the region are already using excellent scanning tools with features such as intelligent self-learning, says Alex Kwiatkowski, senior marketing strategist – banking & digital channels at Misys, although some still have large rooms for improvement in their fraud detection systems. The crush of Asian banks upgrading their fraud scanning tools comes as more incidents like the Bangladesh Bank heist occur and the potential revenue risk escalates.

“Adding advanced analytical capabilities will bring a whole new level of insight and foresight to identify suspicious behaviour at the earliest possible stage in proceedings, thereby reducing risk exposure and the associated revenue leakage,” says Kwiatkowski.

Contextual and cognitive analytics Some banks in Asia use a combination of blockchain and cognitive analytics to prevent losses from duplicate document financing, and blockchain and advanced analytics for customer monitoring, according to Yashesh Kampani, head of financial services at IBM ASEAN. Kampani notes that through the help of a powerful algorithms-based analytics platform, MoneyGram International managers helped them prevent more than US$37.7 million worth of fraudulent transactions, reduce customer fraud complaints by 72% and quickly address regulatory requirements -- results that Asian banks would “The potential for fraud has increased significantly over the last few years,” says Kampani, “it is hence imperative that banks increasingly leverage advanced contextual and cognitive analytics to detect and prevent fraud in real time.”

Running cutting-edge analytics to counter fraud can become very

expensive, and while it is becoming an essential cost of doing business in the region, many Asian banks are gravitating towards solutions that minimise their mounting compliance costs.

“Many Asian banks today are re-evaluating the solutions and processes they use to ensure that they are combining data, technology and analytics in the most productive ways,” says Chrisol Correia, director, market planning at LexisNexis Risk Solutions. “They want tools presented on a single platform to drive operational efficiencies, which, ultimately, reduce the cost of compliance and prevent fraud.”

Beyond big data and analytics While there seems to be a consensus that big data, analytics and risk profiling hold value in protecting mainstream banking and payments, some cyber threat experts believe these measures must be complemented with stronger security programs such as whitebox cryptography solutions to thwart the new wave of threats.

“Considering the evolution of cyber threats and the sophistication of attackers, more sophistication of attackers, more robust solutions residing at a deeper application, browser, API level must be seriously considered to mitigate risk,” says David W. Jones, senior director global business development at Irdeto.

“Unfortunately, cyber criminals continue to evolve their tactics and have devised attack methods to spoof user data and provide false security to analysts who sit further downstream,” he warns.

Jones says it is believed that a key culprit to the Bank of Bangladesh attack was the installation of malicious software in the bank system, which big data and analytics would not have been able to prevent.

“Such an attack cannot be prevented by big data but rather by security software techniques to protect key applications and API. Financial institutions must look at a suite of solutions to provide them with deeper monitoring tools that can detect application and browser tampering at a very early stage,” says Jones.

ASIAN BANKING AND FINANCE | SEPTEMBER 2016 23

retail banking forum: Jakarta

KPMG’s Chia Tek Yew, Citi’s Ivan Jaya, and OCBC NISP’s Ka Jit

Will Indonesia’s massive digital banking appetite trigger branch closures?

Bankers in Jakarta reveal that in-bank transactions are becoming less popular.

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igital banking is rapidly gaining popularity in Indonesia, with local banks splurging huge chunks of their budgets on establishing digital branches, developing mobile apps, and rolling out other digital banking initiatives. The increased popularity of digital banking transactions has resulted in branch closures as the volume of physical over-the-counter transactions has dwindled, according to industry insiders who spoke at Asian Banking & Finance’s Retail Banking Forum in Jakarta held on April 27, 2016.

However, they also warned that Indonesian banks need to come up with a well-thought-out strategy rather than just jumping blindly onto the digital banking bandwagon, or else they run the risk of having a poorly-executed digital platform which can create further inconvenience for their customers.

“The key thing is the pace of

24 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

Banks are no longer that worried about fintech players, the key question now is how quickly the changes can be made and how seamless we can make it.

change. We are seeing banks react to the millennial generation, the smartphone generation. Banks are no longer that worried about fintech players, the key question now is how quickly the changes can be made and how seamless we can make it,” said Chia Tek Yew, head of advisory, Financial Services KPMG. Seamless customer service is key Enhanced customer experience and a seamless integration of physical and digital banking services is crucial to the success of any digital banking strategy, shared Ka Jit, head of individual customer solutions, OCBC NISP. “We come from a mid-sized, very traditional bank. The key challenge for us going into digital banking is to really not just adopt whatever new technological advancement there is in the market but to build an omni-channel experience for our customers. So we leverage on

the branches we already have and enhance the customers’ ongoing interactions through our digital channels,” he said.

Ivan Jaya, head of wealth management at Citibank, noted that a robust digital banking framework will help banks provide more personalised solutions to their clients, while at the same time help in reducing costs and improving the efficiency of advisory services.

“I think in the wealth management world, the most important thing for clients, especially for high net worth individuals and affluent customers, is the ability to get real-time updates and the ability to get the update from their relationship managers. However not all of them currently get the service that they deserve. And this, along with the pace of the technology that we have been seeing so far, and the emergence of fintech as well, is going to help close that kind of gap,” he said.

retail banking forum: Jakarta

Diebold showcases their products at the event

Sharon Kam, regional director for China and Southeast Asia at strategic design consultancy, Allen International, warned that many Asian banks are too focussed on having a digital branch but do not appear to have given their digital strategies much thought.

“In my experience in working with banks around Asia, I have seen that a lot of banks are rushing onto the bandwagon. They all want to have digital branches. I have visited all the banks with digital branches in Indonesia, and my observation is I think it’s too rushed. They didn’t think through the customer journey very well, and also it is not integrated in a seamless way with the other channels,” she said.

She illustrated that at some digital branches, clients can open an account online but will suddenly have to print out certain documents halfway through the process, then undergo manual checking. This creates a disruption in customer experience and can even take longer than purely manual processes, she said.

“A digital branch shouldn’t replace brand engagement. You cannot just put in a live machine and think the customer will actually be loyal to you.

Because what’s important is how you engage with the customer. In fact, digital branches should enhance your brand rather than take away from it.

It has to start not from the design, but from a strategy that integrates the rest of the network to how you actually envisage the branch,” she said.

In-bank transactions slump Jit and Jaya noted that the rapid rise in the popularity of digital banking solutions has resulted in a decline in in-bank transactions. The number of transactions handled by physical

tellers has dropped precipitously in the past few years, while the number of digital banking transactions has risen steeply.

“The number of transactions handled by tellers has dropped drastically on a year-on-year basis. Right now, on average, daily transactions amount to just doubledigits, from 60 to 100 transactions.

This is much lower compared to five years ago. Customers are moving to digital transactions. What we’re doing for the future is shifting the function of the branch to focus less on transactions, more on service and sales,” Jit said.

Jaya shared that Citibank itself has closed 40% of its branches since the end of 2015, with the number of branches dropping to just 11 from 20 at the end of December last year.

Despite the closures, Jaya said that Citibank has not lost a single account or customer, as 92% of customer transactions are already being done online. “Online services make customers stick,” he said.

However, it’s too early to bid goodbye to physical bank branches, Jit added. “I think the level of customer adoption on digital has been speeding up tremendously in the past couple of years. The way I look at it, the branch will still be important because it will be difficult to move away from the cash society significantly, but banks should look at it as an immediate challenge,” he said.

Tellers and other bank staff needn’t panic either, as it is unlikely that machines will completely make their jobs obsolete in the near future.

“Not all customers like to make the decisions for themselves. Some customers still prefer to have their relationship manager to do it for them,” Jaya said.

The branch will still be important because it will be difficult to move away from the cash society significantly, but banks should look at it as an immediate challenge.

“I wouldn’t say that the teller role will disappear entirely, but I would say that it would expand and transform.

We see tellers handling service and maybe doing sales as well,” Jit noted.

Who’s afraid of P2P? Peer-to-peer lending in Indonesia is growing, but panelists noted that these fintech firms have not yet reached enough scale to disrupt the current banking system. And rather than eyeing the newcomers as rivals, banks are in fact looking to collaborate and share knowledge with the new players.

“Some people would call them disruptive, I would say that it create a lot of opportunity for synergy and collaboration. In fact, we are actually engaging them very closely for cross-learning opportunities and collaboration,” Jit noted.

Meanwhile, Jaya said that Citibank is interested in how fintech companies can help the bank increase efficiency. “It’s not up to the level of disruptive currently, however their ability to cut out the middlemen is what will make them successful,” Jaya said.

Jit shared that OCBC is keeping a close eye on fintech players although they do not yet post a significant risk to the bank. “You can always learn from those fintechs because they are very nimble and very impressive.”

Although the bankers are confident that P2P lending will not turn the banking system on its head, KPMG’s Chia noted that there is still room to be cautious when it comes to dealing with these new players.

“Essentially the middleman in this case is the bank. If you take that away and say that you can lend through P2P without a bank, what the banks fear is not really losing revenues from lending, because lending comes with risk. What they fear is the loss of deposits,” said Chia.

He noted that consumers might find it more rewarding to put excess cash in peer-to-peer lending platforms, as these offer significantly higher returns compared to keeping money in bank accounts.

“When that happens, deposits in banks come out. That’s where the P2P lending industry can impact the whole market,” Chia noted.

ASIAN BANKING AND FINANCE | SEPTEMBER 2016 25

SECTOR REPORT 1: RETAIL BANKING

Digital transactions on the rise in Asia

As digital channels rise, bank branches pivot in purpose Personalised customer experience is becoming a vital concern for banks, and they are turning to emerging fintech firms to gain an upper hand.

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hen Citi checked the amount of customer traffic in its physical branches across Asia Pacific over the last five years, data showed a decline by half.

It would have been an alarming drop if not for an offsetting trend: Digital transactions doubled over the same period.

In Asia alone, Citi draws some 20 million visits to its online properties every month and 95% of all transactions already happen outside a branch. Felimy Greene, managing director and regional head of customer franchise in Asia Pacific and EMEA at Citi, notes that one out of every five new credit card accounts acquired comes from digital sources and over 50% of clients are actively using digital banking channels – up from 30% three years ago. “We passed 8m users for the first time in March 2014 and we are targeting 10 million active digital customers within next 26 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

Personalised customer experience is becoming a vital concern for banks, and they are turning to emerging financial technology firms to gain an upper hand.

two years. Citi was the first bank to offer 7 years of online statement history free of charge to all customers and today over half of our clients now receive monthly electronic statements,” says Greene.

Customer activity in Citi and other banks has been shifting sharply towards digital channels and has convinced some banks to close some physical branches to cut down costs.

But analysts insist this does not spell doom for physical branches, which remain critical in the digital age as a nexus for building trust, assisting more complex transactions and bank servicing in less developed countries.

“Digital banking is not completely replacing the branch experience, but rather supplementing it, while the nature of branch interactions is changing,” says Greene.

The extinction of physical branches is also hard to imagine in certain emerging markets like Thailand

where Bank of Ayudhya (Krungsri) has observed that the volume of its branch transactions has not declined even amid an uptick in online transactions. This suggests that a rise in the latter does not necessitate a decline in the former.

“At Krungsri, we see online banking channels as complementary rather than substitution for bank branches,” says Thakorn Piyapan, head of Krungsri consumer group and head of digital banking and innovation at Bank of Ayudhya (Krungsri).

Piyapan explains that basic transactions are being redirected to online channels, which then frees up branch employees to focus more on advisory services on complex products, as well as other highlyspecialized and personalised services.

Personalised customer experience is becoming a vital concern for banks, and they are turning to emerging financial technology (fintech) firms to gain an upper hand.

OCBC Bank, for example, launched The Open Vault, its own Fintech and innovation unit, which seeks to collaborate with fintech startups to create cutting-edge solutions. Some of the concerns The Open Vault deals with are

SECTOR REPORT 1: RETAIL BANKING prototyping and deployment of new technologies, developing innovative commercial business models and solutions to bring to market relevant financial products and services, and enhancing banking processes, says Pranav Seth, head of e-business and business transformation at OCBC Bank.

The Open Vault teams up with startup fintech companies through its accelerator programme, and recently the collaboration has yielded superior customer knowledge and more robust robo advisory solutions. For physical branches, wealth management is becoming a core service and the bank is also looking at making it available to a wider audience through the use of fintech-led applications.

Meanwhile for digital channels, the partnership with fintech firms has led to some breakthrough technologies in mobile and internet banking and resulted in notable gains for customers, says Seth. Two recent examples are the OCBC Pay Anyone micropayment service and the OCBC OneTouch biometric authentication for iPhone and Android devices.

“As we go along, we are seeing more and more companies outside the bank who also believe in innovating for the benefit of customers. These are companies that move very quickly to develop new innovations and solutions. We are actively looking out for these companies as we believe we can work with them to strategically do things faster,” says Seth of the bank’s fascination with fintech alliances.

“Innovation is difficult to create in a highly regulated and structured industry like banking. What we want is to strategically maintain that safety

and trust our customers have in us, while becoming more nimble. We want to dedicate resources to manage these fintech developments that are happening outside the bank,” he adds.

Through the rise of Fintech companies and the proliferation of new digital technology, banks like the Turkish Economy Bank (TEB) can now deliver basic transactions in their online channels that they previously could only provide in physical branches.

“Now, almost all transactions and services that branches provide can be used through our internet and mobile branches as well,” says Gokhan Mendi, head of retail and private banking at TEB, citing 85% of comparable transactions is being done through its digital channels.

The Turkish bank currently has 900,000 active online banking customers and boasts a penetration rate of 36%. Part of its efforts to encourage the use of digital channels is to employ simple language with minimal banking jargon, customer freedom to personalize their menus, and video and web chat services to provide the “human touch” that previously was a cornerstone of physical branches.

The limitations of digital While digital technology is beginning to change the banking landscape in many Asian countries, the adoption has been uneven in the region with nations like Myanmar still relying heavily on physical branches.

“In Myanmar, we have not reached that end of the evolution spectrum where spending on digital channels supersede the effort to open new

The mass adoption of smartphones and tablets redefines mobile banking

Felimy Greene

George Koshy

Pranav Seth

Thakorn Piyapan

Gokhan Mendi

branches,” says George Koshy, director of corporate strategy at United Amara Bank. He recounts the Myanmar banking crisis in 2002, which he says continues to affect the trust levels of the population on the banking sector. “Basic banking is required and physical branches are important to bridge the trust gap and draw customers to open accounts in the Bank,” adds Koshy.

Even though the technology is available, digital transactions such as e-pay services remain constricted by insufficient infrastructure and regulatory support.

“Applications for e-pay services are low given that the major electricity and water utility companies do not have the infrastructure and are not ready for digital payments,” says Koshy. “Major global credit card companies are also still in discussion with relevant parties on the regulatory barriers for card issuance for the domestic market, so whilst there may be demand on the consumer side, the other end is not ready yet.”

Financial inclusion Traditionally, as seen in the case of Myanmar, physical branches are crucial to expanding the retail customer base of banks, but digital initiatives are making their case in reaching out more effectively to unbanked populations.

Piyapan cites the participation of Krungsri to the Thai national project called PromptPay Service, a payment and money transfer platform that makes it easier to conduct financial transactions. PromptPay is one of the key modules in the country’s e-payment project that encourages people to participate in digital financial transactions and include more unbanked populations to the formal banking sector. “We are embracing digital technology as part of our role in promoting financial inclusion,” says Piyapan.

Similarly, the TEB is tapping digital channels to reach young people and encourage them to better manage their financial transactions. TEB launched the TEB Junior program that teaches kids finance with games online, and part of their strategy is to make the online interface as easy to use as possible.

ASIAN BANKING AND FINANCE | SEPTEMBER 2016 27

SECTOR REPORT 2: CARDS & PAYMENTS

Digital becomes the predominant payment method

Is Asia at the dawn of a digital wallet age?

our customers to carry out daily transactions,” says Tan. OCBC is leading the charge in contactless payments with 50% growth in the area, and the highest number of contactless transactions over the past year.

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Disappearance of bank brands The forecasted rise of digital wallets in Asia has far-reaching, and even grave, consequences for banks. Bank brands might become less relevant to consumers as bank Visa and Mastercards lose their popularity in favor of products similar in nature to Amazon One Click, Apple Pay, PayPal and Starbucks apps with similar or enhanced functionalities, says Keith Pogson, senior partner, Asia-Pacific financial services at EY. “In the physical world, the actual payment instrument could be replaced by the likes of start-ups such as ModoPayments, a digital payments hub taking monetary value from just about any source and delivering it to just about any destination, Cartwheel app by Target for coupon offers, and of course Apple Pay,” says Pogson.

Banks that do not want to drown in the digital wallet wave and instead surf to continued relevance must adopt a new consumer payments

Digital wallets will be one of the biggest trends of the next decade, likely defining the way cards and payments operate in the region.

hen Asian consumers open their wallets ten years from now to pay for a pair of shoes or a week’s worth of groceries, the question they will ask will have likely changed from “Which card should I swipe?” to “Which button should I press?”

Digital wallets, accessible through smartphones and other mobile devices, should emerge as a predominant method of payment in the coming decade, according to analysts, and with it the rapid decline of physical credit cards.

Instead of the plastic cards that have for so long assisted consumers in paying for purchases, the average Asian’s wallet will be increasingly filled with digital products like Apple Pay, a mobile payment and digital wallet service that lets users make payments through their iPhones and, in the future, iPads and Apple Watchcompatible devices.

28 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

“Digital wallets, accessible through smartphones and other mobile devices, should emerge as a predominant method of payment in the coming decade.”

“We are expecting digital wallets to lead the next revolution in the rapidly growing world of payments,” says Desmond Tan, head of group lifestyle financing at OCBC Bank.

“With such a high penetration rate of smartphones’ usage, we know that it’s crucial to get these payment services into the hands of our customers – literally. Hence, it was an easy decision to embrace digital wallets, be it Apple Pay or Samsung Pay.” Tan reckons OCBC will be working with even more digital wallet providers in the future, especially if it would result in a higher level of convenience for customers.

“We always aim to provide the best payment solutions to our customers. As one of the key pioneers which actively advocates contactless payment methods, we are certain that the utilisation of digital wallets will go a long way in making payment processes a whole lot easier for

SECTOR REPORT 2: CARDS & PAYMENTS customer bases and distribution infrastructure,” says Pogson.

Banks use NFC for payments at 30,000 retail points

proposition: One that is hinged more on reliable, cheap and memorable service. “What this means for banks is that they need to become an extremely reliable, low unit cost, trustworthy utility for payment origination and processing,” says Pogson. “They have to also ensure ‘top card in a wallet’ thinking not only applies to day-to-day spending by customers but also be that default card used in ecommerce payment gateways.”

He adds that banks should be more creative with their customer rewards programs, breaking out of the runof-the-mill points systems. The goal of these new rewards programs designed for digital wallet users is to create other value differentiator properties.

Fintechs and mobile wallets Technology will be a powerful driving force of the incoming digital wallet era, according to analysts, which is why banks are now forging alliances with financial technology or fintech companies. Pogson observes an outburst of collaborations between banks and payment fintech firms either through outright acquisitions, corporate venture units, incubation and mentorship, and sponsorship and partnerships.

Banks are looking to discover disruptive solutions and foster innovation, such Bank of China (BOC) partnering with China’s phone manufacturer Huawei Technologies in March to allow card holders to use Huawei Pay’s near-field communication or NFC and enable payments through their smartphones.

Pogson also notes how in June, Google launched Android Pay, a

mobile payment and digital wallet service in Singapore, allowing credit and debit card users from five major banks – POSB, DBS Bank, OCBC Bank, UOB and Standard Chartered – to use wireless NFC for payments at 30,000 retail points.

“We are enabling contactless cards for clients in markets which are showing a high uptake in NFCbased transactions. By the end of the year, these cards will be available in major markets across our footprint,” says Chris de Bruin, global head of retail products and digital for Standard Chartered. “This year in Hong Kong, we became the exclusive digital banking partner of Octopus, offering O! ePay mobile payment services to our clients. O! ePay is the first Octopus network-based mobile payment service to provide personto-person payments and instant fund transfers with the Octopus card,” adds de Bruin.

Banks are starting to see that collaboration instead of competition with fintech will be their ticket to triumph, not only in the payments space but also in many other areas of operation. Pogson argues that there is simply more to gain working with fintechs than trying to beat them head on. “We see fintechs and banks co-existing (or attempting to co-exist) symbiotically to create stronger financial systems. This includes not just with the payment start-ups, but strategic partnerships with e-commerce firms, security and enterprise IT, and big data analytic providers,” says Pogson.

“Fintechs are a great resource for banks to truly innovate and inject fresh vision into their cultures, while banks provide fintechs with immediate access to existing

Chris de Bruin

Desmond Tan

Keith Pogson

Thakorn Piyapan

Gokhan Mendi

Other collaborations Turkish Economy Bank (TEB), for example, is forging numerous fintech partnerships to roll out cutting-edge services in a country with a relatively mature digital wallet and contactless payments environment with around 142,000 contactless payment points.

“We think that fintech companies are not our competitors. On the contrary, we prefer to make collaborations to fintech companies,” says Gokhan Mendi, head of retail and private banking at TEB, the first bank in Turkey to adopt cloud-based contactless payments using host card emulation technology.

TEB is collaborating with a number of fintech players such as Monitise, for the improvement of its mobile banking app since 2012. It also teamed up with Metamorfoz, a local fintech firm, for the integration of contactless payment services.

TEB has been building up a suite of services that enable customers to spend a whole day without their leather wallets. “Customers can make payments from groceries to cinema in several stores, and even withdraw money with a QR code,” says Mendi.

Meanwhile, in Thailand, Krungsri is also going full throttle with cashless payment initiatives, headlined by their NFC mobile payment service for all Tesco Lotus cardholders.

Thailand already has a high smartphone penetration rate, which has emboldened the bank to set up a mobile payments facility for customers who prefer not to use cards or cash, says Thakorn Piyapan, head of Krungsri consumer group and head of digital banking and innovation at Bank of Ayudhya (Krungsri). “In the next five to 10 years, digital adoption should be the norm for all Thai people,” says Piyapan, citing the government’s push for a national e-payment scheme that will transform it from a cash-based society to a cashless one.

“By 2026, 90% of Thai population is expected to have internet access.

Everyone will be using smartphones, while people in remote areas will benefit from easier access to financial services via mobile internet,” he adds.

ASIAN BANKING AND FINANCE | SEPTEMBER 2016 29

event coverage: wincor nixdorf seminar 2016

Reinhard Rabenstein, Chief Technology Officer; and Karsten Kemna, Vice President for Banking, Asia-Pacific, Wincor Nixdorf

Wincor Nixdorf puts a spotlight on the future of cash and digitalisation

Over 150 industry experts attended the International Management Seminar in Madrid.

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ith more consumers leaning towards digital banking, retail banks should move towards becoming agile, fast-moving technology adopters instead of just relying upon their inflexible, complex legacy systems in order to stay in the game.

This is one of the main topics discussed at Wincor Nixdorf’s International Management Seminar held at the Silken Puerta America Hotel in Madrid from June 1 to 3, 2016. The event, which was attended by 150 experts from well-known retail banks and industry representatives, tackled the future of cash in an omniand cross-channel world and how digital transformation is connecting the digital and physical worlds.

Christian Weisser, senior vice president of banking at Wincor Nixdorf, said: “Banks around the world are working to take rapid advantage of opportunities offered by digitalisation to improve their 30 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

Digitisation makes sense if you are enabling all the different channels for it.

customer experience and achieve greater efficiency in bank operations.”

Weisser, however, noted that it is still the customer’s decision that sets the pace on how digital retail banks should be. Nonetheless, he discussed three strategies that banks can implement in order to find balance between traditional banking and digitisation.

First is co-locating, where banks can share location with a business (ex. supermarket, post office, etc.) to be where their customers are. Next is automation – automate whatever can be automated with self-service devices. And lastly, engagement, which means building a bridge that can be used to reach your customers by providing it in a way of assisted self-service. “Digitisation has a very big impact on Wincor Nixdorf and we have been working on the strategic issues in the past 2-3 years until now.

We have recognised a long time ago that we have to move since innovative

software and services are much more critical success factors for the business of banks and retailers,” said Reinhard Rabenstein, chief technology officer at Wincor Nixdorf.

He explained that the company needs to help its customers transform to the next level of digitisation, without neglecting the fact that hardware remains a key enabler.

“Digitisation makes sense if you are enabling all the different channels for it. If you are still linked in the silobased architecture, then there is no way to make digitisation successful.

Banks need an omnichannel platform that will serve as an enabler for digitisation,” he added.

Two years ago, Wincor Nixdorf together with Commonwealth Bank of Australia jointly developed a payment tablet called Albert, a unique open ECO system that aims to bring merchant banks/ merchant acquirers closer to their merchants, and merchants closer to their customers.

event coverage: wincor nixdorf seminar 2016 Albert also provides a global gateway for payment transactions together with a marketplace for high quality value added apps and services providing new business opportunities beyond payments. “Digitisation means you have to implement a multi-touch point platform that allows you to support the customer in a completely different way,” Rabenstein said.

Cash and cash recycling Despite indications that the world is moving towards a cashless society with the rise of mobile and electronic payments, speakers at the conference believe that cash will remain as the leading consumer payment type globally. “Cash is important for a number of societies. Ninety percent of payments in the Eurozone are still done in cash. You cannot ignore the fact that for SMEs and retailers, cash is still a big part of their daily life and operation,” Weisser said.

Data from the Euromonitor International Global Cash Report showed that in 2015, eight out of ten transactions were still made using cash. Weisser explained that one of the most efficient ways of saving operational costs is for banks to provide cash recycling and deposit functionality.

“Cash remains an integral part of the economies in Asia Pacific, in both emerging countries or developed economies,” said Karsten Kemna, vice president for Asia-Pacific Banking at Wincor Nixdorf.

“Singapore is a classic example.

With more than 2,700 ATMs around the island, demand for cash is ever increasing, especially during festive seasons. Banks need to optimize their cash ecosystem to improve customer experience while reducing cost.”

“According to RBR’s Global ATM Market and Forecasts to 2020 report1, ATM withdrawals were strongest in the Asia-Pacific and Middle East and Africa regions. Banks are now gradually changing their ATMs from machines that can perform single function such as cash withdrawal to providing a variety of services, including cash and coin deposit, bill payment, account opening, as well as a touchpoint to seek assistance from a branch officer if required,” he added.

Apart from the interesting discussions on the latest banking trends, another highlight of the conference was the announcement of Wincor Nixdorf’s collaboration with Diebold. “Wincor Nixdorf is moving with confidence toward the business combination with Diebold. Digital transformation demands flexibility and innovation from banks and retail companies – and thus also from their technology partners,” said Eckard Heidloff, president and CEO of Wincor Nixdorf.

“Together, we are creating an IT powerhouse with a global reach, a company whose innovative power sets standards and that will be a reliable local partner to banks in dynamic times such as these. One of the new company’s innovative focal points will be the development of new software.” Heidloff explained that through the elimination of duplicate hardware development in the two companies, resources have been freed that can now be used for the development of new software.

Wincor Nixdorf and Diebold When asked about plans for the Asia-Pacific region after the merger with Diebold, Kemna noted that this merger will result in more solutions and value for the customers. “Our common vision with this business combination is to create a company that will deliver fully integrated, transformative solutions to support branch automation, value-added services and omni-channel experiences. Additionally, we aim to create better solutions or more localised solutions for the Asia Pacific market.”

Last November, U.S.-based ATM maker, Diebold made an offer to acquire Germany-based Wincor for the amount of $1.8 billion and the

Christian Weisser Senior Vice President, Banking Wincor Nixdorf

Data from the Euromonitor International Global Cash Report showed that in 2015, eight out of ten transactions were still made using cash.

deal was finalised this March when Diebold gained shareholder approval.

The combined firm will have a market share of around 34%, making it the largest maker of ATMs in the world based on units sold.

Best-in-class solutions Three of Wincor Nixdorf’s products were showcased at the conference: the CINEO C2020, the Cash Cube, and the CINEO C4060. The CINEO C2020 is the next-generation banking system that allows customers to withdraw cash quickly, conveniently and securely by using a smartphone or a near-field communications. It is the ideal solution for digital natives, as it only takes 16 seconds to complete a transaction.

Meanwhile, the Cash Cube, an innovative prototype developed, is an ATM that is controlled by an Android-base device. It is designed to do more than just pay out cash.

With its multifunctional payment terminal, it can also be used to process cashless payments and the like. “The smartphone industry has already shown us what is possible when you combine a wide variety of applications with a customer touch point such as a mobile telephone.

Transferring this approach to an ATM opens up new perspectives, including the development of new software,” Weisser said.

The third product is the CINCO C4060, a cash recycling system that is part of Wincor’s Cash Cycle Management Solutions portfolio. Its core element includes the banknote storage concept, which makes it possible for banks and retailers to interchange one and the same cassette between all systems in the CINEO cash series.

1 Data source: The information is from RBR press release published in January 2016

Eckard Heidloff President and CEO Wincor Nixdorf ASIAN BANKING AND FINANCE | SEPTEMBER 2016 31

OPINION

Liew Nam Soon

The digital challenge from a Philippines banking perspective

I

t is almost a cliché by now when banks cite Know-YourCustomer (KYC) processes and controls as the biggest risk management challenge when going digital but it might be even more so in the case of Philippines. Resolving challenges in cybersecurity, and regulations, and FinTech, among other things, would go some way towards enabling digital banking, which presently, the Philippines has one of the lowest digital banking adoption rates in the region.

In our report on “Managing change and risk in the age of digital transformation; digital journey of ASEAN FIs”, KYC processes and controls are seen as hampering the move to “digital-only” for critical processes such as account opening, loan applications, or investment advisory. Currently, ASEAN FIs are continuing to rely on employeeassisted onboarding or some level of physical intervention to verify a customer’s identity.

Banks in the Philippines meanwhile are taking active steps to address the above issues in a bid to improve the online banking experience for their customers. For example, Metrobank1 has been narrowing loan processing time and approval turnaround within the application period, which has helped their digital banking growth.

China Bank Savings (CBS) recently partnered with Lendr2, the country’s first 24/7 digital loans marketplace. With the partnership, clients of CBS can now complete their loan application process online, track their loan application status and monitor their monthly loan repayments, balance and amortizations.

Cybersecurity is also a key concern amongst the Philippine banks, who see potential risks involved due to a lack of security measures such as two factor authentication and transaction signing to secure transactions. To address this, the local banks have put in place several measures, to protect the banking system and its consumers from risks associated with electronic- banking operations. Banks have migrated from the use of magnetic stripe technology to the use of globally recognized EMV. What’s stopping Philippine banks from dealing with fintechs?

Given how FinTech now plays a key role in more banks’ digital journey, in the Philippines however, the FinTech landscape is still at infancy stage. While regulators are not prohibiting banks from working with FinTechs and other start-ups, they are just uncomfortable with a digital-only strategy because of KYC issues.

Dealing with emerging vendors also requires FSIs to rethink many aspects of the traditional FI-vendor relationship. Most Philippines banks are still not prepared to deal with FinTechs in terms of organizational mindset and policies, which makes it difficult to incorporate them into their existing systems and structures.

From a regulatory standpoint, the responsibility to do appropriate due diligence checks on prospective vendors lies with the banks.

The Bangko Sentral ng Pilipinas (BSP) has put in place a regulatory environment that properly guides banks on how to deal with risks and ensure consumer protection as they pursue 32 ASIAN BANKING AND FINANCE | SEPTEMBER 2016

Vicky Lee-Salas Financial Services Leader Philippines, EY

Liew Nam Soon Managing Partner, Financial Services, ASEAN, EY

technological advancement. Banks are rated for its IT Risk management, thereby encouraging banks to adhere to high standards of IT security as they enhance their services with the use of modern technology.

Given the regulatory requirement, banks prefer to work with the larger, more established vendors, limiting the playing space for FinTech start-ups, though they may have the right technology to help banks advance their digital strategy.

Global players cashing in on the digital growth potential What all this means is an opportunity for global banks to establish their foothold to try and gain first movers’ advantage in the digital consumer market using their existing technological capabilities without having to partner with a FinTech to develop one.

For example, Citi Direct3 was the first to establish digital presence in the Philippines in 2000. It started the banking alerts wherein clients received SMS and email alerts on banking and credit card transactions in 2009. Another innovation is a Citibank Ph mobile app compatible with most mobile phones as well as the eAdvice in 2012. During the year, the bank also launched the Citi Philippines Facebook account. That said, the major domestic banks have the advantage of in-country expertise and home-grown familiarity with their existing customer base, and are expected to give the global players stiff competition.

All in all, though challenges still need to be addressed, the Philippines consumers are using more of the internet and mobile platforms for their financial transactions. We foresee that this will in turn drive more innovation and competitive product offerings in the digital space by both the global and local players alike, giving the Philippines consumers more choices.

For more insights, visit ey.com/digitalrisk The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms 1 http://www.mb.com.ph/metrobank-pushes-expansion-of-retailbanking-operation/#Wd8v3eSLwtRqspu1.99; 2http://www.philstar.com/ business/2016/04/09/1571142/chinabank-taps-pldt-unit-for-digital-auto-loan; 3http:// www.philstar.com:8080/banking/2015/09/29/1504947/citibank-targets-more-clientsusing-digital-banking-services

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