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KRUNGSRI’S CORPORATE AMBITIONS WHY CHINESE BANKS ARE STARVING FOR CAPITAL HOW GO-JEK FORCED INDONESIAN BANKS TO JOIN FORCES CASHLESS PUSH SLOWS IN SINGAPORE KOREA’S NEW DIGIBANK CONTENDER

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ASIAN BANKING AND FINANCE | JUNE 2019 1

FROM THE EDITOR PUBLISHER & EDITOR-IN-CHIEF ASSOCIATE PUBLISHER PRODUCTION EDITOR JOURNALIST GRAPHIC ARTIST

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Cash lies at the heart of all banks, yet the myriad of new payment platforms and e-wallets all promise, in theory at least, to make cash as much a relic of the past as gold. Yet, as our story on e-payments in Singapore shows, the dream of a cashless society in Asia’s most wired cities is failing to materialise.

Elsewhere in Asia, banks are also waking up to the realisation that they may not be all powerful when it comes to settling transactions in the wake of competition from other fintechs or even ride-hailing apps. Indonesia’s state-owned banks have joined forces to present an alternative to Go-Jek payments, whilst elsewhere in South East Asia, Grab remains relatively unchallenged as banks prefer their own payment platforms rather than a combined one.

How long this will remain the case is the big question. Meanwhile, in South Korea, the two web-only banks are now set for more competition with payment app companies actually partnering with banks and hoping to get full digital banking licenses.

Moreover, Hong Kong has just granted the first three virtual bank licenses, two of which went to entities backed by existing banks (Bank of China and Standard Chartered) and the third to China’s insurance giant, ZhongAn. Interestingly, neither payment providers nor the behemoths WeChat or Alipay got a guernsey.

So, cash remains king, payments companies want to be banks and banks want to control payments, all whilst the killer consumer apps, like Grab, eye taking it all.

As the Kinks sang in their hit song Lola, it’s a mixed-up, muddled-up, shook-up world.

What does all of this mean? We will be exploring all these themes and more at our inaugural Digital Payments Summit to be held in Hong Kong on August 28 and are as keen as you are to find out who’s going to win and who will go home with the wooden spoon. Join me there.

As always, enjoy the read.

Tim Charlton

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2019

   

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

ASIAN BANKING AND FINANCE | JUNE 2019 3

CONTENTS

14

INTERVIEW

KRUNGSRI EMBRACES EMERGING TECHNOLOGIES SWIFT 10 INTERVIEW 12 TO CREATE VALUE FOR CORPORATE CLIENTS

16

COUNTRY REPORT

FIRST

INTERVIEW CITI BANKS ON UNRIVALLED EXPERTISE TO SERVICE ASIA’S MOBILE MILLIONAIRES

COUNTRY REPORT BANKS CAUGHT IN BEIJING’S RISKY BALANCING ACT AS SECOND LARGEST ECONOMY STUTTERS

EVENT COVERAGE

08 In the land of e-wallets,

18 Malaysian banks focus on core

26 Priority Banking and Wealth

Islamic strengths as economic

Management Conference: How

09 Korean banks find three is a crowd

pressure mounts

Asia’s young and crazy rich are

10 Indonesian banks unite against

20 Asset quality risks grow as

pushing banks to reinvent

Taiwanese banks grapple with

themselves

China’s slowdown

cash remains king

Go-Jek and Ovo

OPINION SECTOR REPORT

28 New payment technologies will

22 Virtual cash management tools

continue to disrupt ASEAN banks

take off in Asia amidst robust

30 Winning in the mobile wallet space

regulatory support

32 Digitising investment suitability

24 Thailand embraces facial

Published quarterly on the second week of the month by Charlton Media Group Pte Ltd 101 Cecil St. #17-09 Tong Eng Building 4 ASIAN BANKING AND FINANCE | JUNE 2019 Singapore 069533

recognition tech for e-KYC

For the latest banking news from Asia visit the website

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News from asianbankingandfinance.net Daily news from Asia MOST READ

FINANCIAL TECHNOLOGY

TRADE FINANCE

Fintechs cash in as e-money transactions in India hit $3.3b in 2018

Japanese megabank edges out global trade financiers in customer satisfaction Mitsubishi UFJ has emerged as Asia’s E-money transactions in Indonesia top trade finance bank in terms of hit $3.3b (IDR47.2t) in 2018 as users embraced digital money instruments customer satisfaction, according to a survey from East and Partners. Citi from fintech firms for e-commerce, comes in at a close second followed mobile SIM top-ups, parking fees

by HSBC, Deutsche Bank and and public transport ticketing, Standard Chartered. according to Fitch Solutions.

INVESTMENT BANKING

Japanese investment banks lose out to global players in M&A spree Foreign firms occupied the first three spots in Japan’s merger advisory rankings in 2018 to handle $403b (JPY44.6t) of deals, with Goldman Sachs leading the way followed by Morgan Stanley and JPMorgan Chase & Co.

6 ASIAN BANKING AND FINANCE | JUNE 2019

RETAIL BANKING

Chinese banks raise record-high $48b in Q1 to plug capital crunch Chinese banks have raised $48b in Q1 through equity and debt offerings in order to boost their weakened balance sheets. The flurry of issuance saw banks issue bonds that count as capital and rarely-used convertible bonds.

LENDING & CREDIT

Indian shadow banks face cash crunch as developer defaults mount India’s credit-starved shadow banking sector faces further funding challenges as property developers need to repay $18b (INR1.29t) a year on outstanding debt but generate less than half of the income that can be used for repayments.

CARDS & PAYMENTS

Cash and cheques still account for 40% of Singapore payments Singapore remains a heavily cashreliant society with around 40% of payments still carried out through cash and cheques, according to S&P. Cash in circulation is about 10% of the country’s total GDP compared to about 2% in Sweden.

THOUGHT LEADERSHIP ARTICLE

Banks embrace corporate actions automation with SmartStream’s award-winning platform TLM Corporate Actions has a track record of delivering enhanced risk mitigation and efficiency gains.

W

hen a European company was struggling with a corporate actions conundrum of spending four hours each day collating new event notifications that have been received into the organisation, it turned to SmartStream Technologies for a solution that would enable them to automate the painstaking process. The firm implemented SmartStream’s TLM Corporate Actions platform, which then drastically cut down the processing time compared to the previous manual system that was bogged down by an influx of printed SWIFT messages, fax messages, emails and Excel spreadsheet reports.

“They sat down in front of their computer, switched on TLM corporate actions and said, ‘There you go. That’s exactly the same results that we’ve just achieved using the previous manual system,’ recalled Alan Jones, business solutions director APAC at SmartStream. “Four hours were saved by one organisation against a reasonably sized set of securities of interest that were held on behalf of their clients, but not by any stretch of the imagination a top tier.”

In Asia, large financial institutions are catching on to the advantages that a cutting-edge corporate actions platform can provide. Jones noted that SmartStream was extremely proud to have recently won the best implementation project for a very large regional bank in Hong Kong after it set up the platform that could process the entire lifecycle of every type of corporate action event, from the very first event announcement, through eligible position reconciliation, communication of the event data to internal & external clients, elections and posting entitlement transactions.

“Transforming the processing of corporate action events into an exception management process and flagging events that have exceptions identified against them whilst all other events achieve the nirvana of STP has to be the objective of all institutions,” said Jones. “We allow our client’s operational team to move away from all of the heavy lifting, all the manual processing that they traditionally have to take on and allow them to focus more time on the riskier events and on client servicing.”

For Asian financial institutions that want to mitigate risk and improve efficiency, Jones reckoned that only an automated platform can provide the requisite level of sophistication and control to keep up with an increasingly competitive and regulated operating environment.

The majority of new clients that are benefiting for the automation delivered by TLM Corporate Actions had been attracted to the idea of Software as a Service (SaaS) and the OnDemand convenience for both reconciliations & corporate actions processing, where SmartStream manages the IT infrastructure in its entirety and clients simply utilise this solution hosted on their behalf. “Clients that sign up for our OnDemand service (SaaS) profit from a fully hosted corporate actions processing platform from SmartStream’s dedicated & fully certified VPC cloud environment completely eliminating the cost associated to maintaining hardware and manpower should they host the environment themselves.”

These benefits are becoming increasingly popular with clients who wish to enhance control and mitigate risk whilst reducing the operational expenses as Jones notes a spike in demand for on-demand implementation across the region.

In recognition of its automation and customisation advantage, SmartStream won the best corporate actions solution provider category in the 2018 Waters Rankings which cited the company’s improved TLM Corporate Actions platform after adding a model client platform.

The platform’s next evolution will involve scaling up its services to cover a wide variety of customer types, which is instrumental in rolling out a standard across its existing and new clients. “We want to measure the risk associated to different events based on a number of different categories such as the size of the position, event type, and the market in which the asset is held,” said Jones. “We want to drill into some additional analytical

Alan Jones, SmartStream

reports and measure the service level agreements that clients have with their custodians, by asking: ‘How do you know your custodians are meeting the service level agreement that you are paying for?’

The end goal is to create a platform that requires less customisation from its base model, so new clients can hit the ground running with the freshly installed system, and existing clients can benefit from enhanced operational process with a focus on enhancing control, management of risk, said Jones. “The knowledge & experience garnered from working with clients of all shapes and sizes across all of the major financial centres has continuously been fed back into TLM Corporate Actions over the years. The benefits to clients is immense as imagine that as soon as you implement the solution, by simply tweaking of a couple of business rules you immediately progress into user acceptance testing before promoting the solution into production.”

“We allow our client’s operational team to move away from all of the heavy lifting and manual processing.”

ASIAN BANKING AND FINANCE | JUNE 2019 7

FIRST PROFIT CRUNCH HITS JAPANESE BANKS JAPAN

Mizuho Bank

When Mizuho Financial Group flagged that it is writing off a $6.1b (JPY680b) charge related to the restructuring of its retail banking business and losses from its securities portfolio, it reflected the heightened earnings pressure that even the country’s megabanks could not escape. In the same vein, Mizuho slashed its net income forecast by 86% to just $718.48m (JPY80b) from the previously projected $5.12b (JPY570b) in what is an acknowledgment from the bank that the revenue from its weakening retail business is likely to trail behind the company’s investment in the segment, according to Kaori Nishizawa, analyst at Fitch Ratings.

The Japanese megabank also expects further losses from branches that are scheduled to be shut down as part of its overall cost containment and rationalisation strategy.

The picture isn’t any rosier for Japan’s other big banking players that have also been struggling with weak demand for loans as the country rapidly ages and elderly customers shift towards lower-risk products that are less profitable for banks. Indeed, Japan’s system-wide net interest margin (NIM), a common measure of profitability, has been on a prolonged decline since the 2000’s.

Unlike Mizuho, however, Mitsubishi UFJ Financial Group (MUFG) and Sumitomo Mitsui Financial Group (SMFG) already booked significant branch consolidation costs in the fiscal year ended March 2018. Overall, Japan’s three megabanks have announced structural overhauls that will cut headcount by a combined 32,000 as they automate a number of operations. However, the digital pivot doesn’t mean that banks are completely out of the woods as the process of migrating retail operations online may also deal a heavy blow to players who need to unlock enough revenue to cover the costs allocated to digisting their retail businesses.

8 ASIAN BANKING AND FINANCE | JUNE 2019

DBS PayLah

In the land of e-wallets, cash remains king SINGAPORE

S

ingapore should be one of the first countries in Asia to become a cashless society. After all, it has one of the highest mobile phone penetration rates in the world at 141% and mobile coverage is 100% so there is no excuse not to pay digitally. Even the government is behind the effort with an ambitious plan to ban cheques by 2025. So, with all the infrastructure, technology and laws in place, why is Singapore surprisingly resisting the move away from the cold hard stuff?

One reason, according to Ivan Tan, analyst at S&P, is that older Singaporeans just prefer cash, and that for some everyday purchases like food at hawker centres, people prefer the dollar. Yet, this alone may not explain why Singapore, and then possibly the rest of Asia, is not as ready to go as cash-free as places like Sweden, where cash in circulation represents just 2% of GDP compared to 10% in Singapore. “We believe the transition to a cashless society will be a gradual one given the ageing demographics in Singapore.

Anthony Chiam

Ivan Tan

On a behavioural basis, the older population segment is more resistant to change and will likely prefer traditional or bricks-and-mortar banking,” Tan said.

Perhaps it is the good old Kiasu (fear of losing it all) attitude of Singaporeans, who may be more concerned with losing their cyber dollars. Security concerns when using mobile banking apps have grown to 41% in 2018 from 34% in the previous year across Gen Y, Gen X and Baby Boomers, noted Anthony Chiam, Regional Practice Leader, Global Business Intelligence - Asia & Australia at J.D. Power. Recent high-profile data breaches include that of the Singhealth, the national government healthcare agency. If one’s health records can be hacked, how safe is an online bank account?

Perhaps another reason for the poor showing of digital payments is the sheer number of options available to consumers, which can end up being almost too much choice.

Whereas China has WeChat and Alipay, Singapore has multiple mobile payment options, including NETSPay, DBS PayLah and GrabPay, amongst others, which only serves to confuse and possibly discourage consumers from going cashless and cause more pain for merchants that have to maintain multiple terminals and apps.

Chiam suggests that authorities could do more by culling the number of available options to surface the best possible payment alternatives.

“Singapore could introduce stricter barriers to entry so that the mobile wallets on offer are in the best interest of the customers and are secure and of the highest quality,” he proposed.

Singaporeans are also notorious bargain hunters, so retailers could also do their part by incentivising mobile wallet usage through discounts and cashback for smaller purchases, said Chiam. “It is all about value adding and improving a customer’s experience and the key to doing that is also the most fundamental – it is to provide a high-quality, secure service that improves a customer’s banking journey every step along the way and not just focuses on preaching to the converted and replacing one banking channel with another.”

FIRST Toss will be launching its internet-only bank with immediate access to over 11 million of its organic app users

SG Lee, CEO of Toss

K-banks find three is a crowd

S

KOREA

outh Korea’s largest banking group, Shinhan, and mobile payments platform Toss, have joined forces to launch a digital bank where they will compete against incumbents kakaobank and K Bank, which both launched in 2017. One key differentiator is that Shinhan runs an actual bank, which will be of significant value as they build out the various functions of the new entity from the ground up, a spokesperson from Toss told Asian Banking & Finance. Toss is

an online payments platform which hit unicorn status in December 2018 when it was valued at $1.2b.

Launched in 2015 by a dentist who was frustrated that a bank user needed five passwords and around 37 clicks to transfer $10, the app has amassed 11 million active users and Toss sees an opportunity to sell them more with Shinhan as a banking partner. Toss currently offers more than 25 services, including loans, credit score management, and customised insurance plans. “Toss

is the first successful P2P money transfer service removing traditional money transfer processes which were complicated and painful.

Since the disruption by Toss in mobile banking, many traditional banks have hugely invested in their digitalisation, and their processes became much simpler and userfriendly. The two web-only banks also have contributed to changing how the financial services are delivered, and allowing users to access financial services easily and conveniently,” the spokesperson said.

Brand value For Lee Hyungin, finance industry leader/partner, Deloitte Korea, the consortium between Shinhan and Toss parent, Viva Republica, is considered the largest combination of synergy between Korea’s largest financial institution and ICT firms.

“With Shinhan’s powerful brand and execution power, a broad and strong customer base, and the wellcoordinated portfolio of banks/__ card/insurance/securities, it can be seen as a case of enterprise-wide and active progress by overcoming the limitations of digital innovation being deployed by existing banks,” Lee said. “Although there is a tendency for some to consider mobile banking as an auxiliary means of offline branch, overcoming this limitation is the biggest learning point for internet-only banks.”

THE CHARTIST: DEFAULT WAVE THREATENS CHINESE BANKS AS SLOWDOWN DEEPENS Chinese banks’ delinquencies rose to a record $17.88b (RMB119.6b) in January with the energy sector suffering the most defaults of $6.94b, according to a report from DBS. “The resulting deterioration of corporate cash flow was evident by collapsing M1 growth,” Nathan Chow, strategist/economist at DBS said in a report. “Given the reduced risk appetite and huge maturing volume, the outlook is poor, with $523.23b (RMB3.5t) in corporate bonds due in the next twelve months.” Further aggravating the liquidity crunch are steep real interest rates which have risen to 4.3% in January 2019 from as low as -3.1% in Q1 2017. “The consequential tighter monetary conditions would add to the financial stress on Chinese firms with high leverage and maturity mismatches. That doesn’t bode well for their debt repayment ability.”

M1 and M2 growth in Chinese banks have dropped sharply

Source: DBS

The property sector is grappling with severe funding pressure

Source: DBS

ASIAN BANKING AND FINANCE | JUNE 2019 9

FIRST

Indon banks unite against Ovo, Go-Jek

E-money transactions in Indonesia

INDONESIA

I

ndonesia’s major banks have decided that if they can’t beat ride-hailing platform Go-Jek in mobile payments alone, then they’re better off trying together.

The Association of State-Owned Banks (Himbara) in Indonesia went live in March with a mobile wallet service called LinkAja offering an integrated e-payment scheme for the customers of Bank Mandiri, Bank Negara Indonesia (BNI), Bank Rakyat India (BRI), and Bank Tabungan Negara (BTN).

Telco conglomerate Telco Indonesia and energy giant Pertamina are also part of the consortium that will launch LinkAja. LinkAja represents a dedicated attempt by laggard lenders to dent the dominance of e-wallets issued by third-party players, such as Go-Pay from ride-hailing firm Go-Jek and Grab-backed OVO. Fintech companies have driven significant inroads into Indonesia as they took advantage of the low financial inclusion to grow their customer base. Only 49% of Indonesian adults are in possession of a formal bank account in 2017, data from the World Bank show.

For Kenny Liew, telco analyst at Fitch Solutions, LinkAja could reduce cannibalisation between Telkom and the banks as they work together to challenge entrenched competitors. To achieve this goal,

Liew expects LinkAja to turn to discounts and regular promotions to actively grow its userbase although the road ahead is not without bumps. “Like many other companies within the mobile payments field, LinkAja will likely have to engage in a protracted price war with other payment providers to grow its customer base,” he explained.

“However, LinkAja could struggle to build the traction that both Go-Pay and OVO have if it fails to increase the functionality and grow the ecosystem of its service.”

As of February, Indonesia hosts 36 licensed electronic money issuers. The market for e-wallets in the country hit $1.5b in 2018, according to a study from RedSeer, which expects this to swell to $25b by 2023. “The development of new usecases for payment services has contributed to consumer uptake,” Fitch Solutions said in a report. “Whilst meaningful progress has been made in improving financial inclusion over the years, Indonesia still trails significantly, suggesting that there is a large untapped market for fintech companies to capitalise on.”

Price war Go-Pay dominates mobility services by processing payments for Go-Jek’s ride-

Source: Fitch Solutions

hailing platform, which has seen about 150 million users based on app downloads.

On the other hand, OVO managed to achieve its 60-million strong userbase by striking a number of strategic partnerships, including its collaboration with Grab and Indonesian commerce giant Tokopedia. OVO is also used to pay for parking fees in Lippo Group malls. OVO topped the study’s offline category due to its stronger focus on building a network of offline merchants, a strategy that LinkAja could also look into. “LinkAja will need to find more exclusive partnerships with large service providers to build further clout,” said Liew.

In the intensifying mobile wallet war, banks in Indonesia remain on the losing side as they still stand in the shadow of third-party players who enjoy a stranglehold in the domestic market. “We expect the Indonesian and Philippines banks to be net losers (of $1.9-3.8b and $0.9- 1.3b respectively) as larger revenue headwinds are not mitigated by cost benefits,” Morgan Stanley said in an earlier report.

JAPAN

Japanese banks say sayonara to centuries-old Hanko When your correspondent tried to open his bank account in Japan back in 1988, he was told he would first need to visit a name stamp engraver and have his personal hanko made so that he could “chop” the account opening forms. $100 later and in possession of a beautifully handcrafted hanko, the account was opened. Alas, the days of the chop in Japan are now facing the chop. The largest banks in Japan are gradually phasing out the centuries-old hanko or personal stamps which have been used for transactions since the 1800s, in a development that signals how the country’s lenders are trying to catch up with the paperless revolution that has taken off more quickly in other countries.

Mitsubishi UFJ Group (MUFG) has already started offering accounts that do not require hanko as part of its dedicated digital overhaul.

The megabank has also been working to replace tellers with tablet computers and video booths, with the goal of having about 100 of its domestic outlets in the new format by 2024.

10 ASIAN BANKING AND FINANCE | JUNE 2019

Market size of contactless payments in Japan

Similarly, Resona Holdings has been allowing customers to open accounts without the use of hanko since 2018.

Historical hanko Introduced during the Kamakura period (1185-1333) for exclusive use of feudal lords and shoguns, the hanko gained widespread prominence in the Edo period (1603-1868) and was later enshrined in law for use in official documents in 1873. Typically handcarved from wood or cattle horns, hankos come in three types: jitsuin for major contracts; ginkoin for bank transactions and mitomein for common tasks.

The move to phase out the hanko come as lenders push for greater cashless adoption in a country where cash is still king. The government earlier set a target to double the number of cashless settlements to 40% of transactions over the next 10 years. Credit cards and electronic money account for a fifth of the country’s consumer payments, trailing behind China and United States.

Source: Statista

Hanko

We aim to become our customers’ thought partner by providing comprehensive financial solutions to help their businesses grow

Pornsanong Tuchinda head of commercial banking, Krungsri 12 ASIAN BANKING AND FINANCE | JUNE 2019

INTERVIEW

Krungsri embraces emerging technologies to create more value for corporate clients

The bank is the first major player in Thailand to apply blockchain to enhance supply chain transactions.

K

What digital strategies is Krungsri deploying to retain commercial customers? What particular initiatives does the bank have around this area?

Krungsri has implemented several initiatives to adopt digitalisation to improve the efficiency and enhance flexibility for commercial customers. Krungsri became the first in Thailand to apply blockchain technology to supply chain solutions. Not only does the technology increase speed, transparency and accountability of supply chain transactions, but it also provides accessibility for smaller SMEs to financial services.

For instance, Krungsri was entrusted by Siam City Cement to pilot the Krungsri Supply Chain on blockchain to expedite transactions. Krungsri was also mandated by the PTT Public Company Limited LPG Cooking Gas with the development of Krungsri Cashless Chain for PTT LPG Cooking Gas, marking the first truly business-to-business cashless solution for their entire trading community.

Going forward, Krungsri looks forward to bringing new technologies to serve and enhance the operating efficiency of commercial customers.

rungsri is leveraging on the knowledge from its Japanese parent, Mitsubishi UFJ Financial Group (MUFG), as well as new technologies to rapidly grow its commercial customer base in Thailand. The bank pioneered the use of decentralised ledger technology to significantly increase the speed, transparency and accountability of supply chain transactions and expand capital access to cash-short SMEs. It has been six years since MUFG acquired 76.88% of the Thai bank, and since then, it has wasted no time in transferring knowledge, skills and all-important market access to its local subsidiary.

By banking on emerging technologies, Krungsri hopes to sustain robust asset growth figures in its commercial banking business.

The bank aims to achieve its loan and deposit growth target of 6-8% under its Medium-Term Business Plan for 2018-2020 from the average 7.5% loan growth and 5.0% deposit growth in 2015-2017.

In an exclusive interview with Asian Banking & Finance, Pornsanong Tuchinda, head of commercial banking at Krungsri, outlines the bank’s efforts to stay ahead of corporate financing trends through the relentless exploration of emerging technologies in an effort to enhance productivity and efficiency to create more value for its corporate customers.

What are the most pertinent issues in Thailand’s commercial banking landscape and how is Krungsri Bank positioning itself as the preferred partner for corporates in the country?

Like the overall financial services sector, Thailand’s commercial banking has been very competitive - financial technology and innovation are changing the way that banks do business. Commercial loans expanded well last year, especially from large corporates and SMEs, due to improved economic conditions, according to the Bank of Thailand.

For 2019, overall financing through bank loans is likely to grow in line with economic growth, supported by domestic demand, rising infrastructure investments and the Eastern Economic Corridor (EEC) related projects.

For Krungsri commercial banking, which serves large corporates and SMEs, we focus on differentiating our products and services, including enhancing digital platforms to serve the different needs of customers in various industries at different growth stage.

We aim to become customers’ thought partner by providing them not only single traditional products and services, but also comprehensive financial solutions to help them grow their businesses. Besides, as a member of MUFG, we can leverage MUFG’s global networks and wide product suites, which can bring lots of opportunities to our customers.

Krungsri aims to achieve 6-8% loan growth from the average 7.5% in 2015-2017 as part of its Medium Term Business Plan for 2018-2020

How does a homegrown bank contend against global players that have a market-leading position in the commercial banking scene?

Synergy between Krungsri and MUFG greatly enhances our competitive advantage against global players. The combined resources of Krungsri and MUFG provide access to world-class financial solutions to all customer groups, facilitating offshore business expansions, joint ventures, business matching and new markets.

In 2018, the Krungsri-MUFG partnership won over the $148m (AUD210m) refinancing facility of the Boco Rock Wind Farm project in June 2018 where MUFG acted as the sole underwriter. This was MUFG’s first underwriting deal for the EGCO Group abroad. In 2019, we will continue our drive to promote sustainable growth via holistic financial solutions, accentuating our local expertise with the global MUFG network to help our clients expand locally and overseas. Our ability to customise total solutions from the wide array of products, digital platforms, commercial advisory along with the ever-adapting internal process will eventually establish us as customers’ main operating bank that meets their needs.

What are your goals to achieve further growth in the commercial banking segment over the next three years?

Under the medium-term business plan 2018-2020, we aim to gain top tier perception from both stakeholders, moving beyond a loan office to become a thought partner for corporate customers and a main operating bank for SME customers. It’s a long-term commitment. That is why we focus on providing total financial solutions and continue enhancing digital platforms to achieve sustainable growth.

ASIAN BANKING AND FINANCE | JUNE 2019 13

We offer an extensive set of investment options as part of a robust openarchitecture platform, where clients can benefit from traditional and alternative investments as well as access to a wide range of global markets and securities

Rebecca MacieiraKaufmann business head, Citi IPB U.S. 14 ASIAN BANKING AND FINANCE | JUNE 2019

INTERVIEW

Citi banks on unrivalled expertise to service Asia’s mobile and international millionaires

Affluent clients in the region can unlock sophisticated and customised investment opportunities in the U.S.

A

sia’s high-net worth people are on the move literally. In the old days, a wealthy person would live in one country and their needs would be domestic. But a new breed of wealthy with multiple houses, businesses, and needs in different countries is the next target for Citi International Personal Bank.

With a focus on the region’s high-net worth clientele, particularly those residing in Hong Kong, Taiwan, Japan, India, Vietnam, the Philippines, and China, the bank aims to serve affluent clients, who are increasingly travelling, studying abroad, immigrating and looking outward for investment opportunities.

Citi IPB US provides a value proposition that offers access to a wide range of banking and investment products and services available through bank and non-bank affiliates, with the associated benefit of having assets in the US. IPB US. is one of four International Personal Banking hubs - along with Singapore, Hong Kong, and London.

In an exclusive interview with Asian Banking & Finance, Rebecca Macieira-Kaufmann, business head of IPB U.S. and Samantha Lee, IPB U.S. Sales and Client Engagement Market Head for Asia, share Citi’s plans to meet the evolving needs of Asia’s wealthy clientele seeking investment opportunities in the US. With China minting two new billionaires on a weekly basis, the ultra-wealthy based in Asia-Pacific are set to be richer than their U.S. counterparts in less than three years, according to a report from PwC and UBS. How is Citi taking advantage of this shift?

Rebecca: With the rapid pace of wealth creation in Asia, IPB U.S. is responding to this shift by attracting new talent to stay as close as possible to clients locally in order to retain, deepen, and acquire high-net worth clientele. To better serve Asia, we have structured our organisation into small sales teams, referred to as “clusters,” united by geographic region. The focus is on executing personalised, market-centric wealth management strategies, and delivering superior client experiences.

Samantha: IPB U.S. helps affluent clients navigate the complexity of the U.S. financial markets in their native languages, such as Chinese, Vietnamese, Japanese, Thai, and Tagalog. Furthermore, clients are able to open accounts remotely, without traveling to the U.S. Our teams of wealth professionals visit clients in their home countries to design customised solutions based on our clients’ needs.

How does Citi draw on its international expertise and network to service the cross-border wealth management needs of Asia’s super-rich clients?

Rebecca: Whilst we bring investors local expertise, we’re unique in that we’re truly global, serving thousands of high-net worth clients. We leverage Citi’s global presence and footprint, which provides many advantages, such as

a robust range of product and service offerings all over the world. When it comes to investing, our financial professionals have access to a dedicated team of experts – from our Investment Lab providing asset class insights and thought leadership to Investment Counselors building customised portfolio solutions for clients.

Another advantage is that, at Citi, we have a Global Investment Committee (GIC), which enhances the potential return of client portfolios by analysing historical market data, economic indicators and other fundamental factors to build projections of risks and returns to deliver, strategic and tactical asset class allocation. Our customised portfolios, based on these analyses, are a critical part of our value proposition.

Samantha: Asian clients are sophisticated and as such, they like to bank in the U.S. because it provides them access to a variety of products to include in their portfolio asset allocation mix. Clients also appreciate that their U.S. bank deposit accounts are insured by the FDIC. Rebecca: We offer an extensive set of investment options as part of a robust open-architecture platform, where clients can benefit from traditional and alternative investments, as well as access to a wide range of global markets and securities. Our alternative investments platform includes hedge funds, private equity and real estate funds – products that may not be offered by wealth managers based in Asia.

As clients seek to minimise financial risk, they tend to opt for U.S. dollardenominated assets and shift towards more liquid investments

It hasn’t been a good year for the wealth management business as affluent clients have become more risk averse in response to heightening uncertainties in the global arena. How do you see Asia’s wealth management landscape developing over the next 12 months?

Samantha: As clients seek to minimise financial risk, they tend to opt for U.S. dollar-denominated assets and shift towards more liquid investments, such as a savings accounts, short-term CDs, and fixed income instruments.

These types of products may offer principal protection that can provide stability during turbulent times.

Asian clients are digitally-oriented and financially savvy and we expect that the wealth management landscape will see a greater trend toward digital products and services. Today, our clients markedly prefer the expertise and engagement of a financial advisor when it comes to discussing their goals and concerns. In the long term, however, we are committed to delivering value both through our dedicated financial professionals, as well as with digital solutions that address our clients’ evolving needs.

We are committed to being a leader in digital wealth management by providing superior capabilities and partnerships with key digital platforms to create a client experience that is personalised, frictionless, and relevant to today’s economy.

ASIAN BANKING AND FINANCE | JUNE 2019 15

COUNTRY REPORT: CHINA

Regulators have been aggressively launching fiscal stimuli to encourage lending to credit-starved companies

Banks caught in Beijing’s risky balancing act as second largest economy stutters The People’s Bank of China has launched a Central Bank Bill Swap to help banks actively lend more.

T

wo months after the world’s second-largest economy posted its slowest growth pace since 1990, Beijing has stepped up its support for the banking sector, highlighting its key role in the government’s plan to sustain the pace of expansion. However, smaller banks will likely face a trying 2019 despite the slew of measures meant to expand capital access and bolster profits. Unlike the goliaths of the banking sector, smaller banks will feel the squeeze on all sides, from the aftershock of the government’s deleveraging drive to the current push to boost lending as a way to support the slowing economy.

Larger state-owned banks are relatively more insulated from the current industry pressures compared to smaller private banks, which are more exposed in terms of weaker loan quality, funding concerns and diminished access to

16 ASIAN BANKING AND FINANCE | JUNE 2019

Smaller private banks are more exposed in terms of weaker loan quality, funding concerns and diminished access to both internal and external capital

both internal and external capital, according to Andrew Wong, vice president, credit research at OCBC, as they enjoy better access to higher-quality borrowers and a robust funding stream via deposit franchises and capital market access.

China’s economy grew at a slower annual pace of 6.6% in 2018 and Beijing has targeted a more modest expansion of between 6-6.5% in 2019 amidst a turbulent geopolitical backdrop marked by trade tensions with the U.S. With the decelerating economy weakening the ability of businesses to repay debt, the NPL ratio of Chinese commercial banks climbed to a 10-year high of 1.89%, said Liu Zhiqing, deputy head of the statistics department of the China Banking and Insurance Regulatory Commission (CBIRC), according to a Reuters report. “Banks will need to remain alert to these dynamics too and monitor their risk profile

through stringent underwriting,” added Wong. “Higher-thanexpected loan losses will be more detrimental to earnings and capital generation in this slower growth and tighter funding environment.”

Banks will also need to make full use of the perpetual bond issuance policies and other measures that may be rolled out in a bid to ease capital constraint, he said.

In January, the People’s Bank of China launched Central Bank Bills Swap (CBS) to support perpetual bond issuance, which the central bank reckoned will help banks replenish their capital and be in a stronger position to support the broader economy through their lending operations.

“We see the action is credit positive for banks’ depositors and senior debt holders because the swap facility will increase the attractiveness of bank-issued

COUNTRY REPORT: CHINA Funding and liquidity ratios highlight bias towards megabanks

Andrew Wong

Alicia GarciaHerrero

Source: S&P Global Ratings

perpetual bonds to participating investors and support banks’ efforts to strengthen capital,” said Ray Heung, senior vice present at Moody’s Investors Service.

The CBS scheme functions as a policy aid for banks to achieve the ambitious administrative target on lending to the private sectors and expand their balance sheets accordingly, said Alicia Garcia Herrero, chief economist at Natixis.

By allowing banks to exchange their holdings of perpetual bonds with central bank paper, this will boost demand for perpetual bonds and aid the replenishment of noncore Tier 1 capital, said Herrero.

“We believe the development of central bank bills are strongly linked to the support for China’s cash-strapped private sector,” said Herrero. “Banks will be supported whilst obliged to lend for China to stem off its rapid deceleration.”

“The ultimate consequences of all of these are yet to be seen, but it is clear China is ready to do whatever it takes to grow, no matter whether you define it as quantitative easing or not,” she added.

Wong noted that bolstering demand for perpetual bonds should increase their capital buffers and lower funding costs, a critical goal given the current profitability challenges hounding the banking sector as NPLs escalate.

Special mention loans or lending that’s potentially at risk of slipping into non-performing status rose to $503.19b by December 2018,

representing around 3.16% of total commercial loan value, according to CBIRC data. Relatively smaller commercial banks along with rural banks appear to be bearing the brunt of the impact, as their larger counterparts benefit from more expansive coping mechanisms.

“Although China is facing more bond defaults than ever, the problem of rising NPLs has been eased as Chinese banks resort to more write offs and continuous asset securitisation, especially for large state-owned commercial banks,” said Herrero. “That said, banks are able to share the risks of stressed assets with the rest of the financial sectors and household.”

Aside from climbing NPLs, banks are starting to feel the sting of higher deposit funding costs following a decline in deposit growth from corporates and governments, and an increasing dependence on time and structural deposits. “Dragged by weak financing ability, corporate deposit growth has been on a decline whilst banks continued to face tense competition from money market funds for deposits,” according to Herrero.

Shadow banking shrinks These emerging challenges for banks in China come whilst they still have to grapple with the aftereffects of the government-led crackdown on shadow banking.

China’s shadow banking sector shrank further by $522.92b to $9.02t in the three quarters leading to end-

George Xu

September or 70% of China’s GDP, down from 79% in 2017 and 87% in 2016, data from Moody’s show. “The crackdown of shadow banking in China has been extremely tough and effective,” said Herrero, but noted that the change of newly increased loans has failed to fully compensate for the loss of shadow banking, leading to decelerating total social financing.

“Together with weak credit transmission, the private sector is clearly bearing the brunt of such inefficiency of credit supply,” she said. “Against the backdrop of decelerating growth and heightened external uncertainty, we expect China to prioritise economic expansion over deleveraging in 2019. One could even argue that deleveraging is dead in China.”

George Xu, analyst at Moody’s Investors Service, also foresees a slower pace of contraction in the China’s shadow banking sector in 2019. “We would assess this campaign as a double-edged sword,” he said. “On one hand, shadow financing has reduced but at the same time it has pushed some of the hidden issues from shadow financing into the light and onto bank’s balance sheets, impacting loan quality and capital adequacy.”

Balancing act Banks in China are set for a trying year as Beijing tries to tread a fine line between stimulating growth and containing financial risks. “The government already appears to have loosened its grip on its deleveraging plan and is seeing the importance of shadow banking to economic growth. In all, growth could be more important than deleveraging.”

Wong warned that there is a risk that bank balance sheets will be compromised given government incentives for increased bank lending to ensure China sustains economic momentum. “This plays into the policy role that banks have in China’s economy and the state ownership within the sector. This puts the focus on the assumption of government support and whether it will be overshadowed by government intervention instead.”

ASIAN BANKING AND FINANCE | JUNE 2019 17

COUNTRY REPORT: MALAYSIA

Robust regulatory support is helping Malaysia retain its market-leading position in the sukuk market

Malaysian banks focus on core Islamic strengths as economic pressure mounts The Islamic banking sector is set to maintain higher financing growth rates than their conventional peers.

W

hen the central bank of Malaysia issued guidelines on value-based intermediation (VBI) in October 2018, it signified a heightened commitment to push the country’s Islamic finance sector towards Shariah-compliant sustainable practices and products and help boost the share of Islamic banking assets in total banking assets to 40% by 2020 from 32% as of August 2018.

Designed as an intermediation function, VBI outlines practices, conduct and offerings that aim to produce a positive and sustainable impact and sets out a framework on how to incorporate environmental, social and corporate governance (ESG) values in business strategies, risk governance and operations.

VBI aims to translate the Islamic principles it espouses into real banking products and services and update the frameworks for Islamic

18 ASIAN BANKING AND FINANCE | JUNE 2019

Malaysia commands the lion’s share of the global Islamic bond or sukuk market with a 48% market share as of end-2018

banking which have been in place since the 1980s.

“VBI, focused on creating value and impact, is set to be one of the drivers of Islamic financial institutions,” Mohd Izazee Ismail, Senior Vice President, Ratings at Malaysian Rating Corporation Berhad (MARC) told Asian Banking & Finance.

The latest regulatory initiative comes on the heels of the implementation of the sustainable and responsible investment (SRI) sukuk framework in 2014, which led to issuance of the world’s first green Islamic bonds in Malaysia in 2017, data from Moody’s Investors Service show. In 2016, the Investment Account Platform, the country’s first bank-intermediated online platform for shariah financing and investment was also launched, signifying how regulators are throwing their full weight in support of the

development of Islamic banking in the country.

“Much positivity already surrounds the various ongoing VBI initiatives. It is therefore reasonable to expect that there would be even more VBI measures launched in the near future, as well as heightened support and involvement of Islamic financial institutions given benefits accruing to the industry in general and the economy at large,” said Domenic Fuda, Group Managing Director and CEO at Hong Leong Bank.

As the largest Islamic banking market in Asia-Pacific and third largest in the world, trailing only after Saudi Arabia and United Arab Emirates, Malaysia commands the lion’s share in the global Islamic bond or sukuk market, accounting for half (51%) of the total $396b (RM1.6t) of total global outstanding sukuk in 2017, Deputy Finance

COUNTRY REPORT: MALAYSIA IT spending of Malaysian banks against regional peers

Domenic Fuda

Mohd Izazee Ismail

Source: S&P Global Ratings

Minister Datuk Amiruddin Hamzah said in a local media report. The headline figure softened mildly to 48.0% in end-2018, but still retains the country’s marketleading position in the sukuk market, according to Izazee.

With heightened demand from a growing number of end-users and resources invested by companies scaling their Islamic operations, Islamic finance will continue to play a big role in Malaysia’s financial landscape, said Simon Chen, Vice-President – Senior Analyst at Moody’s Investors Service.

“The Islamic banking sector will maintain higher financing growth rates than conventional peers, because of the strong demand in this sector, and as large Malaysian banks continue to adopt an “Islamic-first” approach when marketing and offering new products to corporate and retail customers,” he added. Moreover, the non-performing loan (NPL) ratios of Islamic banks trail behind conventional lenders, indicating a largely healthy asset quality unlike their counterparts in Indonesia which have relatively poorer asset quality due to their focus on retail and SME financing, Moody’s said in an October report.

Keeping pace Compared to their more developed regional peers like Singapore, however, most banks in Malaysia remain in the early stages of digitisation where lenders still

have to build the necessary digital infrastructure, technical capabilities and human resources either through fintech partnerships or in-house tech teams. “The banks will not likely realise any material efficiency gains during the initial investment phase because these efforts require high investment levels and ongoing maintenance costs,” said Chen.

Even as IT investments still translate as a medium-term recurring expense, its long-term benefits help in boosting its business case. “Digitisation of banking services through the integration of technology for the improvement of service delivery, as well as the provision of new offerings through partnerships with FinTechs would further boost the position of Islamic banks as the natural financing partners of Halal industries, for example,” said Fuda.

In December 2018, an instant fund transfer service called DuItNow was launched to enable users to send money via mobile number. Customers need only perform a one-time registration to link their mobile number with their bank accounts. Users can also choose to connect their MyKad, MyPR identity card numbers, army or police numbers and passport to make transfers of up to $1,200 (RM5,000) for free.

Hong Leong Bank is one of the 14 local and foreign banks that offer DuItNow on its Internet and mobile banking channels as

Simon Chen

the bank recognised the value of open data in product and service customisation. “Although in its early stages currently, it is likely that the ability to draw information from a larger pool of data would also help banks establish better controls and contribute towards better compliance and fraud management practices,” said Fuda. “We take pride in our ethos of being Digitalat-the-Core, adapting to changing environments and executing our digital transformation strategy.

We conscientiously strive towards strengthening our digital offerings by re-imagining the banking journey of consumers and small & medium size businesses so that we can deliver more efficient and meaningful products and services.”

The refined focus on cost efficiency is especially critical since banks in Malaysia face dimmer business prospects on the back of lingering economic uncertainties which is tipped to further drive weak loan growth down to 4-5% in 2019 from 5-6% growth achieved in 2018, Izazee of MARC said. Margins will also face pressure amidst tough competition for deposits whilst capital market activities are expected to remain soft.

“Banks will face subdued loan demand from businesses and households in their domestic and overseas markets because of weak sentiment. This dampened demand will curb profitability through weak revenue growth, persistent compression in net interest margins, and incrementally higher credit costs,” warned Chen.

With bank margins set for limited upside in 2019 amidst high household and corporate sector indebtedness and property market imbalances, banks need to perfect the balancing act of keeping a tight lid on costs whilst shelling out for crucial IT investments that will ensure their sustainability in the long run. “Nevertheless, as the challenge for banks going forward is revenue growth, it is important that banks balance their fintech investments accordingly so as not to overburden their overall financial performance,” concluded Izazee.

ASIAN BANKING AND FINANCE | JUNE 2019 19

COUNTRY REPORT: TAIWAN

Although non-performing loans fell to $2.25b in 2018, the positive momentum may not be sustained for long

Asset quality risks grow as domestic banks grapple with China’s slowdown Delinquencies climbed in overseas loans of cyclical sectors as well as loans to China and Southeast Asia.

D

omestic banks in Taiwan ended 2018 on a solid footing in terms of asset quality, shrinking their nonperforming loans (NPLs) whilst growing their total loans, resulting in a healthy improvement in their NPL ratios, but it will be increasingly hard to maintain this momentum in 2019. Foremost amongst the looming risks this year is weakening global growth, and already the latest manufacturing data has pointed to a slowdown that will not likely abate.

In search of margin growth, some domestic banks in Taiwan have been accelerating their international expansion, whilst regulators are looking to support the industry through initiatives and measures such as the awarding of internetonly banking licenses.

“We view that the most challenging issues for Taiwan banks in 2019 is to maintain a

20 ASIAN BANKING AND FINANCE | JUNE 2019

Eunice Fan

stable asset quality and earnings performance amid the global economic uncertainty,” Eunice Fan, director at S&P Taiwan told Asian Banking & Finance. “We expect non-performing loans and credit costs to marginally increase in 2019, whilst the still-constrained margin growth from stiff competition and low interest rates at home would continue to pressure profitability.”

The warning came amidst an improving trend in the NPLs of domestic banks in Taiwan, which slid to $2.25b (NT$69.38b) by end-2018 from $2.46b (NT$75.84b) from the year-ago period, data from the Central Bank of the Republic of China (Taiwan) showed. The NPL ratios – a key indicator of asset quality – of domestic banks in Taiwan also dropped to 0.24% from 0.28% over the same period. The bad loan ratios of domestic banks also held steady at 0.24% in January

2019 compared to the prior month, although their NPL coverage ratio slipped to 569.56% from 575.44%.

Taiwan’s heavy dependence on China threatens this stable set-up which renders the domestic economy and the banking sector by extension particularly vulnerable to the tit-for-tat tariff war. More than 2% of Taiwan’s GDP will be affected

by US tariffs on Chinese goods via supply chains, data from asset management firm Schroders show.

Domestic manufacturers form a key part of the country’s consumer goods supply chain.

Already, sentiment has soured after the Nikkei Taiwan purchasing managers index (PMI) dropped into contractionary territory with a reading of 48.7 in October as manufacturers brace for sluggish demand and order volumes. “This informs our outlook for exports and investment activity to be negatively

COUNTRY REPORT: TAIWAN Repayment ability of corporate borrowers weaken in Taiwan

Source: S&P Global Ratings

impacted as manufacturers pare back their production capacity in anticipation of weaker order volumes, which would reduce loan demand, choosing instead to clear existing inventory,” Fitch Solutions said in an earlier report.

Industrial production also shrunk further to -1.86% year on year in February from -1.22% in the previous month. “We think there is little that monetary policy or fiscal stimulus can do at this point to support growth,” Iris Pang, economist at ING said in a note. “The slowdown in the manufacturing sector is expected to continue until sales of new smart devices produced by Taiwan improve and we believe this could take up to a year.”

The central bank’s options to bolster the economy are limited, Pang reckoned, as cutting the policy rate by at least 12.5 basis points at a time would do little to boost credit and brighten the weak economic outlook. “We believe the economic environment will continue to be difficult for most of 2019, and forecast the economy to grow by 1.8% in 2019,” she said.

In anticipation of the economic downturn, banks in Taiwan have been beefing up their defences with loan loss provisions as a share of NPLs grew from 471.1% in the first half of 2017 to 529.6% in H1 2018.

Overseas expansion Against the backdrop of heightened risks and stiff competition that

have squeezed profit margins on domestic loans, Taiwanese banks have been turning overseas in search of faster growth and better profitability.

CTBC Bank, the largest private commercial bank in Taiwan, has spent the past half-decade expanding its overseas footprint, including the acquisition of Tokyo Star Bank in Japan in 2014 and purchasing a 35.6% stake in LH Financial in Thailand. Overseas businesses currently account for about one-third of the bank’s total revenue, CTBC Bank Chairman Chao-Chin Tung said in a local media interview, as he aims to boost this to 50% in the next five years.

The greater focus on overseas growth comes as domestic banks face a crowded and increasingly competitive market in Taiwan. In an attempt to create a more level playing field for foreign banks operating in the country, the FSC recently introduced amendments to help subsidiary banks of foreign banks increase capital utilisation efficiency, lower financial costs and enable greater flexibility in offering financing services to corporates.

Playing catch-up Banking regulation is also encouraging Taiwanese banks to embrace financial technology adoption, although Fan said the pace of deregulation in this area has been more gradual in the country compared to regional peers.

An S&P report assessed that the

The economic environment will continue to be difficult for the most of 2019 and we forecast the economy to grow by 1.9% in 2019

digitisation efforts of Taiwanese banks have traditionally fallen behind that of their Asia-Pacific counterparts, although in December 2017 the country’s legislators passed the Act on Financial Technology Innovations and Experiment that allows developers to experiment with new financial products and services with fewer regulatory constraints during the trial period.

“We expect the actual rollout of such new products or services will still take time for the 1-2 years,” said Fan. In February 2019, the FSC began accepting applications for setting up Internet-only banks. In February 2019, the commission said it will set up a panel composed of its officials as well as external experts and scholars to review the applications, with the final results to be announced by end-June.

Three teams led by Chunghwa Telecom Co, Line Financial Taiwan Corp and Waterland Financial Holdings Co have expressed an interest in the licences. Chunghwa Telecom established a preparatory office in October 2018 for an Internet-only banking business with three shareholders – Mega International Commercial Bank, Shin Kong Financial Holding Co and domestic supermarket chain operator Pxmart Co Ltd. Line Financial Corporation, a subsidiary of Japan’s Line Corporation, has said it intends to offer repackaged financial services from other providers – excluding insurance, stocks, bonds or credit card products – to younger customers if awarded with an Internet-only banking licence in Taiwan. Meanwhile, Waterland Financial will reportedly invest $159.07m (NT$4.9b) or a 49% share in an Internet-only bank, with Japanese e-commerce giant Rakuten, which already operates an Internet-only bank in Japan, holding the remaining 51% stake.

However, the move to grant two Internet-only banking licenses will not have a significant impact on the industry in over the next one to two years, “but rather could gradually change how the customers use banks and accordingly influence banks’ strategic business direction.”

ASIAN BANKING AND FINANCE | JUNE 2019 21

SECTOR REPORT 1: CASH MANAGEMENT

A real-time settlement system launched in Hong Kong to cater to the demand for real-time and low-cost money transfer option

Virtual cash management tools take off in Asia amidst robust regulatory support Global transaction banking revenues are estimated at nearly $1t in 2017 or 43% of transaction banking revenues

W

hen India’s Kotak Bank deployed its new strategy meant to woo corporate treasurers, a digitalpowered approach that unlocked efficiencies and made life easier for end-consumers was a foremost consideration. The bank’s new cash management solutions must be capable of supporting multiple payment and collection methods through single integration – or else, it might risk losing out business to savvier fintech firms that promise lower fees and quicker processes.

The burden on corporates is becoming more palpable: finance staff in banks spend about 15% to 20% of their time on reconciliation due to suboptimal processes, estimated Shekhar Bhandari, Sr., EVP and business head for global transaction banking and precious metals at Kotak Mahindra Bank. “A plethora of payment options in the

Focus for cash management service will no longer be solely on the digitisation of the endproduct but on the entire ecosystem for product delivery

country have created a landscape for corporate and government bodies to offer multitude channels to their customers, whilst the same has also created complexity and challenges in managing their funds flow and the associated information flow leading to reconciliation issues,” said Bhandari. “Corporates are seeking solutions that can ease this complexity to be able to present bills, receive collections, and manage the reconciliation across various channels in a seamless manner.”

In India, enabling customers’ business efficiency and integrated cash management solutions has become a key differentiator in what has become a highly competitive industry. Kotak is focusing on developing digital solutions that enable Indian corporates to keep up with their increasingly complex cash management needs. The bank’s ALLPAY e-commerce

application has been designed for Indian merchants, fully supporting structured e-invoicing and helping streamline electronic receivables as more end customers prefer to transact online.

“Cash management is set for a complete digital overhaul and banks should be ready to grab the opportunities arising out of it,” he said. “Quicker integrated product designs and less time to market would be the key to cater to the fast-changing product environment, customer expectations, market dynamics as well as regulatory and technological changes.”

The focus for cash management service offerings will no longer be solely on the digitisation of the end product, but on the entire ecosystem for product delivery. “A structured service and implementation team that engages with customers for service and specific technological

SECTOR REPORT 1: CASH MANAGEMENT implementation requirements will emerge as a hook in the coming years,” said Bhandari.

Cash cow The stakes for winning in the digitisation battleground are high. According to management consultancy firm McKinsey, global transaction banking revenues are estimated at nearly $1t, or 43% of wholesale banking revenues, in 2017. Of this, cash management - domestic and cross-border payments, including liquidity management - accounts for $500b.

The number and diversity of organisations vying for a piece of the transaction banking pie have risen significantly over the past decade.

Potential rivals to incumbent banks now include digital consumer-tobusiness payments platforms and ecosystems, IT companies, export credit agencies and even logistics companies. “Banks can safeguard their client relationships, expand advisory services, and strengthen margins only if they take the lead in developing new strategies to address digital disruption in global transaction banking,” reckoned McKinsey. “There is significant risk that banks will cede important aspects of the business to emerging digital challengers if they do not take advantage of recent advances in technology, regulatory changes and new partnership modes.”

In the Philippines, banks are taking up the digital call to arms.

BDO, the country’s largest bank in terms of assets, has embarked on a digital transformation by upgrading its architecture to the cloud and building the foundations for API banking, said Edwin Romualdo G. Reyes, EVP and transaction banking group head at BDO. “These core upgrades have cleared the path for BDO to build our digital cash management strategy, starting with the replacement of our long-standing cash management platform Business Online Banking, or BOB. BDO’s cash management platform of the future will provide an omnichannel approach to managing our clients’ cash positions and cash flow

seamlessly, on any device and on the go. We will also be able to add new capabilities and services that will enable our clients to unlock the full potential of their ERP systems through direct integration with our core payment platforms.”

Reyes admits that Southeast Asia is playing catch-up to digital transformation in cash management. “These solutions are not new, but the outdated infrastructure of local Southeast Asian banks as well as the ‘paperbased culture’ have made it difficult to implement digital strategies.”

Reyes envisions that in the next five years, the new virtual cash management tools that will be offered on its future platform – tools that enable corporate treasurers to assess their financial position and make contextual decisions based on real-time information – will become “the normal way of doing business.”

Regulatory support Similarly, UnionBank is also taking bold digital steps after introducing the country’s first API platform allowing corporate clients, fintechs or third-party developers to build applications and services around its products. “This API platform also empowers us to provide real-time updates to our corporate customers’ systems on payment or collection information, allowing for real-time posting and reconciliation,” said Dino Velasco, Cash Management Products Head at UnionBank.

UnionBank has been actively pushing for a wider adoption of electronic payments in the Philippines, emboldened by initiatives from the Bangko Sentral ng Pilipinas (BSP) aimed at encouraging digital payments. In 2017, the BSP launched PesoNET, a batch electronic fund transfer credit payment scheme that serves as an electronic alternative to the paperbased check system and UnionBank is currently ranked #1 in terms of transaction count for sending.

With PesoNET and InstaPay – an electronic fund transfer service that allows customers to transfer funds near instantly between accounts of participating banks and non-bank

Shekhar Bhandari

Edwin Reyes

Dino Velasco

John Wong

e-money issuers – UnionBank said its corporate clients have seen faster and cheaper fund transfers compared to traditional methods.

Meanwhile, in Hong Kong, its de facto central bank introduced in 2018 the Faster Payment System, a payment infrastructure that facilitates instant payments in both the Hong Kong dollar and the renminbi. The Hong Kong Monetary Authority (HKMA) has said that the system addresses the “increasing market needs for more efficient retail payment services” and makes it easier for banking customers to make cross-bank and stored value facilities payments.

“I think a lot of the Asian countries are pushing for [online and faster payments], because there are expectations from the customer that they want the domestic transfer to be more online and more transparent, and the trend is moving in that direction,” said John Wong, head of global liquidity and cash management at Hang Seng Bank Limited. “From a cost perspective, they’re also expecting the banking charges from domestic transfers to be very low, rather than in the past where the monthly transaction costs quite a lot.”

Wong sees such regulatory support as well as customer demand for automated and secure transactions will encourage banks to move towards API connectivity as non-bank financial institutions such as security firms, insurers and property management companies clamour for API usage. “They are looking for stuff [that is] automated with a very secure interface channel with the bank. That triggers all the excitement about API development.”

Wong expects virtual cash management tools to become even more vital in the next five years. “Customers really need transparency. If there are virtual cash management tools which help them to have more transparency, which helps them to aggregate all their idle cash or cash balance across different geographies, and which helps to maximise their returns, that will be a very welcome and important decision making factor.”

ASIAN BANKING AND FINANCE | JUNE 2019 23

SECTOR REPORT 2: BANKING TECHNOLOGY

Customers can soon open passbooks via mobile app at Krungsri

Thailand embraces facial recognition tech for e-KYC FR is part of the broader shift towards the smart bank branch model

W

hen Thailand’s Krungsri assessed the increasingly competitive banking industry over the next five years, it anticipates facial recognition (FR) technology as becoming a banking standard in the country. The bank currently uses FR technology to strengthen its know-your-customer (KYC) process: customers are identified and verified through their unique facial features, part of a growing field of biometrics authentication that includes fingerprint. The bank plans to scale up its deployment of FR technologypowered applications, such as authentication at the transaction level, both for financial and nonfinancial activities.

“The technology itself may not be much different amongst banks,” said Phonganant Thanattrai, head of retail banking and distribution group at Bank of Ayudhya PCL

24 ASIAN BANKING AND FINANCE | JUNE 2019

All banks in Thailand have adopted FR through government support via the National Digital ID platform

(Krungsri), citing how all banks in Thailand have adopted FR through government support via the National Digital ID platform. “But applying the technology to enhance the customer’s experience will be a key factor for creating differentiation among banks.”

The bank plans to start using the technology to identify and verify customers who open a deposit account at its branches by matching the cardholder’s face to the photo on the citizen ID card they present during the branch visit. The technology will be progressively rolled out to enable customers to open passbooks via a mobile app by the second quarter of 2019, which provides the convenience of completing the application without having to step into a branch.

Krungsri’s plans come amidst a newly introduced Bank of Thailand regulation facilitating e-KYC, or

know-your-customer through electronic means. Thailand’s central bank has set up a “sandbox” which encourages banks to experiment in emerging technologies, including FR technology.

Regulators in the region have been implementing fintech sandbox regimes that allow companies to test their products, services or solutions in the market under a more relaxed regulatory environment. Along with Thailand, Hong Kong, Malaysia and Singapore have launched fintech regulatory sandboxes in recent years.

Widening adoption Beyond Thailand, more banks across Asia are tapping the potential of FR technology, including leading players in financial hubs like Singapore and competitive markets like Taiwan, on the back of exciting new applications as well as regulatory support. “More banks have adopted some form of FR technology across this region in recent years. The banking sector is one of the early adopters of FR solutions and this has to do with maturity in the development and uses of FR,” said Shinya Hashizume,

SECTOR REPORT 2: BANKING TECHNOLOGY senior manager for regional public relations at tech solutions provider NEC. “FR has come a long way from its initial deployment by the public sector in areas of immigration and security.”

Hashizume said NEC foresees FR technology gaining traction in the next three to five years as banks look to bolster their efficiency and enhance customer satisfaction via greater flexibility. The company cited how OCBC Bank is using an FR system powered by NeoFace, an AI engine developed by NEC, to identify premier banking customers as they approach the concierge in its Holland Village branch. “The system provides the concierge the identity and various information about the customer – their preferred name, preferred beverage, and information of their past visits - without the customer having to look into a camera at all,” said Hashizume.

“This allows the bank to provide a seamless, personalised experience for its premier customers.”

OCBC Bank is one of the first banks in Singapore to adopt such an FR system as part of its dedicated digital masterplan to improve customer service. The FR system, which has been implemented since December 2017, is capable of recording the purpose of the customer’s visit, gathering feedback, and understanding customer behaviour patterns such as how frequently they visit the branch.

“Since introducing it, we received positive feedback from customers who were impressed by the personalised hospitality enabled by fast and accurate identification,” Pranav Seth, SVP, head of e-business, business transformation and fintech & innovation group at OCBC Bank said in a release.

Meanwhile, in Taiwan, NEC provided an FR system to E. SUN Commercial Bank Ltd. Designed to improve the security and safety of the bank’s ATMs. The company said that the partnership resulted in the world’s first FR automation ATMs with one-time password technology, and are available at five locations across the country in late February.

During their first visit to the

FR-equipped ATMs, users insert their cash cards and a photo of their face will be captured by a camera installed within the ATM. An additional safety measure was put in place to complement the FR technology: Before their images are registered, users must enter a onetime password sent to their mobile phones within 60 seconds. After this registration process, users can only withdraw cash by FR and PIN authentication, NEC said.

Addressing security concerns, the company assured that anti-spoofing technology prevents fraudulent activities in the ATMs, with the AI capable of detecting between a real person or an inanimate photo, image or mask.

Brightening business case The increasing use of FR technology amongst Asian banks is part of a broader shift in the industry towards a “smart branch” model and the improving market viability of its applications, according to analysts.

“When done right, applying the concept transforms the way a bank branch operates (reduced staffing), significantly lowers realestate requirements, and alters customer interaction - with a resulting 60-70% improvement in branch effectiveness, as measured by cost savings and increased sales,” consulting firm McKinsey & Co. said in a July report.

Whilst banks have begun adopting elements of the smart branch model, McKinsey notes that most still have a long way to go before they can extract its full value potential. Part of a more effective approach to the smart branch model is making sure customers can access full service at any time of the day, which is where FR could assist as part of an array of technologies for authenticating transactions in interactive teller machines.

“Interactive teller machines embed most branch services into a machine; in remote locations, they can function as a ‘branch in a box.’

By incorporating remote connection to a human banker, interactive teller machines effectively extend branch hours to 24/7 and allow customers

Phonganant Thananchai

Shinya Hashizume

to do most of the things they would normally come to a branch for,” such as deposits, account transfers, money transfers, and credit card and loan applications, McKinsey said. “Customer-authentication technologies include national ID and passport readers, fingerprint scanners, two-step mobile authentication, digital-signature verification and even FR.” Banks are also benefiting from the improving market conditions, biometric recognition technologies, and the increasingly apparent benefits from launching an FR system, according to an Accenture report.

“Multiple biometric modalities are now on the market at accessible prices,” the report said.

“Enabling automated recognition of individuals based on their physiological and/or behavioural characteristics, these range from ‘harder’ biometrics such as fingerprint, vein and iris recognition to ‘softer’ modalities, including face, voice, keystroke and signature recognition.”

Accenture estimated that the number of deployed biometrics solutions has grown due to falling implementation costs and widening customer adoption, with its market value estimated to have reached $17b in 2017 from $5b in 2010.

Aside from the oft-cited efficiency improvements linked to faster client onboarding and smoother authentication in subsequent branch interactions, wider adoption amongst banks will help promote financial inclusion in emerging economies where people often lack the necessary identity documentation or access to bank branches.

“Identity used to be all about security. Now it has evolved to the point where, properly implemented, it can bring a broad set of business benefits to banks. These benefits are particularly timely in an environment where the identity requirements – such as KYC and identity verification – being imposed on the industry are increasingly onerous from a bank and customer perspective,” the management consultancy firm added.

ASIAN BANKING AND FINANCE | JUNE 2019 25

EVENT COVERAGE: PBWM

How Asia’s young and crazy rich are pushing banks to re-invent themselves The 20 to 37-year-old age group received an estimated $30t in wealth from their baby boomer parents

M

ore than half of the world’s newest and youngest billionaires are in Asia, making millennials the runners of the world’s biggest finance landscape - one inheritance at a time. In the midst of increasing digitisation and demographic shifts, Asia’s top financial institutions and wealth managers race to offer the trendiest and most novel deals to high-net worth individuals (HNWI) especially since the region is the world’s largest HNW factory, holding more than 50% of the world’s new billionaires in 2017 with a combined net worth of US$2.7t, according to UBS and PwC. Digital wealth in the region is also expected to grow to US$300b by 2025, as digital native clients emerge alongside digital migrants who are also learning the ropes of technology. Globally, one in four of the world’s millionaires are millennials, data from the Shullman

Digital wealth in the region is expected to grow to $300b by 2025 as digital natives emerge along with digital migrants who are learning the ropes of technology

Research Centre show.

Kimmis Pun, managing director and head of private banking, VP Bank, said that this age group of 20 to 37-year-olds are receiving their baby boomer parents’ wealth of almost US$30t while inheriting positions of influence as well.

As banks transform to cater to evolving client needs, they must also be aware that not all their clients will jump on the bandwagon.

One in three banking solutions is purchased from the competitor of a client’s primary bank, mostly through digital means that only need a few clicks. Avishek Nandy, principal, Bain & Company said that hidden defection - the silent fade of a loyal customer as they purchase a product outside of their usual bank - is a rampant phenomenon in the region’s banking scene which is especially unwanted if the defectors are crazy rich clients.

“Banks need to sort of think

Relationship managers remain indispensable in spite of the technological wave in wealth management

26 ASIAN BANKING AND FINANCE | JUNE 2019

about going back to the basics of anchoring and value and thinking about how they differentiate and hopefully provide value to their customers,” said Nandy, as he called for client over product centricity.

Bhaskar Prabhakara, CEO, WeInvest, said that the nextgeneration wealth platform revolves around several key features: cloud hosted infrastructure and data services; execution and custodian connectivity with multiple venues; exception-based operational support; middle and back office; investment strategies from best-inclass-players; and end-user interface and experience.

“By using cloud computing, you can achieve a lower variable cost than you can get on your own.

Because usage from hundreds of thousands of customers are aggregated in the cloud, you enjoy higher economies of scale which translates into lower pay as you go

EVENT COVERAGE: PBWM Relationship managers are the second most important consideration to customer satisfaction, trailing behind effectively managed assets HNWIs can monetise art collections to achieve significant returns

prices. When you make a capacity decision prior to deploying an application, you often either end up sitting on expensive idle resources or dealing with limited capacity.

With cloud computing, you can access as much or as little as you need, and scale up and down as required with only a few minutes notice,” echoed Nilanshuk Haldar, head of financial services partners, APAC, Amazon Web Services.

The evolving role of RMs For HSBC, the trend revolves around not only asset accumulation, but also the customisation of banking services. Mark Surgenor, head of wealth, Asia, HSBC, said that wealth management is something that they feel they should control and take over.

Whilst Asia’s rich millennials want digitisation and a greater say over their assets, banks should not be too keen in eliminating their relationship managers. A study by HSBC revealed that relationship managers are the second most important element to customer satisfaction in wealth, trailing behind effectively managed assets which remain the topmost consideration. This is followed by the organisation’s reputation, reporting and reviews, and networking and education.

Striking the balance is key as customers at HSBC, for instance, prefer a more tailored contact frequency and hybrid contact strategy between relationship manager-led interaction, supported by digital communication.

Michele Ferrario, co-founder and CEO at robo-advisor StashAway, believes that wealth managers can do more by being simple as it aims to resolve a pain point where many companies have made their processes too complex for their clients and relationship managers cannot be fully trusted to have adequate industry knowledge.

‘Going back to the basics’ means leaning the bank, segmenting its customers, transforming its people, and revamping its process and platform, according to Salisa Hanpanich, executive vice president, First Division and Segment Management Division, Siam Commercial Bank. This begins with moving from a one-size-fits-all coverage through a bank network to an agile and hybrid coverage model.

Digging to the core To be fully ready for advanced capital markets technologies, wealth managers should look at asset management fundamentals and consider all trade flows between the buy side, the sell side, and markets.

Eichiiro Yanagawa, senior analyst, Celent, pointed to the importance of transaction cost analytics across asset classes as the first step toward an effective handle on performance, cost, and counterparty checking.

“Innovative buy side firms are already looking more holistically at total cost of execution in a variety of asset classes and reshaping their trading and execution processes for optimal efficiency by channel. We are getting closer to true multi-asset trading, driven by rapid expansion

of electronic trading and regulation that favors automation and transparency,” Yanagawa said.

On the client side, those seeking to maximise investments can look at diversifying their portfolios with assets that generate significant investment returns, such as art collections, especially since generational wealth transfers not only involves money but also properties, according to Benjamin Szeto, partner and deputy head of private wealth practice, RHTLaw Taylor Wessing, Leveraging data Compared to clients in the United States, clients in Asia Pacific are extremely open to using digital channels. A survey by Oliver Wyman shows that 100% of respondents from the United States would rather talk to an advisor in a face-to-face meeting, compared to only 72% of respondents in Asia Pacific. Consequently, only 18% of respondents in the US prefer talking to their advisors via social media channels, a stark contrast to 42% of respondents in the Asian region.

Anutosh Banerjee, partner, financial services, Oliver Wyman, said that they are seeing four broad themes that characterise ongoing digitisation efforts by wealth managers: operational efficiency, customer experience, platforms, and advisor productivity. For instance, Credit Suisse and J.P. Morgan are both working toward operational efficiency by digitising manual processes whilst DBS and Citibank focus on customer experience through improved client interaction and service.

On the other hand, Goldman Sachs and BNP Paribas are working on their platforms by providing access to technology solutions or their investor base and Morgan Stanley and UBS are looking at advisor productivity and efficiency.

“The future of finance is invisible,” said Ned Phillips, CEO and founder, Bambu. The future calls for a more intangible way of interacting with clients - be that on Messenger, Skype, or through real-time advisory solutions.

ASIAN BANKING AND FINANCE | JUNE 2019 27

OPINION

NICK LORD

New payment technologies will continue to disrupt ASEAN banks

I

have been writing about the potential disruption to ASEAN banks from new payments technologies with the belief that it is one of the key structural themes for equity investors in banks to understand as they think about future earnings and dividend streams. In a report Morgan Stanley published last July, we identified the main changes that were taking place to stimulate the growth of non-cash payments.

We believe that there are three main enablers. The first is the development of e-commerce. In addition to this, we are seeing the rapid adoption of new payments technologies, such as the mobile phone, or the common QR code, which enables traditional merchants to accept cashless payments at low cost. Finally, and often with some encouragement from regulators, we are seeing the introduction of cheap and almost instantaneous money transfers, making e-payments as frictionless as possible.

In addition to these enablers, we see four incentives for adoption.

For governments there is the prospect of greater GDP growth from productivity improvements, as well as the potential for increased financial inclusion (especially in the Philippines and Indonesia). For incumbents, there is a need to come up with better products to head off competitive threats from new entrants such as Go-Jek or Alipay or even other banks looking to expand into new markets, such as UOB’s foray into Thailand with TMRW, CIMB’s move into the Philippines and Vietnam, and DBS’s Digibank rollout in India and Indonesia. Finally, for both incumbents and new entrants there is the prospect of new revenue streams as they look to monetise the data that e-payments generate.

These enablers and incentives are driving big changes in the way that payments are being made. In Thailand, we are seeing big growth in interbank internet and mobile transactions (+215% YoY in 3Q18), whilst ATM and counter transactions are falling. Mulya Chandra, my Jakarta-based colleague, pointed out in a recent report that e-money transactions in Indonesia quadrupled in 2018 to US$3.4b, and now account for 7.3% market share.

This is beginning to impact bank revenues. For example, the popularity of PromptPay (a cheap and real-time money transfer capability promoted by the Bank of Thailand and the Ministry of Finance) led to Thai banks waiving fees on mobile, internet and ATM transactions in 2018, pressuring fee income. We expect revenue pressure elsewhere, for example in Indonesia or the Philippines, where banks still charge for many retail transactions, or in new product areas such as retail forex, as competition expands from vanilla domestic payments. In addition to direct impacts, there are knock-on effects. For example, we expect increased rivalry in wealth management and mass-market consumer lending in Thailand as the large banks look to develop new businesses to offset lost revenue streams.

In our July report, we estimated that ASEAN banks would lose 28 ASIAN BANKING AND FINANCE | JUNE 2019

NICK LORD Head of ASEAN Banks Research Morgan Stanley

Value creation from e-wallets by 2022

Source: Morgan Stanley

US$13.1-15.5b of value as a result just of lost payment income by 2022. We thought US$6.4-9.3b of value would accrue to new entrants, with US$2.0-2.9b going to telcos. The balance would accrue to the consumer through lower costs. Of course revenue loss is just one side of the coin; what will also matter is whether or not banks lose market position, which could open them up to more revenue pressure further down the road, and what they can save in costs.

On the market share point, we think the risks will vary by country, with the existing state of the market and regulatory reaction being the main deciding factors. In Singapore, Thailand and Malaysia, incumbent banks have reacted quickly to customer demands for low-cost and convenient solutions, shutting down the space for new entrants, but in Indonesia and the Philippines this process is taking longer, and with added opportunities for increased financial inclusion, new entrants are more likely to take share. In the Philippines, we believe that the telcos are the likely winners, and in particular Mynt, which is owned by Globe Telecom. In Indonesia, we have undertaken a survey that shows fintechs lead, and this is likely to sustain – 20% of survey respondents prefer fintech e-money as a method of payment, compared to 6% each for e-money from banks, telcos and e-commerce.

Costs could be the silver lining for banks as we expect they will be able to generate significant savings as they digitise their business. We see local banks generating cost savings valued at US$20-24b by 2022.

Singapore banks are best placed to benefit (gaining US$5.2-6.4b of net value), followed by those in Malaysia and Thailand.

For bank managements and equity investors alike, the growth of e-payments throws up many challenges. How managements pace investment over the next few years to defend market share, minimise revenue declines in some traditional areas, and expand into new areas of revenue whilst keeping costs under control and maintaining returns will determine the longer-term success of the organisation and investor returns.

OPINION

GRACE CHIA

Winning in the mobile wallet space

A

sia is not only the largest single market in terms of consumer payment value but is also home to the largest share of the world’s unbanked population. Rising smartphone and internet penetration have enabled many to gain access to financial services that were previously limited to mainstream financial institutions. Consumer uptake of mobile payments has been driven by the providers’ ability to value-add by addressing the local markets’ pain points. The value that mobile wallets bring to consumers revolves around the ability to transact with a peace of mind, accessibility to lifestyle services and integrated loyalty platform.

Transact with a peace of mind Consumer technology platforms like messaging apps and e-commerce players have been able to offer financial services not with the intention of disrupting the industry, but rather as a means of facilitating their core offering. These players have integrated their wallets seamlessly into their core offering, providing consumers with peace of mind during transactions. Born out of necessity rather than with the intention to expand their product offering, Alipay’s escrow feature addresses the trust gap between Chinese buyers and sellers on Alibaba’s e-commerce platform. Due to a lack of digital alternatives available, Alipay was introduced to improve the ease of online transactions. The popularity of digital wallets in the online space has had spill over effects into the offline environment, with instore mobile wallet usage becoming increasingly ubiquitous.

Access to lifestyle services The emergence of super apps has blurred the line between lifestyle services and payments. By integrating social, retail, transportation and financial services onto a single platform, it builds stickiness within the super app and encourages cashless behaviour. Indonesia’s Go-Jek has evolved from a ride-hailing service to a super app that includes food delivery, courier services and digital payments.

Dubbed Go-Pay, its digital payment platform extends outside of GoJek’s services, being widely accepted at online and offline merchants.

In an effort to encourage consumers to go cashless, whenever the user pays for a service in cash, the Go-Jek driver will ask if they would like to store the change in their Go-Pay wallet. Both the user and the driver are incentivised to do so, with the driver earning a bonus and the user receiving a discount on their subsequent rides. A rich ecosystem that offers value-added lifestyle services will help to cultivate user engagement and drive mobile wallet uptake.

Reward consumers through an integrated loyalty platform Whilst China has leapfrogged plastic cards and gone straight from cash to mobile payments, markets with high banking penetration, like Singapore, are still heavily reliant on cash and card; and digital commerce has been slow to uptake. As consumers already enjoy the

30 ASIAN BANKING AND FINANCE | JUNE 2019

GRACE CHIA Senior Analyst - Services & Payments Euromonitor International Asia: Digital Commerce Total Value Sales (online and offline)

Source: Euromonitor International

speed, convenience, security and wide acceptance brought about by contactless cards, the appeal of mobile wallets may not be apparent to those who are already performing contactless card purchases.

In markets with a more advanced payments infrastructure, mobile wallets will have to do more than just facilitate a fast, convenient and secure payment. Mobile wallet players will have to value add, which is likely to be derived from an integrated loyalty platform. Leveraging on location-based technologies and big data, mobile wallet providers are now able to personalise rewards in real time based on a user’s location.

Furthermore, as the payments landscape becomes increasingly crowded with new entrants, players which are able to marry various loyalty programmes will bring greater value to users. For instance, Grab’s recent partnership with Singapore’s largest mall owner, CapitaLand, aims to build synergies between the two individual loyalty programmes. Grab users have the flexibility to convert their GrabRewards into CapitaLand STAR$, which in turn can be redeemed for CapitaLand shopping vouchers. Players that are able to build an integrated loyalty platform and embed themselves in the customers’ path to purchase journey will provide consumers with a greater incentive to use their mobile wallets.

Rising smartphone and internet penetration have presented new entrants with the opportunity to reach out to consumer segments which have been often overlooked by incumbents. Brands that are able to offer value-added solutions that address the local markets’ pain points will enjoy strong mobile wallet uptake. The value derived from mobile payments can be in the form of a peace of mind transaction, an ecosystem of lifestyle services and an integrated loyalty platform.

Whilst mobile payments are poised to enter the mainstream, a regionally unified payments system that facilitates cross-border payments may be the next game-changing disruption over the coming years.

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OPINION

CHRISTIAN GILMOUR Digitising investment suitability

F

or private banks and wealth managers, investment suitability is a hot regulatory topic and should be at the heart of front-office digitisation efforts. Increasingly, supervisors are expecting private banks and wealth managers to strive for good customer outcomes and demonstrate that their decision-making processes are centred on an understanding of customer needs.

Recent regional developments include the introduction of regulation on the offline distribution of complex products by the Hong Kong Monetary Authority in October 2018, and the Financial Service Agency of Japan’s Principles for Customer-Oriented Business Conduct, which were finalised in March 2017.

Although regulatory specifics differ between jurisdictions, the underlying fundamental principle remains consistent: an investment product ought to be aligned to a customer’s risk profile and appetite.

In instances where the product is considered to be unsuitable, the obligation is on the banks to control the selling process and protect the customer.

Matching a product to a customer’s needs is the core requirement For private banks and wealth managers, the regulatory pressures are pushing players to adopt a more proactive stance where a deep and ongoing understanding of the customer drives the selection of investment products. To do this, five themes need to be addressed: 1. Enabling effective client suitability assessment In order to enable effective client suitability assessment, the development and rollout of an Investment Profile Questionnaire (IPQ) during the client profiling phase will need to take into consideration the volume of information that is required for an operating model to apply across different jurisdictions, where requirements on data capture may diverge. An effective IPQ is one which supports a single operating model where client information can be compared across various client segments and jurisdictions to build a deeper understanding of client risk appetites and corresponding product suitability.

Five stages of the investment suitability process Client profiling: The first stage entails understanding the client’s risk profile and appetite. This is typically assessed through the use of an IPQ that covers details such as the client type, investment objectives, risk appetite, investment time horizon.

Product profiling: The second stage entails understanding the product’s risk profile. This includes assessing the associated risks of each product type, including its time horizon, liquidity characteristics, counterparty risks and investment objectives.

Matching: The third stage focuses on assessing the suitability of a product for a specific client to ensure that the client’s risk profile matches the product’s risk profile. If these do not match, the focus then shifts towards mitigating the risk through appropriate 32 ASIAN BANKING AND FINANCE | JUNE 2019

CHRISTIAN GILMOUR Executive Director, Consulting Deloitte Southeast Asia

disclosure or acknowledgment from the client of a mismatch.

Disclosure: At this stage, the client is informed about the risk of the product. If a risk mismatch has been identified in the previous stage, there may also be a requirement for the client to acknowledge that they accept the mismatch.

Maintenance: As market conditions and circumstances evolve, there is a need to put in place the necessary controls and ensure ongoing and regular assessments of the suitability of products.

2. Building a comprehensive product data suite This is critical to ensure that product attributes are consistently captured across locations and asset classes, whilst facilitating better comparability between different product types, and enabling private banks and wealth managers to offer a better range of products to their clients. Although more complex asset classes may present challenges in terms of data sourcing, effective data laddering can also help to overcome some of these issues.

3. Customising product offerings Technology is a key enabler for private banks and wealth managers to offer their clients customised product offerings. By matching data from the client profiling and product profiling stages of the process, private banks and wealth managers can obtain greater client insight across multiple parallels and offer enhanced product offerings that are customised to their client’s requirements.

4. Standardisation of disclosure requirements The standardisation of disclosure requirements is critical to ensure consistency across risk disclosures to clients. In addition, by setting up standardised platforms to automate disclosures, private banks and wealth managers can also ensure minimal disruptions to their overall sales process, while retaining a clearly documented audit trail for their future reference.

5. Ensuring consistent data capture This is crucial to facilitate ongoing monitoring and assessment to ensure that there remains a suitable match between a client’s risk profile and a product’s risk profile, even as both continually evolve. This requires the use of analytic platforms that are capable of efficiently consuming and assessing data. In contrast to legacy platforms where single position assessments were the focus, new technological platforms now enable first and second line controls to move beyond sample-based analysis, enabling private banks and wealth managers to leverage entire sets of data for greater accuracy and more comprehensive oversight.

Ultimately, regulators will not only be watching investment suitability but also the delivery of good customer outcomes.

Ensuring that firms are not serving the wrong types of customers is a continuing regulatory priority. Robust procedures for understanding customer identity and associations, ongoing monitoring and analysis of transactions, and timely identification, and escalation and action on suspicious matters continues to be top of mind for regulators.

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