International Finance | November 2019 | 1
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2 | November 2019 | International Finance
november 2019 Volume 9 Issue 13
Editor’s note Samuel Abraham Editor, international financial magazine
Virtual banks are virtually here
T
he costs of branch-based banking amount to 40 to 60 percent of the total costs of banking companies, which they recoup as charges from customers. Branchless banking or virtual banking provides a new value proposition to banking customers based on differentiated products offered at dramatically lower costs compared to physical banks. The virtual banks are able to pass on the gains from not having vast physical infrastructure to customers. Opening an account with a traditional bank can be a cumbersome process involving multiple forms to fill up while on a virtual bank’s app a user may be able to complete the process in five minutes. The evolution of virtual banks is based on the banking maxim that banks need to operate on the same real estate that customers live their lives. Yesterday’s banks were located on the high streets that users did their shopping and recreation. So, logically in the digital age, banks needed to move to the digital real estate on which customers are living their lives. Traditional banks have a lot of legacy IT infrastructure that limits their agility and flexibility in the digital age. Most their online services are digitised versions of their offline services. This realisation is where virtual banking innovation starts. Hong Kong and Singapore are unparalleled in Asia as global financial hubs and both jurisdictions are set to launch digital banks. In our cover story we look at the regulatory environment and innovation ecosystem for virtual banks in both cities and then analyse their future prospects. This edition of International Finance also goes head long into finding out how the GCC nations leapfrogged the rest of the world in 5G implementation. As usual, across banking and finance and key industries, we have packaged great stories that you are bound to enjoy in this edition.
sabraham@ifinancemag.com www.internationalfinance.com
International Finance | November 2019 | 3
inside
if november 2019
24
interview
Money drives 36 NOW financial inclusion 70% of the GCC's workforce doesn't have bank accounts. A fintech is changing that
Who has the edge? Hong Kong and Singapore are licencing virtual banks with different approaches fintech
fintech
Analysis
62 Trade war: Time for foreign
investment in GCC banks?
72 Healthcare: AI faces data
12
18
Silicon Valley of Fintech facing brexit windfall?
Nigeria: Will MTN succeed where others failed?
With Brexit, can Ireland challenge London's position as the fintech hub of Europe?
While mobile money is already a success in Kenya, Nigeria may be getting its act right
fintech
Telecom
and black box challenges
78 Southeast Asian airlines
leverage the precision of AI
insight
54 China embraced wealthtech;
why hasn’t the UK?
Company Profile
40
66
Daring what banks didn’t
5G: How GCC leapfrogged the world
Mexico's fintech startups have carved out a market that the banks couldn't serve
The local governments’ willingness to invest in niche technologies helps GCC win 5G game
4 | November 2019 | International Finance
46 Ensuring Mexicans
save for their future
82 Tong Eng: Singaporean
developers going global
www.internationalfinance.com
Opinion Jonathan Barrett saving FIs from Geopolitical Risks
52
Exposure to geopolitical risks is inevitable for expanding financial institutions; but technology can help
60
Ian Bradbury Challenging the challengers
How can banks become powerful digital platform businesses connecting trading partners through trust?
76
Ben Davis Tech is Streamlining realty buying
Technology transforms the way we buy, sell, and search for real estate, providing buyers with short sales cycles
92
Terry Wallby AI and emerging Markets FIs
AI helps financial firms in Latin America and Africa compete on the basis of customer experience
Director & Publisher Sunil Bhat Editor Samuel Abraham Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Sangeetha Deepak, Production Merlin Cruz Design & Layout Vikas Kapoor Web Developer Prajitha Rajesh Business Analysts Sid Nathan, Sarah Jones, Christy John, Gwen Morgan, Ayesha Misba, Alex Carter, Janet George, Stephie Eric, Supreet Balekai, Maria Mamtha, Henry James, Indra Kala, Mohammed Alam, Chris Harris Business Development Manager Steve Martin Business Development Sunny Shah, Sid Jain, Ryan Cooper Accounts Angela Mathews, Jessina Varghese Registered Office INTERNATIONAL FINANCE is the trading name of INTERNATIONAL FINANCE Publications Ltd 843 Finchley Road, London, NW11 8NA Phone +44 (0) 208 123 9436 Fax +44 (0) 208 181 6550
regular Editor's note
03 08 06
Virtual banks are virtually here
News Singapore, Shanghai threat to Hong Kong
Trending Huawei's partners 'will win' 5G race
Email info@ifinancemag.com Press Contact editor@ifinancemag.com Associate Office Zredhi Solutions Pvt. Ltd. 5th Floor, Sai Complex, #114/1, M G Road, Bengaluru 560001 Ph: +91-80-409901144
International Finance | November 2019 | 5
# trending Economy
Photo by David Fitzgerald/Web Summit via Sportsfile
Bitcoin surge manipulated?
Huawei's partners 'will win'
Whatever the Americans might think, Huawei is confident that the winners in the 5G game will be its partners. At a web summit in Lisbon, Portugal, Huawei rotating Chairman Guo Ping urged global companies to partner the Chinese technology giant in building 5G applications, saying that those who partner it will be 5G winners. Guo Ping also told the audience that Huawei’s 5G network rollout is going on faster than the company expected.
Bitcoin had risen to an alltime high of nearly $20,000 in late 2017. Bitcoin traded at about $9,300 on November 5. What caused the bitcoin price surge two years back? A forensic study by two finance professors from the University of Texas and Ohio State University found that one large player – an unidentified market manipulator caused bitcoin’s entire rise in 2017.
At a Glance UAE GDP 2014-18
$414
2018
South African bank lending to take a hit?
APac trade bloc loses heft as India cries off
When the South African President Cyril Ramaphosa signed the National Credit Amendment Bill on August 16, 2019, many in the country celebrated the bill, but it was heavily criticised by the banking sector, credit industry, and many economists. Around nine million South Africans could qualify for debt intervention under the act and their total debt amounts to R20.7 billion. Many in South Africa fear that after the bill becomes a law, banks will play safe and refrain from providing credit access to those who qualify for their debt to be intervened.
Despite negotiations going on for years, India recently announced its decision to not join the Regional Comprehensive Economic Partnership (RCEP) trade deal. India argued that it did not get any credible assurance on market access and non-tariff barriers.The Indian government came under immense pressure as the opposition and many experts saw the deal as unfavourable for India. Many believed the deal would result in China dumping its products in India and it would cause major disruption in India’s small scale industry.
Banking
6 | November 2019 | International Finance
Tra d e
$382
2016
2017
$357 $358 2014
$403 ($ billion)
2015
NEWS | INSIGHTS | UPDATES | DATA
Ones to Watch
Oil and Gas
Aramco IPO to be retail hit Even though Saudi Aramco’s IPO valuation set in the revised prospectus issued by the company fell short of the $2 trillion valuation sought by Crown Prince Mohammed bin Salman, the IPO is expected to be hit among Saudi retail investors. Saudi retail investors are being offered 0.5 percent of the company. Retail investors can apply for the shares of the company until November 28 and institutional investors can apply till December 4. Saudi HNWIs are expected to invest in the IPO with little persuasion. Aramco has not named any cornerstone investors or given a formal listing date. Reuters reported that there will be no international roadshows to market the shares abroad. Aramco’s IPO size is expected to be larger if there is sufficient demand to use a greenshoe over allotment
option.“We are planning to subscribe to the IPO in two funds that we manage,” said Zachary Cefaratti, chief executive officer of Dubai-based Dalma Capital Management Ltd, told Reuters. Aramco plans to sell 1.5 percent of the company amounting to three billion shares at an indicative price range of SR30 to SR32. This share price values the IPO at SR 96 billion or $25.6 billion, giving the company a potential valuation of $1.6 trillion to $1.7 trillion. The IPO is higher than Alibaba’s $25 billion IPO in New York in 2014.
By the Numbers
“If Beijing doesn’t accede to America’s trade terms, he said, “we’re going to substantially raise those tariffs. We will only accept a deal if it’s good for the United States” Donald Trump
“If a bank wants to lend higher than the minimum cap there is [still] a higher overreaching cap they cannot [exceed] even if they want,” Mubarak Rashid Al Mansoori, Governor, Central Bank of the UAE
The impact of AI on global healthcare
5.4%
Increase in AI spending by 2022
$150 bn
AI savings for US healthcare by 2026
15%
Increase in healthcare productivity by 2022
$6.6 bn
AI healthcare market by 2021
"We must, together with India, work hard to solve RCE'Ps problems. And India must decide on the basis of this resolution whether to enter into the agreement” Wang Shouwen Vice commerce minister of China
International Finance | November 2019 | 7
in the news
finance
banking
industry
technology
Hong Kong investors have moved around $4 billion from Hong Kong to Singapore concerned with the unrest
The apex bank of Kenya is pushing for a consolidation of the Kenyan banking sector
Consolidation in East African banking? It seems to be consolidation time in East African banking. Access Bank, which is Nigeria’s biggest bank, is acquiring a 93.57 percent stake in Kenya’s Transnational Bank in a bid to build a stronghold in the East African market. The bank recently received a nod from the Competition Authority of Kenya. Access Bank’s deal to acquire Transnational Bank will be welcomed by the Central Bank of Kenya as the apex bank is pushing for a consolidation of the Kenyan banking sector. As of 2017, there were 40 commercial banks catering to the financial need of 50 million Kenyans. Out of the 40 commercial banks, 15 of them were foreign banks. Also, 73 foreign exchange bureaus, 13 microfinance banks, 19 mobile money remittance providers and eight representative offices of foreign banks were part of the Kenyan finance sector. Surprisingly, Kenya has more banks per person compared to other emerging African economies such as Nigeria and South Africa. Earlier this year, the Kenyan central bank approved the merger of NIC Group
8 | November 2019 | International Finance
and Commercial Bank of Africa. The merger between NIC Group and Commercial Bank of Africa was one of the biggest mergers in the Kenyan banking sector since the imposition of interest rates by the Kenyan government. During the same period, the central bank also approved KCB Group’s acquisition of the National Bank of Kenya. After the acquisition, KCB Group strengthened its position as the biggest bank in East Africa in terms of assets. This year, Mauritius-based SBM Holdings also bought assets from Chase Bank Kenya and the entire capital of Fidelity Commercial Bank. CBK Governor Patrick Njoroge did mention earlier that the country will witness more mergers and acquisitions in the sector as it pushes for a consolidation of the industry. In the Financial Sector Stability Report, the Central Bank of Kenya also revealed that mergers are more profitable for the parties involved in the transaction.The report said that mergers lead to more efficiency and profitability as it impacts organisational culture and business models, whereas, acquisitions may not do so.
Singapore, Shanghai threat to Hong Kong Hong Kong’s status as Asia’s top financial hub has been under threat for a while now. But in recent times, Shanghai and Singapore have proved to be worthy challengers. The emergence of these cities as global business hubs and the political unrest in Hong Kong has made the former British colony vulnerable to losing the coveted status. Hong Kong raised $36.8 billion last year in initial public offerings. Even though Hong Kong has been a top destination for initial public offerings, Shanghai is proving to be a tough competition. Shanghai, which is China’s biggest city, is set to raise more money than Hong Kong through IPOs for the second time in the last decade. Shanghai’s push to become Asia’s top financial hub is also being backed by officials by flexing rules and regulations to encourage companies to adapt equity as their primary source of financing. Shanghai, which is also the financial hub for China, is growing rapidly. Experts believe Shanghai is benefitting due to the size of China’s massive
economy. By 2023, China’s GDP is expected to be $37.28 trillion. The Chinese government’s push to globalise the renminbi will also help Shanghai’s cause. Hong Kong’s status as a global trading hub is also being challenged by Shanghai’s growing trade volume due to the increasing number of retail investors in the city. A takeover attempt of the London Stock Exchange Group by the Hong Kong Exchange proved to be unsuccessful earlier this year. The London Group even publicly announced that they prefer to work with the Shanghai Stock Exchange and access the markets in China. To make matters worse for Hong Kong, reportedly, investors have moved out around $4 billion from Hong Kong to Singapore with growing concerns with regard to the political unrest which started in August. During the same period, foreign currency deposits reached a record high in the island city-state of Singapore. While Shanghai and Singapore continue to grow, Hong Kong still maintains the coveted financial hub status despite the ongoing anti-government protests pushing the economy to the brink of a recession.
International Finance | November 2019 | 9
in the news
finance
banking
industry
technology
Many Europeans have received letters from their banks asking them to clear unpaid taxes to the US of up to $5000
In the UAE, investment in fintech increased by 120 percent last year. UAE wants to benefit from the boom
Nadiem Makarim, co-founder of Gojek | Photo by Sikarin Thanachaiary
Tax law hits US-born Europeans
Gojek founder joins government
A new taxation law introduced by the US has become a source of torment for Europeans who were born in the US. Over the years, many Europeans have received letters from their local banks asking them to clear the unpaid taxes owed to the US which could amount to somewhere near $5000. The Foreign Account Tax Compliance Act (FATCA) was pushed by the Barack Obama-led regime to stop Americans from laundering their money overseas, but around 300,000 Europeans whose birthplace happens to be the US are facing the heat.Reportedly, the 300,000 Europeans did not have a clue that they were liable to pay taxes in the US before receiving the letters from their local banks.
Indonesia based leading on-demand multi-service platform and digital payment service provider Gojek’s CEO has been offered a position by President Joko Widoko’s in his cabinet. Nadiem Makarim announced that he has accepted the President’s offer and resigned as the Chief Executive Officer of Gojek. According to media reports, President Andre Soelistyo and co-founder Kevin Aluwi will take over the role of CEO for the time being. Makarim was supposed to take over as the minister of education and culture in the Indonesian cabinet. He is departing from Gojek at a time of intense competition with Singapore's Grab.Nadiem Makarim co-founded Gojek in 2010 with others.
Global fintech adoption rate
96%
Consumers aware of at least one fintech service
75%
Consumers using a fintech service
Source: EY Global Fintech Adoption Index 2019
10 | November 2019 | International Finance
US vs. China: A 5G war?
56%
SMEs using a fintech service
46%
SMEs using a financing fintech service
428 mn 5G connections in China by 2025
190 mn 5G connections in the US by 2025
China mulls merging smaller banks
UAE fintech office to boost sector
Authorities in China are considering merging the small banks in the country in order to avert a financial crisis. Reportedly, Chinese authorities will ask banks with assets less than $14 billion to either merge or restructure their businesses. While the local authorities will be mandated to oversee the transition of the smaller banks, the People's Bank of China will provide liquidity when the need arises. Currently, there are more than 3000 small lenders in China, a majority of which are struggling due to increasing bad loans and stricter regulatory framework. The global economic slowdown and the escalating US-China trade war are only adding to their woes.
The Central Bank of UAE is setting up a dedicated fintech office in the Emirates in a bid to develop a fintech ecosystem. In the last decade, fintech has boomed across emerging markets in Asia, Africa, and Latin America. In the UAE, investment in fintech increased by 120 percent last year. As a result, many fintech startups have also popped up in the Middle East and the UAE wants to benefit from the boom. According to the Governor of Central Bank of the UAE, Mubarak Rashid Al Mansouri, the fintech office will position the central bank as the co-ordinating authority, as an author of prudential and market conduct regulatory requirements and as an enabler and facilitator of fintech activities in the UAE.
$1386 January 12, 2018
Is Ethereum set for a consolidation?
$154
$183 November 1, 2019
January 4, 2019 International Finance | November 2019 | 11
Banking and Finance
feature fintech
Ireland fintech
Silicon Valley of fintech facing Brexit windfall?
12 | November 2019 | International Finance
feature Ireland fintech
IF Correspondent
As the Brexit uncertainty drags on, Ireland’s time to snatch the European fintech innovation hotspot tag might have come
I
n Europe, the continent’s entrepreneurial dynamism currently seems to be concentrated in its islands at least as far as technology driven innovation is concerned. While Malta is making a major play to be a blockchain innovation hub in Europe as International Finance reported earlier, Ireland seems to have found in Brexit an opportunity to buttress its claim to be Europe’s ‘Silicon Valley of fintech’. The KPMG Pulse of Global Fintech report published early this year showed that there is an increasing interest in Ireland from fintech companies looking to establish a European presence. One report showed that 55 fintech companies established a base in Ireland creating at least 4500 jobs in 2018. “In 2018, we’ve seen a lot of financial services companies and fintechs establish operations or grow their footprint in Ireland” Anna Scally, Partner and Fintech Lead, KPMG in Ireland, said in a press release. Scally also added that traditionally these companies might have built their businesses in the UK but are choosing Ireland because of the Brexit uncertainty. She noted that many of these companies were at that time working with the Central Bank of Ireland to obtain licences that would enable
International Finance | November 2019 | 13
Banking and Finance
feature fintech
them to continue to deliver their products and services across the European market in the event of a hard Brexit. AssureHedge is an example of how Irish fintech companies are leveraging Brexit to their advantage. The company offers a range of hedging instruments to help clients prevent unexpected currency losses — and is making its products available to smaller corporations, SMEs and new entities. AssureHedge’s differentiator with respect to competition are products that also help clients to benefit should the rate move in their favour. An AssureHedge spokesperson told International Finance that Brexit might be Ireland’s opportunity to grab the European fintech hotspot advantage from London. “Ireland has strong competitive advantages and is uniquely positioned to be a significant global fintech hub. Our vibrant tech talent-based ecosystem and low tax rates makes us a highly attractive destination for international fintech firms. As a currency hedging fintech, AssureHedge expects to gain from Brexit. Brexit has heightened many businesses awareness of the need to hedge currency exposure to protect profits. “As Brexit drags on, we have seen an increase in the level of understanding businesses now have to their hedging needs. With this increase in the potential customer base and our unique offering in the marketplace, Brexit offers a unique opportunity for Assure Hedge to capture a greater market share sooner than might have been possible in less turbulent market conditions,” the AssureHedge representative told International Finance. In the view of J.F. Clarke, Market Advisor for Financial Services at Enterprise Ireland, there is a possibility that Brexit could give Ireland a competitive advantage in financial services. The reason is because 14 | November 2019 | International Finance
Ireland fintech
The AssureHedge team
400
Irish fintech firms
37000
Employees in fintech sector
Source: Irish fintech survey
regulatory changes around Brexit will give the Irish business ecosystem a boost — and reroute companies seeking to trade in the EU to Ireland. With Brexit, Irish companies will be able to operate and move easily across Europe compared to UK companies as the Common Travel Area shared between the two countries predates the EU. The main factors supporting Ireland’s fintech growth have been in place for a number of years. “Brexit has, however, increased the interest of investors in Irish firms, creating a broader range of players to support early stage and Series A growth potential and, following recent clarification around the common travel area, Brexit has heighted interest in Ireland as an EUbased headquarters location. It remains
a story built around people, and Ireland, has over the past several years, attracted international talent to drive the fintech sector forward. Our stability should continue to encourage and promote that flow of talent,” said a spokesperson from Corlytics, a growing Irish fintech. A spokesperson for Carne, a global provider of fund management solutions from Ireland told International Finance that the company is enjoying the twin benefits of being English-speaking and Brexit-proof — although it operates within Europe, mainly concentrated in the UK, Ireland, and Luxembourg. Ireland’s wealth of fintech talent from around the Europe has helped Carne to meet its diverse technical requirements. Ireland’s fintech scene has over 400 companies employing roughly
feature Ireland fintech
37,000 people in the sector. An enabling technology ecosystem and a skilled workforce are certainly empowering Ireland’s fintech sector. Ireland’s academic institutions have developed excellent manpower with a sophisticated set of skills and access to both the EU and the UK marketplaces to lay the foundation for fintech innovation. The government of Ireland’s national financial services strategy, also known as IFS2020, has supported financial services businesses and helped scale up exports. In addition to these, there has been a strong presence of international financial services institutions operating in Ireland including fund administration and middle office services that boosted the quality of skills available before Brexit.
Government support critical So far, the Irish government has played a pivotal role in supporting Ireland’s fintech industry. Enterprise Ireland has also been helping Carne to expand its business for over many years now, according to its spokesperson. This is especially true in helping the company to locate centres of operational excellence outside of Dublin, where it has been attracting a diverse highly skilled workforce. The IFS2020 strategy and the new 2025 strategy have put in place a framework to coordinate between agencies and government departments. Clarke explained that Enterprise Ireland assists fintech companies planning to set up or scale up their existing businesses. A long term view of the fintech situation gives international clients certainty — positioning Ireland as an ecosystem with unique capabilities to support fintechs. In fact, IDA Ireland, an agency designed to streamline foreign direct investment provides critical support to foreign fintech startups seeking
establishment in the country, compared to Ireland’s rivals like Malta, Clarke said.
Regtech Ireland’s stronghold In one of 2019’s biggest rounds of Irish fintech funding, regtech Fenergo raised $66 million in July. Led by CEO Marc Murphy, Fenergo is one of Ireland’s fastest growing companies. It now has a dozen offices spread across the world. J.F. Clarke told International Finance, “Being a small territory has enabled Ireland to develop a more effective and collaborative business network. In turn, this has played a significant role in Irish businesses meeting legally binding targets and attracting bigger and smaller businesses alike to look at investing in Irish fintechs.” According to Colm Heffernan, COO, Fenergo, Ireland has demonstrated a unique ability to create progressive entities that draw from a diverse pool of talent stimulating global digital growth. Even though one might notice a particular strength in regtech or compliance in Ireland— the truth is that it is the pedigree of software innovation that works as the foundation for Ireland’s fintech innovation. Fenergo helps solve regulatory challenges for financial institutions by streamlining the endto-end client lifecycle management processes for investment, corporate, commercial, and private banks. Regtech and identity tech are particularly strong fintech sub sectors in Ireland. After the financial crash of the late 2000s, a raft of new legislations governing financial services were introduced across the world. This in turn necessitated the industry to remain vigilant with the new laws in the picture. Irish entrepreneurs have been proactive in identifying the role technology can play in this regard
“Fenergo’s headquarters location in Dublin has exposed the business to multi-jurisdictional requirements and has enabled Fenergo to tap into a pool of talent highly skilled in software innovation and best in class delivery. ” - Colm Heffernan, COO, Fenergo
leading to the rise of a robust regtech and identity tech sector in the Irish fintech ecosystem. Irish companies such as Corlytics have devised regulatory technology solutions that are globally perceived as rigorous in their approach to compliance. The reputation of the Irish regtech sector is rapidly growing on a global scale. Regtech has reinforced its role in the country “from a combination of experienced market professionals, entrepreneurs, and an academic network that supports both technical
International Finance | November 2019 | 15
Banking and Finance
feature fintech
and subject matter development. The clustering effect also helps support startup companies, as firms, at different stages, tend to help and support each other. We have been building the fintech sector for a long time, but there is now real global momentum,”a Corlytics spokesman told International Finance. Corlytics’ system tackles 80,000 regulatory notices a year. Its cloudbased service collates, structures, and organises data in a manner that helps clients manage their regulatory risks effectively. The company uses leading data techniques such as AI and machine learning coupled with the expertise of legal and financial subject matter expertise to deliver solutions covering EMEA, North American, and APAC regulations. Fenergo, on the other hand, differentiates itself from its competitors through financial industry expertise, pre-packaged future-proofed data solutions, and community-based product development model. With that, clients are empowered to build a robust product development roadmap to address their regulatory and technology needs. It has built a regulatory community with 20,000-plus risk and compliance experts that convene on a regular basis to thrash out regulatory and compliance challenges. In fact, these sessions ensure that the Fenergo Regulatory Rules Engine is able to track all known and planned regulations — and allows teams to explore upcoming regulatory risks. To accelerate growth, Fenergo continues to invest in R&D ($10 million in FY18) so that its solution can respond to market demand. Showing the truly global scope of Irish fintech innovation, the company’s coverage extends over 70 regulatory jurisdictions worldwide.
16 | November 2019 | International Finance
Ireland fintech
Irish fintechs – anticipated revenue growth in future
32%
17%
100% – 500%
>500% Source: Irish fintech survey
Irish fintech aspirations are all global Scaling up a global fintech startup from Ireland is a challenge but there is persistent support from the government through Enterprise Ireland, IDA Ireland, and the embassy network — all aimed at delivering a global clientele base to Irish fintechs. The Irish by large carry an innate ambition to be global which is perceived as an advantage to companies such as Corlytics, a leader in regulatory risk intelligence, a Corlytics spokesperson told International Finance. In the globalisation context, Corlytics explained that having team members who worked closely with US banks has been an advantage, for its solution. And Fenergo is thriving on the global fintech-regtech stage. Last year, Fenergo’s revenue growth in APAC rose 256 percent from the previous year. With offices in Tokyo, Singapore, Hong Kong, Sydney and Melbourne to support regional clients, Fenergo attributes its growth to unrelenting regulatory changes and intensifying regulatory scrutiny. Recently, the company
partnered with TUNG-I, a Taiwanese solutions provider to drive growth in APAC, including Taiwan and China. Carne, an older fintech company, similarly innovates with a global scope. Carne’s fintech solution CORR (Compliance, Oversight, Risk and Reporting system) has been designed to streamline the traditional processes of the financial services industry that have, up to now, been predominantly manual in nature. “These governance and oversight functions exist globally and are comparable, so like many global tech firms the development is scalable, particularly by location,” a Carne spokesperson said.
Irish fintechs breach the US market but need more support Older Irish fintechs have successfully breached the ultimate tech frontier market – the US. The Irish network in the US and its connectedness are established through Enterprise Ireland and IDA Ireland that has given Corlytics a range of entry points to the US. Also, partnering with early stage Silicon Valley companies such as Digital
feature Ireland fintech
Ireland has, however, built a supportive business landscape where access to global talent is easy. The Corlytics representative said, “We are very fortunate, although we’re based in Dublin, our team of 35 people comes from 10 countries." Ever since Apple’s arrival in Cork in 1980 — technology companies have been establishing their operations in Ireland — with Dublin becoming the headquarters for some of the world’s leading corporations. The fact that technology skills are transferable has added to the ease of locally finding highly skilled talent for Ireland’s fintech startups, the Carne spokesperson said.
Reasoning has provided opportunities for it to effectively compete with larger global incumbents. AssureHedge will be expanding its operations to the US in the fourth quarter this year. “We have already made our first hire there in Chicago. This decision was made after an EI Fintech trade mission to Chicago last year,” the AssureHedge representative said. Likewise, a major percentage of Carne’s clients are US-based or owned by US parent companies. Its fintech solutions are mainly designed to operate on a global scale — to support companies from its Irish operational support centres. But it is questionable whether Irish fintechs entering the US have a level playing field in the US while jousting with well-funded US fintechs. “We strongly need government policy innovations to support indigenous fintech firms to compete for tech talent with the US tech giants. The US tech giants have lower tax rates and deeper pockets which then is utilised to increase the cost of employing the talent pool. This impacts indigenous fintech firms in obtaining talent which
could have been used for the product and service offerings,”the AssureHedge spokesperson said.
Local VC funding limited and conservative One aspect in which Irish fintechs lag their British counterparts is raising venture capital funding. According to the Irish Venture Capital Association, VC investments in Ireland’s tech sector dropped to €430 million during the first six months of 2019. But funding increased over 90 percent to €233 million in Q2 2019 compared to Q2 2018. The Irish VC sector is small and often conservative in its approach – but Irish fintech startups can easily acess capital next door in the UK. “Of course, the UK is a global hub for fintech and fintech investment. We strongly advise any Irish fintechs to engage with the London VCs as early as possible. Being an Irish firm does not put you at any sort of disadvantage to a UK firm, other than the 55 minute flight to get there,” the AssureHedge spokesperson told International Finance.
Ireland confident of its position as the Silicon Valley of fintech According to the Ireland Fintech Census of 2018, 32 percent of Irish fintechs foresaw global revenue growth of between 100 percent and 500 percent, while 17 percent of them anticipated growth of more than 500 percent in the future. Although Ireland’s fintech leadership aspirations are well known, it has formidable challengers in Europe – both established technology innovation hotspots and upstarts. In Europe, the one country that rivals with Ireland in fintech innovation is the UK. “As long as Britain remains in the EU, it is the biggest market for fintech innovation. Aside from that there are a number of countries with forward looking attitudes to fintech. Estonia, Germany and Malta are some of the countries that have vibrant fintech ecosystems, that would appear to have government support,” Clarke said. However, “Ireland is well placed and confident in its capacity and skills to continue being the Silicon Valley of the fintech world.” editor@ifinancemag.com
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18 | November 2019 | International Finance
Mobile Money Nigeria
feature Mobile Money Nigeria
Nigeria: Will MTN succeed where others failed? IF Correspondent
While mobile money is already a success in Kenya, Nigeria is finally adopting the right policies to make it a success
N
igeria is Africa’s largest economy in terms of nominal GDP and also the most populous country. However, 80 million Nigerians do not have access to financial services, a report jointly released by the Microfinance Information Exchange and MasterCard Foundation revealed. It does not mean 80 million Nigerians do not carry out financial activities; they more or less rely on the informal financial instruments. Their reliance on the informal financial instruments which involves acquiring loans from moneylenders, landlords, or a companions limits their ability to get the benefits of carrying out financial activities through the formal financial sector. Overall,
financial inclusion has been poor in Nigeria. So was the case in many African countries. However, in recent times, mobile money has brought in a revolutionary change in the continent and countries like Kenya have embraced the change. Data released by the Central Bank of Kenya revealed that mobile money transactions in the country stood at $38.5 billion last year, a 10 percent increase when compared to 2017. The face of Kenya’s financial sector changed after the establishment of M-Pesa in 2007. By the end of 2017, 83 percent of Kenya’s population had access to financial services, according to its apex bank. But compared to Kenya, Nigeria does not have a similar story. The launch of the first
International Finance | November 2019 | 19
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mobile money service in Nigeria dates back to 2009. Over the years, a dozen new mobile money service providers have popped up in Nigeria. Around 90 percent of adults in Nigeria claim they have a mobile phone as well as a SIM card, however, mobile money hasn’t boomed in Nigeria as of yet. The primary advantage mobile money enjoyed in Kenya over Nigeria was the regulator’s adoption of a waitand-see approach at inception. Secondly, M-Pesa, the global poster child of mobile money in Kenya, was launched by the dominant telco in Kenya, and was able to piggyback on their already existing network of airtime distributors, thus eliminating the need to build out an extensive distribution network. Also, M-Pesa rode on the wave of political unrest in Kenya. During the 2007 and 2008 election crisis, there was political unrest that resulted in road closures and this affected the financial flows.
How mobile money is impacting banking in Nigeria Authorities in Nigeria have finally amended rules and regulations that previously prevented wireless carriers to transfer cash. Around 50 million Nigerians still do not have a bank account, and the central bank finally realised that it must rely on wireless carriers in the country to improve financial inclusion. Finally, telecom companies in Nigeria will be able to collect money, carryout payments, issue cash cards, and also provide financial advisory services. Under a new scheme introduced by regulators in Nigeria, telecom companies can apply for a payment service bank licence. In July, MTN secured a licence from the Central Bank of Nigeria to provide
20 | November 2019 | International Finance
Mobile Money Nigeria
Expected growth rate in Nigeria (2019-25)
Mobile Money vs Mobile Wallet
Mobile Money
Mobile Wallet
CAGR
CAGR
25.6% 25.7% financial services in the country. MTN Nigeria’s Yello Digital Financial Services will provide financial services in Nigeria such as money transfers. However, some experts believe it is the banks in Nigeria who will most benefit from it. According to the terms and conditions of the licence, MTN Nigeria will have to tap into those Nigerians who still do not have a bank account. As a result, a lot of data about the unbanked Nigerian population will flow into the country’s banking sector. This data will help the banks in Nigeria target the ones who are unbanked and bring them under the banking umbrella.
Nigeria’s mobile wallet and payment market At present in Nigeria, even though cash transactions still continue to be the most preferred choice for Nigerians, mobile money is seeing steady growth as well. Currently, there are 21 licenced mobile money services providers in
the country. Paga, which was launched in 2009, continues to dominate the market with more than 8,000,000 users. However, the number is very small given that Nigeria is Africa’s most populous country. Experts predict the mobile money market will grow substantially in the next five to six years in Nigeria. The market is expected to grow at a compound annual growth rate (CAGR) of 25.6 percent to reach $73 billion by 2025. Its mobile wallet segment, which is also experiencing strong growth, is also expected to grow at a CAGR of 25.7 percent between 2019 and 2025. Besides issuing mobile banking licences to telecom companies in the country, the Nigerian Central Bank has taken the help of the Shared Agent Network Expansion Facility (SANEF) to improve financial inclusion in the country. The central bank aims to achieve a minimum of 80 percent financial inclusion by 2020. However, currently,
feature Mobile Money Nigeria
53 percent of the adults in Nigeria still do not have access to financial services.
Why is it important for Nigerians? With the Central Bank of Nigeria determined to accelerate financial inclusion in the country, mobile money may prove to be the tool to do so. Around 90 percent of adults in Nigeria claim they have a mobile phone but most of them do not use mobile money services for various reasons. One of the major reasons that Nigerians do not use mobile money is the lack of infrastructure. Secondly, many prefer to use cash as a mode of transaction because the person they do business with prefers cash as a mode of payment. Also, many Nigerians are sceptical when it comes to giving up carrying transactions through cash. It is highly important for Nigeria to improve the mobile money infrastructure in the country as more and more Nigerians will have access to financial services and they will come
under the formal financial sector. This will ultimately accelerate Nigeria’s financial inclusion. At the same time, the growth of mobile money in Nigeria will also help the country tackle its unemployment problem. With the issue of more licences, more players will enter the mobile money market in Nigeria. This will lead to the creation of various jobs within the sector.
Why mobile money concept is not successful in Nigeria While mobile money has revolutionised how Kenyans deal with their money, make deposits, receive money or save money, Nigeria has failed to duplicate the same despite being the largest economy in the continent. It’s not just Kenya, but other African countries such as Uganda, Tanzania, Rwanda, Botswana, Senegal, Cote d’Ivoire and neighbouring Ghana have benefitted from the introduction of mobile money in their economies. Mobile
Money has helped these countries stimulate financial inclusion. The introduction of the Bank Verification Number policy in 2016 in Nigeria did not help either. According to the policy, every Nigerian who owns a bank account was required to link their biometric details with their bank account. This policy was introduced by the government so that every transaction carried out in the country could be traced. However, this led to Nigerians distrusting the financial sector and abandoning their savings out of fear of being interrogated. In a bid to discourage cash transactions and at the same time encouraging more electronic-based transactions, the government in 2012 introduced a cash-less policy. As per the policy, the government charged a cash handling charge on daily cash withdrawals over N500,000 for individuals and N3,000,000 for businesses. But all these policies seem to have failed in Nigeria. When it comes to mobile money, Nigeria is classified alongside Morocco and Egypt as sleeping giants by experts. Some of these headwinds are constraining factors limiting mobile money growth and success. They include insufficient infrastructure, inadequate knowledge about the underserved, financial literacy and consumer education and identity poverty. In the northern regions of Nigeria where exclusion is highest, infrastructure like power, roads and even mobile network connectivity are deficient and have significant implications on mobile money access and quality. Some of the other challenges faced by Nigerians include their ability to access national identity documents. All the Nigerians who are not a part of
International Finance | November 2019 | 21
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the financial sector are not necessarily poor. Some of them may be cash-rich but they do not have access to national identity documents and their inability to fulfil mandatory customer due diligence (CDD) requirements are challenges they face in spite of the tiered KYC regulation. Also, awareness of mobile money in Nigeria is under 5 percent. Consumers can’t adopt what they don’t know or understand. With regard to this, Dr. Olayinka David-West, from the Operations, Information Systems and Marketing Division of Lagos Business School and the academic director at the Enterprise Development Centre (EDC) of PanAtlantic University, told International Finance that, “I would like to introduce a new perspective - mobile banking – that has been remarkably successful. Nigeria is a mobile-first market and so, while mobile money (using a wallet as the store of value) has not been widely adopted, mobile banking on the other hand has. Mobile banking solutions provide access to bank accounts using either mobile apps (available on smartphones) or unstructured supplementary service data (USSD) protocol (available on all phone types). Mobile banking’s popularity continues to rise year on year, based on transaction figures reported by the Nigerian Interbank Settlement System (NIBBS). Hence, I can narrow the perceived failure of mobile money in Nigeria to the lack of acceptance of the wallet as a store of value.”
How regulators promote mobile money in Nigeria With authorities making amendments to rules and regulations and introducing new policies, telecom companies in Nigeria can provide financial services
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Mobile Money Nigeria
which were once limited to banks. Telcos in Nigeria can now apply for a payment banking licence and carry out all banking activities such as collecting deposits, making payments, issuing cash cards and also providing financial advisory services. While MTN has already acquired a licence from the Central Bank of Nigeria, Bharti Airtel, another telecom giant in Nigeria is also in line to acquire a licence. Over the years, many in Nigeria have argued whether the decision to provide payment banking licences to telcos is a good idea. But the current Nigerian government has realised telecom companies should be allowed to provide financial services, especially after witnessing the mobile money revolution in Kenya. Many banks in Nigeria also feared that the entry of telecom companies as payment banks would hurt their business and they will end up losing their customer base. This led to years of lobbying by the Nigerian banks which delayed the Nigerian government’s decision to issue payment bank licences to telecom companies. The National Communications Commission and the Central Bank of Nigeria finally signed a memorandum of understanding in 2017. A year later, authorities revealed the guidelines for the licencing and regulation of the payment bank licences.
How can MTN make mobile money work? In a bid to tap into the mobile money sector, MTN Nigeria’s subsidiary Y’ello Digital Financial Services Limited launched its mobile money services in the country called MoMo agents. Y’ello Digital Financial Services Limited has been issued a super-agent
$73 bn
Value of mobile money market in Nigeria in 2025
80%
financial inclusion target of Central Bank of Nigeria
53%
of Nigerians without access to financial services now
licence, which allows them to manage and sustain a network of financial service agents and provide services on behalf of licenced financial services providers. This is very different from the Payment Service Bank licence which is a recent development within the Nigerian financial service industry and allows licencees to offer payments and remittance services, issue debit and prepaid cards, deploy ATMs and other technology-enabled banking services. To avail the services, all the user needs to do is send a free text. As a response, the user will get a list of active MoMo Agents near him, through a text message. To send money, the user pays the MoMo agent the sum who in return generates a code. The receiver can walk up to another MoMo near him and collect the transferred sum with the help of the same code. Dr. Olayinka David West told
feature Mobile Money Nigeria
International Finance, "As such, MTN’s entry into the financial services industry is still early to comment on. The superagent licence is a good foundation for the company to build out its financial services distribution network which is critical to the success of any mobile money operation." MoMo has been a success story for MTN in other markets especially Ghana. Experts predict that the launch of MoMo in Nigeria will prove to be significant for MTN. Besides funds transfer, through MoMo, a user purchases data and airtime, and pays bills. During the launch, the company said it will roll out about 500,000 MoMo Agents across all 36 Nigerian states. MTN, which is the biggest telecom company in Nigeria, acquired a licence to provide financial services from the Central Bank of Nigeria earlier in July.
When International Finance asked how mobile money operators in Nigeria create profitable operations, Dr. Olayinka David-West said there are five important parameters the operators in Nigeria must understand. First, They need to understand that the mobile money business is a long term investment and requires patient capital to get to profitability. They also need to understand the market they serve and provide compelling value propositions to meet the needs of customers. This can only be done by using the appropriate customer segmentation frameworks to inform the design and delivery of their services, Dr David-West said. Distribution is important, according to Dr David-West. Providers should consider extending their business to the areas where exclusion is highest, especially the northern regions and
rural areas. The uniqueness of the Nigerian market requires mobile money operators to think creatively about customer acquisition and retention. They also need innovative business models that will optimise their reach while reducing operating costs. Operators in Nigeria also need to forge strategic partnerships that will enhance the reach of their services, reduce their cost to serve, improve affordability as well as their value proposition. Dr. Olayinka David West added that the quality of the service needs to be good enough to provide a positive experience for the consumers and hence, reduce customer churn. This means operators need to invest in efficient IT platforms with appropriate interfaces and an overall positive user experience. editor@ifinancemag.com
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24 | November 2019 | International Finance
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Virtual banks in Singapore and Hong Kong
Who has the edge? Hong Kong and Singapore are licencing virtual banks to serve the underserved and unhappily served – with different approaches Samuel Abraham
International Finance | November 2019 | 25
Banking and Finance
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T
he banking regulators of Singapore and Hong Kong, the Monetary Authority of Singapore (MAS) and the Hong Kong Monetary Authority (HKMA) decided more than a year back to licence standalone virtual banks. Singapore is ready to licence two full virtual banks and three wholesale virtual banks. Hong Kong’s MA has already gone ahead and licenced eight virtual banks from a pool of more than 30 applicants. "The new digital bank licences mark the next chapter in Singapore's banking liberalisation journey," Tharman Shanmugaratnam, head of the Monetary Authority of Singapore, had said in a statement. Singapore and Hong Kong are highly banked regions with close to 95 percent of the population in both regions having access to banking services. And the traditional banks in the region have deeply entrenched operations with a stranglehold over the banking market while enjoying high levels of customer trust. In addition, these traditional banks have enabled a fairly high level of digitalisation compared to their peers in the region. HSBC, for example, claims that it is already a digital bank with 90 percent of transactions happening digitally in Hong Kong. So in these highly advanced and banked markets, is there space for standalone virtual banks? What are the make and break factors that will determine the success or failure of virtual banks? And which jurisdiction among Hong Kong and Singapore is likely to see virtual banking success in five years?
Banking the underserved and unhappily served Razer, basically a digital gaming hardware company that has achieved
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Virtual banks Southeast Asia
success with a payments app in Southeast Asia, is one of the companies interested in applying for a virtual banking licence in Singapore. As soon as Singapore’s MAS announced its decision on virtual banking licences, Razer’s chief strategy officer Lee Limeng had said in statement that the company would ‘definitely consider’ applying for a virtual banking licence in Singapore. Razer told International Finance that the company had no further comments on the matter at this moment. In July, Reuters reported that Grab, a Southeast Asian unicorn that started off primarily as a ride hailing company, was gearing up to apply for a virtual bank licence.
A virtual banking licence in Singapore could help Grab to benefit from its data on mobility metrics, payment transactions, and consumer behaviour. The entry of Razer and Grab, which are companies with large existing customer bases, could shake up Singapore’s banking sector so far dominated by DBS Group, Overseas-Chinese Banking Corp, and United Overseas Bank. With a banked population of close to 96 percent, which is the demographic that fintechs like Grab and Razer are targeting at? What is the differentiated value proposition that they are trying to deliver? Grab first created its mobile wallet GrabPay to meet the challenges of cash in
Snap shot Virtual Banking Singapore
Hong Kong
96% 144% 18%
96% 281%
Banked population
Mobile penetration
Considering switching bank accounts
Banked population
Mobile penetration
33%
Considering switching bank accounts
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Southeast Asia. While SMEs contribute more than 50 percent of Asean’s GDP, two thirds of SMEs cite business funding and financing as their biggest problem. Grab claims to have served more than nine million micro-entrepreneurs over the last six years. It expects to leverage scale and data insights to bring financial services products to market at a more competitive price point than anyone else. With its Grab SuperApp, the fintech already provides a wide range of earnings and financial security opportunities for entrepreneurs in Southeast Asia. It presents a formidable challenger bank contender for the existing banks, sitting on data goldmine.
Singapore’s 2018 SME Development Survey showed that 50 percent of Singapore SMEs face financial challenges in managing cashflow, liquidity, and credit risk, up from 38 per cent in 2017. SMEs make up close to one-third of all companies in Singapore. Regionally, more than half of all micro enterprises and SMEs in southeast Asia faced a financing gap of about $175 billion, according to McKinsey. Singapore’s Business Times had reported early this month that OCBC is engaged in discussions with Keppel Corporation, peer-to-peer lender fintech startup Validus, and venturecapital fund Vertex Ventures to form
a digital-bank consortium. The major banks in Singapore are risk averse in lending to SMEs, especially those that do not have a track record of operating for more than three years. These SMEs typically address their financing gaps through financing through family and friends, angel investors, and peer to peer lenders. The virtual banks are expected to address the needs of these segments using technology and also to potentially nudge the incumbent banks to examine how to serve these small businesses. Validus itself is a good example of a fintech reaching out to the underserved SME segment of Singapore. The P2P lender works with a number of large
SMEs
Millennials Singapore
Hong Kong
Singapore
Hong Kong
22%
25%
50%
98%
48%
91%
67%
12%
Of population
Regularly check accounts through mobile
77%
Find investing hard due to information gaps
Of population
Save or invest
36%
GDP contribution by SMEs
SMEs find financing biggest challenge
would like to use digital platforms for investing *-in Q319
Of businesses
Consider getting credit from banks easier than before*
63%
Bank credit applications unsuccessful or partly successful* International Finance | November 2019 | 27
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enterprises in Singapore to match the group of small vendors and contractors that have contracts with the large companies with financing. It is in the interest of the large enterprises to ensure that their small enterprise vendors are sufficiently financed. Validus uses the risk profile of the large corporates to finance the SMEs at a lower cost. Validus said in the press release that it had facilitated over 5,000 loan facilities, amounting to nearly S$250 million (US$184.4 million) in growth financing to Singapore’s SMEs without needing to pledge a hard collateral. Since 2015, Validus has disbursed an average of S$20 million (US$14.8 million) per month and claims to have brought down the financing costs for SMEs by almost 80 percent as compared to other sources. A Validus spokesperson told International Finance that the company is reserving comments on the virtual banking licence for the moment. Behind the Singapore government’s decision to licence three wholesale banks focused on SME lending is the need to digitise SME services and to increase SME productivity. A lot of SME services are not digitised while at the same time, the SMEs are getting digitised to a certain extent. Services such as invoice discounting or getting a letter of credit are not fully digitised in Singapore and Hong Kong. Singapore has a major government programme called SME Go Digital, with a focus to increase the productivity of SMEs through digitisation. “This means that the financial services aspect of the SMEs must also be digitised. Which includes digitising their payrolls, expense management, claims management, and the reconciliation of their accounts payable and receivable to bring efficiency in all these areas,” says
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Virtual banks Southeast Asia
“Customer experience has always been at the core of banking services, and virtual banking is about better banking experience enabled and facilitated by technology. We also aspire to understand customer needs better, deliver solutions at a more cost-efficient manner, and adapt to evolving market changes quicker,” Carmen Lee, Communications (Fintech) Hong Kong, Tencent.
Varun Mittal, Ernst & Young’s Global Emerging Markets FinTech Lead. “The overall aim is to make SMEs more efficient. Hence, the focus is to build financial institutions that can serve these types of digital native businesses and customers. The premise is that since these niche financial institutions do not have legacy technology, they can leapfrog certain process steps, focus on innovation, and drive financial inclusion through innovation,” adds Mittal. The three virtual wholesale bank licencees
cannot take deposits from individuals except in the case of fixed deposits of at least SG$250,000 but they will maintain business deposit accounts for SMEs and other businesses. Although capital and liquidity rules or the wholesale virtual banks are the same as existing wholesale banks, and they are mandated to keep a minimum paid-up capital of SG$100 million. Mobile penetration is extremely high in Singapore at 144 percent and 22 percent of the population is made up of
cover story banking
millennials. According to an Ipsos survey, 48 percent of Singapore millennials who regularly check their bank account do so through mobile phone. There is possibly another segment of the Singapore banking market who are not adequately supported by the incumbent banks – who can be called the ‘unhappily served’ segment of the population. For example, according to a survey published by Blackrock early this year, 90 percent of Singapore millennials said that they were overwhelmed by the sheer number of investment options available while 77 percent found investing too hard to understand due to the “lack of clear and user-friendly information.” Today’s customers want banks to empower them with the right financial decisions. But are banks doing it? Probably not. “The core function of a bank is threefold. First, to safeguard the customer’s assets. Second, to enable their lives – such as helping them make payments or lending money. Third, to
help them build their wealth. Today with regard to the third aspect, there is an emerging sense from customers that banks have moved to selling products, rather than empowering them,” says Harjeet Baura, Partner and Asia Pacific Digital Banking Leader, PwC Hong Kong. How do banks use technology to nudge customers and help them make smarter decisions? This is the function the traditional bank relationship manager used to do for customers. “When you approach that problem from a tech mentality you look at that problem very differently compared to a bank and that is where real innovation begins. Banks in the region can do that because they still retain customer trust unlike say, the UK banks after the crisis. But customers are not receiving that education and empowerment that they are expecting from traditional banks and many feel that they are being sold to,” adds Baura. This is one aspect in which virtual banks can bring a differentiated value proposition.
Another value proposition is convenience. An ecommerce company understands its customer’s behaviour, account, and how much the customer is selling to give a loan on the basis of the records it has. The value proposition of a virtual bank run by an ecommerce company is that the customer need not present further documents for financial services. “A ridehailing company might be able to give a driver a loan to buy a car, because it knows when, where, and how of the way he operates and issue the loan without further documentation. These kind of user experiences can drive people towards virtual banks run by the technology companies,” says Varun Mittal of EY
Hong Kong – targeting the mobile banking underbanked On the surface, Hong Kong might seem to have similar dynamics to Singapore in the sense that 96 percent of the population in Hong Kong is banked. But there’s a major
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difference – according to a JD Power survey, Hong Kong is significantly underbanked as far as mobile banking is concerned – only 30 percent of Hong Kongers interacted with their banks through mobile phones compared to 41percent in Singapore and 78 percent in China. Also, according to the same survey, close to one-third of Hong Kongers are considering switching their main bank account compared to around one fifth of Singaporeans. In Hong Kong, the licenced banks control virtually 99.3 percent of total loans. Among the licenced banks, Standard Chartered, Bank of China (HK Holdings), and HSBC (with unit Hang Seng Bank), — control two-third of retail banking and three fourths of mortgages and credit cards. So, is there space for eight virtual banks? A spokesperson for SC Digital told International Finance that the fact that Hong Kong is underbanked as far as mobile banking is concerned and also the fact that online services of traditional banks are just digitalised versions of traditional services is the reason that they believe that virtual banks can make inroads into the Hong Kong banking market with niche products. “We will be bringing together a new brand, a new technology stack, and a whole new customer experience that will be cloud-based and serviceled, leveraging on our unique partner ecosystem, including with PCCW, HKT and CTrip.com to deliver a differentiated banking experience for customers,” the SC Digital spokesperson told International Finance. We will update the market with more details of our products and services closer to launch,” the spokesperson added. One of HKMA’s key goals for licencing virtual banks is to promote financial inclusion for target retail
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Virtual banks Southeast Asia
Interacted with their banks through mobile phones Hong Kong
30%
Singapore
41% 78% China
segments and SMEs. Of the eight licenced virtual banks in Hong Kong at least four have an explicit SME financing focus. Standard Chartered and Bank of China (Hong Kong) are among the eight virtual bank licencees in the city. The others are ZhongAn Online, WeLab, Ping An OneConnect, a unit of Ping An Insurance Group, Ant Financial Services' subsidiary Ant SME Services, a XiaomiAMTD Group venture named Insight fintech, and the Fusion Bank consortium — including Tencent Holdings, ICBC (Asia), and Hong Kong Exchanges and Clearing Limited (HKEX). Ant SME the virtual bank of Chinese fintech giant Ant Financial and Ping An OneConnect the virtual bank of Chinese financial conglomerate Ping An are going solo for their virtual banks. At the same
time, SC Digital is a consortium between Standard Chartered, telecom majors PCCW and HKT and leading Chinese online travel company CTrip. Chinese internet giant Tencent has won a virtual banking licence in a consortium. The impact the virtual banks are trying to make is on customer experience and the effect of the competition is already visible in the recent actions of the traditional banks who have mostly done away with or reduced minimum balance fees in Hong Kong. Virtual banks are not allowed to charge anything for low balance. Carmen Lee, a spokesperson for Tencent, told International Finance that with regard to Fusion Bank, the consortium’s digital bank, the focus is on delivering a better banking customer experience through the use of technology. “As a virtual bank based in Hong Kong, local customers are Fusion’s primary target users as we hope to promote financial inclusion in Hong Kong. We also aspire to understand customer needs better, deliver solutions at a more cost-efficient manner, and adapt to evolving market changes quicker. Fusion is now in the preparatory stage and we are hoping to gradually put (it) into service as soon as possible,” Lee added. Does the consortium model provide a workable model for running a virtual bank or is going solo better? “This consortium model shows how potentially powerful such partnerships can be and how they can offer services that traditional banks are not able to deliver. In addition to quickly achieving scale, partnerships also help to bring a differentiated value proposition to the market. The winners are going to be the virtual banks that bring a differentiated proposition to the market quickly – different to the way
ExpErt SpEakEr panEl Nathan Bird Head of Operational Risk Specialists
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banks operate today in Hong Kong and across the region,” said Harjeet Baura of PwC Hong Kong. Millennials have active lifestyles and they seek curated lifestyle experiences, so bank in partnership with a travel company can get involved in the endto-end customer journey with regard to travel. The involvement can be from the moment they start planning to save for the holiday right to providing the financing for the trip and to the travel experience, the ability to pay for shopping and the transactions overseas in the same manner a credit card distribution bank would be doing today. In this regard, the SC Digital spokesperson told International Finance, “Leveraging available technology, we can provide products
32 | November 2019 | International Finance
Virtual banks Southeast Asia
and services that are more contextual and personalised to customers.”
What makes a virtual bank successful? Virtual banks that have attained profitability have done so by growing personal loans massively. The key make or break factors for virtual banks include achieving scale in terms of customers, lowering operating costs over time, and getting the business model right. According to Varun Mittal of EY, for digital banks, one make or break factor is whether the virtual bank can become the primary bank of its customers. “The measures for success would be the share of wallet a virtual bank has, or the share of services that it has, the percentage of loans it gives, the insurance it sells, and
the share of wealth management it does. If a virtual bank’s customers are mostly secondary accounts, the question is how can the bank be the best secondary account possible as well as how the bank can build a sustainable business out of it,” he adds. The winners are going to be the virtual banks that bring a differentiated proposition to the market quickly. And it is also about the digital banks being able to integrate the differentiated proposition into how people live their lives, says Harjeet Baura. Integrating financial services and payments into a chat platform is a great example of such integration. Baura cites the example of Russian digital bank Tinkoff which is public about the fact that it wants customers to visit its app ten times a
cover story banking
Capital requirement MAS
S$1.5 billion paid-up capital within three to five years
day. Today, banks have to be on the same real estate the customer lives his life. “Customers do not check their bank balance ten times a day, but they do live their lives on many apps and platforms – people check their chat messages with friends many times a day and they may also pay money to buy coffee and other daily goods and services many times a day through a payment app. And when you build a platform where people come in ten times a day and you enable their lives through financial services and payments on top of that, you have a great business model,” adds Baura. Kakao Bank of South Korea, one of the few, if any, profitable virtual banks in the world, is a clear example. Launched in mid-2017, by September 2019, Kakao had over 10.69 million customers with total deposits at 19.9 trillion won ($1.7 billion) and lending at 13.6 trillion won ($1.1 billion). It made a profit of 15.3 billion won or $13.1 million in the first nine months of 2019. Kakao Bank was built off South Korea’s highly popular messaging platform, Kakao Talk. 60 percent of the Korean traditional banks’costs come from branch operations. With mobile only operations, Kakao reduced overseas remittance commissions to one tenth of
HKMA
HK$300 mn existing banks and offered much better prices for deposits and loans. What’s more it cut in half the number of steps customers need to take to open accounts and access financial services, bringing real convenience. Fact is with virtual banks, a top-class customer experience is a given expectation. Where virtual banks can make a difference is in offering differentiated products with convenience. Long-term success of the virtual banks depend upon differentiated products – technology is just an enabler. The virtual bank licencees realise this as we understand from the SC Digital spokesperson’s statement that “digital and technology, in our view, are enablers. Only when we solve real customer pain points are we bringing something real to the table, and that’s our goal.”
Hong Kong vs Singapore virtual banks: A different approach? The HKMA and Singapore’s MAS have got their regulatory requirements right although their prerogatives and approaches are different. According to MAS, to get a virtual banking licence, a company needs to have S$15 million paid up capital and paid-up capital of S$1.5 billion within three to five years’
time of setting up business. In addition, making the audience of the licencing process clear, MAS also stipulated that at least one company that holds a 20 percent stake in the applying group needs a track record of three years running a technology or ecommerce business. Also, MAS requires applicants to provide five-year financial projections with a clear road map to profitability. MAS does not want consistently lossmaking technology or ecommerce companies to apply for a licence. Also, it is interesting to note that Singapore does not expect the virtual banks to destroy existing value or, in other words, it does not want virtual banking innovation in a way that destabilises the existing banks’ businesses. This is also probably the reason why MAS has limited the number of licences given that traditional banks were allowed to run virtual banks outside of the quota since 2000. Unlike the HKMA, the MAS seems to be keen to ensure that the virtual banks prove themselves first. A full-fledged bank status will be provided after MAS is assured of the management’s ability to manage risk. The HKMA’s capital requirement of HK$300 million or approximately $40 million is seen as a high bar, although the HKMA’s concern as well is about stability and safety of customer’s money. At least one fintech startup withdrew its Hong Kong virtual banking licence citing the high cost compared to the European Union where virtual banks need only approximately $6 million to start. Given the eventual capital requirement of $1.5 billion, the MAS is ensuring that only the financially strongest of the technology companies will apply for the licences. MAS’ interest also seems to be in the need to introduce digital innovation
International Finance | November 2019 | 33
Banking and Finance
cover story banking
and better customer experiences at the incumbent banks through the backdoor. A challenge for Hong Kong virtual bank operators is the fact that millennials in the region prefer a combination of high technology integration in their banking experiences with a high touch experience, which would mean higher costs and investment in more human resources for on-demand interaction. One pertinent question that remains is whether Hong Kong needs eight virtual banks at the moment? Is the HKMA experimenting and expecting that there will be some consolidation down the line? Outwardly, it might seem that it is willing to see out which of these challenger banks will be successful in five years compared to the MAS approach of ensuring that only the potentially successful enter the game. In Singapore, the two-staged licencing process also ensures that new entrants can course correct after the first stage, if need be, and then target a larger market. Both Hong Kong and
34 | November 2019 | International Finance
Virtual banks Southeast Asia
Singapore are expecting the virtual banks to take their virtual banking value propositions to populations outside the cities – the Greater Bay Area, which has a population of 68 million, for Hong Kong banks, and the Asean market for Singapore banks – while retaining Singapore and Hong Kong as their headquarters. “Hong Kong has always played a pivotal role in connecting businesses in Greater China with the rest of the world and Singapore has similarly connected Southeast Asia. In future, that will continue, but the focus with the digital banks will be around connecting the digital economy,” says Harjeet Baura adding that virtual banks in both regions will have a significant wealth play considering the concentration of wealth in the region. Varun Mittal of EY warns that comparing virtual banks in Singapore and Hong Kong is not an apples-toapples comparison. “It is important to note that the premise of the digital banking licence in Singapore is that it is
sufficient to meet the demand for now; in future, if the country needs more digital banks, it can add more. Hong Kong has other objectives such as connections to businesses in mainland China. So the difference between Singapore and Hong Kong is not just a matter of numbers, but it is also about the amount of capital, the extent of controls, the overall economic objectives, and the primary concerns of the banking regulator that mandates the need for more players,” Mittal told International Finance. In Singapore, “MAS supports innovation while seeking to achieve a level playing field among the players. This is why the capital requirement and the end stage for virtual banking licence is the same. The Singapore model seeks to serve the unserved and underserved segments of the banking market such as the SMEs, the gig economy and the silver economy,” he adds.
editor@ifinancemag.com
International Finance | November 2019 | 35
Interview
Banking and Finance
Katharine Budd co-founder, NOW Money
70% of the GCC’s population, mostly lowincome expat workers, do not have a bank account – NOW Money wants to change that
Dubai fintech NOW Money drives financial inclusion if correspondent
Globally, fintech startups are making financial services accessible to previously unbanked populations and business segments like SMEs. NOW Money, a Dubai fintech startup, provides the region’s 25 million low income workers who typically cannot open accounts with the mainstream banks in the region, an alternative way to send money home and a salary account. According to the founder of NOW Money, Katharine Budd, 70 percent of the GCC region’s population does not have a bank account. At the same time, she says smartphone penetration in the region is as high as 98 percent. Katharine, who was working in data analytics related to credit cards in the UAE saw a business opportunity in providing banking services to the low-income workers of the region who typically come from South Asia, Southeast Asia, and Africa. Through its app, NOW Money provides access to competitive exchange rates for low income expat workers with broader access to the financial system through a debit card including in-store and online purchases as well as ATM withdrawals. NOW Money has entered into partnerships with established exchange houses and banks to provide a forex remittance marketplace. The Dubai fintech startup makes money by taking a cut from the other service providers on its platform. While awareness of the importance of fintechs to the financial services ecosystem is increasing in the GCC region, getting the required regulatory approvals and establishing partnerships with incumbent financial services providers, which are essential to the success of fintechs, remain a challenge. NOW Money took four years from ideation to launch in Dubai. It took tremendous tenacity and perseverance on the part of founders Katharine Budd and Ian Dillon
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Fintech startups
to bring the product to market, especially as the founders claim that 10 other fintech startups in the region that tried to provide similar products simply folded up. NOW Money is also one of the rare GCC fintech startups to raise funding from US and UK venture capital funds – its backers include Accion Venture Lab and Newid Capital. In between, NOW Money has been able to introduce innovations like its unique online user-led KYC process, In an exclusive interview with International Finance, NOW Money Co-Founder Katharine Budd speaks about the challenges of building a fintech startup in the GCC region, the implications of a Dubai fintech startup raising funding from specialised western VCs, and the expansion plans of NOW Money.
International Finance: Since you started working on the idea of NOW Money to the launch in 2019, it took you four years. What were the challenges you faced over these four years in launching the digital bank and how did you overcome the challenges? Katharine Budd: The biggest challenge for anybody seeking to do something new in payments, particular-
ly in an emerging market, is that it’s also new from a regulatory perspective. So there is not much guidance – for example on what licence we needed, and what permissions from the UAE Central Bank we needed to obtain. It also took a long time to fill the network of partners that we needed to fulfil to provide services to our customers. If you need to build a consumer finance product, you need to be working with banks, Mastercard, the regulators, and even hardware producers because you have a hardware product, a card, and a mobile app. All these need substantial capital to finance. We have raised three rounds of funding. When we first raised funding, again because what we were doing was very new, there were doubts as to whether low income people could even read, let alone carry a smartphone and use the NOW Money app – even though the Gulf is an extremely well-penetrated smartphone market in the Gulf – 98 percent of the population have a smartphone. It took investors who were not familiar to the Middle East market a lot of convincing to understand that people in our target market would actually be competent in using a smartphone app and be able to send money from one.
International Finance | November 2019 | 37
Banking and Finance
Interview
Katharine Budd co-founder, NOW Money
“NOW Money was able to raise funding from fintech specific funds in the US and the UK. We believe this helped give Middle East investors comfort. Having a live working product also makes a huge difference to this, as it demonstrates you have been able to surmount the regulation and will again”
to take a business as a customer without knowing whether it is going to pay back after the compliance and diligence work performed in the beginning. There is a significant cost to hosting a bank account, particularly one that may not generate revenue for two or three years. Banks are commercial operations and it is difficult for them to take a punt on a startup like a venture capital partner may do.
NOW Money has introduced a new system for customer KYC, which is automated. Could you please tell us more about this KYC system and its advantages and challenges? Getting a bank account has always been a challenge for startups in the UAE. Do you see any positive moves by the banking industry or the government to change this situation? The UAE has put a lot of effort and resource into stimulating startup economy lately. A substantial proportion of jobs and income of the people in the country come from the SMEs. Even in other nations in the region like Saudi Arabia or Qatar that have been traditionally reliant on oil, governments are looking to diversify and startups and SMEs are an obvious way to start doing that. This has driven improvements in the business practices in the region, particularly around licencing, but unfortunately that doesn’t necessarily mean banks have changed their approach. For a bank, if they want to take in a new business as a corporate client, there is a laborious process around the know your customer (KYC) or know your business (KYB) processes. A bank has to spend a significant amount of money screening a business to make sure that it is safe to work with and to ensure that all the shareholders are people who have KYC documents. Then they need to ensure that the business is going to be profitable for the bank, so they must check that the account holders are going to keep money in the account, and that the business is going to make money quickly enough. It’s very difficult for a bank to do that for a startup that has no history whatsoever. There might be one shareholder who is the person setting up the company or there may be a number of outside investors who are difficult to screen. It is thus very difficult for a bank
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We screen customers in our backend when they register on the NOW Money app. The customer uses their own smartphone to scan their passport, national ID card, residence documents, and take their selfie video. The images are cross referenced to ensure that they are the same person and we check them against the UAE database here as well. We have a thorough checking at the backend before we give anybody a NOW Money account and card.
Venture capitalists (VCs) in the Dubai are typically reluctant to invest in early and growth stage startups, but you have secured investments from two MENA VCs. Could you please tell us more about your interactions with the two MENA VCs and how they became interested in Now Money? We are not in a market like the US. The Middle East is not a common market and there are individual restrictions within each country, which might make it hard for startups to expand and for VCs to have confidence that they can scale. This limits the number of attractive deals on offer; meaning Middle East VCs need to operate with a generalist approach, whereas bigger markets like the US or UK have enough opportunities that VCs can become specialist fintech or edtech investors, and develop acutely sophisticated methods for evaluating those opportunities. Middle East VCs don’t have that luxury; they have to evaluate everything. Most investors are aware the biggest potential hurdle to fintech is regulation. VCs are always looking for the only gaps in a startup that they can help to fill — scaling, marketing, or the user experience design of the
Fintech startups
“Using the NOW Money, users can make remittances overseas directly from the app, pay bills locally or internationally, get paid in real time, purchase phone credit – we are always adding more features. We monetise through commissions from our suppliers of these services. If users are just pulling out cash, they are not likely getting the benefits of NOW Money”
product. A generalist venture capital fund unfamiliar with fintech is unlikely to have expertise with financial technology regulation. This makes investing in a fintech even more of a ‘punt’ than your average investment, so there is a natural degree of risk averseness. NOW Money was able to raise funding from fintech specific funds in the US and the UK. We believe this helped give Middle East investors comfort. Having a live working product also makes a huge difference to this, as it demonstrates you have been able to surmount the regulation and will again.
NOW Money also received funding from western VCs. It is rare for western VCs to fund Middle East startups. What are the implications of Accion and Newid’s investments in Now Money for GCC fintech startups? When reputable US funds or UK funds invest in Middle East startups it tends to build confidence and attraction in the market both locally and internationally. I think that’s exactly what we are seeing with NOW Money. That is what entrepreneurs and governments in the region want. Although we want our local investors to invest, we also want new investors from abroad to be interested in the region and demonstrate that the UAE and particularly Saudi Arabia, with the changes that are taking place, are great places for international investment. On the one hand these are emerging markets, on the other, these are some of the most advanced markets in the world if you look at things like smartphone penetration, internet accessibility, and how the local population is consuming digital products. We are at tipping point and it is the right time for global investors to start investing in the region.
Essentially the market that NOW Money is addressing – the low-income workers – do a lot of transactions in cash. Considering this, how is a salary account that allows just two free ATM withdrawals a month workable? NOW Money’s offering is digital - not a cash-based product. Although all our account holders receive a physical Mastercard card they can use at an ATM, we are very much a digital product and more akin to overseas digital banks such as Monzo and Starling, than a mere salary account. Using the NOW Money app, users can make remittances overseas directly from the app, pay bills locally or internationally, get paid in real time, purchase phone credit – we are always adding more features. We monetise through commissions from our suppliers of these services. If users are just pulling out cash, they are not likely getting the benefits of NOW Money.
What are your expansion plans? In terms of expansion, we are Gulf-focused for the time being. UAE, Saudi Arabia, Oman, Bahrain, and Kuwait are where our focus is and we have great demand from those countries. As I mentioned earlier, it is not a common market and we have to get through the regulations and the approvals and we need partners in each market. However, I think all our markets are significantly more welcoming of fintech startups than they were a few years ago. Governments now appreciate fintech innovation as an opportunity. Earlier, nobody knew what fintech or digital banking was; now it is a hot topic.
International Finance | November 2019 | 39
Banking and Finance
feature fintech
Mexico fintech
Experts predict fintech volume in Mexico to reach $68 billion by 2022
IF Correspondent
Daring what A banks didn’t
s of May 2019, there were 380 fintech startups in Mexico and more than 80 percent of them were less than five years old. In recent times, Mexico has evolved as one of the strongest fintech ecosystems not only in Latin America, but across the world. Mexico’s recent policy reforms and market potential heavily contributed to the establishment of a vibrant fintech ecosystem in the country. The sector is only expected to substantially grow in future. Experts predict fintech volumes to reach $68 billion by 2022. Finnovista predicted that Mexican
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feature Mexico fintech
fintech startups have the potential of taking over 30 percent of Mexico's banking market in the next 10 years and this is where fintech startups in Mexico can make a difference to the common man’s life considering the archaic laws under which the banking system in the country operates. Yet another survey revealed that the business models of a majority of the fintech startups in Mexico’s are designed to tap into the need for financial services of those sections of the society that are not part of Mexico’s formal financial system. In short, these Mexican fintechs seek to provide affordable financial services to the unbanked or underbanked Mexicans. 20 percent of the Mexican fintechs are focused on payments and remittances while 14 percent are focused on consumer
lending. A minority of the Mexican fintech startups are focused on providing services such as credit scoring and other payments solutions including cross-border trade. In spite of the potential it possesses, the Mexican fintech system still remains relatively small. According to a report published by Ernst Young, 36 percent of Mexicans have adopted the services provided by fintechs. The percentage is higher when compared to a global average of 33 percent. In Mexico, the birth of fintech startups over the past few years. has prompted many
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Banking and Finance
feature fintech
traditional financial services providers to actively become interested in getting a foothold in fintech innovation through mergers and acquisitions. BBVA Mexico – Mexico’s largest financial institution with a financial services market share of 20 percent – acquired fintech startup OpenPay in 2016. Similarly, fintech startups also rely on traditional financial institutions or banks for funds or to boost their customer base. The Mexican government has brought about a number of regulatory changes to help fintechs flourish in the country. In fact, Mexico became one of the first countries to bring in a comprehensive fintech law in 2018 to regulate the sector. Recently, the Comisión Nacional Bancaria y de Valores – the Mexican banking regulator, revealed that 85 new fintech startups have applied for licences under its new fintech law. While over the years, traditional banks have failed to accelerate financial inclusion in Mexico, fintech startups have the potential to help achieve the government’s aim to make Mexico a cashless economy while driving higher financial inclusion.
Mexican fintech startups are on investors’ radars A research report published by Finnovista revealed that around 63 percent of the fintech startups in Mexico have received external funding. Out of those who have agreed to take part in the research, around 62 percent of them revealed that they were in the market in search of funding. These figures highlight the role of fundraising and venture capital firms when it comes to the Mexican fintech sector. Also, 69 percent of these startups have received funding from a third party in the market. However, only 4 percent of the total startups surveyed have
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Mexico fintech
Bernardo Silva, co-founder and CEO, Smart Lending
raised funds of more than $10 million. While around 18 percent of them have raised around $100,000 to $500,000, interestingly, 44 percent of them have raised investment of less than $100,000. The total investment accumulated by the Mexican fintech startups is estimated to be around $800 million. The CEO and co-founder of Smart Lending – a Mexico-based financial services company that provides mortgage loans digitally – Bernardo Silva told International Finance that, since Mexico is one of the strongest fintech ecosystems in Latin America, a lot of external investors have their eyes on Mexico. According to him, the fintech
sector in Mexico provides tremendous opportunities to investors to participate in fintech projects of various dimensions. “As for the funding environment in Mexico, it is very competitive, the private equity investors, mainly banks or investment funds, are those who participate in the financing of new or small projects in the financial sector. In our experience, we have recently been recognised by DILA Capital, Jaguar Ventures, and other international investor angels, including founders of similar companies in the United States, securing US $80 million in capital and debt to operate and grant mortgage loans,” said Silva. A spokesperson for
feature Mexico fintech
33% Global average
Albo, a leading Mexican challenger bank, corroborated the view that Mexican fintechs were attractive targets for investors. “A lot of funds are eager to invest in the country and fintech firms. That’s why we have seen a lot of huge investment rounds. Albo, for example, managed to raise 7.4 million dollars in a Series A investment round in January this year, the spokesperson told International Finance.
Challenges with old regulations Prior to the introduction of Mexico’s fintech law in 2018, the sector in Mexico was highly unregulated. Some of the conventional financial activities carried out by fintechs now such as crowdfunding, financial consultation, loans to SMEs and individuals, payments and remittances and foreign currency exchange services were unregulated. Another problem for the Mexican fintech sector was the lack of supervision from the National Banking and Securities Commission. Neither the consumers nor the investors were provided with any kind of security despite the existence of two consumer protection bodies in the Commission for the Protection and
36% of Mexicans have adopted fintech
Defence of Users of Financial Services (CONDUSEF) and the Federal Consumer Protection Office (PROFECTO). To put things into perspective, the legislations were highly inadequate to monitor the activities carried out in the fintech sector. Even though regulators amended various laws to bring in stability and bring the fintech sector under its blanket, such attempts proved futile. These very challenges faced by the Mexican fintech sector led to the creation of the new fintech law.
What is the impact of the Fintech Law 2018? The financial technology Institutions law (Fintech Law) was enacted on March 9, 2018 to promote financial inclusiveness in Mexico and to build a regulatory framework aimed at the fintech sector. It also aims to promote the development of financial services, regulate competition, accelerate Mexico’s financial inclusion and also position Mexico as the strongest fintech ecosystem not only in Latin America, but globally. The law also aims to promote innovation and provide testing grounds for new technology; facilitate innovation experimentation; and
encourage the sharing of data between different players in the financial sector. The CNBV, Mexico’s central bank, published certain general provisions in the Federal Official Gazette on September 10, 2018. The provisions made it mandatory for the Mexican fintech startups to follow proper documentation and licencing processes before carrying out any activities related to fintech. The provisions also gave the Mexican central bank and other authorities the ability to supervise and monitor the activities being carried out in the fintech sector. The fintech law also created the antimoney laundering provision to prevent or detect transactions that could lead to fraud or money laundering. Despite the central bank publishing the general provisions of the fintech law, it is expected to amend or further develop the provisions of the law in the near future. While speaking about the new fintech regulations in Mexico, co-founder and CEO of Smart Lending, Bernardo Silva told International Finance,“As far as Smart Lending is concerned, the open banking regulation being pushed through by the Mexican government could provide a huge benefit. This regulation will allow us to have equal conditions in terms of obtaining information from potential clients. This will allow us to perform a better risk analysis, to better understand their finances and, therefore, will give us the opportunity to lend to more clients and at lower rates, it will be for the benefit of the entire market.” However, according to him, the legal process of recovering a property in case of defaulting customer is arduous and requires a more balanced approach. Albo, on the other hand, believes the new regulations are necessary but calls for improvement by better understanding the new technologies and the regulator
International Finance | November 2019 | 43
Banking and Finance
feature fintech
being faster in adapting to innovation and the new initiatives and services offered by the fintech companies.
Mexican fintechs drive efficiency in financial system Fintech startups are definitely driving efficiency when it comes to the financial system of Mexico. A Mexican can today send money to another part of the globe just by logging into his mobile phone. Smart Lending, for example, has redesigned the experience of acquiring a mortgage loan focusing on the needs of the consumer, the digitalisation of operations, and the attention to customer service by leveraging a high degree of technological and financial knowledge. “We improve and update mortgage processes and procedures that are currently frustrating, bureaucratic and slow; and that without a doubt should remain in the past,” says Smart Lending’s Silva. “We are the only automated platform in Mexico that provides a completely online experience and we have the power to adapt the credit products based on customer needs. To mention some technological solutions, we have automatic integrations for the validation of income and credit history and we make appraisals with big databases,” added Silva. Meanwhile to access Albo’s services, a consumer does not need to walk into the nearest branch, but all he needs to do is download Albo’s app and his bank account will be ready within the next five minutes and free of cost. Such is Albo’s business model that it does not need to charge any additional cost from its clients. While the traditional way of opening a bank account by walking up to the branch and filling up paperwork would require a minimum of 24 hours, the same can be done within five to ten minutes on Albo’s app. Same goes with
44 | November 2019 | International Finance
Mexico fintech
4% of the total fintech startups surveyed have raised funds of more than
$10 million 18% raised around
$100,000 to $500,000
problem of access is being solved by the fintech startups. The digital products and services offered by fintech startups are easily accessible compared to products of traditional banks. Traditional banks offer their products with high commission and long operating processes. Fintech startups such as Albo are taking on the traditional banks by providing affordable services that are accessible through a digital device. Many fintech startups have taken advantage of the low quality service provided at a high cost when it comes to cross-border transfer of funds. Similarly, fintech startups have also targeted the 69 percent of Mexicans who still do not have access to credit. Many startups are now offering fast and easy international money transfer services and also offering credit products at a lower and competitive rate.
Collaborate or compete with banks?
applying for loans, deposits, withdrawals and transfer of funds.
Where Mexican fintechs outdo banks Fintech startups in Mexico have been so successful because they tap into those sections of the market which are often overlooked by traditional banks. In Latin America, Mexican fintech startups have caused disruption throughout the lending, payments, trading and crowdfunding sector. While traditional banks in Mexico have been operating in the country for a very long time, they are still not easily accessible by the unbanked or underbanked Mexicans. The very
But are traditional banks willing to willing to collaborate with fintech startups? When International Finance asked the same questions to Smart Lending’s Bernardo Silva, he said that there is a huge possibility of collaboration between with traditional banks in Mexico because fintech startups could gain from these banks’ size and the scale they operate in, the way they raise capital and the cheap capital cost they handle. He revealed that Smart Lending seeks such kinds of collaboration as it would improve its product offerings. Albo, too believes there is potential for such collaborations as its ultimate goal is to improve client experience. However, Albo did also point out that many traditional banks in Mexico currently do not have the technological infrastructure
feature Mexico fintech
Smart Lending office , Mexico
to form alliances with fintech startups. Similarly, PayU the fintech and electronic payments division of Prosus, also revealed its priority is growth and to improve Mexico’s financial ecosystem. Therefore, it is open to and actively seeking partnership opportunities. PayU is also working closely with banks in Mexico to improve its product offerings
Are digitalising banks a threat? While the transition of many Mexican traditional banks into the fintech sector provides an opportunity to collaborate and form alliances, it also brings along a degree of threat to the fintech startups. The size and structure of the traditional banks that are operating in the market for years might overshadow the newly formed startups. But according to SmartLending’s Bernardo Silva, the fintech startups have an edge over the traditional banks because of characteristics such as speed, convenience, and transparency.
In this regard, he told International Finance, “It is true that every day more traditional Mexican banks add similar products and services to fintech companies, they don't want to be left behind in this technological revolution, but it’s also true that fintech's DNA is made up of innovation, extensive use of technology and a 100 percent customer-oriented approach, which makes it difficult for banks to compete against fintech.” While PayU, on the other hand, sees the traditional banks’ entry into the fintech sector as a possible sign. PayU believes it represents an understanding across the industry that there is a need to innovate especially in the way the players in the fintech sector deliver banking services, particularly within densely underbanked populations. However, PayU highlights that the investment from fintech in technology is superior to that of the legacy banks as it underlines its core business approach. PayU even states that
the real threat is faced by the traditional banks and not the fintech startups as technological investment is key to survive in the Mexican financial ecosystem.
Regulatory flexibility and dynamism is key Authorities in Mexico are not oblivious to this fact and the fintech law proves that. Even though it is at its initial stage and various amendments are anticipated, the law aims to provide a regulatory framework and protect the players in the sector. It is highly important that regulators understand the rapid changes taking place and keep themselves up to date with regards to innovation in fintech. The growth of fintech will also depend on the rules and regulations that the regulators will set and the enabling ecosystem they create.
editor@ifinancemag.com
International Finance | November 2019 | 45
company
profile
46 | November 2019 | International Finance
Afore Profuturo Mexico Wealth Management
Wealth management Pension funds
Ensuring Mexicans save for their future
T Afore Profuturo is one step ahead of the game with new tie ups that open up global investment opportunities for customers
The retirement savings system came into effect in Mexico in the mid-1990s. During this period, the retirement fund administrators (Afore) were created to better manage the savings of Mexico’s working class. The Afore invest the public’s funds in specialised retirement fund investment companies (Siefores) with the objective of obtaining competitive returns, ensuring the financing of a dignified pension for each worker, and guaranteeing the sustainability of the system. During the last decade from 2009 to 2019, the value of the assets under management (AUMs) of Mexico’s pensions management system went up from 1.1 billion pesos to 3.7 billion pesos representing 15.5 percent of Mexico’s nominal GDP. These figures stand testament to the fact that the pensions reforms were a success. It was in this context that Afore Profuturo entered the retirement savings scene. A pioneer in the Mexican savings system with complete focus on Mexico, it is the only retirement savings manager that offers its services in three different fields: Afore, pensions, and loans. Afore Profuturo, a part of leading Mexican group Grupo BAL, is among the top three leading fund administrators in the country, managing a capital of around $28 billion. It is also the only Mexican retirement fund to survive the pension reforms of 1997. Over the years, Afore Profuturo has
International Finance | November 2019 | 47
company profile
Afore Profuturo Mexico
Wealth Management
become a leading retirement fund in Mexico through organic growth and numerous acquisitions. Since its inception, Afore Profuturo has been offering the most competitive returns in the sector. Afore Profuturo’s dominance in the market is evidence that its funds are outperforming most others in the long run. Over the years, Afore Profuturo has stood out in the Mexican market, not only for offering higher returns but also for managing approximately 15 percent of the gross savings of Mexico’s working class.
Preparing for yet another reform Currently, a reform of the Mexican pension system is being discussed to adopt the generational funds framework, which is already being implemented by
some developed economies. With around $14.5 trillion in the market, the new structure will strengthen the investment system and provide a robust operating framework. The new structure, which will come into effect by the end of the year, will confirm Afore Profuturo as a top fund manager in Mexico. With the objectives of improving Mexico’s pension system and adopting guidelines that will position Afore Profuturo as one of the most important pension funds in the world, it has formed alliances with global institutions. In two of Afore Profuturo’s major projects – the creation of the new generational funds – target date funds (TDFs) – and the diversification of alternative investments outside of Mexico, the company has worked closely with global experts to incorporate their inputs and guarantee the success of these projects. Afore Profuturo is also creating 10 target-date funds – one of them called ‘Initial’ and another one ‘Basic Pension Siefore’. There are eight basic generational Siefores with five-year age groups.
Global alternative investment alliances and options While Vanguard, one of the world’s largest investment companies with 30 million investors, is exclusively advising Afore Profuturo with the creation of a glidepath, experts such as
“In Mexico, Afore constitute a major pillar for the investment and infrastructure development of the country. Afore Profuturo is a pioneering institution in the sector and is recognised in the field as a very solid company made up of professionals in all its departments, and that has the backing of BAL Group” - Arturo García, CEO of Afore Profuturo 48 | November 2019 | International Finance
Spruceview Capital Partners, a US-based investment management company, and StepStone are advising the company on issues related to global private equity investments. These alliances not only provide access to different markets, but also distinguish Afore Profuturo from its competitors in the domestic market. This strategy helps Afore Profuturo diversify, break away from its main portfolio exposures, and increase returns without incurring additional risks while also reducing the overall risks of these portfolios. So far, Afore Profuturo has invested in sectors such as energy and tourism and in the US and Europe. Ultimately, Spruceview Capital Partners and StepStone’s vast experience and their successful track record convinced Afore Profuturo that these two firms could provide the requisite support and guidance, and the company ventured into the alternative investment market. Afore Profuturo chose these firms with a broad and deep network that can give it access to the best funds and support Afore Profuturo in developing direct contacts with the most prestigious global funds. Similarly, Afore Profuturo chose Vanguard after a due diligence process to oversee its transition process by using its demographic data for portfolios and its capital market assumptions (CMA) for each asset class. Vanguard’s model seeks to build a consistent and objective retirement investment framework, based on the characteristics of Afore Profuturo population, that strikes the right balance between investment risks and expected rewards through retirement. The alternative investment markets Afore Profuturo seeks to tap are the US, Europe, and Asia, especially the developed markets. With the help of its allies, Afore Profuturo is determined to penetrate these markets with the best possible strategy and better risk-performance profile.
Afore Profuturo’s investment strategy With a team of experts led by CIO Antonio Sibaja, Afore Profuturo makes sure that it invests in accordance with the established guidelines and in compliance with regulations, maintaining its strategic mission – ensuring Mexicans can save for their future.
Antonio Sibaja, CIO of Afore Profuturo
$28 bn
Total capital managed by Afore Profuturo
Similarly, the integration of technology has helped Afore Profuturo enhance its multi-asset strategy. It was the first administrator in Mexico to incorporate the Findur system, a world-class, end-toend platform that facilitates control and recording of operations, transactions, and accounting processes into management process. In 2018, the Findur system helped Afore Profuturo win the 4TIC Prize from the National Chamber of the Electronic, Telecommunications and Information Technology Industry (Canieti), in the category Intersectoral Impulse 4.0. All the nominees in the category were evaluated not only on the basis of their contribution to productivity in the sector, but also on the basis of their contribution to the development of the country.
International Finance | November 2019 | 49
company profile
Afore Profuturo Mexico
In the last two years, Morningstar, a company that carries out independent analysis of investment companies across different countries, has rated Afore Profuturo’s performance as positive. Morningstar's analysis highlights that Afore Profuturo possesses one of the most robust investment teams in the sector and it has the ability to identify new investment opportunities and to adapt to the constant changes in the market. Earlier in the month of September, Afore Profuturo became a signatory of the Principles of Responsible Investment (PRI), joining a list of global investors to contribute to the development of a more sustainable global financial system. It is also a member of Mexico’s Green Finance Advisory Board (CCFV).
Wealth management of global standards With the support of Grupo BAL, Afore Profuturo also manages the wealth of many Mexican families.
Assets Under Management of Mexican retirement savings system 2009
2019
$1.1bn $3.7 bn It always seeks to provide the best possible services while maintaining global standards when it comes to ethics, transparency, and social responsibility. Afore Profuturo’s motto is to increase the profitability of the assets it manages. In this regard, CEO Arturo García says, “In Mexico, Afore constitute a major pillar for the investment and infrastructure development of the country. Afore Profuturo is a pioneering institution in the sector and is recognised in the field as a very solid company consisting of professionals in all its departments, and that has the backing of BAL Group.” One of the most important fundamental pillars under which Afore Profuturo operates is the
50 | November 2019 | International Finance
commitment to provide the best services without compromising with quality. Afore Profuturo has strengthened its investment processes by adopting innovative techniques with a focus on asset allocation while keeping in mind three simple points: 1. Goal: Achieve competitive and stable returns with results based on replicable processes. 2. Risk tolerance: Achieve results within a specific framework of tolerance and risk control. 3. Best practices and technological innovation: Align operations with international best practices and incorporate technological innovation to improve results.
Profuturo’s role in mitigating Mexico’s pension challenges One of the main challenges faced by the Mexican pension system is the low replacement rate, which is estimated to be around 30 percent. To tackle the issue, Afore Profuturo has raised various campaigns highlighting the importance to save for retirement. One of Afore Profuturo’s advertising campaigns this year was themed – it’s time to believe in savings—which aims to improve the replacement rate in Mexico. The Mexican pension system is a defined contribution programme in which savings depends on factors such as the rate of savings, years of contribution, and age of retirement. The low replacement rate in Mexico is not expected to improve due to the factors such as the existence of a large informal sector in the economy, lowerincome, lack of voluntary savings, and also the lack of financial knowledge among its people. In order to improve the situation in Mexico, Afore Profuturo is working on a research report and will soon present it to the government. It is also sponsoring financial education programmes such as Profukids, in which kids who excel academically receive a prize in their retirement account. Another programme called ‘Dialogues for the future’ aims to inspire young Mexicans to think about their future and understand the importance of savings and also create innovative solutions for their needs. editor@ifinancemag.com
Banking and Finance
Financial institutions and geopolitical risks
opinion
Jonathan Barrett SVP EMEA and APAC at Dataminr
Although exposure to geopolitical risks is inevitable for financial institutions on the expansion path, technology can help
Keeping FIs ahead of geopolitical risks As the global political landscape becomes more complex and traditional trading blocs are reshaped, it has never been more important for the financial industry to pay close attention to geopolitical risks. This is supported by KPMG’s Frontiers in Finance report on geopolitical change in banking, which highlighted that “as [banks] navigate volatile conditions, they will be well advised to adopt or maintain a more holistic, integrated approach to managing risk and uncertainty.� While little can be predicted, companies need to know what is happening across the countries in which they operate, as well as potential new markets and the regions their supply chain touches. The nature of the risks that could impact a business vary widely; potential issues or crises are unfolding second by second. These could be anything from trade wars, weather-related disruption, or political unrest. Whatever the cause, such potential risks can have significant implications on business operations and the future direction of companies in the finance sector.
Growth pains of financial institutions Constantly, executives face challenging decisions, such as which markets to move into or where to locate offices and publicfacing outlets. Many of these decisions can see
52 | November 2019 | International Finance
organisations venture outside the confines of their established markets. Therefore, before such decisions are finalised, business leaders must gain insight into both short and long term threats that might impact their business in a given location and the businesses' ability to operate effectively and keep employees safe. Macroeconomic issues are critical here, but so too are smaller incidents; both could derail an organisation's expansion plans, so situational awareness must be comprehensive and holistic.
Changing world, changing data When it comes to issues such as those outlined above, the theory is easy. Businesses need to know what is happening where they currently, or plan to operate. The practicalities are more difficult. In a world where indicators of unrest can come from anywhere, businesses need to think differently to ensure they are ahead of the curve in identifying and managing risk. Knowing first so they can act faster provides a material advantage. If we look back twenty years, key risk stakeholders would have relied on scheduled reports and ongoing news bulletins to stay abreast of the global news agenda, and the impact it has on their business. In the digital age, the world spins much faster. In the past five years, the increase and diversity of platforms
that global citizens turn to means that social media has been one of the largest – and most powerful – contributors of real-time information that businesses can now include in their awareness arsenal. However, the digital fingerprint of risk now extends far beyond social media. Event signalling can now come from ship data, aircraft data, and weather sensors as well as social media, and a myriad of other places. The sheer number of publicly available datasets is rising exponentially, and increasingly the difficulty for organisations is to make sense of patterns and exceptions in those data streams. To gain a deeper and more comprehensive understanding of the geopolitical landscape, many business professionals are now turning to artificial intelligence (AI) to help spot the patterns and highlight the issues that matter, without necessarily having to be in the region, the city or the street where an event is happening. Moreover, by spotting previous patterns and identifying the potential risks within new geographies, finance professionals are increasingly supported by AI in their critical business decision making. While the core function of a real-time alerting platform is to provide situational awareness,
data analysis can also help financial institutions spot opportunities for growth.
AI-based risk analysis central to FI growth strategies Risk departments across financial services companies already understand that geopolitical awareness is vital to both survival and growth in today’s complex world. Armed with the right data, these teams have more security in their decision making. By having real-time insights, powered by AI, financial institutions can benefit from a central core of information on which to make effective and clear decisions, regardless of the geopolitical scenario. Only by embracing these tools will banks and financial institutions be able to mitigate risk, and drive growth and innovation. Jonathan Barrett has over 25 years’ experience in the technology industry. As Senior VP, EMEA & APAC at Dataminr he helps clients get ahead by delivering timely, impactful data: they know first, act faster. Previously, Jonathan has led teams at Cisco and Microsoft. editor@ifinancemag.com
International Finance | November 2019 | 53
Banking and Finance
insight
Wealth management
UK wealth clients want human engagement while making investments — especially in the given political climate
China embraced wealthtech; why hasn’t the UK? Sangeetha Deepak
Wealth management is increasingly evolving with a new form of a digitised business model. According to an Ernst and Young (EY) report published last year, holistic wealth managers, who incorporate technology, are expected to gain a 30 percent market share by 2025, challenging the traditional wealth managers. The effects of new digital capabilities, according to an EY report, will improve strategic alignment, create appropriate demand for IT services, and manage the slow evolution of core platforms. The EY analysis showed that 23 percent of wealth managers perceive digital transformation to be relevant to their business within the next one year, 36 percent in one to three years and 42 percent in three to five years. China, the UK, the US and Singapore are the four major markets for wealth management — with China’s wealth management market exceeding $21 trillion last year, it has become the third-largest wealth management market in the world.
What drives wealthtech Typically, client and shareholder expectations
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and new regulations open up the industry to use technology to drive future growth opportunities. Research suggests that technology will be the key driving force behind most innovations in wealth management practices. For example, recently, a new wealth management service was launched that allows clients to open accounts using video conferencing. Now other wealth managers are also digitising client on boarding processes using electronic signatures and biometric signatures — but there is a huge difference in the approaches to leveraging technology for wealth management across markets. For example, China and the UK have developed competitive advantages from their fintech ecosystems in recent years. For China, the ecosystem is largely underpinned by global fintech powerhouses, state-owned funds, and access to an active IPO market. Chinese fintechs are particularly strong in wealth management. For instance, in China, companies have built technology-designed business models built for investment advisory services, or for providing
insight Wealth management
Percent of UK wealth managers who perceive digital transformation to be relevant to their business in 3 to 5 years
23%
within the next 1 year
42% 36%
in 1 to 2 years Source: EY
trading access to the mass market. In comparison, the strength of the UK’s fintech ecosystem mainly stems from a supportive policy environment comprising tax incentives, regulatory initiatives, and government programmes. Keith MacDonald, Partner, Head of Wealth Management at Ernst and Young UK, told International Finance, “The wealth sector’s use of technology is at best mixed in the UK. The last few years have seen heavy lifting around regulatory work such as MiFID and GDPR to name but a few. Some firms have replatformed and built out their front office during this time, but many are only now turning to the task now.”
Most UK wealth managers lack embedded technology Although value creation opportunities remain stark for both new and existing clients in the UK wealth management industry, most wealth managers lack embedded technology. Sergel Woldemichael, an analyst from GlobalData told International Finance, “Technology has
$21trillion China’s wealth management market in 2018
$2.2 tn
assets expected to be managed by automated advisers using AI by 2020
recently begun cementing itself in the UK wealth management industry and usage is expected to continue growing in the future.” Clients are mostly given a one size fits all approach. This approach is adopted because the power of technology is not fully realised — and it is creating an opportunity as well as a threat to the current market situation. Another interesting point that Eric Mellor, Wealth Management Strategist at Temenos,a leading provider of software for global financial services companies, tells International Finance, is that the UK industry previously adopted fee-based models on hourly rates for holistic planning or percentage-based assets under management charges for portfolio management. Because of that many wealth managers are compelled to focus on high net worth individuals — leaving behind small investors unadvised. Temenos conducted a survey The NextGeneration Wealth Manager with Forbes, which found that three years ago, only 33 percent of wealth managers in Europe believed digitisation is important to do business. Currently, 52 percent
International Finance | November 2019 | 55
Banking and Finance
insight
Wealth management
Percentage of European wealth management executives who perceive technology as significant to highly significant
90% 85% 81%
Operational Marketing efficiency products and services
Cost reduction
78%
Talent retention or acquisition
75% Regulatory compliance
74% 74% 73% New market share
Personalisation
Customer retention
Source: Temenos - Forbes
of European executives find digitisation of wealth management services essential. According to the survey, executives are by a vast majority aware of the need to incorporate technology in virtually all aspects of wealth management.
Cognitive computing the new reality It is possible for wealth firms to deliver deep cognitive personalisation and address complex client questions in real-time through virtual advisers. According to a Capgemini report published last year, automated advisers using artificial intelligence are expected to have assets worth $2.2 trillion by 2020. An example of cognitive computing-led personalisation is the fact that investment managers are using predictive analysis to create investment ideas or to detect assets at risk in early stages. A report published by BofA Merrill Lynch found that advancements in computing technology, machine learning, and user-friendly interfaces will generate higher efficiency and output worth $5.2 trillion to $6.7 trillion. BofA Merrill Lynch is testing an AI stock-picking tool to identify potential value
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in small-cap stocks. This will help to cover the loophole of what conventional analysts might miss while doing the same. To common knowledge, the crucial aspect of a wealth management firm’s appeal is client engagement. Globally, high net worth clients between the age group of 20s and 30s generally seek a good mix of digital investing tools and human advisers for their wealth management needs. For that reason, a new hybrid strategy is what is necessary for wealth firms to draw value out of client data and align with evolving industry demands. Wealth managers should consider robot advisers because they function similar to selfdriving cars. Essentially, the algorithms will handle basic services but won’t completely replace the human presence. That sort of an approach will help them to progress from selling basic services to advanced market insight, while the full extent of technology is being offered to the industry’s techsavvy wealth clients. Woldemichael of Global Data explains that, “From robot advice to software that can automate compliance tasks, wealth managers are
insight Wealth management
$5.2 tn to $6.7 tn
UK millennials on robo advisors
20%
might consider using
value of efficiency and output to be created by machine learning and user-friendly interfaces in investment management Source: Bofa Merril Lynch
now at a stage where technology can no longer be ignored in this historically paper-based and aged industry. Robot advice remains top of the list when it comes to what technology players are using, with both startups and incumbents introducing their own platform.” However, the Financial Conduct Authority’s 2017 report showed how UK millennials are wary of robot advisors. The report showed that only 20 percent of 18 to 34 year olds in the country would consider using a robot adviser, while 40 percent of them distrust the technology. “Robots and robot advice are at an early stage in the UK wealth market, and we are seeing the smarter firms look at customer segments in terms of their propensities to use technology rather than traditional asset under management measures. For most clients, some form of hybrid solutions are favoured, with a heavy dependency on what service or transaction is being looked at,” EY’s Keith MacDonald explained.
Trust lacking in technology Trust plays a vital role in establishing a fundamental rapport between top-end clients and relationship
40%
will not consider using Source: UK FCA – 2017
managers. A hybrid approach will enable clients to access self-service capabilities through fintech interfaces, while advisers will be able to focus on higher value-added activities, such as on boarding more clients or spending more time with those top end clients. Temenos’ Mellor said, “This model is unlikely to change dramatically, but evolving hybrid advisory solutions are likely to become the new standard, providing the best of both worlds.” Eric Mellor says that younger investors still favour human expertise and personal interaction with an adviser, despite increasingly positive attitudes toward the adoption of technology and robot advisors in wealth management. But this is not to say that robot advisors have no effect on the investment landscape. They target the mass affluent segments which are not catered to or underserved by wealth management firms. Despite assorted views in the current climate, the technology is likely to become sophisticated and relevant to high net worth and ultra-high net worth individuals in the future. GlobalData’s 2018 observations suggested that only 1.6 percent of UK mass affluent
International Finance | November 2019 | 57
Banking and Finance
insight
Wealth management
Percentage of UK mass affluent using robo advisers
1.6% 4% 2018
2019
Source – Global Data
population were using robo advice as their main investment provider. As of 2019, the number has jumped to 4 percent. “Although many players are yet to make profit from such platforms, in the long term, our data shows that demand is increasing and will be even more important to the next generation of investors. Furthermore, 46 percent of UK millennials prefer to use online methods through smartphones, tablets, or desktops when arranging their investments according to our 2019 Banking and Payments Survey. And so technology is definitely infiltrating the UK and is here to stay,” Global Data’s Woldemichael explained.
Chinese mass affluent – a study in contrast In their scepticism toward robo advice, UK investors show a noticeable difference in approach with their Chinese counterparts. Even though using wealth managment technologies is perceived as an opportunity to grow wealth, the majority of UK wealth managers are not fully convinced — as opposed to their Chinese peers
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Demographics of mass affluent in China
64% Under 40
24% Under 25
Source – Global Data
about deploying technology to the extent that Chinese wealth managers have. “The proportion of Chinese wealth managers using blockchain, voiceactivated technology and robo advice is higher than in the UK,” Global Data’s Woldemichael said. This is because the emergence of digital wealth management clients in China is changing the game in the segment. Those clients’ online managed assets represent more than 30 percent of their total investable assets — showing higher trust in wealthtech among Chinese investors. Findings published by research firm Boston Consulting Group (BCG) last year found that the affluent middle class has formed the majority pool of digital wealth management clients in China. The Chinese wealth management market is set to grow exponentially in size as the this middle class becomes increasingly wealthier. The study points out those digital wealth management clients continue to invest in fixed income products — with 55 percent of them showing a higher risk tolerance. In the last five years, the digital finance boom in China has led to digital wealth management transformations on two fronts. China has become
insight Wealth management
Chinese at a different level
30%
of total investible assets in China managed by digital wealth managers
55%
of Chinese affluent show a higher risk apetite
more receptive to online wealth management and has witnessed the first development of independent internet wealth management platforms. By closely observing the extent of private wealth in China and the mass adoption of technology, it seems that Chinese wealth managers and investors are more positive toward new technologies than UK investors. For example, China Merchants Bank launched a robo advisor Machine Gene Investment with characteristics of both human wealth management practices and fund research experience through machine learning algorithms. The use of such goal-based planning tools can help clients target objectives more effectively and drive discipline into their investing behaviour. Eric Mellor of Temenos explains that quant tools and Monte Carlo performance simulators, for example, will help clients to better understand investment risk. Even auto-balancing features in most robot solutions will enable quick rebalancing of portfolios. That said, Woldemichael of Global Data emphasises the importance of hybrid strategy, where the presence of a human is not all dispensed away with. “The hybrid strategy is the best option
"Younger investors (in the UK) still favour human expertise and personal interaction with an adviser, despite increasingly positive attitudes toward the adoption of technology and robot advisors in wealth management." - Eric Mellor, Wealth Management Strategist, Temenos
at this current time, rather than a purely digital investment platform. Yes, users want a digital platform, but they also want someone to talk to for their emotional needs regarding their investments,” he said. “They still want guidance or advice from a human being as the technology is yet to answer every question investors have.” One of the reasons for wealth management clients to develop distrust in the technology is cyberattacks and hacking. Their primary cause for concern rises when investing large amounts of wealth with higher risk factors attached. For that reason, “We are seeing robo startups such as Nutmeg, the UK's largest robo-advisor by assets under management, recognise the importance of having human advisors as they have introduced human advice into their platform last year following client demands,” Woldemichael said.
Elders still hold much of the wealth in UK It is important to understand that “The trend is China is likely a reflection of the mass affluent client demographic,” Eric Mellor said. According to the BCG report, two thirds of the world’s mass affluent will be based in Asia and only one fifth will be from Europe or the US by 2030. Also, 64 percent of the mass affluent in China are under 40 and 24 percent are less than 25 years of age. Meanwhile, the majority of wealth in the UK still remains in the hands of an older demographic — suggesting that they are likely to continue to seek advice from banks and advisers. editor@ifinancemag.com
International Finance | November 2019 | 59
Banking and Finance
opinion
Banking digital technology
How can banks become powerful digital platform businesses connecting trading partners through trust?
Ian Bradbury CTO for Financial Services, Fujitsu UK and Ireland
Challenging the challengers Traditional banks and challenger banks alike are beginning to harness the power of digital technology to transform the services they offer. Implementing the technology alone will not provide competitive advantage in a fast-changing market – banks need to adapt the way they operate and even think about what they do for their customers. Born-in-the-cloud challengers already work this way – for incumbents it is a seismic shift to their culture and ways of working. Challengers have already shown the potential of thinking and acting differently – with rapid growth of an increasingly loyal customer base, multiple industry awards, and rising investor confidence. As banks mature in their journey to become true digital disruptors they can start to review
UK challenger bank Monzo's vital stats
3 MN
users currently
34,763 current accounts switched over to it since Q2 2018
Source: Apptopia
60 | November 2019 | International Finance
13,500 current account switch overs since August
and diversify their traditional money-centric business model. Securing and lending money will be supplemented by obtaining, securing, and creating benefits from other forms of personal and business owned ‘value’ – for example, identity and data and perhaps even reputation. Banks can become a powerful digital platform business connecting trading partners through trust provided by the bank. Obviously, there are already many digital platform businesses focusing on bringing together trading partners. These businesses lack the unique value a bank can bring – the extra assurance and integrity required to operate in a highly regulated industry.
Four ingredients for success I believe there are four elements in today’s financial services landscape that help create a successful banking organisation that will rapidly gain market share and form long-lasting relationships with the customers. 1. Accelerate the adoption of new digital technologies To become a digital challenger you need digital technologies. Existing monolithic systems – which have served banks well for many years – are now significantly holding banks back in terms of cost, agility, and digital services. Adoption of cloud native applications, utility
services from the public cloud, and automation of the vast majority of bank operations need to be the new norm, and banks need to get there quickly. 2. Change the mindset and the skills For incumbent banks, the biggest challenge is one of mind-set change, leading to new skills and ways of working. Digital companies think and act differently – experimentation and even failure are encouraged, software is always the first solution to any task, collaboration and empathy are core values, agility rises to top of the performance benchmarks and everything is 100 percent data driven. Most incumbents are a long way from this, and the journey to it is not easy. Incumbent banks need to align this journey with accelerating their adoption of digital technologies. 3. Maintain and build that key value – trust Many studies have shown that despite a number of high-profile credibility challenging events, the banking industry maintains a high level of trust from the public and from businesses. This is due in part from being within a regulated environment – designed to protect customers and trading partners. Interestingly these studies have also shown that banks come out significantly higher than most other organisations
for protection of non-money value; for example, a customer’s data. Banks need to focus on their own social purpose to reinforce this unique differentiation. 4. Seek out new business models With new digital technologies and a new mind-set banks can begin to explore new business models. The most successful digital disruptors are always looking for new ways to reinvent the value they offer and the markets they operate within – without being constrained by any notional boundaries of what they do and don’t do. With a large customer base, significant volumes of data and a unique position with respect to trust, banks can disrupt other industries – and perhaps even create new ones. Banks need to become ambitious to do this! Ian Bradbury is chief technology officer for financial services, Fujitsu UK. Ian has over 30 years’ experience in the IT Services industry, much of it working with a broad spectrum of financial services clients. Ian is responsible for providing input and direction in the generation of Fujitsu and partner offerings and solutions for the financial services marketplace, as well as advising clients and the broader market on successful technology adoption, transformation, and change programmes. editor@ifinancemag.com
International Finance | November 2019 | 61
Banking and Finance
analysis
banking GCC Banks
The top banks in the UAE have increased their foreign investment cap while the Saudi markets regulator has also done the same. Is the timing right?
Trade war: Time for foreign investment in GCC banks? IF Correspondent
The GCC countries have recently introduced a wave of financial reforms to open up their markets to foreign investment. This move mainly stems from their collective plans to adopt modern financial stability policy frameworks and reinforce economic diversification away from oil dependency. Most of the GCC nations are proactively taking FAB has steps to create a conducive 11.30 percent business ecosystem for against foreign foreign investors. A tentative ownership step toward firming up limit of 40 their non-oil economy was percent and the liberalisation of the for Emirates foreign ownership limit NBD it in local companies. On currently July 2 this year, the UAE stands at 5.61 cabinet announced that the percent government would allow 100 percent foreign ownership in 122 business activities specifically in agriculture, manufacturing, and services. Even then, the Department of Economic Development of each emirate has the authority to decide the extent to which a foreign investor can own a proportion of a local business. The Dubai DED is said to be considering applications of companies with activities in the positive list on a case by case basis. In a milestone decision, the Saudi markets regulator also announced in June that it was removing a cap
62 | November 2019 | International Finance
on foreign ownership in publicly traded companies enabling foreign investors to take control in sectors from banking to petrochemicals. Even though the Captial Markets Authority has removed the cap, caps placed by other regulators or the companies themselves remain. In banking, telecom, and insurance the authorities still have to approve deals that cross a pre-established threshold. This allows foreign banks to take majority stakes in Saudi banks for the first time since 1970 when foreign lenders were forced to sell their majority stakes in their local operations to Saudi nationals. In the UAE, the largest banks quickly warmed up to the prospect of welcoming more foreign investors and announced strategic moves to relax their foreign ownership caps. UAE’s largest bank, First Abu Dhabi Bank, increased foreign ownership limit from 25 percent to 40 percent. The bank has been jockeying for a full removal of the cap, although that decision would depend on the regulators. “The potential for more foreign investment in banks is large in the UAE with existing quotas largely unfilled. For example, In Abu Dhabi Commercial Bank the foreign ownership is only 13.37 percent when compared with the foreign ownership limit of 40 percent, FAB has 11.30 percent against foreign ownership limit of 40 percent, Mashreq Bank at 2.99 percent against foreign ownership limit of 49 percent and for Emirates NBD it currently stands at 5.61 percent.
Analysis banking
In fact, on an average 88.55 percent of the foreign ownership limit is unused in DFM listed banks while for ADX listed banks about 83.54 percent of the limit is unused. The UAE has taken various steps in the recent past to attract foreign investors such as 100 percent ownership in certain sectors and issuance of 10 year visa,” Vijay Valecha, CIO of Century Financial tells International Finance. More recently, Dubai’s largest bank, Emirates NBD, raised its foreign ownership limit from 5 percent to 20 percent—and had announced its plan to further increase the limit to 40 percent in the future. One benefit from liberalising the limit is the bank’s potential inclusion on the emerging market indices by MSCI and FTSE Russel, which is expected to increase passive inflows. Even with a 20 percent foreign ownership limit the bank could see foreign fund flows of up to $425 million. “The earlier foreign ownership limits of some banks were very low, acting as impediments to foreign investments. Emirates NBD, the second largest bank in the UAE by market capitalisation had a very low foreign ownership limit earlier at five percent and has been subsequently increased to 20 percent,” MR Raghu, Executive Vice President Research of Kuwait Finance House, tells International Finance. “The changes in ownership limits are expected to remove constraints for index providers such as MSCI and FTSE to assign higher weightages to the UAE banks in their indices,
consequently resulting in higher passive inflows into the UAE banking stocks. A foreign ownership cap of 40 percent would provide the necessary headroom in the medium to long term to attract more foreign investments,” he added. The Capital Market Authority of Saudi Arabia has developed significant reforms to foster capital market development and boost investor protection since 2014. The reforms that have been implemented can be categorised into four groups: operations, regulatory framework, corporate governance and investor protection. All listed companies in the Kingdom have adopted IFRS.
How attractive are GCC banks to foreign investors? Standard & Poor in its global rating report GCC Banks 2020 Industry Outlook stated that prominent banks in the GCC countries should remain stable in 2020, with the exception being the influence of any significant increase in geopolitical risks or a drop in oil prices. GCC banks adopted the International Financial Reporting Standards (IFRS) 9 last year to maintain financial stability. The banks currently demonstrate strong capitalisation by industry standards. The report said that the average tier 1 capital in GCC banks increased by 100 basis points between 2015 and 2019 owing to various capital boosting initiatives — such as muted lending growth, IFRS 9 adoption rate, higher dividend payout ratios and hybrid issuances. According to an S&P report published in 2017, banks across the GCC are expected to maintain robust capital levels till at least 2019. A Saudi Arabian Monetary Authority (SAMA) report also said that growth in capital levels are positive in the Saudi
International Finance | November 2019 | 63
Banking and Finance
analysis
banking GCC Banks
banking system as it succeeded to increase capital during a period of negative credit. “The UAE and the Kingdom of Saudi Arabia banks are robust, fundamentally strong and command high capital levels. Improved disclosures, higher level transparency of operations and better corporate governance measures would entice foreigners to invest in the UAE and the Kingdom of Saudi Arabia’s banks,” Raghu said. The Kingdom’s recent efforts to remove the cap on foreign ownership are expected to benefit domestic banks in the long term despite the threshold barrier. “The Kingdom’s move to remove the cap on foreign investment by strategic investors is a positive step for the long term as it allows foreign investors to increase their exposure to Saudi banks and acquire strategic stakes that was previously not possible,” Raghu said. Foreign banks are already strategic investors in some the Kingdom’s listed companies. Some of the examples of foreign strategic investors in the Kingdom’s listed companies include HSBC, Royal Bank of Scotland, and Credit Agricole. So who are the foreign investors likely to be interested in investing in the banks in the UAE and Saudi Arabia? “The valuations at which the UAE and the Kingdom of Saudi Arabia banks trade are attractive compared to their Emerging Market (EM) peers. Now that the foreign ownership limits are relaxed, we could expect them to be included in various indices and attract capital inflows into their stock. This presents an opportune moment for
64 | November 2019 | International Finance
UAE banks: Unused FOL quota
88.55% DFM investors to consider increasing their exposure. We expect global fund managers, insurance firms, pension funds and endowments to be interested,” Raghu explains.
Benefits of higher foreign investment limit The removal of the foreign investment limit is expected to enhance the due diligence process for foreign investors who demand operational transparency and additional disclosures specific to strategy and long-term goals.
83.54% ADX GCC banks are already making moves to bring governance at par with global standards. According to Valecha, financial institutions in the region are already making progress in implementing blockchain enabled technologies, digitisation of documents which enable standardisation, reusability, and monetisation of data, vital to strengthening the internal systems and client experience. For example, the Kingdom has introduced an electronic investor protection system to promote investor interest.
Analysis banking
The GCC countries believe that a broad range of investors will boost their banks’ liquidity and strengthen the pool of industry expertise. “Increased foreign investment into domestic banks offer manifold benefits for the institutions concerned. Foreign investors, especially those with management expertise can help improve the risk management practices and increase transparency, thereby leading to better corporate governance standards. They also bring in specific domain knowledge which helps in improving the skills of local management,” Valecha explains. If the foreign investment cap in the UAE banks is removed it will impact the knowledge transfer and reskilling of the workforce. “The presence of a foreign strategic partner like a bank will enable in increasing the product diversity
and deepening the financial market. Most are motivated by profits and they tend to promote M&A’s, if it leads to a better cost to income ratio for the banks. Increased foreign investment is beneficial for the UAE in the form of economic development, employment boost, improved productivity, knowledge transfer and facilitation of international trade. Moreover, it will strengthen the UAE’s image as an international trading hub that is friendly to business,” Valecha says. Foreign strategic investors can also introduce specific domain knowledge in the Saudi Arabia’s banking sector to improve local management skills.
the UAE banks raising their foreign ownership limit is apt, especially with the trade war looming and the economic uncertainty that comes along, Valecha explains. “While Long drawn out trade wars uncertainty surrounding it is certainly damaging to those in conflict, this creates opportunities for investments in other jurisdictions. Due to its strategic location between the East and the West, and being the link between MENA, Asia, Africa and Europe—the UAE offers easy access to investors from all around the globe. Most of the foreign investments in UAE and Saudi Arabia in the past have been from countries like India, the USA, the UK, Thailand, France and Spain and this is expected to continue in the future. Large financial institutions and wealth funds seeking income or dividend growth coupled with capital advance will be particularly enticed to invest in the UAE and Saudi banks.” Kuwait Finance House’s Raghu shares similar views on the timing of the banks’ and regulators' moves to remove the cap on foreign investments. “The relaxation of ownership limits to attract foreign investments is a step in the right direction at the current juncture. It also aligns with several other structural reforms introduced by the UAE government in recent times to improve foreign trade and capital inflows,” he said.
The regulators and the banks have got their timing right The timing of the Saudi regulator lifting the foreign investment cap and
editor@ifinancemag.com
International Finance | November 2019 | 65
5G
industry
feature Telecom
66 | November 2019 | International Finance
Middle East 5G
feature Middle East 5G
5G: How GCC leapfrogged the world Samuel Abraham
The local governments’ willingness to invest in niche technologies helps GCC outdo the rest of the world in 5G deployment
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here is a lot of hype around the world with regard to telecom players’ 5G plans and the intention of enterprises and countries to leverage the benefits of the technology. In the world’s most technologically advanced nation, the US, 5G fixed wireless broadband internet from Verizon, C Spire, and Starry are available at just a few locations and T-Mobile, Sprint, AT&T and Verizon have made 5G services available for a few select customers in a few cities. In the US’ chief economic rival China, three carriers launched wireless services on October 31, 2019 and again like in the US, 5G services are not widespread. With regard to early 5G deployment, one region seems to have stolen
a march over the rest of the world in terms of speed of execution and achieving the most mass coverage – the GCC. While 5G services were made available in a limited scale in China late this year, leading Middle East telecom operator Zain first announced the launch of 5G services in Kuwait in June 2018. Another operator had also announced the rollout of 5G commercial services in Kuwait almost at the same time while a third announced the launch of 5G services in Kuwait immediately after. According to Zain, the company’s commercial 5G services today cover 95 percent of the Kuwait’s populated areas with full coverage imminent. Moreover, in Saudi Arabia on May 10, 2019, Zain
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Saudi Arabia announced that it had completed one of the first 5G calls in the region on its network. It was one of the first 5G calls in the world without using voice-call apps. Furthermore, on October 6, 2019, Zain Saudi Arabia announced the launch of 5G commercial services, with the first phase of the rollout being implemented through a network of 2,000 towers that cover an area of more than 20 cities in the Kingdom which is probably the largest 5G network deployment in the region to date. The company said that it will be followed by a gradual expansion of the network to cover a total of 26 Saudi cities utilising 2,600 towers by the end of 2019. In Qatar, telecom company Ooredoo claims to have been be working on 5G implementation since 2016 and in May 2018, Ooredoo claimed a breakthrough with the launch of what it claimed was the world’s first commercial 5G network. In a statement, the company said it had launched a live 5G network on the 3.5GHz spectrum band and, effectively, beat rival global operators to the post. In the UAE, 5G became available through local carrier Etisalat with the launch of the ZTE Axon 10 Pro 5G phone in May 2019. Earlier in March, the other local carrier in the UAE, du announced that it had conducted the first live 5G data call on its network while rolling out 700 5G sites across the country. Zain's 5G network in Kuwait is available through the 5G Bolt router for home broadband internet. For using 5G mobile connections users need 5G capable mobile phones and the accurate information on the actual number of mobile 5G users in the region is scant. An Ericsson spokesman told International Finance that while the number of 5G users in the Middle East will be significant in five years, as a proportion of all mobile users the
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“The region has definitely an edge in viable use cases to the extent in that we have good frequency which is the mid band 2.6 mghz and 3.5 mghz that provides for better coverage and is much more efficient, as opposed to millimetre wave spectrum elsewhere. ” Hisham Allam, CTO, Zain Group.
number will still be small. “In fact, all major service providers in the region are moving aggressively to launch 5G commercially. According to Ericsson Mobility Report MEA, 5G will reach 60 million subscribers in the MEA region by 2024 though that will represent 3 percent of all mobile subscriptions in the region,” the Ericsson spokesperson said. In 2019, Ericsson started the commercial roll out of 5G with leading operators in advanced markets and announced 5G commercial launches with Etisalat, STC and Ooredoo. Ericsson was also selected by Batelco to commercially deploy 5G across Bahrain. According to the GSMA, The UAE and the Gulf region are at the forefront globally in terms of 5G launches and plans. Operators in MENA – particularly in the GCC
states – are among the first to launch 5G networks commercially. According to GSMAIntelligence, by 2025, there will be around 50 million 5G connections across MENA, with around 20 million in the GCC Arab States alone.
What’s behind the GCC’s 5G advantage? What was the reason for the lead that the Middle East had over other regions in 5G deployment? Zain Group CTO Hisham Allam told International Finance that “the region has definitely an edge in viable use cases to the extent in that we have good frequency which is the mid band 2.6 mghz and 3.5 mghz that provides for better coverage and is much more efficient, as opposed to millimetre wave spectrum elsewhere.
feature Middle East 5G
Moreover, because access to fibre is very limited in the region, especially the markets Zain operates in, 5G will provide massive capacity and is the best alternative. In short, 5G is a perfect fit for region.” Matthew Reed, Practice Leader for Ovum, Middle East and Africa notes that some of the Gulf markets – the UAE, Kuwait, Saudi Arabia, Bahrain – were among the first in the world to launch commercial 5G services. Part of the background to those early 5G launches is that the governments of some of those countries are keen to show that they are technologically advanced and also to use new technology to support their broader national development plans, including economic diversification, Reed told International Finance. The
intent on part of the local governments to roll out niche technologies before others and to develop viable use cases fast is definitely one reason behind the Middle East leapfrogging the rest of the world in 5G deployment. Jawad Abbasi, head of MENA at GSMA corroborates this fact.” The GCC Arab States have been quick to establish the foundations for global leadership in the deployment of 5G technology moving rapidly from trials to early commercialisation. This has been achieved by proactive government support and close collaboration between mobile operators and businesses,” Abbasi told International Finance. Abbasi notes that intent was followed with action because the governments ensured that there was an emphasis on creating a
regulatory environment that allows 5G to flourish by releasing sufficient spectrum, so that businesses and citizens can fully enjoy the innovative new services that 5G will deliver. Bernard Najm, head of Middle East market unit at Nokia, MEA also backs this observation. “While we see a strong initial appetite for 5G in the US, China, South Korea and Japan, we also see a strong acceleration of 5G launches in the Middle East region in this year. The Middle East has a strong top-down approach, driven by local governments, to adopting new and smart technology for its citizens and residents and we see that this tends to sometimes help these countries leapfrog into new technologies before the rest of the developing world,” Najm told International Finance. In the region, Nokia has worked with telecom operators including du (UAE), Saudi Telecom Company (STC), Zain KSA (Saudi), and Ooredoo Qatar on 5G implementation. From the industry to the government there seems to be clear understanding of the value proposition of 5G in terms of higher mobility. “We see this understanding and awareness of the advantages that mobility brings a society as one of the driving advantages in the Middle East, which has led to the region continuing to have the motivation to invest in and roll out of nascent technologies such as 5G,” Zain’s Hisham Allam tells International Finance.
GCC will be ahead of global average The region will be among the top 5G players, according to GSMA. The GCC states will be slightly ahead of the global average in 5G usage by 2025, with 16 percent customer 5G adoption, compared to 15 percent globally,
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according to GSMA. 5G progress in the region is mainly driven by the mobile operators and governments with the support of mobile technology partners. “Some GCC countries ensured both consumers and businesses will have instant access to 5G as soon as the service becomes commercially available and they installed 5G towers across the country,” Joe Lahham, General manager, TBWA\RAAD, in charge of du told the International Finance. “5G progress in the region is also driven by governments, with 5G set to have a profound effect on countries' economic performance and GDP. GCC governments are playing an active role is creating right environment to drive 5G growth,” adds Lahham. 5G innovation and deployment is also part and parcel of the regional governments’ ambitious vision for a technologydriven future. “In Saudi Arabia, for example, the sheer size of the population and implementation of national policies such as Saudi Vision 2030, will no doubt have a direct impact on roll out plans for 5G, although other countries in the GCC especially Kuwait and Bahrain where Zain operates have similar imperatives,” says Hisham Allam of Zain. Zain KSA recently inaugurated its 5G network at the Neom Bay Airport, an area regarded as Saudi Arabia’s futuristic gateway. Zain KSA also showcased some technologies the 5G network will enable during the inauguration ceremony of the Kingdom’s new ‘welcome the world’ tourist visa. In Saudi Arabia, 5G will be essential to the country’s flagship new city project (Neom). Dubai has also announced that by 2030, autonomous vehicles which will leverage 5G should account for 25 percent of journeys within the emirate. The first popular use case of 5G in
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5G adoption by 2025
Global
GCC
15%
16% (of all mobile users)
the GCC is likely to be consumption of digital content on 5G devices. “We believe early on, access to digital content at a must faster rate will be the first popular use case powered by 5G. Customers will be able to access videos and exchange content at much faster rates than they do over current mobile networks, and that will prove popular,” says Zain’s Hisham Allam. Allam says that 5G low latency use cases will be rarely applicable in the industrial sector in the region. “However, in the energy industry, 5G will support new levels of industrial safety as technicians remotely control mining and oil drilling equipment,” he adds. Nokia’s Bernard Najm says many interesting use cases that could transform society and industries are being developed in the region. For specific examples already being developed for the Middle East he cites the following: • Low-latency, ultra-reliable connected cars are expected to be developed in Dubai.
Source: GSMA
• High level of government and public safety use cases, building on previous 4G public safety networks and taking it to the next level. • Fully replacing the need of fibre to the home (FTTH) with equal or better fixed wireless connectivity. • Enabling digital top-quality education across the Middle East, with full classroom interactive experiences for remote schools by interactive HD VR projections. • Fully automating, monitoring and controlling shipping and container ports across the Middle East with high bandwidth, highly secure low-latency 5G networks. Ericsson has identified four industry verticals that form the primary focus of the addressable 5G business potential opportunity in Middle East and Africa. According to an Ericsson spokesperson, regional service providers not only have established expertise in these verticals, they also offer clear opportunities for 5G use cases. The verticals include oil and
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Expected number of 5G connections By 2025
MENA
GCC
50 million
20 million
Source: GSMA
traffic lights; augmented reality and 360-degree immersive gaming and movie experiences; and transmitting touch and texture to realize the tactile internet. Truly, the IoT applications that 5G will help enable is limitless,” the Ericsson spokesperson adds. Looking at the expected innovations in the next two to three years, Etisalat is expected demonstrate 5G technology and services including streaming video from drones to VR goggles during Expo 2020. Ooredoo is looking into using 5G in smart-city developments (Lusail), and is working with tech vendors to develop applications for the 2022 World Cup.
Spectrum challenges to overcome gas (mining), transport and automotive, public safety, critical infrastructure and manufacturing. A highlight was the innovative 5G solutions Nokia brought to Hajj this year. Nokia together with Zain Saudi Arabia brought 5G-enabled VR (Virtual Reality) advanced use case in Mashaer area and the Holy Mosque area in Makkah. It allowed visitors to experience Hajj remotely as if they are present on site. And with STC, Nokia deployed the firstever 5G-based volumetric 3G hologram communications during Hajj. This innovative solution was used to provide educational and awareness service to the pilgrims about Hajj rituals. The visitors were able to talk, meet, and interact with a 3D hologram who made them aware of Hajj provisions.
Short term and long term 5G innovations What are the innovations that can happen in the short term and long term in the GCC region? According to
Mathew Reed of Ovum, over the next couple of years one can expect to see the development of 5G use cases in vertical markets, such as for automation and remote monitoring in the oil and gas sector; or more advanced video services for transport management systems. He says that 5G smartphones will become more widely available from 2020 onwards. The 5G quick win use case in the Middle East has been the rollout of 5G primarily for broadband. The next big step for 5G is high data rates and very low latency that are expected to enable a range of new applications and services. “As a long-term objective, the region’s 5G application is expected to emerge in entertainment, health, retail and education, oil and gas, and mining. Governments and operators are collaborating on smart city initiatives to address population-related challenges and deliver socioeconomic benefits,” says TBWA/RAAD’s Lahham. “Users will experience smart cars that are capable of communicating with
How soon can we see use cases such as immersive reality, autonomous transport, and remote surgery implemented in the GCC and what are the current challenges? The most pressing challenge is the availability of necessary radio frequencies, including those known as ‘millimetre wave’ frequencies that will deliver ultra-high capacity and ultra-high-speed services. GSMA’s Abbasi told International Finance that 5G mmWave spectrum will be identified at the World Radiocommunication Conference 2019 (WRC-19), which will take place in Egypt from 28 October to 22 November 2019. WRC-19 is the only opportunity for years to come for countries to identify mmWave spectrum for 5G use. “The MENA region stands to benefit from better healthcare and education, as well as new benchmarks in industrial productivity, entertainment services and smart transport, but only if we can secure the needed spectrum, adds Abbasi. editor@ifinancemag.com
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Healthcare AI in European healthcare
European hospitals are using AI softwarebased recommendations for diagnosis. Can it be susceptible to bias?
Healthcare: AI faces data and black box challenges Sangeetha Deepak
After years of experimenting with it, the European healthcare system and the healthcare experts in Europe are seeking to adopt a more value-based approach in healthcare delivery using artificial intelligence (AI). The primary nature of AI applications in healthcare science is to study the correlation between prevention or treatment techniques and patient outcomes to make accurate clinical decisions and to build the year AI is a robust body of research for expected to the future. be useful and Currently, the UK is widespread dubbed the “heartland of in European European healthcare AI,” healthcare while Germany and France are the two flourishing hubs. The UK government has committed to invest $300 million in the AI, which will be used by the public healthcare system — also known as the National Healthcare System (NHS). The NHS is setting up an exclusive lab that will work toward enhancing AI tools within its healthcare delivery. The lab will act as an interface for both experts and academicians to drive innovation and study the biggest healthcare challenges, including early cancer detection, new dementia treatments, and enhanced personalised care.
2023
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AI in healthcare is still in the development stages, although there are many areas in which the technology could be useful: imaging, ophthalmology, genomics and intensive care. “At University Hospital Zurich, we are working on projects regarding using AI on our images. These projects are still in work in progress at the present time,” Andreas Boss, professor and doctor of medicine at the Department of Diagnostic and Interventional Radiology, University Hospital Zurich, said in an emailed interview with International Finance. Consulting firm LEK published a report on AI: Six challenges for the European Healthcare Sector, which stated that the technology is being developed to work with multiple data types. Citing its versatility, the report said that AI has the potential to perform across the entire patient care pathway — starting from the point of early detection to diagnosis to treatment management and to monitoring of ongoing treatment. Commonly, radiology and oncology are the two health branches that see more types of AI algorithms. “In radiology, we are currently using AI for standardisation and quality control of mammograms,” Dr Boss says. “The technology is not applied for diagnostic purposes or treatment monitoring. However, a lot of research is going on in that direction.” In another example, Geneva University Hospitals (HUG) is using IBM’s Watson for Genomics in the
Analysis Healthcare
$300 mn The UK’s NHS is investing in the development of AI
field of diagnosis. In theory, Watson for Genomics is an AI tool for oncologists to provide patients with more personalised, evidence-based cancer care. “Patients who need and are able to undergo additional treatment after having exhausted the standard treatments can be candidates for extended genomic analyses,” a HUG spokesperson tells International Finance. In practice, the spokesperson explains, genomic data is compiled in a text file containing descriptions of the gene alterations, their location, and their frequency. The file is analysed securely by Watson for Genomics which scans nearly three million publications to find articles evaluating potential treatments. After that, the oncologist will receive a multi-page report reviewing the literature, including article references with abstracts and direct links to publications. Clinical trials are also suggested based on the tumour profile matching the inclusion criteria. eHealth professionals in Europe predict AI to become dynamic, useful and widespread by 2023, according to HIMSS Analytics. The prime reason for that is because the technology has capabilities that can demonstrate robust performance in both frontline care and back office tasks in hospitals. “AI’s biggest potential is seen in workflow improvements and standardisation. If repetitive tasks are performed using AI, more resources can be used for interaction with patients,” Dr Boss says. The NHS of UK, for example, has 45,000 clinical
job vacancies and 50,000 non-clinical open roles — and a similar situation can be seen in hospitals across Europe. Usually, hospitals tend to alleviate staff shortage using a temporary solution that only puts them under further financial strain. So the possibility of using AI applications to conduct triage before patients arrive at the hospitals will not only speed up the healthcare delivery process, but allow overstretched clinicians to focus on interacting with patients effectively.
Transformative with unintended effects LEK in its report has classified AI to have ‘transformative capabilities’, but involving algorithms and systems, can cause unintended effects in both clinical legality and decision-making. Data sharing is a case in point. Hospitals in the NHS system offer a treasure trove of patient data, that is built on an extensive medical history of each patient. Inevitably, data sharing between partners is expected to increase as connected devices, data volumes, and applicability of AI continue to evolve in healthcare delivery. This form of interconnectedness is a major cause for concern for AI developers and healthcare facilities because failing to comply with the General Data Protection Regulation (GDPR) while developing or using the software is a liability. In a nutshell, data privacy in healthcare gives patients the right to control how their data is used, which is expected to become the industry norm over time. Programming that leads to control over evolving technology platforms will allow AI developers to preemptively avoid serious consequences. “Sharing patient data between different institutions for the development of AI solution is a danger to patient privacy. Patients need to be protected against unauthorised sharing of
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medical data with AI companies, such as Google, Facebook or Chinese companies even. The Swiss Personal Health Network (SPHN) is implementing the required infrastructures among universities,” Dr Boss explains.
AI has to survive Europe’s stringent standards Europe’s protection standards are stringent. “In Europe, medical software requires a CE marking with a strict approval process,” Dr Boss says. Algorithms to be used in European healthcare must apply for CE marking, which is a certification mark that conforms with health, safety, and environmental protection standards for products sold within the European Economic Area — and have to be categorised according to the Medical Device Directive. Also, independent algorithms that are not fed into a physical medical device must be classified as a Class II medical device. In the big picture, actual data is more valuable than clinical data. “Today, therapy decisions are often made empirically, based on the
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“Today, therapy decisions are often made empirically, based on the experience and knowledge of those involved. It would be desirable to support the decisions with real-time data analyses and state-of-theart medical knowledge from other sources, such as globally harmonised databases,” Emanuela Keller, professor and doctor of medicine, Institute of Anaesthesiology, University Hospital Zurich
experience and knowledge of those involved. It would be desirable to support the decisions with realtime data analyses and state-of-theart medical knowledge from other sources, such as globally harmonised databases,” Emanuela Keller, professor and doctor of medicine, Institute of Anaesthesiology, University Hospital Zurich tells International Finance. With so much data on hand, identification and cleaning of credible information to form core data sets is
a complex feat in the development phases of AI programmes. “Conventional monitoring systems trigger around 700 alarms per critical patient each day and a significant proportion of those alarms are false,” says Keller. For that reason, the neurosurgical intensive care unit of the University Hospital Zurich, ETH Zurich and IBM Research, as part of the ICU Cockpit Project, are working to reduce data volume, increase accuracy in critical situations and improve patient safety.
Analysis Healthcare
Keller, who is also the principal investigator describes the project’s long-term goal is to “initiate a fundamental development in emergency and intensive care medicine — and thus, significantly improve the way hospitals work in day-to-day practice." Many European hospitals and research institutions are wary of cloud platforms and choose to use their own servers because patient data is typically not allowed to exit Europe. The use of AI in patient care at HUG does not involve sharing large volumes of data. “At the HUG we are customers who do not need to provide large amounts of data to use the solutions because we need answers for one patient at a time by using only the patient’s data. Even if Switzerland is not in the European Union, we tend to apply the GDPR rules and fully respect its constraints in order to remain EU compatible,” says the HUG spokesperson, emphasising on the fact that “companies providing AI solutions need big volumes of data to train their models.” For AI developers, another subsequent concern while developing healthcare tools is the black box issue, which typically stems from incomplete information. A blurry image, for example, can make the algorithm arrive at an inaccurate conclusion. Sometimes, what happens is that AI technologies result in key algorithms that are not exposed to enough peer review or a detailed scientific analysis. “Before algorithms for automated detection of critical complications can be implemented into clinical practice they have to be extensively tested in clinical studies and validated
“I am deeply sceptical, when I hear of 99 percent accuracy of AI for reading mammograms. It sounds very much like propaganda. But, I admit that there is large potential for AI reading X-ray images.” Dr Andreas Boss, professor and doctor of medicine at the Department of Diagnostic and Interventional Radiology, University Hospital Zurich
according to the directives for medical device software,” Keller explains. A limited testing process is highly consequential because it can lead to malpractice risk, an important factor that cannot be overlooked by chance. Physicians cannot impulsively rely on clinical software recommendations alone, as they consistently do not match physicians’ judgement in accordance with the standard of care. “One of the most important challenges is the validation of the software. AI software should not be implemented in the clinical workflow until it is properly tested and validated,” Dr Boss says. “I am deeply sceptical, when I hear of 99 percent accuracy of AI for reading mammograms. It sounds very much like propaganda. But, I admit that there is large potential for AI reading X-ray images.” The LEK report suggests that AI developers will have to work closely with lead adopters to ensure transparency in clinical software and to build sound approaches in liability management for algorithms to consistently reproduce results. editor@ifinancemag.com
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Real estate Property technology
Ben Davis CEO, PropertyHeads Group
Technology transforms the way we buy, sell, and search for real estate, providing buyers with short sales cycles
Streamlining realty buying with tech Today real estate technology has developed to help potential buyers and renters to view properties instantly through their own devices. 360-degree videos capture the details of the property much more so than images, allowing for a more realistic depiction. Augmented reality (AR) and virtual reality technologies (VR) have many benefits for both real estate brokers and buyers.. For instance, those looking to relocate can easily view properties in different locations without having to travel and physically see the property. The real estate broker is also likely to attract more sales this way as more properties will be viewed closely and objectively by more prospective buyers. The cost of such technologies has declined massively in recent years and they should be accessible to all brokers now at some level. Real estate and letting brokers are increasingly using review sites to boost their online presence. The value of these review sites, however, is debatable since decisions on what property to buy or rent is normally down to personal choice with perhaps some inputs from family and friends. The emergence of property-specific social networks is enabling a greater dialogue between local residents, fellow purchasers, landlords, tradespeople, and those selling their houses. Property specific social networks go deeper to help provide a greater depth of
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information to prospective buyers aiding better decision making. For example, they provide information regarding local schools and amenities as well as the best local builders to help with renovations. 

Data and transparency enable fairer pricing The amount of data now available online can enable prospective owners, investors and other stakeholders to gain a detailed picture of property prices, trends, and influencing factors. Transparency allows for fairer pricing as it helps the market to self-regulate, giving prospective buyers and renters greater confidence in their decisions. Using data also allows for the personalisation of property search. Real estate brokers can recommend properties based on personal wants and needs, such as number of bedrooms, providing recommendations more tailored to the individual. This technique inevitably saves the buyer time and unnecessary stress, making the property search an easy and smooth process. The harnessing of data also offers the opportunity for forward-thinking brokers to demonstrate their local property market expertise through informative social media posts, and as further collateral to achieve the best possible price for their vendors and landlords.
Automation tools help brokers focus on core tasks Gathering and analysing property data can be time consuming, but brokers can use automation tools in a number of ways to speed up this process. Using automation tools means less manual work to complete, freeing up time to generate leads and close deals. They also help with the pricing stage of the deal as data from similar properties can be gathered and used to come to a quicker and more accurate agreement. Real estate brokers can also put this data into an algorithm, allowing them to predict prices for certain areas easily. Automation tools are also a powerful way to help brokers eliminate unnecessary communication with clients, allowing deals to process faster as market data is always up to date and quick to access. Real estate brokers can also use automation tools within their marketing strategies, enabling them to post on social media, update ads, send emails, and text messages all while out and on the go.
A property social network has its own tech value proposition There is an app for everything these days and real
estate apps are no exception to this trend. Such apps allow the user to buy, sell, find a broker and browse properties from the comfort of their own home. They also notify users when a new listing hits the market so you can always be up to date on new developments. Technology has greatly impacted real estate and the way buyers and renters search for property, making the process much faster and more efficient. The availability of information and contacts through PropertyHeads.com is a unique contributor to these developments, acting as the first social network for homebuyers and tenants, helping them to gain true to life insights into their future property moves. Technology will continue to transform the way we buy, sell, and search for real estate, providing buyers with short sales cycles and tenants with top service. Ben Davis is the CEO of Property Heads Group, and PropertyHeads.com - The Property Social Network™. He is committed to empowering people to make better decisions on property. PropertyHeads Group founded in 2018, is based in Essex, UK, and is one of the fastest growing property websites in the UK. editor@ifinancemag.com
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Aviation Southeast Asia aviation
Full service and budget carriers in Southeast Asia are aggressively using AI for better forecasting, planning, maintenance, and event response
Southeast Asian airlines leverage the precision of AI Sangeetha Deepak
The once static aviation industry in Southeast Asia today has artificial intelligence (AI) algorithms everywhere. Southeast Asia’s key full service and budget airlines are heaviliy investing in artificial intelligence to optimise operations management. Artificial intelligence essentially supplements the industry’s existing systems to match evolving customer expectations. It is in improving “The the overall flight experience component and fleet management that algorithms it is working its magic to developed have enhance competitiveness and been deployed performance. since end 2018.
The airline has managed to mitigate more than 500 minutes of flight delay time"
AI brings in targeted customers
Last year, Singapore Airlines embarked on a digital journey using artificial intelligence to rebrand itself and drive sales. The airline worked closely with technology firm Rocket Fuel to target users based on online behaviour. The two noticeable outcomes from the activity were bookings to offbeat destinations such as the Philippines, Vietnam and Myanmar increased and 14 percent of total website bookings in May occurred after seeing ads powered by Rocket Fuel. Another technology driven model used by
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Singapore Airlines was the deployment of natural language processing and machine learning. “As part of efforts to expand the airline’s digital servicing channels for customers, the public will be able to chat with our chatbot Kris via Facebook messenger as well as on our website. Kris can provide immediate and accurate responses to customers on topics such as baggage allowance, seat selection, and flight updates among others, thus improving staff efficiency and productivity,” a representative from Singapore Airlines told International Finance. Collaboration and research is of utmost importance while developing new digital business models. Singapore Airlines also works with Agency for Science, Technology and Research and Rolls Royce to develop a predictive maintenance solution to enhance aircraft reliability and flight punctuality. This model is a wholly data driven solution. Machine learning techniques are used to predict aircraft component failure based on historical flight recorder data—a similar method that many airlines are adopting as a criteria. “This prevents flight delays and ensures aircraft safety,” the Singapore Airlines representative said. “We are able to develop and deploy a machine learning algorithm using historical flight recorder data from both normal flights and flights with component failures,” the Singapore Airlines representative added. The component algorithms developed by
Analysis Aviation
Singapore Airlines with Agency for Science, Technology and Research have been deployed since the end of last year. Essentially, the algorithm will give an output that reflects the health of the aircraft’s component, which allows analysts to calculate the probability of failure or identify a pattern. “The component algorithms developed with Agency for Science, Technology and Research have been deployed since end 2018. The airline has managed to mitigate more than 500 minutes of flight delay time across all the component models developed by the Agency for Science, Technology and Research and Rolls Royce,” the Singapore Airlines representative added. It is important to understand that all machine learning algorithms become adept as data is repeatedly fed into them over time. Singapore Airlines and Agency for Science, Technology and Research’s Predictive Maintenance Joint Lab will continue to create additional training events and data to retrain the deployed models, improve accuracy and lead time. “The team is poised to embark on new predictive maintenance use cases related to emerging issues, possibly utilising new and appropriate methods including unsupervised learning,” the Singapore Airlines representative said.
AI and IoT take care of dirty engines Malaysian budget airline AirAsia is leveraging AI to a great extent in its critical functions as part of its
Singapore airlines operating statistics – September 2019 2019
2018
Change
9175.4 8402.4 9.2% Passenger kilometres travelled
1838
1681 9.3%
Passengers carried (1000)
digitisation strategy. Last year, AirAsia partnered with Google Cloud to integrate artificial intelligence and machine learning into its business culture. The airline has pre-installed more than 10,000 IoT sensors into its aircraft to help engineers to save time in aircraft maintenance and reduce wastage of spare parts. With the help of artificial intelligence, the data collected from those sensors is being used to implement predictive maintenance. Defect analysts can simply understand what is to be done on a specific aircraft component or system as a turnaround action by anticipating and mitigating failure. The result is significant cost-savings for the airline. An AirAsia representative told International Finance earlier, “Dirty engines consume more fuel, and while engine cleaning is regularly scheduled, monitoring the data allows for adjustments and cleaning. What we can do now is if an engine is starting to burn more fuel, we can go ahead and
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send it in for washing earlier. Now, we can be more proactive and these things will save us money.� Those sensors can collate up to 24,000 data parameters related to aircraft systems or component sensors in every flight it is installed. The data is gathered as soon as the aircraft is switched on and is captured by the maintenance management systems. In the next step, a predictive maintenance machine learning algorithm analyses the data to predict failure of a specific target system, such as depletion of oxygen from the crew oxygen bottle. AirAsia is also exploring other business models and methods to limit its exposure to volatile fuel prices. It has partnered with American conglomerate General Electric to use Flight Efficiency Services to make its aircraft more fuel efficient in terms of cost and carbon footprint. The technology used by General Electric is the Industrial Internet that can enhance the airline’s efforts in fuel cost management.
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Air Asia
10,000
24,000
IoT sensors for AI systems to leverage
data parameters collated by sensors
In theory, Flight Efficiency Services will amplify airlines’ precision to follow advanced routes, that are otherwise estimated to be 20 percent inefficient across the aviation industry. AirAsia predicts that it will save between $30 million and $50 million over the next five years by using this technology. Machine learning which is a subset of artificial intelligence is also useful for weather pattern prediction, that is an extremely important part of flight management. AirAsia has been assessing the technology to equip
its passengers with flight delay predictions ahead of time. Earlier getting customer feedback through surveys and polls was a cumbersome exercise that they have now streamlined the feedback process fully using artificial intelligence for constructive data. AirAsia is exploring sentiment analysis that could scan pictures of passengers as they board and leave the plane to determine their level of satisfaction with the airline. Last year, AirAsia introduced Fast Airport Clearance Experience
Analysis Aviation
System to improve the boarding experience for its passengers. This facial recognition technology identifies enrolled passengers as they come closer to the automated boarding gate — and therefore, will not have to submit their travel document. For now, the technology is only operational at Senai International Airport in Malaysia. The airline’s representative said, “The more things we can digitise, the better we can improve our efficiency and our operations.”
AI to prepare airline food China Eastern Airlines is another case of using artificial intelligence to create a better customer experience. Its data lab unit is trying to solve problems even before they could occur by developing a pilot service. For example, the in-flight meal preferences and feedback given by passengers will be gathered, analysed and and the data crunched will be used to prepare meals in future. Another model that the stateowned airline’s data lab worked on is how to automatically classify thousands of complaints. The idea is to shorten customer response time that will positively impact the overall experience. This is especially relevant to the airline because complaints regarding its in-flight meal service stacked up quite a lot and managing them became a hassle. Refined monitoring of customers’ response patterns and data analytics is a transformative step for the airline. SITA’s 2018 Air Transport Insights research explained that artificial intelligence has become a sophisticated technology offering strategic and operational advantages
to airline companies. Japanese flag carrier Japan Airlines has replaced a decades-old passenger management system with Amadeus' Altea programme to automatically to adjust ticket prices to match flight demand for higher revenue. For Japan Airlines, the technology complements the task of optimising ticket prices, helps to understand losses from wrongly calculated demands and offsets the impact of high fuel prices on earnings. The upgrade has been referred to as a switch from bamboo spear to a machine gun — which firmly suggests the effect that artificial intelligence has on Southeast Asia’s aviation industry.
Self-service check in set for mass adoption What does the future of AI in the Southeast Asian aviation industry look like? Passenger numbers are expected to hit more than 4.1 billion by 2036 at Asia Pacific airports. At that level of passenger traffic, maintaining efficiency with human-controlled systems
will become acutely challenging. This is where the impact of AI is expected to make drastic changes to aviation operations efficiency. AI is today understood to be capable of handling end-to-end passenger handling and check-in operations on its own. In future AI combined with facial recognition technology will make self-service check in a reality at most major airports, possibly the first mass adoption will happen at airports in China. AI could also be used to maintain and repair aircraft at more Southeast Asian airlines. One possibility is that AI can reduce the need for routine maintenance by triggering repairs only when they are needed. Also by using data from in-service aircraft, AI might be able to predict flight delays and faults to avoid traffic disruption and to enhance customer satisfaction. Essentially AI is taking aviation in Southeast Asia to a new elevated plane.
editor@ifinancemag.com
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profile
Centrium Square
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Tong Eng Group Real estate
Artist's Impression
Teo Tong Lim Group Managing Director, Tong Eng Group
t
Tong Eng: Singaporean developers going global
With the third generation now running the day-to-day operations, Tong Eng Group has uniquely come on top of all boom and bust real estate cycles
The Tong Eng Group (‘Tong Eng’) is a Singaporean real estate company that has grown leaps and bounds with the Singapore growth story while contributing to the city state’s stellar growth. The company branched into real estate during the post-war rebuilding efforts of the 1950s when Teo Thye Chor, a migrant to Singapore from Hui Ann District of Fujian in China, saw the potential of the Paya Lebar District, an undeveloped precinct, and developed it into the first industrial estate in that area. Thye Chor and his brother Teo Thye Hong, who accompanied him from Fujian, continued to buy more greenfield land in the city’s suburbs. Tapping into Tong Eng’s already existing tin can business, the brothers sold the land to major oil refining companies such as Shell and Mobil to build petrol stations. In 1968, Thye Chor’s eldest son Teo Tong Wah, together with his uncle Thye Hong, took over the company’s reins and developed the company’s land while pursuing Thye Chor’s legacy of land banking. A visionary, Tong Wah acquired the pre-war rent control shop houses adjoining Tong Eng’s own three units at Cecil Street in the heart of Singapore’s Central Business District and built a 26-storey office building known as Tong Eng Building, where the company’s headquarters is now located. The group has developed real estate across the residential and commercial sectors, including condominiums, landed housing, apartments, offices, and retail projects. Although the third generation of the family is now running the day-to-day operations, the strong mentoring of the second generation ensures that the group is able to maintain its stellar track record over 60 years. With careful financial planning and prudence, the group has come on top of each
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company profile
For all its residential projects, Tong Eng Group pays careful attention to spatial planning in ensuring that the spaces provided are functional, efficient, and utilitarian
Belgravia Green
Tong Eng Group
Real estate
boom and bust cycle that the Singapore property sector has witnessed. The group cushions the impact of property downturns by cleverly using a mix of investment and development properties in its portfolio and using the cashflow from the investment portfolio to weather downturns. Tong Eng Group is today known for ensuring the utilitarian layout of all living and commercial spaces through creative and spatial planning. It is also the first to embrace new design concepts and construction technologies, while following a diligent material selection process and robust project management to ensure all construction is done with excellent quality and finishes. By being on top of market trends and demand patterns, the group stays ahead of competition. In an exclusive interview with International Finance, Tong Eng Group’s Group Managing Director Teo Tong Lim tells us more about its unique approach to business, its marquee projects, and expansion plans outside Singapore, especially Australia.
International Finance: Tong Eng Group has used innovative ways to build spaces while delivering value to buyers. Could you please tell us how you achieve this? Teo Tong Lim: For all its residential projects, Tong Eng Group pays careful attention to spatial planning by ensuring that the spaces provided are functional,
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efficient, and utilitarian. In some of our past residential developments, we chose to erect a loft in selected units with higher floor-to-ceiling heights for creating a dual use as a living space. In addition, in many of our previous residential projects, we adopted bay windows for aesthetic appeal, versatility in space usage, as well as ventilation. In one of our two new commercial developments in Singapore, we have creatively adopted the use of bay windows. This garnered positive feedback from office workers who have found that the extended space can be used functionally as an additional sitting area, for low shelving, display cabinets, and for plants and green pottery. Furthermore, in both commercial projects we mentioned, we have magnificent floor-to-floor heights of close to 5 metres and the effect of the bay window not only allows more natural light and ventilation to be brought in but it also enhances the already impressive view experience.
Can you tell us more about your marquee projects so far and what are the features that distinguish Tong Eng Group as a developer of such niche projects? We single out two marquee projects. ARC 380 is a 16-storey office building that has
Artist's Impression
garnered several design awards in Singapore and overseas. Fully clad in light green curtain wall and adopting a stunning curved form, the building users benefit from sweeping panoramic views across the heritage Jalan Besar District as well as Singapore’s Kallang river. Other special features include a roof top swimming pool, gym, and clubhouse that offers a panoramic view of the surroundings and a covered terrace garden of 9.8 metres height on each level of office floor. Located on the city fringe, ARC 380 provides qualities akin to a Grade A office with an open columnfree internal layout. Each office floor features 4.9 metre floor height and is designed with individual toilets and air-condition (AC) ledges that enable occupants to install their own AC units after normal office hours. Utilising the principle of ‘form follows function’, the AC ledges are designed to articulate the stunning façade, creating juxtaposing punctures through the glazing. Communal facilities such as the infinity pool, indoor gym, and clubhouse were introduced to create opportunities for social interaction and encounters. The concept of designing spaces for work-life balance continues on the alternating cantilevered sky terraces that act as private relaxation spaces. The other marquee project by the group is the three phases, Belgravia Villa, Belgravia Green, and a remaining housing phase. This currently constitutes the largest cluster of freehold strata landed housing in Singapore totalling 306 units. The three phases are freehold strata housing developments that have a multitude of communal condominium-like facilities, with each unit still retaining all the features of a landed house. Private lift access in each home allows smooth access to all levels in each home and all homes also come complete with two designated basement covered car park spaces. In the developments, there are a range of amenities such as a clubhouse, gym, barbeque decks, playgrounds, a tantalising number of infinity edge swimming pools, water features, landscapes, themed gardens and nature pathways and even hydrotherapy equipment to create a complete landed lifestyle. With particular emphasis shown in the facade treatment, the
Artist's Impression
Wilshire Residences
design ethos are homes that are contemporary and distinctive, with indoor spaces connected seamlessly to outdoor greenery. At the same time, we focus on internal living spaces to deliver airy, contemporary homes that offer an optimal level of shelter, privacy, and shade.
With the limited space available in Singapore, Tong Eng group has developed close to 200 acres of land. Could you please tell us more about your land bank strategy?
With particular emphasis shown in the facade treatment, the design ethos are homes that are contemporary and distinctive, with indoor spaces connected seamlessly to outdoor greenery
In the past, the company's first-generation founders amassed large tracks of greenfield land whose values rose in tandem with Singapore's economic growth attributed to a good, strong, business friendly Singapore government. This was also possible due to the freehold nature of the land acquired. Today, land banking for residential developments has become difficult and expensive due to the additional land tax associated with the buyers stamp duty. However, we still look out for land banking opportunities in Singapore and overseas.
What is your outlook for the Singapore premium residential property market in the next 5 to 10 years and what are your plans for the time period? Despite the latest residential cooling measures, we believe that there will always be demand for residential premium housing as Singapore continues
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Tong Eng Group
Real estate
to rank highly in liveability polls and the country is seen as a safe haven by foreign investors with no restriction on ownership of residential property except landed property. Moreover, Singapore ranks top in the world for education with renowned educational institutions attracting families from all over the world. Furthermore, there is a strong demand from locals who aspire to own premium residential property. Tong Eng Group has successfully completed several premium residential properties recently. The company is currently developing Wilshire Residences, View at Kismis, and Belgravia Green. We believe Singapore will continue growing as an Asian financial business hub and thus, we remain positive on the premium office property market
What is your outlook for Singapore’s premium retail and office property markets in the next 5 to 10 years and what are your plans in that space for the timeframe? The Asia Pacific region is the fastest growing economy in this era. Foreigners looking to invest in this region will always look to Singapore to set up their headquarters or base due to Singapore's political
stability, transparent governance, state-of-the-art infrastructure, low corporate tax environment, highly educated and skilled work force, and probusiness environment. Furthermore, we believe Singapore will continue growing as an Asian financial business hub and thus, we remain positive on the premium office property market. The retail sector in Singapore faces challenges and downside risks amidst an uncertain trade environment, and global uncertainty. Moreover, with the impending increase in goods and services tax in 2020, the premium retail property market will face downward pressure. However, Singapore's reputation as a place for good food options ranging from hawker food to Michelin star restaurants will help sustain demand for food and beverage spaces.
There seems to be an increased interest in Singapore office real estate from foreign investors and entrepreneurs who seek a competitive first world business environment with political and economic stability. How will Singapore meet this demand for office real estate and what role will companies like Tong Eng Group play? The supply of office space is provided by government land sales and rejuvenation of old office buildings. Tong Eng Group is currently developing Centrium Square, a 19-storey mixed use commercial development in the city fringe that comprises a retail podium with food and beverages, a multi-storey car park, and a tower comprising medical suites and offices. Our other completed building ARC 380, a 16-storey retail, food and beverage, and office building, is substantially leased to multi-national corporations which includes technology and professional firms and co-working space providers.
Similarly, in Singapore, there seems to be an increasing demand for premium residential property set in sylvan and lush green surroundings from local and foreign investors. How will Singapore meet this demand and what role will Tong Eng Group play to meet this demand? Transforming our modern cityscape from a garden in a city to a city in a garden, the Singapore government's commitment to enhance the
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We are still sanguine about the commercial market in Australia and continuously look to add to our portfolio
Arc 380
quality of our living environment through greenery and recreation is still as strong as ever today. The Urban Redevelopment Authority of Singapore plans and facilitates Singapore's physical development, in partnership with other government bodies and Tong Eng participates in URA’s initiatives through the provision of high rise green communal spaces.
What is Tong Eng Group’s real estate development strategy outside Singapore, especially Australia? We are committed to growing our existing presence in Australia where we currently own four office buildings in Sydney and Melbourne. We are still sanguine about the commercial market in Australia and continuously look to increase our portfolio. We are taking a measured approach to the Australian residential market at the moment, but keeping our finger on the pulse.
Does Tong Eng Group see further value in real estate development projects outside Singapore and which are the key areas and markets that
interest Tong Eng Group and why? We see value in offices and hotels in Asia Pacific where the office sector will see continued growth momentum in Asian economies, while the hospitality sector in Asia will benefit from a robust growth in tourism activity. In addition, we are focused on other key capital cities such as London, and cities in Japan, and are exploring opportunities in these global cities where we can continue to explore commercial opportunities as well as residential opportunities.
Joint ventures and partnerships have been a feature of Tong Eng Group’s operational strategy. Will you continue this strategy into the future and what are the typical terms under which you enter into such JVs and partnerships? Joint ventures and partnerships will continue being a feature of Tong Eng Group's operational strategy – we believe in collaborating with joint venture partners with the same vision, core values, and alignment of interest as us. And we continuously manage each asset with integrity and excellence.
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industry
Interview
Emmeline Roodenburg Head of Healthcare, KPMG, Saudi Levant cluster
KPMG’ s head of health for the Saudi Levant cluster says that the rising female workforce will boost Saudisation in healthcare
Private providers should fill 21st century care gaps if correspondent
The transformation of Saudi Arabia’s healthcare sector is a core agenda of the Kingdom’s ambitious Vision 2030 strategy. The Kingdom faces a number of healthcare challenges, including a rapidly ageing population, increasing incidences of chronic diseases such as diabetes and obesity, and staffing challenges with an over reliance on expatriate manpower for critical healthcare functions. The Kingdom’s National Transformation Plan envisages a larger share for the private sector in the healthcare spending and the nationwide deployment of digital healthcare technologies. The Saudi Arabian ministry of health targets at least 70 percent of the local population having unified electronic healthcare records (EHR) by 2020. Equally important is the reform of the primary healthcare system focusing on improved integration with the national healthcare system while ensuring continuity in services offered. Among the strategic initiatives mentioned by the NTP are increase in training, both nationally and internationally, improvements in infrastructure, facilities management, and safety standards; identifying additional sources of revenue, as well as investing in improving the skills of healthcare providers. The Ministry of Health in Saudi Arabia is also interested in increasing public private partnerships through the privatisation of at least one of the medical cities and the localisation of the pharmaceutical industry. Foreign investors interested in investing in healthcare in Saudi Arabia might find opportunities in setting up additional private medical facilities, healthcare education, deployment of digital healthcare technologies or healthtech, and local manufacture of pharmaceuticals. In an exclusive interview with International Finance, Emmeline Roodenburg, Head of Healthcare for
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healthcare
Saudi Arabia healthcare
KPMG in the Saudi Levant Cluster talks about the readiness of the Saudi healthcare system for digital technology deployment and the challenges facing Saudi healthcare. In an earlier role, Emmeline Roodenburg was one of the lead directors in a $100 million KPMG engagement to transform New York state’s healthcare system in the US. Her areas of expertise include international health systems with a focus on care system redesign, including value-based payment systems, provider transformation, life sciences and change management.
implementation. Saudi Arabia actually gets the opportunity to be the architect of a well-functioning system and should (will) grab that chance with both hands. The administrative challenges, that are inevitable in any IoT implementation, should be tackled through cultural training and development of healthcare staff to adopt and promote the use of IoT, especially with regards to patient care. Legal barriers, as anywhere else in the world, need clear policies on data sharing, privacy and recovery, and backup plans on information systems and the robustness of those systems.
International Finance: What are the current barriers to IoT healthcare implementation in Saudi Arabia and how can they be overcome?
With the increasing adoption of technology-driven healthcare in Saudi Arabia, how will healthcare organisations assuage consumers concerns on issues such as data safety?
Emmeline Roodenburg: Technical, administrative, and legal barriers exist. Technical barriers are the full implementation of health information systems that are automated and interoperable at national level, between emerging clusters and providers (and patients!) within the clusters. Central coordination is the key. Many countries in the world would like to press the ‘reset button’ when it comes to IoT healthcare
As said earlier, clear policies on how data is shared with transparency of guidelines and a national stance on these is important. However, we need to be cautious about overregulation. The downside is that development of algorithms, which lead to smarter, targeted personalised care, can be slowed down if data protection is getting the overhand.
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industry
Interview
Emmeline Roodenburg Head of Healthcare, KPMG, Saudi Levant cluster
The trick is not to go for the simplest systems that are just good enough, but to go for the best new-generation systems that are fully interoperable – not just from the system point of view – but also from the patient perspective
healthcare
How important is Public Healthcare Centre reforms to the improvement of healthcare outcomes in Saudi Arabia? Extremely important as the areas of reform are geared towards a shift to population health management, involving patients in their care and shifting care to the most appropriate settings.
Are the healthcare information systems in Saudi Arabia mature enough for the implementation of the latest healthcare technologies? If not, how can the gap be closed? How do patient management systems in Saudi Arabia compare with the developed world? Saudi Arabia is rapidly catching up with executing patient management systems, however, the implementation of full electronic health records that are used for patient care are still not in place, especially, where it matters the most such as in primary and community care. This includes proper coded records that allow for population health management to be implemented and financial mechanisms aligned with quality metrics.
Saudi Arabia has seen a change in pattern of prevalent diseases from communicable diseases to chronic diseases. How can the healthcare system in Saudi Arabia meet the increasing demand for chronic disease treatment? Saudi Arabia is moving to population health management systems that will be essential to managing chronic diseases. As data begins to be gathered robustly on prevalence of diseases and segmentation of patients becomes possible, the Kingdom can proactively target patients. Using technology to drive these interventions, such as digital behavioural management programmes supplemented with offline care management systems, will achieve better outcomes and better patient satisfaction. Crucially, and I understand this will take time, but specifically on prevention and treatment of non-communicable diseases, I am a strong believer in alternative payment systems that reward providers for their added value, the patient outcomes. Finally, consumers or patients can be incentivised to take their health more into their own hands.
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They are not currently. The trick is not to go for the simplest systems that are just good enough, but to go for the best new-generation systems that are fully interoperable – not just from the system point of view – but also from the patient perspective in how consumers of healthcare expect to interact with their health systems through their mobile phones and wearables and apps. Systems need the backbone and infrastructure to be robustly developed so that machine learning, remote diagnostics, and treatments can be superimposed.
What are the challenges to the deployment of healthtech systems in Saudi Arabian hospitals and how can these challenges be overcome? There are many, but one of the biggest challenges remains the cultural shift that busy healthcare workers will have to make to get systems integrated in their daily way of working. The best systems fail when healthcare staff is not engaged in the implementation. A definite digital dip occurs when new systems are implemented and it is essential to stay close to the difficulties front line staff face and help iron those out as quickly as possible.
Has the Saudi Telemedicine Network brought any discernible improvements to healthcare outcomes in Saudi Arabia? We know that systems that have a good data and telecom coverage generally achieve better universal health coverage. This is the same for Saudi Arabia.
What challenges do an increasing population and ageing bring to the Saudi healthcare system? What
Saudi Arabia healthcare
Private sectors’ share of healthcare spending in Saudi Arabia
25% 2019
Saudi government's 2020 target of EHRs for the population
70%
35% 2030 (e)
The biggest contribution that the private healthcare sector can make to fill the gaps in care that are going to be required in 21st century care such as investment in remote and point of care diagnostics and monitoring, offering different models of care
investments are needed to meet these challenges? An ageing population brings the challenge of increasing comorbid conditions and frailty that need a different healthcare response for the 21st century. The cost of care goes up, so keeping care in the right setting which is in the community, and wrapping interventions that allow for keeping independence at home with supportive structures like multidisciplinary teams that are geared and trained to support people at home will be needed, supported through technology. In addition to improved home and community care, investment is needed in long-term care, specifically nursing homes.
What does the private healthcare sector need to do to meet the government’s target of raising the private healthcare’s share of healthcare expenditure to 35 percent from 25 percent? The shift in shares is a combination from a shift from public to private, but also private providers simply offering access to care and services that didn’t exist before. The biggest contribution that the private healthcare sector can make to fill the gaps in care that are going to be required in 21st century care such as investment in remote and point of care diagnostics and monitoring, offering different models of care like home multidisciplinary teams, technology-enabled care coordination of chronic comorbid conditions, investment in artificial intelligence and personalised medicine, digital pathology and at the high-end train-
ing and development of professionals, to be able to use robotic interventions and new treatment techniques. The government, in return, is going to have (to continue to) fulfil its part to help create the right environment and payment mechanisms to allow this to happen, in collaboration through public private partnerships.
How can the government increase the rate of Saudisation in the healthcare sector? The biggest challenge that modern day medicine faces today is going to be the skills gap and the healthcare workforce shortages. Even after optimisation of the current facilities, the gaps are dazzling. A skills transfer is going to be needed quickly as other countries rapidly industrialise and keep their workforce at home. The beauty of Saudi Arabia is that the female workforce participation is growing rapidly. I am not saying it will be easy, but it brings great opportunity for Saudisation in the healthcare sector.
editor@ifinancemag.com
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industry
opinion
technology Intelligent automation
Terry Wallby CEO, Thoughtonomy
AI helps financial firms in Latin America and Africa compete on the basis of customer experience as opposed to labour arbitrage
Intelligently automating financial services The last two years have seen artificial intelligence (AI) and automation hit the mainstream. Over the past 12 months, AI has been deployed in emerging economies, both by international businesses looking to expand into new markets, and by local organisations scaling up their operations in an agile, rapid, and cost-effective way that helps them to become far more competitive in the market. As governments and think tanks around the world continue to search for ways to ensure a more inclusive form of globalisation, which
Emerging markets gain from AI - 2030 Total impact of AI on GDP
26% ($7 tn)
5.6%
5.4%
($1.2 tn)
($0.5 tn)
Latin America
China
Source: PWC
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Africa, Asia (EM) & Oceania
improves the lives of all citizens around the world intelligent automation and AI are set to play a critical role.
Redefining resourcing and delivery models The early sceptical tone of much doomsday coverage about AI has matured into a more rounded evaluation of how we can navigate the change in employment structures all over the world to deliver widespread benefit using AI and automation. Indeed, the World Economic Forum’s ‘Future of Jobs 2018’ report shows that while AI will of course lead to some job displacement, it will actually deliver a significant net increase in jobs over the next ten years, most of which will be far more rewarding and fulfilling roles than those being replaced. Within many sectors, such as financial services and energy and utilities, adoption of RPA is already widespread, with organisations deploying the technology to streamline their back-office and call centre processes and to reduce costs. Intelligent Automation (IA), which combines RPA with AI functionality, including capabilities such as natural language processing (NLP), is now enabling businesses to automate a far wider range of workplace processes, in a fast, effective and secure way. So automation is no longer just about cost or resource efficiency;
instead digital labour becomes a strategic asset, a game changer for businesses. Financial services organisations can redefine work resourcing within their businesses through intelligent automation, allowing them to be more agile to respond to disruption, comply with everchanging regulation, and also to innovate and pursue new opportunities that would otherwise be impossible with a traditional approach to resourcing. We are seeing financial services businesses developing and launching new products and services that are conceived and built specifically to leverage digital labour as well as human labour. For example, we have seen examples of banks that are using this hybrid virtual workforce as a platform to expand their operations into new territories.
Opportunity for emerging economies Intelligent automation helps companies in emerging economies to scale their operations in a fast, costeffective, and agile way, meaning it provides a lower cost to serve customers and more efficient outcomes. Whereas previously, many businesses were restricted in their ability to expand by prohibitively expensive infrastructure costs (real estate, IT systems and so on), they can now deploy digital labour to enter new markets and develop new products and services. They
do not need to invest in costly and complex IT systems or open up new local offices to enter a new market; instead they can simply resource their operations through digital labour, using a software-as-a-service model which allows them to be up and running in a matter of days, as opposed to large-scale infrastructure projects which can take months or years, and very rarely meet expectations anyway. For example, a global wealth manager is using Thoughtonomy’s intelligent automation platform to automate their Know Your Customer (KYC) process in one of their emerging markets operations. The organisation operates in a highly regulated market and therefore has stringent requirements for on and offboarding clients. With limited in country resources, the organisation has turned to a virtual workforce to deliver significant operational, compliance, and efficiency benefits. Success in the first project will pave the way to replicating this approach to other regions across the world. Additionally, a South African insurer is using a virtual workforce to automate the provision of competitive policy quotes and process claims. Both processes use a combination of virtual worker skills such as reading and extracting data from PDF documents and processing that data in multiple
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opinion
technology Intelligent automation
systems and applications. In both scenarios, the businesses have seen significant benefits. In fact, companies in emerging economies are actually beginning to enjoy a distinct advantage over established global players, who are often constrained by their legacy IT systems and are far slower to adapt to change and disruption in the market. Using intelligent automation, businesses in emerging economies, that rarely have the same IT and structural complexity as larger global players, can react more quickly to market conditions, be faster to innovate, and become better equipped to exploit new opportunities. And while organisations in developed economies continue to struggle to implement their digital transformation strategies, those in emerging economies can leapfrog into the fourth industrial revolution, building digitalfirst, lean and agile businesses that are primed for the future. Secondly, with the adoption of intelligent automation, organisations can also navigate around the skills shortages that are becoming so debilitating in many emerging economies, particularly within the financial services industry. By automating the mundane, repetitive processes which are such a drain on time and motivation within a workforce, businesses can free up their best talent to focus on higher value activities, such as forging better relationships with customers and prospects and driving innovation.
In South Africa, where there is a lot of demand for intelligent automation, it is striking how intelligent automation is presenting the economy region with a unique opportunity to establish itself as a global centre of excellence for high-quality service delivery and customer experience, building on its existing reputation in this area
Shaping a more inclusive global economy At a broader, macro level, intelligent automation can enable economies and regions to re-invent their place within the global economy and compete in new ways. In South Africa, where there is a lot of demand for intelligent automation, it is striking how intelligent automation is presenting the economy with a unique opportunity to establish itself as a global centre of excellence for high-quality service delivery and customer experience, building on its existing reputation in this area. Rather than competing on cost as an offshore destination, embarking on a race to the bottom in terms of cheap labour, regions such as Africa and Latin America can instead now forge a new identity as regions that provide first-rate customer experiences and become the go-to-to places for setting up high quality, customercentric business processes and functions. And as customer experience becomes the next big battleground
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for businesses, this will become a strong value proposition for businesses in the emerging markets. Africa and other emerging economies can achieve such shifts and take their economies in new directions by deploying a hybrid workforce, where highly skilled people work alongside and optimise the scalable, multi-skilled resources that a virtual workforce provides. This creates the scope for a more equitable globalisation.
Terry Walby is founder and CEO of Thoughtonomy. Thoughtonomy is an intelligent automation company that offers a single platform combining Artificial Intelligence, robotic process automation and cloud deployment. editor@ifinancemag.com
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