The message to finance players, big and small, is clear - disrupt yourself or be disrupted. We look at how smart companies in the Asia-Pacific are changing the ways they think and work, whether it's transforming digital finance, cybersecurity or fintechs.
By Beverley Head
Financial services are evolving. The twin drumbeats of digital disruption and regulatory flux have forced organisations to transform. Spurred by the internet and ubiquitous smartphone connectivity that has ratcheted up customer expectations, banks, insurance companies and superannuation firms have had to transform or risk being trounced by more nimble rivals.
Microsoft, in partnership with Harvard Business Review, released their Moving Past Prosperity: how Australia’s financial services industry is adapting to disruption report in 2017. It reveals that 85 per cent of the sector is reliant to some degree on digital technologies, 73 per cent of companies have implemented cloud and big data technologies, and 52 per cent agreed that the main driver of transformation is improving the customer experience.
Providing a better customer experience is becoming critical for Australia’s financial services providers, as consumers have more choice than ever before. Don’t like the payment types on offer? Turn to PayPal or Apple Pay. Not happy with the loan? Try SocietyOne.
Switching banks will get a whole lot easier with the dawn of Australia’s open data regime from July 2019, which gives bank customers control over their own data. Moving to a new bank will be as simple as moving your phone number to a new telco.
Meanwhile, Australia’s New Payments Platform (NPP) is set to allow people to send money to one another just using a mobile phone number. Australia’s big four banks and other finance industry players, are rolling out NPP services during 2018.
Despite this activity, Australian banks don’t see themselves as digitally mature or digital leaders. EY’s Global Banking Outlook 2018 notes that where one in five banks around the world rate themselves in these categories, not a single Australian bank felt they qualified.
Tim Dring, EY partner and Oceania banking and capital markets leader, believes this is because Australian banks have set the bar higher than their global peers.
“Australian banks are likely to be benchmarking themselves against emerging competitors and online leaders in other industries, who have more digitally focused business models and less legacy technology systems to navigate,” he says.
Across Asia, there is a clear awareness of the need for transformation. The Microsoft Asia Digital Transformation Study, which in late 2016 quizzed 1494 business leaders across 13 Asia-Pacific markets, found that 81 per cent agree their organisations need to become a digital business to drive growth, and that data can create new revenue. However, less than a third (31 per cent) say they have a comprehensive digital strategy in place and 53 per cent have work in progress.
Digital finance's to-do list
Sudhir Pai, the Melbourne-based chief technology officer for global financial services at CapGemini, says there are three areas where digital transformation has real traction.
The first area is banks and insurance companies using technology to enhance the customer experience. They are bringing customers into the innovation ecosystem to ensure new products and services meet their needs.
The second area is open banking, where financial sector data vaults are being broken open, both to deliver more financial transparency to account holders, and to enable third-party developers to build applications that deliver a better experience for the institution’s customers.
The third critical area involves genuine transformation, where a bank recognises that online disruptors could offer cheaper, better services, says Pai. He offers Singapore’s DBS Bank as an example. It has launched its mobile-only Digibank service in Singapore, Hong Kong and Indonesia and Pai says 80 per cent of its consumer-bank interactions are led by chatbots.
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Pai concludes, “Most plays are around delivering a better [customer] experience. The game-changing business models have yet to emerge.”
NAB’s digital-only subsidiary UBank has also shifted the dial on products, services and customer expectations.
Ken Christie FCPA, chief financial officer of NAB Australia, says that UBank has proven to be a “great success and has taught us how to operate digitally and efficiently”. There has been little evidence of UBank cannibalising NAB’s business. Instead, these are new customers seeking new services – it’s a fresh revenue stream, says Christie.
He says innovation and disruption have been gathering pace over the last decade, prompting NAB to innovate, work with emerging fintechs and invest in start-ups. Christie stresses that “this is all customer driven, becoming more digitally centric in the way we operate day to day”.
NAB’s executive general manager of digital and innovation, Jonathan Davey, adds that besides meeting customer expectations, digital transformation is essential for the incumbents to be able to respond to digital disruptors. Consumer access to richly featured mobile communications and the continued rise of cloud computing means that “anyone with a few dollars can set up a business; the capital costs are significantly diminished”.
Cybersecurity arms race
Eugene Wong FCPA, managing director of corporate finance and investments for the Securities Commission Malaysia, acknowledges the significant benefits that can accrue from deploying technologies such as artificial intelligence and machine learning. He also notes the challenges in terms of protecting the market and consumers, managing cybersecurity issues, and transitioning finance sector employees to a new world of work.
On the jobs front, Wong says that while there are concerns that some roles will be replaced by technologies such as robo-advisers, “new, high-value jobs will be created. We need to reskill people.”
When it comes to cybersecurity he says it is an “arms race” and that financial institutions cannot afford to let their guard down. “The bad guys have to get it right just once; the good guys have to get it right all the time.
“There has been a lot of debate and a lot of fear about technology. Balanced proportionate regulation is important to engender trust and security,” he says, noting the negative impact of events such as A$660 million heist of NEM coins from cryptocurrency exchange Coincheck in Tokyo this year.
Despite such issues, “technology is important because capitalism has given rise to inequality and technology can help close the gap,” explains Wong.
Technology-based financial services, often delivered over mobile phone networks, are making a significant difference around the region, he says. At the same time, he notes the potential of blockchain as a tool for transparency and confidence: for example, to deliver clarity about property ownership.
“Technology is helping with transparency and that helps with better capital allocations,” says Wong. “Technology is helping direct capital and [it’s] democratising finance.”
This march of new tech means existing financial services providers need to “disrupt yourself or be disrupted”. Banks that fail to use technology to improve their services and products – and their cybersecurity – will “end up like the dinosaurs”, says Wong, as more nimble competitors move faster.
Fintechs and banks collaborating
According to EY census data, there are close to 600 fintechs now in Australia alone. KPMG partner Mason Davies says this is helping drive a second wave of transformation, as banks increasingly collaborate with fintechs to create new services and optimise operations. That second wave is essential, he adds, as the “commoditisation” of financial services was trimming margins, forcing financial services businesses to find new ways of operating.
Danielle Szetho, CEO FinTech Australia, says fintechs are looking at everything from payments, budgeting and wealth creation through to cryptocurrency. She adds that financial institutions are now partnering with fintechs, and constantly scanning for true disruptors. “This has very significant potential to be a very disruptive change that is set to evolve around the world.
“In the UK and EU, where there is Open Banking and GDPR (general data protection regulation), the consensus is this will be transformative to competition between banks and fintechs. It’s the same here, once the open banking regime comes into force.”
“Technology is helping direct capital and [it’s] democratising finance.” Eugene Wong FCPA
Paul Sin, Deloitte’s Hong Kong-based research leader in Asia-Pacific, says that digitisation, and particularly AI and blockchain, will have the most impact. He adds that many institutions across the region have already deployed robotic process automation and are using machine learning for advanced fraud detection.
He notes also the trend for banks to collaborate with fintechs and each other. “Banks need to collaborate to get bigger. They have started to realise that when they collaborate their competitive strength is much greater.”
To support both the banks and emerging financial services providers, so-called “sandboxes” are being operated in countries including Malaysia, Singapore and Australia. These allow new services to be trialled and tested, while also protecting an institution’s live data to manage any risk from new software. Malaysia and Australia have also established a “fintech bridge” to spur collaboration in financial services innovation.
It’s clear that digital transformation efforts are gathering pace, led by the major institutions, spurred by fintechs and monitored by regulators. The age of inertia is over.
The view from Deloitte
Ho Kok Yong, financial services industry leader at Deloitte Southeast Asia, shares his perspective on regional financial services transformation.
Q: What are some of the common drivers for digital transformation?
Banks are constantly looking at ways to improve efficiency and facilitate game-changing innovation, and also implement cost reduction measures to maintain their legacy systems. Fintech start-ups are rapidly invading established markets, taking the lead with customer-friendly solutions that are developed from the ground up [so are free from legacy platform issues], creating innovative solutions that are setting new and higher bars for user experience.
Q: Are they moving fast enough?
Speed is primarily determined by the demand, supply and infrastructure. Growth of digitalisation in the region is resultantly not uniform. China, India and Singapore are the leaders in the region; however, they are using different models for digital growth.
Q: What do you see as the major impediments to transformation?
Technology resources at most banks are becoming difficult to manage, with a hodgepodge of systems, platforms, software and tools – much of it legacy infrastructure that demands significant resources and capital to ensure that operations run smoothly. As such, modernising core operating infrastructure is an obvious priority.
While most organisations are starting to develop or have in place a digital strategy, this development is generally slow, and some of these digital strategies may not be well thought out and, in some cases, more of a form than substance.
Q: How would you describe the current state of play?
Fintechs, while disrupting the industry, are not yet disrupting the incumbents as some commentators had forecast. The trend seems to be moving towards co-existence, instead of elimination.
Shortcuts to trouble
Finance sector innovation and digital transformation can be fraught. The Commonwealth Bank (CBA) found itself in hot water in August 2017 when AUSTRAC initiated proceedings against the bank for what the financial intelligence regulator described as serious and systemic non-compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.
CBA’s intelligent deposit machines were intended to streamline services for customers. However, the regulator argued that transactions made through the machines were not properly monitored and reported, potentially opening the door to money laundering.
Whatever the outcome, it highlights the fact that in the race to innovate, financial institutions cannot take shortcuts; nor can the regulators. However, they can form alliances to speed innovation.
AUSTRAC held its second codeathon in March 2018, bringing together software developers from the ASEAN region to explore how digital technologies such as blockchain, artificial intelligence and machine learning could support its work to thwart money launderers and terrorism funders.
A similar event held in Kuala Lumpur in 2017 showcased an idea to red-flag addresses linked to suspicious activity. That solution continues to be developed.
Leanne Fry, AUSTRAC’s chief information security officer and chief innovation officer, stresses the need for collaboration, given the organisation’s limited resources (it has 300 staff) and broad remit. In 2017, AUSTRAC launched the Fintel Alliance to spur innovation that could help it perform its role better, faster.
It’s fair to say that there is something of an innovation arms race between the good guys in the white hats and the crooks in the black hats. Rajesh Walton, AUSTRAC director of innovation, acknowledges the need for collaboration between developers, fintechs and regtechs. “We have to admit we need help to join the dots and tackle organised crime.”
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