Commentary

When it comes to growth opportunities for digital payments, Indonesia is in a league of its own. The prospect of tens of millions of new digital payment customers is too much for digital companies and investors to ignore. The likes of SoftBank, Alibaba’s Ant Financial, and Chinese ride hailing giant Didi-Chuxing are injecting billions of dollars into companies with a chance of gaining a foothold in the market.

It might seem as though vertical division of labor and horizontal disintegration have already proliferated enough.

Banks that focus on customers over products have the best shot at standing up to Amazon's juggernaut when it steams into their market.

Banking executives today not only have to deal with running the bank, but also transforming it to grow in a sustainable manner. Banks have to balance these goals against the exigencies of the day, and those that are able to do so will be amply rewarded. This holds true for all banks, even those operating in Southeast Asia (SEA).

In general, an API refers to a technical specification for operating a specific program by another program, and it defines command statements (commands and functions) used when the program is operated, a format of data to be transmitted and received, and the like. For example, many businesses today display a Google map when publishing their location on the website. This is realised by outputting map data (Google Maps) using Google's API (Google Maps API).

This is now an inflection point for foreign asset managers as China vows to allow foreign players to take controlling stakes and operate domestically in the private securities fund management (PFM) and even mutual fund management markets.

As we move into 2018, Asia-Pacific banks are facing a range of challenges — from implementing Basel III reforms and keeping pace with technology advancements, to responding to the disruption and opportunities posed by new, non-traditional market entrants. Pressure is also coming from investors, who are demanding that banks improve returns on capital in an environment where economic growth continues to be modest and competition fierce.

Chinese banks seem to have made meaningful progress in the resolution of problem loans. The aggregate amount of the announced debt-to-equity (D/E) swaps has reached 1 RMB trillion, to 19.5% of problem loans by the end of 2017. However, words are louder than actions as only 15.7% of the total announced D/E swaps have been executed. Banks clearly need to move faster in their cleanup and Chinese regulators are not only aware but also increasingly supportive. To this end, the big five banks have established their own asset management companies (AMCs) to help carry out debt-to- equity swaps. The way in which banks and their asset management companies will operate for the loan cleanup was clarified in a new guideline jointly published by regulators last January.

Banking is considered by most as the business of money. However, talk to a banking veteran and he or she will categorically instruct you that banking is a business of customers. This realisation is what ensured that customer centricity is an important value adopted by banks; and it has stood us in good stead. It then follows, that if we are in the business of customer, then our business is shaped by evolving changes in customer behaviour.

In just decades, digital advancement has enabled technology to shift from being a business enabler to being THE business.

In the banking sector, we take a broad view of digital—one that transcends new apps and the deployment of new and different channels. Moreover, we believe that digital is making it imperative for financial institutions to review and transform their organisational structures to ensure success and survival.

Banks need to narrow the distance with customers, to offer them an array of contact points, and to better understand their behavior and needs. New banking models start with establishing frictionless relationships with customers.

Robust economic growth and, especially, higher industrial prices have pushed up Chinese corporates’ profits since 2016. This comes as an upturn after a horrible 2015. Indirectly, this has also helped banks as it has increased companies’ cash flows to repay their large debt burden. However, this improvement in asset quality cannot mask other growing concerns in China’s banking sector.

Since the BCBS 239 principles on risk data aggregation and risk reporting were published by the Basel Committee in 2013, globally systemically important banks (GSIBs) have invested significant time and budget to reach compliance. However, four years on, the great majority are still not yet fully compliant, as updated by BCBS in March 2017.

The rapid advance of technology has created the impression that the entire banking industry will soon be digitised. Yet whilst much of traditional banking has gone the way of the abacus, we’ve learned something interesting along the way: people still want to speak to people. When my credit card was rejected recently, my first reaction was to call the bank. My app won’t tell me what the problem is, at least not today. And when it comes to a decision about my own money, that human touch becomes even more important and reassuring. Not everything will be online and clients don’t want it to be.

With all the noise surrounding distributed ledger technology (DLT), you’d expect participants in financial markets in Asia Pacific and elsewhere to be racing full-bore to get ready for it. But many are not. Presented almost daily with new claims about DLT’s disruptive and revolutionary potential, some executives have begun to wonder when they’ll actually begin to see some benefits from the technology. Financial market participants know DLT is coming. In Asia Pacific and around the world, about 80% of executives at financial institutions surveyed by Bain & Company believe the technology will be transformative, and a similar percentage expect their organisations to begin using it before 2020. Yet, at the same time, they’re hesitant to commit resources now. Among the market participants Bain surveyed, 38% said they’ve adopted a wait-and-see approach to DLT. What’s holding them back? First, uncertainty. It is hard to predict the exact timing or path of DLT. There are different types of DLT platforms (public or private, for example) and a wide spectrum of potential applications, from narrow cases such as proxy voting and Know Your Customer (KYC) vetting to broader uses such as post-trade clearing and settlement for equities. The way DLT evolves in a localised market like Australia, for example, is likely to be different from how it develops in a more connected market like Hong Kong. Much will depend on regulations that are still being formulated. Some regulators, such as the Monetary Authority of Singapore, actively support DLT innovation. Getting ready for DLT requires substantial investment, and it can involve working through tricky and expensive issues with legacy IT systems. Some firms, in an attempt to preserve near-term competitive positions, are trying to delay industry-wide adoption of DLT. Yet companies that are willing to be proactive and strategic about DLT, even in such a challenging climate, can gain an edge. DLT has the potential to broadly affect financial markets, but the most significant near-term impact is likely to be on settlement and clearing. While a trader can now execute a transaction at lightning speed, it can take as long as three days for that transaction to settle. With DLT, execution, clearing, and settlement could occur simultaneously, minimising cost and credit risks. Bain estimates that across global financial markets, annual expense and capital cost savings from DLT could amount to 1-3 basis points of total global assets under management, or about $15 billion to $35 billion. DLT can eventually also play a role in improving reference data, including benchmark interest rates like Libor, replacing existing survey processes that are opaque and subject to abuse. A DLT-based benchmark-setting mechanism, possibly administered by trading venues and industry-wide utilities, could directly capture data from spot transactions. Beyond trading, DLT has the potential to change the way firms interact with their clients in areas such as proxy voting, digital identity management and KYC. Broadridge, a global leader in proxy communication services, is developing a system to help make US proxy voting more efficient, secure, and transparent. As financial markets evolve with respect to DLT, companies will face game theory-type decisions. If they promote the early adoption of DLT across the ecosystem, they may benefit, but they may also end up disrupting their own economics and competitive positions. Yet if they’re slow to embrace DLT, they run the risk of being left behind. The most valuable DLT innovations can’t be developed in isolation; they require collaboration among participants, exchanges, and regulators. With so many participants involved across so many jurisdictions and asset classes, the adoption process will be messy and piecemeal — and this is the heart of the challenge. It may make more sense to share the costs as well as the benefits through industry utilities. One way or another, firms that want to reap the benefits of DLT will have to make significant changes to their processes, policies, and IT architecture. As part of their efforts to make their IT systems ready for digital, leading companies are taking some of the preparatory steps that will be necessary for DLT. Once a company has a perspective on how DLT is likely to evolve in the areas in which it does business, it can develop a systematic approach and a multi-year roadmap. Whether a company prospers or flounders in the DLT-dominated markets of the future will depend, in large measure, on strategic decisions it makes today. Once a firm defines a DLT-readiness posture and a high-level roadmap, its next step is to outline specific no-regrets initiatives. Many of the investments a firm makes, especially in IT, can bring benefits regardless of the pace or shape of DLT adoption. Those market participants that thrive with DLT will spend less energy on making excuses for inaction and more on developing a strategic and longer-term approach that’s consistent with who they are, what they do, and where they operate. They’ll focus on driving themselves and the entire industry toward a more efficient ecosystem. The winners in DLT will be those that push the pace of change, rather than resist it.