Special Report: How banks are leveraging fintech

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 20, 2017 - March 26, 2017.
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The global financial technology (fintech) wave has swept across many sectors in the past few years. But it was only recently that traditional financial institutions and independent fintech players joined forces to leverage each other’s strengths rather than operate independently and as competitors. Such partnerships have enabled banks to embrace digitalisation and offer better services to clients.

The partnership model is inevitable and here to stay for both traditional financial institutions and fintech players alike, says Maybank Group chief strategy officer Michael Foong. “Gone are the days of vertical integration as it no longer confers a lot of benefit. Building an ecosystem of partnership where you leverage partners that have best practices in a few areas is the way to go. 

“The challenge here, of course, is how to make it work. It is much more difficult because you do not have the same owners and you obviously have different agendas. Thus, it is a bit more difficult to get an aligned partnership. But once you do, it can be beautiful.” 

There are two main reasons why banks have partnered fintech players — access to new thinking about business models and exposure to new technologies. “While Maybank has been very successful for the last 50 years, we are very clear that moving into the future, the models that we have had may not serve us very well anymore. Most of the models will still work, some we need to treat and some we need to completely overhaul. That is why access to people who think differently about the business is very important,” says Foong. 

Banks want to innovate their systems in a symbiotic manner with fintech players and their technologies, including enhancing their brands, services, solutions and product offerings. Such partnerships also benefit fintech players. 

Kenny Thing, managing director of U for Life Sdn Bhd, cites three reasons as to why these players would want to partner traditional financial institutions — to abide by the regulatory restrictions, ensure consumer privacy and security and leverage the technology big institutions already have in place. “For smaller fintech players, partnering big entities just makes sense. There are a lot of regulations that they need to observe, such as keeping consumers’ information safe. We are dealing with something as emotional as money, so it is very risky to stand alone,” he says.

“While we commonly see these types of partnerships between banks and fintech players, there have also been successful partnerships in the insurance space. One example is when Ping An, Tencent and Ant Financial (Alibaba) joined forces in 2013 to launch Zhong An, China’s first complete online insurance platform. The combination of the insurance company and two financial giants was very disruptive and managed to change the game there completely.”

According to Reuters, Zhong An had underwritten more than 7.56 billion policies for more than 535 million customers as at March 6 and is looking to issue an initial public offering soon. 


Data analytics and automation 

Beside the partnership model, banks are looking at other ways to enhance their core services and save on operational costs. This includes setting up an innovation team to leverage technologies such as artificial intelligence, digital payments and big data and analytics. 

Rakesh Kaul, country head of retail banking, wealth management and mortgages at Citibank Bhd, says data is the key for banks and other financial institutions to deliver a better experience, unlock new revenues and resist the efforts of new market entrants. “It is also about how we use the data meaningfully. While clients are already giving their data to the bank, it is not centralised. It comes from 20 different touch points, such as the credit card, wealth management and home loan divisions. 

“Therefore, imagine how useful it would be if we were able to use this big data capability to enable us to service clients better. For example, when they call in to ask how much they are spending, it is an opportunity for Citi to inform them about their account balance, amount of interest they have paid and the deals they would be able to benefit from, all in one conversation.” 

Data aggregation is another theme that will play an important role in wealth management services, says Kaul. “There are fintech players coming in with a solution to aggregate all of the users’ credit cards on one platform, enabling them to monitor their overall spending pattern. For example, a user will be able to know that across all four of their credit cards, they are spending 30% on dining, 15% on utilities, 20% on transport and so on. Once banks have that data over a meaningful period of time, they will be able to provide users with the best offers according to their spending.”

Moneylion, one of the fintech players in Malaysia, offers this solution. It uses data analytics technology to help users keep track of their spending across different credit cards and investment accounts. While the company’s core business in the US is offering loans to its users, its Malaysian business only offers loans provided by its business partners, such as banks and other financial institutions. 

In other parts of the world, advanced analytics and artificial intelligence (AI) is applied to every part of the banking industry, from real-time customer engagement and more efficient operational processing to better risk and fraud management. Virtual data agents (VDA), which are automated software applications that enable human interaction through natural language processing, are widely used. When integrated with AI-based knowledge bases such as expert systems, the VDAs can perform multiple autonomous roles, including customer service, back-office workflow automations, enabling transactions and providing information. Examples include “Hannah” by UK-based M&S Bank, “Nina” by Swedbank and DigiBank by Singapore-based DBS Bank. 

According to research and consulting firm Tractica, the global VDA market is expected to reach US$15.8 billion by 2021 while the number of unique active consumers and enterprise VDA users is anticipated grow to 1.8 billion and 843 million respectively.



Insurtech and regtech the next focus areas


Insurance technology (insurtech) and regulatory technology (regtech) are the next areas to watch for on the local financial technology (fintech) scene. 

Insurtech was the most popular fintech segment in the US last year, having attracted the biggest share of venture capital (VC) funding. According to Citi GPS’ Digital Disruption — Revisited: What Fintech VC Investments Tell us About a Changing Industry report published in January, the segment made up 34% of the VC investments in the country as at September last year. This was a considerable increase from 2015, when the segment was not large enough to be classified on its own. 

Insurtech players have started to emerge in Malaysia. U for Life Sdn Bhd, an online term life insurance provider that was launched in 2015, recently announced a partnership with Jirnexu, another homegrown fintech player, to offer a seamless online application experience for insurance products.

Although insurtech is new in the country, it has strong potential to take off, says U for Life managing director Kenny Thing. “If we look at the trends … although the use of telematics in insurance policies started in Italy and the UK, after gaining good traction there, it started to catch on in Asia as well. After that, people started talking about using the same value proposition in healthcare, leading to the concept of wearables in insurance policies. That is why I feel using technology to enhance the value proposition for consumers has strong potential.” 

Regtech is another up-and-coming focus area, according to the Citi GPS report. As the financial industry has been hit by large conduct and litigation charges in the aftermath of the global financial crisis, banks have invested heavily in regulation compliance. 

There are very diverse business models of regtech, targeting every area of regulation including regulatory reporting, Know Your Client (KYC), risk management, and control automation. At the moment, regtech players are seen focusing on regulatory reporting and KYC, seeking to simplify existing processes and reduce manual inputs.

Jan Bellens, EY’s global emerging markets leader for banking and capital markets, says regtech firms can help banks cope with the increasingly onerous regulatory requirements by offering innovative technologies that automate capital assessment, tracking, monitoring and reporting. “Such technologies not only simplify the compliance process, but can be delivered remotely as regulation-as-a-service platforms, offering continuous compliance to multiple regulatory requirements. 

“Beyond regulatory reporting, regtech solutions further apply cognitive computing to big data for trade surveillance to monitor suspicious transactions or limit incidences of money laundering and terrorist financing. This helps to protect against fraud and penalties for non-compliance, improve quality of information and insights that institutions offer clients and regulators and ultimately, engenders enhanced customer experiences and better quality regulatory reporting.”

The emergence of fintech has added another layer of complexity to financial instruments and business models, which regtechs can help untangle as they are able to identify risks and develop suitable responses, says EY’s managing partner for Asean financial services Liew Nam Soon.

He adds that the Monetary Authority of Singapore is exploring regtech solutions that could make information disclosure more efficient. “This is done by making data available through an open-source Application Programming Interface (API) architecture to increase efficiencies in submitting data on applications and transactions for financial stability assessments. Given Malaysia’s proximity to Singapore, it will not be long before such developments are also introduced there.”

Liew says regtech solutions offer potential redesign, simplification and automation of data-driven compliance. “For Bank Negara Malaysia, regtech-inspired reforms can provide automated reporting and advanced analytics to modernise its internal systems and update regulations to keep pace with market participants and better manage systemic risks.”

The US and the UK lead the rest of the world in regtech, with more than half the 127 companies coming from these countries, says the Citi GPS report. The potential for regtech to take shape in Malaysia is equally large, says Rakesh Kaul, Citibank Bhd’s country head of retail banking, mortgages and wealth management. 

“There are a lot of regulatory reporting and assessments of bureau here too. As you know, banks have to reduce their cost of operations and fee of delivery, so automation is the only solution. If there are regtech players here that are able to offer solutions that ease the regulatory process so that it is less manual and at a lower cost, regtech will play a vital role in Malaysia’s financial industry,” he says.

For this to happen, more high-potential fintech players will have to emerge in the country. Thing says Bank Negara’s fintech regulatory sandbox framework has served as a valuable stepping stone to get more players to participate in the country’s growing fintech sector, which is already vibrant in its own right.

“One thing I like about Malaysia is how synergistic the ecosystem is. For example, at fintech conferences, you can see all the players coming together and sharing information. This showcases how we are able to see each other as partners more than competitors. Big players are also open to the idea of partnering smaller fintech companies despite their being very new in the financial industry. That is why I feel Malaysia is a good place for players such as ourselves to grow,” he says.