In an era of change, the technological landscape for financial technology (fintech) requires the right digital leadership at the helm as we prepare society for digital finance.
The changing market dynamics raise some important strategic questions for banks, including how banks will choose to fundamentally approach competition, what this means for existing business models, and what outcomes this will entail both in the short and longer term.
Bank Negara Malaysia Deputy Governor Jessica Chew said that strong digital leadership starts with an acceptance of a new normal.
“Historically, finance has been a close-knit community. But the barriers to entry are being lifted by technology. This has blurred the boundaries of what it means to be a bank, or a financial services provider.
“As a result, banks are no longer just competing with other banks. Non-traditional players – such as fintech firms and platform-based companies – are increasingly well-positioned to offer financial services.
“Digital disruptors want to not only gain market share, but to transform the market itself. This is reflected in the willingness to take loss-leading positions when entering a market,” Chew said in her opening address at the Asian Banker Digital Finance Convention 2018 on March 22, 2018.
“One strategy has been to leverage opportunities for collaboration – whether among existing players or new entrants. We see this emerging as an increasingly important, if not inevitable, response globally on several fronts.”
Initiatives of digital change
As an example, in the blockchain space, the industry in a number of jurisdictions has pooled resources to defray the cost of experimentation involved in developing scaleable use cases for the technology’s application.
In Malaysia, nine banks have done this by coming together to develop blockchain applications for trade finance.
Establishing shared networks, or opening up previously closed ones, is also gaining traction, Chew said. This can be seen in the growing use of Open Application Programme Interfaces (APIs).
“Over the last five years, publications of APIs in the financial sector have increased exponentially, with an estimated 200 new APIs published every year. In a survey that we conducted earlier this year, more than half of banks and insurers in Malaysia indicated plans to roll out open APIs in the near to medium term.
“At the industry level, the Bank has established an open API implementation group with members drawn from the industry, fintech community and key stakeholders to develop open API standards for the financial sector as part of efforts to broaden access and promote innovation and competition.”
On the risk management front, the World Economic Forum had announced the creation of a consortium to facilitate more coordinated efforts in addressing cybersecurity risks. This entails developing common principles for risk assessments, guidance for implementation, and a scoring framework.
In the area of payments, Bank Negara Malaysia had recently issued the Interoperable Credit Transfer Framework (ICTF), which promotes collaborative competition or ‘co-opetition’ for mobile payments.
Under this framework, banks and non-banks alike collaborate at the infrastructure level through a shared payment infrastructure, while individual players compete at the product level by developing innovative value-added features.
This approach is envisioned to expand the network reach at a lower cost, while promoting competition in areas that advance financial inclusion, higher service levels and the delivery of a superior customer experience.
Clear synergies for collaboration
With this in mind, the BNM Deputy Governor said there were clear synergies to be gained from such collaborative efforts, enabling technological infrastructure to be shared across the industry.
This shifts the competitive focus towards improving the value created for customers and the economy at large, rather than a race towards building proprietary networks that ultimately leads to market fragmentation, Chew said.
“However, the effect of this is also a sharp laser focus on bottlenecks within individual firms. By levelling the playing field, firms will face a greater urgency to address internal constraints that prevent them from capitalizing on opportunities for higher growth and productivity. This may well be the most important challenge for digital leaders.
“Digitisation offers enormous potential for the financial sector to achieve what was not possible before, at least not without prohibitive costs. Secondly, the transition to a digital economy itself calls for a re-orientation of the financial sector to meet the new business demands for financial services. On both counts, the financial industry can, and in fact ought to be, powerful agents of change.
“With a little ingenuity, digital finance can unlock new growth opportunities that were previously deemed to be not commercially viable. Indeed, disruptive innovations – whether in banking or beyond – often begin at the fringes of the market, such as the underserved and unserved segments.
“With growing inequality, environmental degradation and more uncertain global developments, the stakes are high. If banks do not take up the mantle of leadership within the community, at risk is their legitimacy in the longer term as vehicles for the efficient allocation of economic resources.”
Preparing society for digital finance
With this wave of change, the consumer experience of financial services is changing dramatically as well. This is happening on several levels.
The basic commodity of finance – money – is being replaced by electronic forms. Financial products are offered as part of a seamless solution for customers buying property, subscribing to a mobile phone or data package, going on a holiday or enrolling in university.
This in turn alters the relationships that a consumer develops, which can be several layers removed from the entity that is ultimately providing a financial product or service.
“Frameworks and business practices designed to protect consumers have not fully kept up with these changes,” Chew forewarned. “This can increase risks to consumers – from a lack of transparency, misrepresentations, the inappropriate use of data to unfairly discriminate against consumer segments, legal loopholes, and financial fraud.
“Greater access to financial services itself through the entry of new and unconventional players can also contribute to over-indebtedness.”
As such, Chew advocated that more needed to be done to better prepare society for digital finance.
“This must address the information needs of consumers in the context of digital financial services, clear parameters adopted by financial institutions for offering financial products through a new interface, and expanded arrangements for handling complaints which also cover the role of intermediaries through which financial services are offered.
“Most importantly, we need to increase efforts to educate consumers on how to protect themselves against fraud, and the implications of giving consent for their data to be collected and used.
“Drawing on lessons from our engagements with financial service providers and fintech companies in the regulatory sandbox, BNM intends to clarify and enhance existing standards expected of financial institutions in these areas to maintain confidence in the use of digital financial services.
“Ultimately, what really matters is how effective your customer engagements are in addressing potential consumer risks. We look to financial institutions to preserve, if not further improve on, a positive consumer experience for your customers.
“At the industry level, financial institutions should also collaborate on public communication strategies to educate and raise awareness on digital financial services.”
Malaysian leaders not ready for Digital Age
In ann in-depth research titled ‘Digital Leadership in Asia Pacific’, Korn Ferry found significant gaps between Malaysian leaders and the ‘great digital leader archetype’.
Approximately seven per cent of Malaysia’s GDP in 2017 was derived from digital products and servicesm, it said, while the research called for a radical mind set shift amongst Malaysian leaders to enable sustainable digital change for a successful future.
“Many Malaysian leaders understand the need for change. However they are struggling to balance current performance expectations, against innovating for the future,” Korn Ferry unveiled in the report.
“Researchers found that Malaysian leaders’ strong preference for structure suggested that their confidence is restricted to operating in process-driven environments with a high-degree of certainty.
“Culturally, a strong adherence to hierarchy and a lack of open communication is inhibiting the ability of Malaysian leaders to engage, inspire and empower their people to create innovative solutions.”
Mohammad Iesa Morshidi, Senior Principal, Korn Ferry Hay Group, Malaysia said, “The rapid pace of change in the digital age fundamentally challenges how Malaysian leaders conceptualise and execute their role.
“Relying on direct, hierarchical power and structured processes to deliver profits will no longer work in an environment that rewards novel thinking. Malaysian leaders need to see this change as an opportunity and embrace a new vision of leadership.”
The research calls on Malaysian leaders to engage their strong capacity for self-development and embrace challenges to update their understanding of what it means to be a leader in the digital age.
Malaysian leaders should build on their innate confidence to expand their leadership capacity in more ambiguous situations. Leaders must become more adaptable, curious and take more risks in the face of uncertainty. Leaders need to also adopt a more approachable style to encourage the contribution of opinions and ideas.
Michael Distefano, chief operating Officer, Korn Ferry Asia Pacific said, “With disruption now the norm, future success depends on the ability to continuously adapt and change: not just with the business model but a culture change on a grand scale.
“The role of leaders in activating people to support change is therefore of utmost importance. But first, leaders must personally transform to inspire and engage their people and create a more open, agile and networked culture to power performance.”
The report analysed the leadership profiles of more than 9,000 leaders from eight APAC countries and territories and compared these profiles against the traits, competencies and drivers of great digital leaders2. The countries and territories involved in the study include: Australia, China, Hong Kong, India, Japan, Malaysia, Singapore, and South Korea.
Across the region, Australia and India fared relatively well against the profile of a great digital leader. However, much of APAC is struggling with the scale of change required and are looking for a way through the complexity.
FinTech firms in Southeast Asia show strong growth aspirations
A strong 87 per cent of financial technology (fintech) firms in Southeast Asia and a corresponding 73 per cent in Malaysia are planning to expand their footprint beyond their current markets.
This is according to the Asean fintech Census 2018 study by EY, which surveyed 170 Southeast Asia-headquartered Fintechs across 16 key subsectors, including payments, blockchain, money transfer, data analytics and robo advisory.
About three-quarters (77 per cent) of the fintechs believe that they will be able to compete internationally, with 87 per cent of the respondents planning to expand outside their home or current market in the next 12 months.
Fintechs in Malaysia reveal a similar direction, with 73 per cent of respondents planning to expand beyond their home markets. Outside of Southeast Asia, the preferred destinations for growth and expansion are the US, UK and China.
The survey also found that 61 per cent of fintechs in Southeast Asia are planning to achieve revenue growth within the next 12 months as their immediate future goal, with 46 per cent of the respondents expecting to achieve a compound annual growth rate (CAGR) of 30 per centfor their revenue.
Funding challenges create growth barriers
Funding remains an issue for the fintech firms surveyed. With most of the firms in the earlier stages of development, more growth-stage equity and capital are needed.
However, over two-thirds (68 per cent) of the respondents have a runway of less than a year to plan and raise funds for growth. In fact, 45 per centof the respondents rely on self-funding. While most (76 per cent) of the respondents agreed that there are enough funding channels available, 52 per centstill found it difficult to obtain funding on their own.
Shankar Kanabiran, Partner and Malaysia Financial Services Banking and Capital Markets Advisory Leader at Ernst & Young Advisory Services Sdn Bhd explained, “As with most start-ups, fintech firms may find themselves limited by funding options.
“Venture capitalists and banks are often the first port of call for fund-seekers, although most will not take on the credit risk of companies with a track record of less than three years.
“That said, there are many incubator and accelerator programs, and even government channels that fintech firms can leverage for seed funding. They should also look to access the wider network of business opportunities and investors who can help them to scale and be a source of funding too.”
In Malaysia, 19 per centof fintech firms believe there is high support from the government in terms of funding support, while 50 per centsay there is medium or moderate support, and 27 per centindicate low support. According to the respondents, the government should make funding more accessible (43 per cent), come up with more assistance schemes (29 per cent) and have a wider range of criteria (29 per cent).
Talent and government support are key to growth of sector
The study also revealed that fintech firms find talent shortages an acute issue, with over half (60 per cent) saying that there was a lack of start-up or fintech talent in the markets they operate in.
The skills gaps are in technology and software, product management, and sales and marketing. Most of the fintech firms are still relying on personal connections (57 per cent) and recommendations (48 per cent) to hire talent.
Respondents also believe that the government can do more to enable the growth of the sector, in particular, increasing tax incentives for angel investors in early stage investment (78 per cent) and introducing policy reforms to make it easier to hire employees (78 per cent).
Shankar commented: “Locally, all the Malaysian Fintech firms surveyed say they have trouble hiring the talent to meet the needs and growth of the industry, with 73 per centsaying that there is a shortage of fintech talent in the country.
“The top three areas of talent shortage for Malaysian fintechs are in technology and software (73 per cent), sales (27 per cent) and compliance (27 per cent).
The availability of talent and skills needed to run fintechs at the different stages of their growth can make or break success. Governments play a vital role in shaping a conducive fintech ecosystem that helps to attract and develop the right talent pool, and promotes innovation, collaboration and healthy competition.”
Shankar added: “Southeast Asia offers an attractive play for both fintech players and investors.
“Rapidly expanding economies; young, urban and digitally savvy populations; increasing mobile and internet penetration; and largely under-served small- and medium-sized enterprises and consumer markets have led to the rapid adoption of fintech innovation in the region.
Key to the success of fintech firms are access to customers and technology, and understanding the regulatory and compliance requirements.
“As such, it is important to help bridge the gaps between fintech firms, traditional financial services providers and regulators, by providing local knowledge on the market landscape, and the fund-raising channels and government support schemes available.”
In terms of regulation, 45 per cent of Malaysian respondents have expressed that it is either moderate or difficult to conform to local financial sector regulations, while 75 per centhave asked for more support from regulators and policy makers to assist fintech start-ups get off the ground.
Top 10 fintech predictions for 2018
The global fintech ecosystem continued to mature at an accelerated pace over the course of 2017. According to the 4Q17 edition of The Pulse of Fintech by KPMG International, total global investment in fintech remained steady at over US$31 billion, year-over-year.
With big developments ranging from the rise of open banking, increasing regulatory clarity and maturation of AI and blockchain, 2018 promises to be another big year for fintech.
Alvin Gan, executive director of KPMG Management Consulting in Malaysia, has been observing how emerging technologies like big data, AI, robotics, blockchain, coupled with ever-changing customer expectations, are reshaping how the Malaysian financial institutions (FIs) deliver services.
“The introduction of robotic process automation (RPA) and chatbots, for example, had enabled greater productivity hence allowing FIs to address more complex customer needs.
“Many also recognise AI becoming a pivotal technology behind fintech innovation, presenting massive opportunities to be the first mover in causing a shift in customer expectations by being able to know what their customers need, even before they know it themselves,” said Alvin.
With these developments in play, Alvin is not surprised to see greater collaborations between FIs and large-scale technology providers to build customised solutions and value creation. Globally, FIs have invested more than USD27 billion in fintech and digital innovation since 20151.
Alvin added, “Collaborations such as these are becoming more rampant in Malaysia, not only between organizations within the private sector, but between regulators and non-profit organizations as well.
“The application of blockchain technology into the financial sector is an excellent example. In the Asean region, we are seeing FIs working closely with the regulators to develop a blockchain proof-of-concept aimed at streamlining know-your-customer processes.
“As we move further into 2018, we expect blockchain to continue being a hot area of focus in this part of the world as it does globally.”
With these digital transformations and emerging disruptors taking place in 2018 and beyond, KPMG sees fintechs enabling the provision of more effective products and services in the financial sector.
“Fintechs, being the disruptors and facilitators, will see corporations, innovators and regulators come together to use technology and innovative propositions to improve financial inclusion and enhance customer experience in Malaysia.
“We will see greater access for customers that were previously excluded from the traditional financial system as product innovations and lowering of costs will allow them to enjoy the same standards of services as other customers.
“Also, there will be a significant increase in customer engagement and experience as fintechs are able to analyze customer data to offer personalized services and provide more interactive communication through multiple channels,” Alvin concluded.