Commentary
BANKING TECHNOLOGY | Contributed Content, Japan
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Eiichiro Yanagawa

Paths to overcoming the trap: Digital transformation as an opportunity

BY EIICHIRO YANAGAWA

The topic being discussed most nowaday is “Opportunities and Challenges of Digital Transformation in Southeast Asia”. OECD-SEARP has been engaged in active discussions on policies to make digitalisation work for better lives and inclusive growth. Japan has actively lead those discussions. OECD has been working on a horizontal project to assess the potential and impact of digitalisation on various aspects of human lives. It is essential to recognise digital transformation as an opportunity, not as a problem.

Effective use of digitalisation will enhance productivity growth and regional connectivity, thus helping ASEAN countries address such challenges as Middle-Income Traps. To this end, it is indespensable to develop and maintain ICT infrastructure, such as broadband networks; to promote a free flow of information and cyber security; to protect intellectual property rights; and to provide ICT education. In addition, through the digitalisation of the financial infrastructure, digital financial services can become a killer application.

OECD and FSAs of the ASEAN countries have a role to play in establishing high level international standards in various areas including digitalisation, thus contributing to economic growth and the expansion of trade around the globe. Moreover, if those standards are internalised by ASEAN countries and become the basis for regional integration and domestic reforms, it can have a great impact on regional economic governance. Such standards will help to avoid Middle-Income traps in the entire Southeast Asia.

Initiatives and advocacy
This year's Retail Banking Forums were held in ASEAN's four fast-growing cities. (Manila leg - 28 February, Jakarta leg - 21 March, Kuala Lumpur leg - 25 April, Bangkok leg - 31 May)

The agenda of the conferences is the Growth Strategy through Digital. Together with global and regional bankers, technology vendors and strategic consultants, we discussed the following topics.

  • Branch design & the customer journey
  • Emerging technologies & the pressure on banks
  • Digital transformation

We participated in the conferences in Jakarta and Bangkok; we proposed an open API strategy there.

Open API Threats
From the perspective of systems, open application programming interfaces (Open APIs) mean that a new communication path is being established to link the information systems of financial institutions with the outside world. This can bring new risks such as data leaks, data fraud, and illicit transactions. There is also a possibility that data relating to user account information and settlement instructions will be exposed to the risks of leaks, tampering, and fraud via handling by third party providers (TPPs).

First and foremost, when financial institutions open up their APIs to TPPs, the fundamental system risk relates to the reliability of information having to do with user (bank customer) identity verification and account as well as account-related instructions. Today, financial institutions face the tricky and intractable problem: how to this correctly determine that the authentication and account instructions are genuine.

Against this backdrop, in Japan, the service formats and data transmission methods that have become mainstream at TPPs were thrust into the spotlight. Various discussions were held focusing on both the related risks and convenience from the varying viewpoints of financial institutions, TPPs, and users. The outcome: a shift from using the scraping method to token authentication in order to aggregate information for user account access. 

Open API Strategies
We emphasised the importance of and advocate an open-banking strategy both for the financial institutions that are striving to build an open API strategy and for the IT vendors that are supporting those institutions.

Financial services and financial institution businesses are highly contingent on the specific properties of local financial regulations and systems. No global standards yet exist when it comes to Open APIs and pen API trends. Nevertheless, in any era, there is always much to be learned from corporate trailblazers.

Based on insights gained from observing world markets, we proposed the following four points that will guide companies on how to prepare for new regulations and establish business and technology strategies:

  • Formulating an Open API vision
  • Redesigning products and services
  • Building relationships between developers and TPPs
  • Redesigning IT as an enabler

Significance of learning from global experience
How and why the system reform was implemented in Japan; what kind of items were considered; and what the details of the new system are like; will be a good case study for other regions and countries.

The creation of a new framework in a mature Asian market could serve as a precedential reference case in terms of institutional design for neighboring countries and emerging economies. In addition, such cases could contain many of hints and insights for financial services in the future APAC market as well as when it comes to the concept or thinking behind collaborative models between financial institutions and service vendors.

The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.

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Eiichiro Yanagawa

Eiichiro Yanagawa

Eiichiro Yanagawa is a senior analyst with Celent's Asian Financial Services group and is based in the firm’s Tokyo office. His research focuses on IT strategy issues in the Japanese and Asian banking and financial industries.

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