Commentary

When one door closes, another one opens up. As deleveraging moves up in the scale of objectives of the Chinese leadership, banks now face more restrictions from regulators. In any event, this is not the first time they find themselves in the regulatory whirlpool. From the usage of repo agreements to wealth management products (WMPs), and most recently negotiable certificate of deposits (NCDs), banks have been very creative in playing the cat and mouse game in front of evolving regulations.

The regulatory and business environments have become more volatile and unpredictable. Financial institutions have also faced a tsunami of new regulatory requirements which have driven up compliance costs, whilst increased capital and liquidity requirements have reduced returns. At the same time, fintech startups are threatening to disrupt traditional financial services business models.

Asian banks have seen an exponential growth in regulatory requirements in recent years, including a greater focus on consumer protection, market integrity and a demand for faster remediation of supervisory issues. This has added to the cost of operationalising compliance across the three lines of defence. For instance, firms are investing heavily on the business side to develop consistent methodologies, enhance data lineage, and implement risk identification. The industry’s approach to compliance though has been tactical and has amplified the need for end-to-end tools and platforms capable of automating and integrating front-to-back operations with compliance requirements that will ultimately drive accountability into the first line. As firms continue to make technological advancements that enhance customer experience and increase convenience, the next challenge for Asian banks is to look for practical and more effective ways to take advantage of “big data” — customer, risk, financial, operational, and more — that holds the potential to address many of these compliance concerns. However, managing this data efficiently, manipulating it effectively to serve a variety of purposes, ensuring sufficient quality to yield actionable results, and safeguarding it from cyberattacks remain elusive. Human biases and other limitations in managing big data’s multiple sources, volume, and complexity, whilst unavoidable, have only served to exacerbate these concerns. Although significant cost and effort has been expended, many firms still find themselves in non-compliance with regulatory obligations which has led to substantial fines and considerable reputational damage. From big data to smart data To address these challenges, Asian banks are exploring RegTech solutions to move away from the concept of big data towards one of “smart data.” Smart data uses machine learning and intelligent algorithms to make sense of big data’s overwhelming volume and complex patterns by structuring these patterns in a cost-effective way that is better able to identify current and emerging risks, predict compliance failures, and enhance business line coordination. Amidst significant business model disruption from increased competition and the rapid pivot toward growth objectives, it is critical that many of the manual processes firms have relied upon are automated to promote agility, scalability, and enhancements to customer and employee experiences. Increased competitive pressures from various market players, new entrants, and idiosyncratic customer demands for an improved delivery experience are also driving a need for agility in firms’ business processes and their ability to simultaneously achieve real-time compliance. To address this, many banks have either purchased or partnered with FinTech startups to support these key functions, assist in developing a lower-cost operating model, and provide technological innovations in financial product and service development. This trend is expected to continue for the foreseeable future as more banks consider their options. As profitability continues to improve and technologies become more scalable, the industry will likely continue attracting additional FinTech competitors, and smaller institutions will likely consider following the lead started by larger firms by leveraging technology hubs designed to foster innovation in product development and provide agile platforms to support growth. Risk management ‘as a service’ Another area that organisations are exploring is the use of the cloud and the benefits of 'as a service' solutions. This is of particular assistance to Asian banks as it allows them to access best in class solutions in a “turnkey” format which has the attraction of reducing costs through economies of scale, accessing specific intellectual property, and providing regulatory compliance. It removes a significant amount of the headaches involved in implementing a risk or regulatory driven project (think IFRS9), and moves it from a Capex expense to an Opex one through subscription services. It also opens up access to a range of cognitive approaches to enhance analytics or automate processes through the additional computational power that can be accessed. Whilst there are some regulatory hurdles that may need to be crossed, the general tone from the industry is that the benefits provided by these platforms far outweigh these challenges. Overall, Asian banks are having to change their mindsets around how to meet these challenges and leverage emerging technologies to remediate current tactical approaches and solutions, automating these processes to reduce costs and allow staff to focus on value adding activities, as well as differentiate themselves from their peers from a pricing or shareholder point of view.  

Asian banks are focussed on finding growth under the current market conditions, which present opportunities in terms of new areas of business growth, as well as challenges in the form of competition from non-banks and evolving regulatory requirements.

Customer expectations for financial and banking services are rising at an ever faster rate. The approaches of banks are increasingly framed in black and white terms of good and bad. Banks found wanting or less than desirable are abandoned like sinking ships as customers take their transactions and businesses to more preferred institutions. Digital has made it simpler for customers to move their business to a different bank at the same time that it has made it possible for “undesirable” transaction business reviews to be disseminated nearly instantaneously — and as negative customer experiences can be shared in the blink of an eye, analog banks risk being left behind in the dust of the new digital era.

Industries across the board are undergoing structural change. This change extends beyond individual firms and spills across industrial sectors. Other industries that have been exposed to the tide of technology-driven structural changes have through the process harnessed technology to be reinvented as new industries befitting this evolution in industrial structure. The financial industry traditionally has been far from the vanguard of this change.

China bank risk is on the rise. The unweaving focus by both markets and regulators – ranging from individual bank to financial system stability as a whole – reflects a sense of urgency that actions are needed to contain the risk. This is no easy job. And at least in the government’s mind, it requires not only a trade-off between short-run profitability and long-term system risk of commercial banks, but also balancing the interest between different players in the financial industry, for example, insurers and asset management corporations (AMCs).

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61% of respondents to the ICC Banking Commission’s latest Global Survey reported a shortfall in global trade finance. And US$700 billion of the unmet demand comes from developing Asia. Here we examine the measures that can be taken to address the trade finance gap across the world’s largest continent.

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Global banking is facing a perfect storm. In addition to weak economic growth, major regulatory challenges, and historically low interest rates, the industry also faces an intensifying threat stemming from changing consumer perceptions of traditional banks coupled with the emergence of new competitors offering attractive, personalised products.