FinTech in the Age of Attacker

Expert perspectives on FinTech in Asia TABLE OF CONTENTS

1 PREPARING FOR DIGITAL DISRUPTION The Age of Digital Attacker 4 Shrikant Patil, Principal at Oliver Wyman How Banks Can Become Blockchain Innovators - or Fall Behind 9 Igor Khmel, Founder and CEO of BANKEX Is the Financial Sector in Asia Facing a Kodak Moment? 11 Aditya Haripurkar, Founder and CEO of HitKey From Zero to $1 Billion: P2P Lending in Indonesia 14 Iwan Kurniawan, Co-founder and COO of Modal P2P Lending: Lessons from Asian Governments 16 Ajit Raikar, Co-founder and CEO of Validus Capital

2 HOW TECHNOLOGY DRIVES DIGITAL TRANSFORMATION The Digital Accelator: Revving Up Government in Asia 19 Vitor Gaspar, Director of Fiscal Affairs Department at International Monetary Fund Chang Yong Rhee, Director of the Asia and Pacific Department at International Monetary Fund Real-Time Risk Management and Next-Generation Insurance 23 John Drzik, President, Global Risk and Digital at Marsh Technology's Role in Financial Inclusion 26 Geoffrey Prentice, Co-founder of Oriente Data Paints a Grim Picture of Workforce Financial Fitness. Is Tech the Answer? 29 Renée McGowan, Global leader for Individual Wealth for Mercer How Technology is Delivering Better Access to Financial Services 31 Philippe Le Houérou, Executive Vice President and Chief Executive Officer at International Finance Corporation Dan Schulman, President and CEO of PayPal

3 FINTECH-THE FUTURE OF FINANCIAL SERVICES How Fintech is Transforming access to Finance 35 Arup Kumar Chatterjee, Principal Financial Sector Specialist, Sustainable Development and Climate Change Department at Asian Development Bank FinTech in Asean-Collaboration is Key 38 Brink Asia Editorial Staff Driving Growth in Asia's Fintech Sector 42 Tancho Fingarov, Principal at Oliver Wyman Peter Reynolds, Partner and Risk Practice at Oliver Wyman The Battle for E-Wallet Supremacy in Southeast Asia 45 Duncan Woods, Partner and Head of Retail and Business Banking, APR at Oliver Wyman Nihal George, Principal, Digital, Technology and Analytics, APR at Oliver Wyman Anosh Pardiwalla, Associate, Financial Services at Oliver Wyman Keeping Bace with Asia's Evolving Robo-Advisory Regulatory Landscape 49 David Lee, Managing Director at Prive Financial INTRODUCTION

This compendium is prepared for a special Fintech event by Fintegrate Zone 2019, in collaboration between Oliver Wyman and BRINK/Marsh & McLennan Insights. The articles contained in this publication are selected based on relevant Digital and Fintech themes considering the event audience. It covers three main aspects related to incumbent banks including strategies for dealing with Digital attackers, optimally leveraging Technology and recognizing evolution of Fintech. We are entering an age of “digital attackers, those who are challenging the existing paradigms of how financial institutions remain relevant in our lives. The concept of ’ambient finance’ brings financial transactions to life via seamless customer experience. In the race to hold customer touch points across digital ecosystems, fintechs are well-positioned to dominate customer access. Interestingly, financial institutions and fintech firms are seeking collaboration opportunities to innovate new products or solutions via sustainable partnerships. However, traditional legacy infrastructure poses a major risk for banks to embrace strategies for the future. Banks’ technology functions need to adapt not only to scalable cloud native platforms adapt new technologies such as AI, Blockchain or robo-advisory, but also to embrace soft aspects such as new ways of working, dynamic organization and enabling culture. The next big wave of innovation in financial services will be driven by existing firms taking a greenfield approach that allows incumbents to combine what is possible in a new build with business model advantages of an existing firm. Taking such an approach means tapping into the same flywheel momentum of growth employed by big tech, breaking out of the low-returns cycle. The quality and low cost of new technology, the potential for dramatic change in competitiveness, the reduction in conduct and cyber risks if done correctly, and modern methods for migration, all make this idea compelling right now.

mmc.com BRINK Compendium 3 PREPARING FOR DIGITAL DISRUPTION THE AGE OF DIGITAL ATTACKER

Shrikant Patil, Principal at Oliver Wyman

“Forty percent of businesses today, 38 to 325 globally. Additionally, face disruption from various quarters unfortunately, will not exist in a they have continued to expand making it imperative for them evolve meaningful way in 10 years,” John in terms of their valuation, and in order to remain profitable over the Chambers, retired Cisco CEO, once today, 20 of these companies are medium- to long-term. predicted in 2015, adding that while decacorns – companies valued at 70 percent of companies would over $10 billion. These numbers The disruption is starkly evident “attempt” to go digital, only 30 not only reflect a phenomenal as new entrants pose a formidable percent of those would succeed. growth at an unprecedented scale threat to the incumbent banks. The but a burgeoning optimism that shift in value proposition is clearly Over the past decade, the industry speaks volumes about the needs pointing to the mastery of new has witnessed a radical shift in the and aspirations that were largely entities to dominate the world stage. perceptions of value proposition unaddressed by existing players. – from incumbent multinationals Meanwhile, in the same period, to responsive and scalable digital the total market capitalization of IMPACT ON INCUMBENTS entrants to reinstate their relevance the top 10 banks has increased less for markets. While the phenomenon significantly from $1.7 trillion to Incumbent banks need to watch out is often referred as a disruption, $2.3 trillion. for these digital attackers or neo it presents a glorious opportunity banks. This is because not only do for embracing value creation by Speaking in context of the financial they serve as an alternative to banks, embracing new age digital principles. sector, banks and insurance they are also leaders in adopting companies across the world are technology, helping customers Since 2014 and 2019, the number currently experiencing an era of and businesses to uproot legacy of unicorns has sharply risen from hyper digitization. Traditional banks technology that plagues traditional

mmc.com BRINK Compendium 4 players. As of 2018, these new market for dynamic product offering, parties on the bank’s platform, entrants have accumulated up to one- while the universal bank typically originating and/ or embedding bank third of new revenue in the global takes 6-12 months with its in-house products on third-party platforms, banking industry. As banks adapt to solutions and products. supporting the launch of micro- the changing ecosystem, there are banks and providing customers with four driving forces that they must be Additionally, new players don’t have third party apps. cognizant of. large legacy infrastructures, making it easy for them to change direction CUSTOMER EXPECTATIONS (if needed) and strategy – something BENEFITS OF ADAPTING of banking have shifted from that large incumbents with well- A CHALLENGER MODEL transactions at physical branches established infrastructures cannot do to frictionless product opening, as swiftly. The new generation digital At the current rate that digital optimized financial management and bank has a lean data infrastructure attackers are progressing and even banking super-markets. that allows easy access to any data evolving, traditional financial almost real time and for quick services firms will need to learn to NEW COMPETITION from digital development. It also has an agile disrupt, or they will be disrupted. entrants is accelerated by price modular IT architecture with Incumbents can gradually move comparison sites, mono-lines, advanced functionality. A universal towards a challenger model by swiftly and even info-tech giants and bank with digital offerings will pale adding new digital capabilities on the online retailers. in comparison with its complex top of their current model. data infrastructure, traditional BUSINESS MODEL/BENEFITS are data analysis techniques, and rigid These are some key benefits of the increasingly marked by outsourcing IT infrastructure. challenger model for incumbents: of non-core backend activities to vendors and partnerships forged with 1. Low cost to serve as build costs other players in the ecosystem. NEOBANK have decreased dramatically with advances in cloud-based services REGULATIONS increasingly warrant PRODUCT OFFERINGS and technology. customer ownership of data and AND INITIATIVES compliance by regulation aggregators 2. Speed to launch and time to and platform providers. A neo digital attacker is one that market have also significantly typically has no physical locations been reduced without the need and serves its customer primarily to build from scratch. NEO DIGITAL ATTACKERS through digital platforms. Most CONQUERING FRONTIERS neobanks, such as Pockit and Monzo, 3. Zero operations owing to the start by launching core products possibility to create businesses Disruption in the financial services such as current accounts, cards and that are digital by design, sector is posing formidable payments. Only a few independent contributing to significantly challenges for incumbents. This is neobanks, such as Atom Bank lower run costs. largely due to the various products and N26, have ventured into the and services new players offer credit domain. This is easier for 4. Modular, scalable architecture that incumbents are still getting subsidiaries of institutions with that support data-driven accustomed to and are reacting credit decision capabilities. business models and provide to adapt. active solutions to win over In addition, OpenBank and customers. For example, today a new generation Oaknorth for example, have also neo digital attackers can offer a added products such as savings or 5. Infrastructure agnostic, which highly targeted value proposition insurance-to-date, with most using allows player to sidestep the enabled by data and analytics, third parties for such offerings. challenge of legacy infrastructure achieving a Return of Equity (ROE) and get to a truly customer- rate of over 30 percent. On the other With innovative opportunities and centric and pragmatic hand, a universal bank with digital leadership commitment, neo-banks offering faster. offering provides a broader value can embrace challenger ambitions proposition and receives a lower ROE in line with global leaders. Key of 15-20 percent. The new players initiatives include enabling secure also have a much shorter time to data exchange, embedding third

mmc.com BRINK Compendium 5 THE OLD VERSUS THE NEW

Source: Oliver Wyman, 2019. The State of the Financial Services Industry 2019: Time to Start Again

GROUP OF EXISTING BANKS GROUP OF DIGITAL CHALLENGERS

AVERAGE COST TO ACQUIRE NEW CURRENT ACCOUNT CUSTOMERS ~$150 ~$30

DAYS FROM APPLICATION TO CURRENT 3 ACCOUNT FUNCTIONALITY BEING ACCESSIBLE 0

3-6 TIME TO LAUNCH A NEW FEATURE 2 months weeks

<1,000 RETAIL BANKING CUSTOMERS PER FTE >2,500

EMPLOYEES RATING THEIR 25% COMPANY AS A 5 STAR EMPLOYER 68%

mmc.com BRINK Compendium 6 GREENFIELD AS A Existing players are starting to platforms or originate and/ or embed CATALYST FOR BANK realize the merits of starting afresh. their own products on third party The National Australia Bank (NAB), platforms. Additionally, with scalable TRANSFORMATION for example, recently launched and secure technology platform they QuickBiz, a digital unsecured lending can also support or launch “micro” We refer to this incumbent strategy solution that has become a key banks or even provide ecosystem as the Greenfield approach channel for small business. Another customers with third party apps. (Exhibit 2). As an incumbent, is Nexible, built by German insurer imagine if you could combine what ERGO as a challenger proposition to Traditional players can look at is possible in a new build with the its auto-insurance business. greenfield as a transformation business model advantages of an catalyst for change. In fact, it is now existing firm (such as the established There are ways for incumbents in possible to deliver a major greenfield branding, funding, customer the banking industry to tackle the business with an experimentation base, regulatory approval and disruption being seen. Banks need flywheel approach in 12 months, existing data). to be flexible and can potentially starting from an experiment phase, embed third parties within their bank to pilot, scale up and finally run it.

GREENFIELD APPROACH

Source: Oliver Wyman, 2019. The State of the Financial Services Industry 2019: Time to Start Again

$ +

EXISTING BANK DIGITAL CHALLENGER GREENFIELD BUSINESS

Established brand Agile and innovative Best-of-breed technology Customer base Customer centric Customer centricity Funding Low-cost base Freedom to operate Existing data Cloud-based Venture discipline Perceived safety Next generation system Regulatory approval API driven Micro services

mmc.com BRINK Compendium 7 The return on each investment GREENFIELD IN AN INVESTMENT PORTFOLIO will be uncertain, but the funding required is stage-gated. The Source: Geo rey A. Moore, “Zone to Win”, and Oliver Wyman Collaboration investment funds allocated are also with the scope to scale up the most GREENFILEND BUSINESS CORE BUSINESS TODAY promising ideas. (Disrupting Innovation (Sustaining Innovation)

Additionally, governance is no longer TRANSFORMATION PERFORMANCE about big multiyear budgets with New businesses with scale to Optimization of the existing contribute >10% of revenue in time operating model fixed, micro-detailed deliverables. CATALYST Shareholders can see how the FOR CHANGE portfolio aligns with the company o o strategy, both in terms of growth or addressing disruption threats. RACE TO MATERIALITY The rapid pace of digitalization and TRANSFORMATION PRODUCTIVITY the infiltration of new tech players New businesses with scale to Eciency e orts and associated into the financial sector is compelling contribute >10% of revenue in time investments targeted at cost centers incumbents to get onboard the tech bandwagon or risk missing out in o the current digital era. Incumbents will increase their chances of holding their own if they start taking action now.

* More about the greenfield approach can be found in Oliver Wyman’s State of the Financial Services Industry 2019 report.

mmc.com BRINK Compendium 8 HOW BANKS CAN BECOME BLOCKCHAIN INNOVATORS — OR FALL BEHIND

Igor Khmel Founder and CEO of BANKEX

At its simplest, a blockchain-based global financial transactions with and allow market-makers, who could currency such as bitcoin is a means the assistance of the blockchain. be the banks themselves, to serve as of value storage and transfer. This While this may sound complex, it is the intermediary. These participants makes it similar to a traditional staggeringly straightforward: Simply, would absorb the residual spread risk currency, although with some current banks can make a blockchain, make a and be compensated accordingly. limitations. Some analysts focus on currency, and enjoy greater liquidity. these limitations and declare that The native currency would bitcoin is useless if it is not faster be comparable to Ripple’s and easier to use than credit, but BANKS SHOULD implementation of XRP, which can this is an extreme position. With BUILD THEIR OWN complete transactions in 3-4 seconds the throughput and the scalability with minimal costs. initiatives currently underway, one BLOCKCHAIN CURRENCIES With this implementation of will soon be able to use bitcoin for To create their own blockchain- blockchain among banks, Bank A larger purchases, payroll, purchasing based currency, banks need to could send almost any amount of U.S. inventory, and much more. create a permissioned blockchain: a dollars to Bank B overseas in a few So how does this emerging nonpublic blockchain where specific seconds—virtually for free. technology matter to banks? Banks identifiable participants are only can make the strongest and most allowed to perform certain actions. immediate impact in settling Then, banks would power this blockchain with a native currency

mmc.com BRINK Compendium 9 INCLUDING BLOCKCHAIN REAL-WORLD ASSETS BANKS CAN BE CURRENCIES IN FOREX STILL MATTER THE FORERUNNERS

An obstacle to realizing this vision is But even elegant systems are not Beneath all the technical esoterica, the lack of an environment in which uncomplicated. For example, banks one thing is clear: Banks need to exchange occurs smoothly. The often deal with real-world assets be the front-runners in this space, current process is cumbersome, as whose existence and condition must or they will have to surrender blockchain networks can only send be confirmed and then converted their market share to their more their own native currencies: In the into a unified value that can then innovative competitors. aforementioned Ripple scenario, be represented on the blockchain. the banks still need to maintain Otherwise, when banks and other Streaming and mail-delivered credit lines with one another, since financial institutions attempt to movies decimated the movie rental the delivery was in Ripple’s XRP use blockchain as a method of industry. Banks don’t have to suffer relative to U.S. dollars. That value exchange, there will be no trust in a similar fate; they can adapt. For then has to be converted back into a the underlying assets providing and now, the banks are dominant, but fiat currency. establishing the value. as technology develops, blockchain and its associated currencies will This is where market-makers Thankfully, a few solutions have been find more and more of a foothold. or calculation and compression proposed that use existing Internet- By accepting this truth, banks can agents become important. They can of-Things technologies as well as innovate and compete by creating streamline this whole process. artificial intelligence to confirm the their own protocols and blockchains. existence and condition of real-world Banks that choose to ignore the Market-makers who quote buy and assets. In these instances, to deal with emerging decentralized economy will sell rates for FX pairs would simply the increased complexity of assets, find themselves at a distinct strategic add USD/XRP and GBP/XRP to their banks could partner with technology disadvantage in the global market. lists. This would grow liquidity over providers to facilitate trade finance, time to facilitate extremely rapid commodities trading, interest This article first appeared on BRINK cross-border transactions since there rate swaps, and other derivatives would be no hiccups in the process of seamlessly on the blockchain. on August 28, 2018. value transfer. Further, distributed virtual machines Imagine a business in San Francisco such as Ethereum allow fintech firms sending payment to a distributor and banks to create protocol layers in Taiwan and the money being to facilitate the tokenization—the confirmed and cleared in 3-5 seconds. conversion of real-world value into There is very little stopping this a digital value that can be easily scenario from becoming a reality— expressed on the blockchain—of and the banks that implement tangible assets and cash flows, these systems will be able to attract which would all be backed up by the new business quite easily. This will tokenization process. This would provide a nice return on investment serve as an enhanced digital form for the capital expenditures involved of securitization and optimize the in creating the system. liquidity of the assets.

mmc.com BRINK Compendium 10 IS THE FINANCIAL SECTOR IN ASIA FACING A KODAK MOMENT?

Aditya Haripurkar Founder and CEO of HitKey

The recent explosion in fintech an innovative platform, to improve However, financial services providers activity in Asia has created a dilemma customer experience, or to benefit and regulators are conservative in for traditional financial institutions, from cost savings and increased approach and tend to be plagued service providers and regulators: productivity. with hierarchical structures, slow whether to collaborate with the decision-making and legacy systems. fintechs as long-term partners, or to There have been successful Fintech companies, on the other limit collaboration and invest in their examples of collaboration in Asia hand, are nimble outfits with the own digital restructuring activities. such as Active.AI and Axis Bank ability to execute quickly, but they for chatbots; soCash and Standard come with limited resources in terms When traditional financial services Chartered Bank for cash withdrawals of team size and capital backing. This providers partner with fintech in Singapore; and Bambu and cultural and structural mismatch companies, they usually do it to Franklin Templeton Investments for introduces complexities in the get access to new or underserved robo-advisory platforms. relationship between a fintech and markets, to deliver their services over the incumbent.

mmc.com BRINK Compendium 11 The incumbents, on their part, have 1. Publishing business problem Despite the success of many attempted to bridge the divide by statements for fintechs to tackle fintech-incumbent collaborations, launching incubation and accelerator on an ongoing basis some incumbents choose to limit programs, while regulators have collaboration and instead invest introduced sandbox-based initiatives 2. Clear awareness of the different in internal restructuring activities to encourage new innovations in a stakeholders for each business to better serve customers and fend controlled environment. problem and the point of off competition. While some of communication these restructuring efforts can be Despite these initiatives, successful, there are potential pitfalls 3. A sandboxed environment more can be done to facilitate of this approach as well. collaboration between fintechs being made available to fintech and the incumbents, since fintechs companies of any size can make traditional financial 4. Streamlining internal processes services stronger. Some additional for faster reviews of applications measures include: that leverage open banking APIs

THE STAGES OF DIGITAL TRANSFORMATION IN A FINANCIAL INSTITUTION

Source: Cisco, Digital Transformation for the Retail Banking Industry

Enables Di erentiates Defines

• IT agility and increased • New user experiences, • Business model innovation, productivity products and services industry transformation • Reduced technology costs • Accelerated product, • Machine-to-machine, (OpEx and CapEx) services and business augmented decisions, • Faster response times process innovation self-learning analytics to customer needs • Distributed connectivity • New growth and and intelligence constant innovation

mmc.com BRINK Compendium 12 INCUMBENT WHAT SHOULD Financial institutions view the AND DIGITAL INCUMBENTS biggest technology platforms of the world such as Amazon, Facebook, TRANSFORMATION FOCUS ON? Apple, Google and Alibaba as the biggest source of disruptors. To provide better digital experiences Despite the above internal initiatives, Adopting a continuous process of to customers and to fend off can an incumbent afford to stay away swift and strategic partnerships with competition, financial institutions from collaboration with fintechs? fintech innovators and adopting an have undertaken internal digital The answer lies in the ability of a open and collaborative framework transformation exercises. One aspect financial institution to answer the in the form of API platforms and of these exercises is to train internal followin g questions: sandbox environments are likely to employees on having a digital keep financial institutions relevant 1. Does the incumbent have the mindset and a customer-centric for customers. approach. Financial institutions have necessary skills and resources also formed mini “startup” units internally to innovate new But in the absence of constant within their organizations to make products and create new innovation and rethinking of these units think and function like experiences for customers? products, services, and processes, startups. Other initiatives include who would bet against the banking 2. Does it have the ability to quickly securing key hires from technology industry facing a Kodak or test new ideas and concepts? companies and startups to facilitate Blockbuster moment? an internal culture change and 3. Does it have the ability to launch streamline functions and processes. new products in a swift and This article first appeared on BRINK nimble manner? Banks such as DBS in Singapore and Asia on February 15, 2018 Wells Fargo in the U.S. are prime Since a majority of financial examples of financial institutions institutions retain legacy structures that have been quick and early and systems, a transformation of to respond to industry changes systems, processes and thinking and launch internal initiatives. is likely to be a slow and gradual Unsurprisingly, these banks process. At the same time, have led in providing superior incumbents do not want to be omnichannel customer experiences lagging behind in digital innovation, and remain at the forefront of and hence close partnerships and digital transformation. collaborations with fintechs remain the order of the day.

mmc.com BRINK Compendium 13 FROM ZERO TO $1 BILLION: P2P LENDING IN INDONESIA

Iwan Kurniawan Co-founder and COO of Modalku

In late 2015, when I first presented mean feat, given the numerous anti-growth, basic regulations my business plan to a group of regulatory, risk management and related to consumer protection and financial professionals in Indonesia, growth challenges the industry has risk management can, in fact, play it was met with strong skepticism faced along the way. an enabling role as it fosters the and apathy. “Do you understand sustainability of the industry. Indonesian borrowers? They will default on you,” or “Are you sure OJK LAUNCHING A DIGITAL- As a fintech platform, there are (the regulator) will support this?” FINANCING PLATFORM benefits to spending time at the were common refrains. The journey start engaging with the financial to launch a digital-financing platform WITHOUT REGULATION services regulator and government seemed treacherous back then. institutions, while educating the Launching a digital financing public and media. The message is Fast forward three years, the platform in 2016 was simple; there clear and consistent: Fintech is Indonesian P2P lending industry is were no regulations to comply with the answer to financial inclusion, now a billion-dollar industry, having or industry standards to follow. No yet fintech will only thrive under disbursed an estimated $1 billion regulations may sound like a good a balanced set of regulations. since 2016. Over the same period, thing for a startup, yet countries Recognizing the need to regulate, more than two million borrowers that waited longer to regulate P2P in late 2016, Indonesia’s Financial (companies and individuals) and lending, such as China, have seen Services Authority announced its 150,000 lenders have also been difficult outcomes for the industry. first set of regulations for fintech, served by the industry. In the case of China, years without which has since set a solid foundation regulations have meant that it is for the digital financing industry. The rapid growth of P2P lending not uncommon to see platforms has led to investments by reputable shut down due to fraud and poor global and local investors, such risk management, taking investors’ as Sequoia Capital, SoftBank and money down with them. While Mandiri Capital. This has been no regulation is easily perceived as

mmc.com BRINK Compendium 14 NAVIGATING THE RISKS arrangement is larger and more instrumental to startups’ ability to OF SME FINANCING complicated and where a more robust scale. Most of Modalku’s lenders, assessment approach is still the most for example, come organically to The financing gap in Indonesia, reliable. Under this situation, it is our mobile and web platforms, especially for MSMEs (micro, small still imperative to review traditional and compared to our initial days, and medium enterprises), is as large information and data, such as bank most of our borrowers now know as $75 billion. Yet, serving small statements and invoices, to approve Modalku before they even come to us, businesses is often challenging from credit for SMEs. influencing their decision to borrow. a risk-management standpoint. This was made possible through The majority of Indonesian SMEs constant engagement with the public have limited or poor financial SCALING TO $1 BILLION and media, including publishing and management practices and limited or distributing relevant content on a One would think that in a country no credit history, making it difficult regular basis. where smartphone penetration is to underwrite credit. Solving such high, marketing to SMEs would not a challenge is not straightforward, be difficult, but that is not the case with different companies adopting REALIZING FINANCIAL in Indonesia. Reaching $1 billion different approaches. was a three-year journey filled with INCLUSION The first school of thought is about challenges and surprises. One of Despite the rapid growth of the leveraging data and technology in our more surprising findings was industry, there is still a long way the most impactful way possible. that, despite the penetration of to go in achieving greater financial By using alternative data provided smartphones, most small-business inclusion. After all, with $1 billion of by loan applicants, such as online owners are not savvy users of the loans disbursed, P2P lending has only transactions and mobile-use pocket machine. The fact that the closed a tiny part of the $75 billion behaviors, it is possible to discern majority also have a weak or basic financing gap that exists in Indonesia. through the quality of the loan understanding of financial literacy Credit data infrastructure remains applicants. It is equally important exacerbates the problem. So how weak, and SMEs—which are spread to have the methodology and habit does one scale a startup when across various islands of Indonesia— to conduct tests, measurements most of the potential users are not remain largely weak in managing and iterations on a regular basis on easily accessible? finances professionally and are less- various underwriting approaches Part of the answer lies in than-savvy users of technology. to determine the optimal methods. partnerships, a channel that seems Putting technology, data and This, in turn, implies continued to be working out quite well for disciplined testing together, challenges and potential industry players. It is possible to have it is possible to navigate risk- opportunities for startups in this collaborations with e-commerce management challenges so as to space. To move forward, fintech and payments platforms to deliver serve more SMEs. companies are increasingly investing financing to merchants, leveraging more into market education, The second school of thought could transaction information on these product development, and credit be called the “bank-plus” approach. platforms. In addition, there assessment technologies. With the In short, the bank-plus approach is are opportunities to work with backing of a supportive regulator, about adapting a credit underwriting traditional supply chains, leveraging major technology investors, and a approach that has worked well at their networks and track records slowly maturing industry, it will only banks and adjusting parts of it to to serve SMEs operating in their be a matter of time before we see make it work for the underserved distribution channels and managing the industry reach a new high for market. Adjustments could include risk by using data and technology. financial inclusion. changes to the product design or the Such partnerships allow fintech replacement of specific document startups to reach a wider audience or loan requirements, without while keeping credit risk manageable. This article first appeared on BRINK compromising on risk management. Asia on November 13, 2018 Yet, partnerships are only one part Such an approach works well of the puzzle. In a new industry especially when the financing like ours, branding has also been

mmc.com BRINK Compendium 15 P 2P LENDING: LESSONS FROM ASIAN GOVERNMENTS

Ajit Raikar Co-founder and CEO of Validus Capital

The digital transformation which and enhanced convenience for financial solutions. It has also has swept industries from retail to end users. Coupled with Southeast increased their demand for transportation has now set its sights Asia’s high mobile subscription immediacy and customized products firmly on the financial services rates, Internet penetration rates and services. industry. Though financial services and a young population, this is a have been computerized for several recipe for success. With the high decades, a true transformation has level of connectivity, both lenders LESSONS FROM P2P been quite elusive. That is, until and borrowers can be connected in LENDING IN CHINA the rise of fintech and alternative a remarkable cost-efficient manner. platforms promoting peer-to-peer While P2P lending is only a small China’s retail loan penetration rate is (P2P) lending and financial inclusion. fraction of overall loans disbursed, its around 20 percent, among the lowest rising prominence in Southeast Asia in the world. Its banking sector has Southeast Asia presents a massive cannot be ignored. typically prioritized state-owned opportunity for P2P lending enterprises and influential borrowers platforms. This is because of Besides, the digital transformations over SMEs and the broader retail the many advantages that P2P of other industries have made market. This means that a large lending platforms provide, which customers more trusting of and segment of the population is include lower transaction costs comfortable with tech-based

mmc.com BRINK Compendium 16 underserved – although China’s halting operations due to police most productive, digitally enabled average income is relatively low, the investigations or just fleeing with and open to change. According to size of its middle class is roughly the remaining money. In 2018, the a report on accelerating financial similar to the population of Europe. number of P2P operators dropped by inclusion in Southeast Asia, more more than 50 percent to 1,021 and no than half (54 percent) of the adults in Responding to the market gap, over new firms have entered the market the poorest 40 percent of households two thousand peer-to-peer lending since August. By the end of 2019, remain unbanked. Access to credit platforms set shop resulting in that number could drop to as few as from formal channels and use of world-beating growth. According to 300 firms. insurance solutions are significantly Bloomberg, there were outstanding lower. Only 18 percent of adults use P2P loans to the tune of RMB1.22 a bank account to receive wages and trillion ($180 billion) in December FROM CHINA’S P2P pay utility bills, and just 27 percent 2017, ballooning from almost nothing LENDING WINTER TO of adults save formally and 11 percent in 2012. SOUTHEAST ASIA’S P2P borrow formally. What happens when there is a lack LENDING SPRING The government as well as the of regulatory oversight, an inability private sector are stepping in to of P2P lending firms to access There are several examples which tackle this gap. In Indonesia for credit scores and the prevalence of highlight that first-mover advantage instance, initiatives to support the operators who do not know how to may not be as powerful as some sector by the regulators include the run a P2P platform properly? Add to entrepreneurs think. Google was not setting up of the Fintech Office, the this mix lenders who quickly jumped the web’s first search engine, Amazon launch of the National Payment at the opportunity for high returns was not the first online bookstore, Gateway, and the establishment of without proper due diligence. The and Facebook was not the first social the Fintech Regulatory Sandbox for result was a disaster, with widespread media platform. China happened P2P lending services. defaults and the loss of billions of to be one of the first countries to dollars’ worth of investor savings. embrace P2P lending massively. “One of the key priorities for the There was widespread anger and Indonesian Government is to several protests which forced the Recent data from shows that the create a sound and strong financial government to step in and purge the five most populous Southeast Asian sector that is easily accessible, even industry. “P2P finally turned from countries–Indonesia, Philippines, for those in remote areas. This is ‘peer-to-peer’ to ‘police-to-people,’” Vietnam, Thailand and Myanmar– why microfinance is becoming so tweeted one disillusioned investor together have over 90 million youth important; so we can create access who was unable to reach the protest or close to an average of 17 percent to formal financial products,” site due to government lockdowns. of each country’s population. Out of said Muliaman Hadad, Chairman this, 49.8 percent of the population of the Otoritas Jasa Keuangan This resulted in thousands of is urban and the median age in (OJK), the Indonesian Financial P2P lending platforms that were Southeast Asia is 28.8 years. This Services Authority unable to repay investors, either generation is considered to be the

mmc.com BRINK Compendium 17 Here lies the key to P2P lending service levels for both lenders and for loan repayment to continue and success in Southeast Asia. It is only borrowers. This will help ensure paid to the investors. These are a few when various stakeholders from sustainability for the players and examples of how the government can across the board—the government, a viable market where digital trust provide good support to the sector. P2P lending platforms and can be established. This is where investors—come together in a more the power of digital transformation The new forms of alternative finance integrated way that the concept comes in. will profoundly shape Southeast can be genuinely successful. And, Asian economies for decades to this is already happening across Digital tools powered by an come. They promise to challenge Southeast Asia. open data sharing architecture the regulatory environment, test the are enabling fast, low-cost, and political will and question our ability convenient customer identification to embrace change. DIGITAL and verification. This is especially TRANSFORMATION so when the processes are powered There is no doubt that there are by unique national IDs, a real-time many potential vulnerabilities that PROVIDES SIGNIFICANT verification infrastructure, and a might impede the future growth OPPORTUNITY FOR supportive regulatory framework of P2P lending in Southeast Asia. featuring tiered KYC and cross- These pitfalls need to be identified, LEGITIMATE PLAYERS product KYC. Alternative sources understood and prudently managed of data such as data from payment for the long-term viability of Many banks consider the growth of transactions and telecoms providers, the sector. To have long-term, P2P lending as direct competition, combined with analytics are sustainable and inclusive growth, as was the case in China. However, improving customer profiling, credit the industry needs to adhere to best in Indonesia and other Southeast risk assessment and fraud detection. practices and cultivate trust, while Asian countries, the fintech industry However, there remains plenty of continuing to innovate in products will support and run parallel to scope to make open data sharing and services that provide returns banking. While banks were wary at more accessible and useful for all to investors. the early stages of P2P lending, with the stakeholders. increasing regulations, large banks This article first appeared on BRINK are significantly more inclined to Apart from having a digital and open Asia on February 26, 2019 partner with these platforms. data sharing architecture, a strong regulatory framework needs to be Hence it is crucial that P2P enforced to ensure that the investor’s players demonstrate the right money is protected. Firms should be balance between protecting the required to meet a minimum capital lender through a robust risk requirement and the regulators management framework, good level should also ensure that if a platform of transparency on loans and high collapses, there is a system in place

mmc.com BRINK Compendium 18 HOW TECHNOLOGY DRIVES DIGITAL TRANSFORMATION THE DIGITAL ACCELERATOR: REVVING UP GOVERNMENT IN ASIA

Vitor Gaspar Director of Fiscal Affairs Department at International Monetary Fund

Chang Yong Rhee Director of the Asia and Pacific Department at International Monetary Fund

Asia’s digital revolution shows greater access to timely and accurate BENEFITS no signs of slowing down. From data. With better information, FROM E-GOVERNMENT e-commerce giants, like China’s governments can design and Alibaba and Japan’s Rakuten, to implement better policies, such as Critically, digitization can make ride-hailing and digital payment improving tax compliance and the governments fairer and more tech startups, like Indonesia’s efficiency of government spending. efficient. India’s experience with Go-Jek and India’s Paytm, and the the Aadhaar is a case in point. It Indeed, Asia’s governments’ use widespread use of industrial robots is the world’s largest biometric of digital technologies in public for manufacturing, digitization identification system that provides finance management is directly is changing the way the region’s a unique 12-digit ID number for 1.2 transforming the lives of millions of businesses operate billion residents in India. people. But to fully reap the digital It is also transforming the way dividend, policymakers will need The identification system links to governments operate. Thanks to comprehensive policy actions on various social programs, including digitization, policymakers have multiple fronts.

mmc.com BRINK Compendium 19 subsidies on liquefied petroleum CHALLENGES OF tourists may use digital platforms gas. In 2013, the government linked GOING DIGITAL to stay in private homes. These Aadhaar beneficiaries’ numbers to small-business transactions may fall the liquefied petroleum gas program, These digital initiatives bring large below the thresholds for taxation— which helped prevent claims from gains to governments, but there are resulting in loss of revenue for the ghost beneficiaries or multiple also critical and urgent challenges government. The digital economy claims. In addition, the government to address. also makes it easier for tax avoiders transferred subsidies directly to to move profits abroad, out of reach the Aadhaar-linked bank accounts, First, the popularity and necessity of of tax authorities. bypassing dealers and improving its digital technologies across the region support of those in need. mean that more people are at risk Third, more than half of those of cyberattacks. Hackers have used without access to the Internet live in Additionally, the Philippines’ digital their digital skills to steal private Asia. While broadband subscriptions registry—Listahanan—serves as a information and disrupt government have increased in the region, there gateway for as many as 52 social functions. A digital world is is a widening gap between leaders programs, ranging from cash also a target-rich environment and their less-advanced peers. For transfers to emergency assistance, for fraudsters, including in example, less than one percent with 75 percent of the population cryptocurrency exchanges. of Myanmar’s inhabitants have registered. In Indonesia, digital social access to fixed broadband networks registries appear to have also helped Second, digitization of the economy compared to over 25 percent in expand the coverage of conditional could, in principle, reduce tax Singapore. E-government can only cash transfer programs. revenues. For example, instead of work if people have access to it. staying in hotels that charge a tax, Even in countries where digitization is in its infancy, initiatives are on the rise. Digitization can improve public service delivery. For instance, MORE ACCESS Bangladesh uses smart water MORE THAN HALF OF THE WORLD’S POPULATION WITHOUT INTERNET ACCESS LIVE IN ASIA Number of people with and without internet access; billions; latest available) meters to monitor water quality. Source: World Bank; and World Development Indicators (WDI) Digital initiatives can also help in public financial management—for example, Bhutan’s e-Tool has helped standardize project appraisal and selection for public investment. 0.6 0.7 The benefits go beyond spending. On the revenue side, e-filing, 1.9 0.9 4.1 3.4 1.8 0.4 e-payments, and e-customs initiatives in tax administration are 0.5 common in Singapore, Malaysia, 0.6 Vietnam, Indonesia, and Thailand, and they are paying off. In Malaysia, ongoing efforts in e-filing and e-payments have reduced compliance time by 30 percent. China India Other Asia Non-Asia Users Non-users

mmc.com BRINK Compendium 20 Finally, some countries have leapt GOING DIGITAL GOVERNMENTS’ USE OF DIGITAL TECHNOLOGIES TO IMPROVE PUBLIC SERVICES IN ASIA ahead, while others are far behind. VARIES WIDELY ACROSS INCOME LEVELS South Korea, Singapore, Japan and (Digital Adoption Index for governments; latest available year) Malaysia rank in the world’s top ten Source: World Bank; and World Development Indicators (WDI), IMF in terms of digital government. India outperforms advanced economies, 1 Korea, Rep. Singapore on average, while China, Sri Lanka, Singapore Korea, Rep. 0.9 Chile Indonesia, and Thailand outperform Uruguay 0.8 their emerging-market peers. 0.7 Rwanda At the same time, small islands Nigeria 0.6 and fragile states have struggled 0.5 to make significant advances in Cyprus 0.4 e-government. In Myanmar, Tuvalu, San Marino and the Marshall Islands, digitization 0.3

Digital Adoption Index still needs a boost. Ongoing 0.2 applications of digitization in the Tuvalu Turkmenistan Marshal Islands Tuvalu 0.1 MArshall Islands Equatorial Guinea region, far-reaching and diverse, 0 show such a boost is possible. Asia Advanced Emerging Low-income and Pacific economies market developing economies countries

OVERCOMING Governments should also remain data on financial transactions. This DIGITAL ROADBLOCKS vigilant and protect their revenues. is particularly true for developing This requires governments to and emerging economies, whereby WILL REQUIRE monitor areas where digitization closing half the distance to the SHIFTING GEARS impacts revenues. For example, if digitization frontier could bring in digitization shifts some services more than one percentage point of The good news is that the right to smaller firms that fall below the GDP of value-added tax revenue policies can help governments tax threshold, the government may in ASEAN economies. Countries prevent fraud and cyberattacks, as choose to revisit and change current with populations that do not have well as boost digitization benefits. thresholds to allow them to tax reliable access to the Internet should Singapore and Malaysia, for similar activities. enable early investments in digital example, have established agencies infrastructure, like broadband to oversee cybersecurity strategy Further advancing digitization can technology, to ensure inclusion and and operations. also improve tax collection and, to reap the benefits of digitization. as a result, revenues, by making it easier for governments to collect

mmc.com BRINK Compendium 21 Countries with populations that EPOLICIES MORE GOVERNMENT OVERSIGHT OF DIGITAL TECHNOLOGY USAGE IN EMERGING AND do not have reliable access to DEVELOPING COUNTIRES IN SOUTHEAST ASIA AND THE PACIFIC ISLAND STATES CAN the Internet should enable early BRING SUBSTANTIAL GAINS IN VALUE ADDED TAX REVENUE Estimated VAT revenue gains from closing half the distance to the digitalization froniter; investments in digital infrastructure, 2016; percent of GDP) like broadband technology, to ensure Source: Fiscal Monitor Spring 2018, IMF; and sta caluclations. inclusion and to reap the benefits 3 Note: ASEAN=Association of Southeast Asian Nations. of digitization. For all countries, this would require building 3 fiscal institutions to manage the design, planning, budgeting and 2.5 implementation of policies. With these policies, Asian economies 2 would continue to drive the digital revolution and advance the frontier, not only for themselves, but for 1.5 other government innovators across the world. 1 This article first appeared on BRINK 0.5 Asia on October 11, 2018.

0 Pacific Island ASEAN East Asia South Asia Industrial Asia Countries & Small States

mmc.com BRINK Compendium 22 REAL-TIME RISK MANAGEMENT AND NEXT-GENERATION INSURANCE

John Drzik President, Global Risk and Digital at Marsh

A confluence of trends is enabling What makes real-time risk and more of them are run on businesses and the insurance management possible? Three high-speed wireless networks. industry to move toward a concurrent developments By 2025, the world will have 1.2 revolutionary new approach: real- are starting to reshape the billion 5G connections, and 4G time risk management. risk landscape: will reach 5 billion connections, according to the GSM Association, Managing risk in real time offers • New real-time data streams. a global trade association of mobile the potential to both reduce risk From telematics to satellite telecommunication operators. This and transfer it more effectively. imagery to wearable technology means the majority of the global It means businesses can have an to property sensors, there are population will have access to the up-to-the-minute view of their a growing number of emerging advanced wireless networks that changing risk exposures—and take technologies generating new data can power real-time data streaming. actions to mitigate them—and that streams that provide dynamic the insurance industry no longer signals with risk content. Mobile needs to rely only on historical data phones are also a growing source to price risk. of risk signals, especially as more

mmc.com BRINK Compendium 23 • Analytics driven by artificial ENABLING BETTER THE INTERNET OF THINGS. intelligence. Advances in AI and RISK ASSESSMENT Current projections are that 25 to machine learning now enable 30 billion connected devices will be the processing of large-scale data Advances that would have seemed deployed by 2020 (up from more streams at a speed significantly like science fiction barely a decade than 7 billion today). From embedded faster than previously possible. ago are reality today. Consider just a sensors that enable “smart” buildings AI-powered analytics can distill few examples of emerging technology or “smart” homes, to wearables the expanding set of real-time that are contributing to real-time or used on construction sites or data signals into a dynamic view near real-time assessment of risk. manufacturing operations, connected of risk that can be used to trigger devices generate alerts that can warn mitigating actions or consideration TELEMATICS. From passenger cars users of unsafe conditions and trigger of risk transfer alternatives. to trucks to cargo ships, telematics them to change their behavior, are being deployed to improve perform maintenance or take • New insurance products. New transportation safety by actively other actions that help to prevent policies that adjust price or identifying risky driving behaviors accidents. Until 1986, canaries coverage in relation to changing and conditions. Accident rates could alerted coal miners to the presence of risk signals are creating incentives be reduced further if insurance deadly fumes. Environmental sensors to manage risk more actively. products provided price incentives perform that task today in real time, The most developed area is for individuals and businesses to improving safety above and below personal auto insurance, where use the telematics feeds to manage ground. Connected devices are often some policies now provide their risk more actively. Commercial installed for reasons other than risk premium credits in relation to insurance policies can be developed management—for example, property telematics-based information to reprice motor or marine cargo sensors might be implemented on driving behavior. While still insurance in real time based on the to improve energy efficiency, and embryonic, innovative insurers are behavior of the operator, the roads or wearables might be deployed to exploring the potential to create seas on which the cargo is traveling, improve productivity. However, the next-generation policies in other the value of the cargo, weather same sensors often carry risk content property and casualty areas that conditions, and other dynamic that can be used to improve risk use new data streams to adjust variables. Fully autonomous vehicles mitigation or transfer. price or coverage dynamically and have the potential to create a step- that also use real-time streams to change decrease in risk—and the use CYBERSECURITY TECHNOLOGY. process claims more rapidly. of the autonomous features can be Cyber risk continues to escalate, and encouraged through an insurance an expanded set of technologies is policy that shifts in price based on a being deployed within businesses real-time feed signaling whether the to help their information security autonomous capabilities are on or off. professionals prevent or respond more effectively to cyberattacks.

mmc.com BRINK Compendium 24 Many of these new technologies THE ROAD AHEAD dynamic projections about future generate data streams that can also outcomes and develop risk-based be processed with advanced analytics Real-time risk management premiums that are calculated based into a moving view of cyber exposure. technologies will not eliminate on the new approach. Risk professionals can then use risk, but can increasingly provide these views to quantify potential loss businesses and individuals with To date, risks traditionally covered by scenarios more actively and consider actionable intelligence to manage insurance could not be managed this the economics of risk transfer with and reduce their risk—significantly, dynamically. However, the prospect greater precision. in some cases. The advent of new for real-time risk management is data streams and powerful analytics now on the horizon. By harnessing VISUAL INTELLIGENCE TOOLS. also opens the door to innovation in real-time data streams and analytics Satellites, aircraft and drones are risk financing, whether that takes driven by artificial intelligence, capable of deploying high-resolution the form of innovative coverage from businesses and the insurance cameras and sensors that provide insurance providers, an expanded industry can dramatically shift how additional real-time data streams. and creative use of a captive, we manage risk and think about More powerful machine learning or tapping new products from insurance. We’ve barely scratched the techniques can now process these alternative capital markets. surface, but the potential benefits for images into relevant real-time identifying, assessing and managing risk information. For example, the Insurance is likely to remain the risk in real time are already coming combination of property images and primary risk transfer vehicle for into view. high-frequency weather feeds can these risks. Traditionally, insurance provide a rapid and accurate view of premiums are determined based property damage, which can be used on historical data. Underwriters This article first appeared on BRINK for high-speed claims processing. The and actuaries compile and use past on October 9, 2018. same visual intelligence technology, data sets to look for loss patterns combined with property IoT data and make projections about future and AI-based weather forecasts, can outcomes. Emerging data sources provide a forward-looking view of can now be leveraged to provide a property risk for a home or building continuously updated view of the that can be used in insurance pricing. underlying risk. Insurance providers can use this real-time data and evolving data science to make more

mmc.com BRINK Compendium 25 TECHNOLOGY’S ROLE IN FINANCIAL INCLUSION: HYPE OR HOPE?

Geoffrey Prentice Co-founder of Oriente

More than a third of the world’s With growing income levels, rapid risk, encourages savings, helps adult population, or some 1.7 billion technological innovation and the people build financial identities and people, have little or no access proliferation of smartphones, participate in the economy (many for to formal financial services. In financial inclusion is now a key the first time), and supports MSMEs. Southeast Asia, the problem is even driver for public and private greater, with more than 70 percent financial institutions that see Across emerging Asia, many people of the region’s estimated 640-million it as their mission to help the and small-business owners don’t population remaining unbanked and unbanked to more easily access have bank accounts and have never a majority of them being from low- financial services and the enormous been approved for a loan or service and middle-income segments. economic opportunity it brings from a formal financial institution. As with it. For banks alone, closing a result, for them, financial exclusion Research by the Asian Development this gap in emerging markets could is almost guaranteed. They can’t get Bank estimates that addressing generate more than $380 billion in access because they have no credit this opportunity could increase annual revenues. profile, and they can’t build a credit gross domestic product by between profile because they’ve never been 9 percent and 14 percent, even in The socioeconomic impact potential approved for a loan. They are credit- relatively large economies, such as from financial inclusion can be invisible and stuck in a black hole. Indonesia and the Philippines. game-changing in developing As a result, they are forced to look markets. It unlocks greater access elsewhere. And tens of millions of to fundamental services, mitigates them do.

mmc.com BRINK Compendium 26 In the Philippines, for example, only According to the 2018 e-Conomy nontraditional data signals to provide 12 percent of adults borrow from Report, there are more than a robust alternative to traditional a formal financial institution, and 350 million Internet users across credit scoring and risk assessment. over 40 percent rely on informal ASEAN—90 million more than in lending sources. While in Indonesia, 2015, and this is the most engaged When you consider the scenario, over 77 percent of borrowing is still user base in the world, spending the writing on the wall couldn’t conducted informally. more time on their devices than be clearer. anywhere else. Moreover, in many cases, people While globally, only a third of adults have to pay more to access these As a result of their ubiquity, these are covered by a credit bureau, the informal services than those who hundreds of millions of mobile situation is far grimmer in emerging are fully banked, often in the form of devices can—and already—do serve as markets like the Philippines, where exorbitant interest rates, personal a rich potential source of data. the public credit bureau is still in collateral, and unscrupulous business development and private bureaus practices. But there is hope. Today, both existing and new-age cover less than 10 percent of the financial institutions are looking to adult population. For greater inclusion, technology leverage these data sets and harness and data have a vital role to play in the power of next-generation For people in these markets, who building a new, more equitable, and technology to expand the reach of have for decades been underserved digital infrastructure that will enable affordable and efficient financial by traditional financial systems and millions—trapped by the limitations services to more people in even the preyed on by loan sharks, this comes of existing financial systems—to most remote areas. For companies, as a welcome relief. break away and unlock their true this translates into significant profit Cashalo, a mobile-lending app in the economic potential. And this opens opportunities, while also doing good. Philippines, is one such example. It up opportunities for companies. Mobile technology allows companies was built to unlock financial access to bypass the hurdles imposed by and opportunity by easing access to CONNECTING traditional banking because it breaks credit. It uses technology to assess MORE PEOPLE down geographical constraints while people’s financial capacity based on delivering greater convenience, smartphone data, including social connections and personal identifiers. The popularity of mobile phones affordability and security—whenever These signals serve as a proxy for supported by the availability of and wherever consumers demand it. traditional “offline” data, giving affordable smartphones and faster people an opportunity to build a and more reliable networks have financial identity, regardless of their fueled the unprecedented growth of BUILDING FINANCIAL “banking” history. Southeast Asia’s Internet user base. IDENTITIES USING The opportunity for technology to Developing markets especially have ALTERNATIVE DATA power a more financially inclusive demonstrated an insatiable appetite Advances in next-generation society is clear, but cultivating for new technologies. Due to this, technologies like artificial responsible financial habits among mobile penetration in markets like intelligence, machine learning, data consumers is equally important. Indonesia, Vietnam, Cambodia, and science, and predictive analytics Often, they are held back due to a Laos have seen an increase from allow companies to challenge the low level of financial literacy and 5 percent to more than 70 percent in status quo. These technologies help overall awareness. less than a decade. analyze thousands of traditional and

mmc.com BRINK Compendium 27 FINANCIAL IGNORANCE refreshing move from a regulator that progressive regulatory frameworks, ISN’T BLISS has defined a clear road map. data and consumer protection, and collaborations between the public The private sector, too, is stepping up For underserved communities, the and private sector to balance the their efforts by developing financial hope of a better future remains a risks and benefits. education strategies and digital pipe dream if they don’t have the literacy and knowledge programs. The hype is as real as the hope this understanding to use these new tools Some of these are in collaboration opportunity provides, and the time effectively. Financial ignorance can with local governments and NGOs, has come to seize it. impede the progress of technology. like Knowledge Community Inc. The And to this are tied the fortunes of rapid development in new technology companies operating in this space. This article first appeared on BRINK has given us the ability to leapfrog Asia on November 28, 2018 Action is therefore needed from the decades of inertia that has excluded public and private sectors to drive significant global populations. It greater awareness through financial has also opened tremendous growth literacy programs that focus on basic opportunities for the economy, concepts to cultivate responsible businesses and social good. behavior. Just last year, Indonesia’s With more companies entering this Financial Services Authority or space across emerging markets, it is Otoritas Jasa Keuangan announced just as important for all stakeholders a Revised National Strategy on involved to take a responsible Indonesian Financial Literacy to approach that also focuses on accelerate the financial literacy and education, the development of inclusion targets in the country—a

mmc.com BRINK Compendium 28 DATA PAINTS A GRIM PICTURE OF WORKFORCE FINANCIAL FITNESS. IS TECH THE ANSWER?

Renée McGowan Global leader for Individual Wealth for Mercer

Globally, people are not saving primarily (but not exclusively) by These findings show that there is enough for an adequate retirement, technology-first millennials, the desire to save more. Most people—81 and a growing number of them face largest segment of the workforce. percent—believe they are responsible the daunting prospect of outliving for ensuring they have enough their savings. As longevity increases income in retirement and are willing and defined benefit pension systems STATISTICS TELL to do something about it. Eighty-five give way to defined contribution A CLEAR STORY percent are willing to make changes plans, this savings gap is a critical today to improve their income workforce issue and a key to the Eighty-five percent of adults in retirement, while 40 percent multigenerational present—and (including 93 percent of 18-34 year- are willing to save more of their future—of work. olds) are interested in obtaining disposable income, and nearly a third access to secure, easy-to-use, jargon- are prepared to reduce consumption One takeaway from recent Mercer free, online financial tools to help or downsize their lifestyle to improve research is that technology provides manage their finances. Additionally, their standard of living in retirement. an excellent pathway to enhance two-thirds of adults spanning all age individual savings. The workforce groups are comfortable managing In addition, new research from is looking to employers to provide their savings using mobile banking, Thomsons Online Benefits found easy-to-use, secure digital tools to online tools or smart apps. that benefits that help employees “help me help myself” with financial stay physically as well as financially planning. This demand is driven healthy by offering advice on

mmc.com BRINK Compendium 29 physical and financial well-being, key message was that people want among this age group, resulting in helping them manage child care, or tools that are easy to use—but also higher job satisfaction as well as improving their career development secure and jargon-free. greater commitment and loyalty to will engage employees and provide the organization. the best value to employers. The For 62 percent of people, ease of research concludes that these use ranked in their top three most More than any other segment in the benefits now sit in the digital and important features. Being able to survey, 71 percent of millennials global domain and that companies store personal data securely was expect to keep working in later life are adopting a technology-enabled important to 39 percent of people, and wish to maintain their desired approach to their benefits strategy. and 35 percent highlighted the quality of life. Conversely, as they importance of having tools that are are still in the early stages of their Indeed, Thomsons found that over simple to understand and jargon- careers, they are also the most 90 percent of organizations that have free. People are much less worried stressed about finances of all the age the technology that allows them to about the lack of human contact groups surveyed. Not surprisingly, measure all aspects of their benefits (only 26 percent have concerns) that as digital natives, they are the most program have made well-being a comes with digital tools and have interested in online tools and mobile high-priority initiative, whereas less little concern around the amount of apps. Millennials are twice as willing than 40 percent of organizations that time taken to use technology (only as baby boomers to allow an online aren’t tech-enabled have done so. 15 percent are concerned). app to hold their data and manage their finances for them (80 percent Although most individuals— compared to 42 percent). TECHNOLOGICAL 65 percent—are willing to allow a BENEFITS ARE CRITICAL financial online app to hold their Our health, wealth and careers all personal data, they do have concerns play a part in how confident we TO EMPLOYEE SUCCESS about the validity and security of feel about our finances. The stress the tools they use. Almost half of of financial insecurity affects all These data tell us what should be individuals have concerns about countries, organizations and people— obvious. Technologies empowered sharing their data, and 38 percent and the time to cultivate financial by the ever-evolving breakthroughs are skeptical about trusting the security is always now, never in AI and other forms of automation results and have concerns about their tomorrow. In a world of rapid change can transform the frustration of valuable financial data becoming lost and diverse workforces, technology navigating health care and benefits or stolen. can help organizations elevate the into something personalized, employee experience. Blending engaging and educational. People digital tools with the human touch of want new ways of working and an DEMOGRAPHIC DIVIDES leadership can only help ensure the employee experience that offers financial future for today’s workforce. just-in-time, intuitive digital access, Mercer’s research also found that personalization, and wellness. age does matter when it comes to stress around financial security and This article first appeared on BRINK They also want digital tools that will comfort with and acceptance of on August 29, 2018 help them do their jobs better, faster online tools and advice. Millennials— and smarter. The Mercer study shows who fully expect to live longer— that two-thirds of employees believe face a savings gap compounded that state-of-the-art digital tools are by changing jobs more frequently critical to their success. over their lifetimes than previous generations did.

WHAT ARE THE FEATURES However, and perhaps unexpectedly, EMPLOYEES WANT? millennials have a high level of trust (83 percent) in their employer’s The research dug further into ability to give good financial what type of financial tools people advice. Also, employers who offer are interested in and what type of better savings and/or investment features are important to them. The benefits have a positive impact

mmc.com BRINK Compendium 30 HOW TECHNOLOGY IS DELIVERING BETTER ACCESS TO FINANCIAL SERVICES

Philippe Le Houérou Executive Vice President and Chief Executive Officer at International Finance CorporationDan SchulmanPresident and CEO of PayPal

Digital technology is spurring Access to financial services is critical The key features of digital financial financial inclusion around the world, for global development, as it makes it services—ease of use such as through enabling millions more people and easier to invest in health, education mobile phones, scalability, and businesses to join the global economy and business. Digital technologies customer-centric design—promote for the first time. Yet there is much offer a powerful way to boost affordability and convenience. This, more work to do. financial access. in turn, underpins their adoption and promotes financial access That’s the key message from the As the fintech revolution continues and inclusion. World Bank’s new Global Findex to unfold, digitally enabled financial database, a groundbreaking portrait services are dramatically expanding Digitally enabled financial services of how people in more than 140 the ways in which people transact facilitate day-to-day living, help economies use cards, mobile phones beyond traditional banking. They are families and businesses plan for and the Internet to make payments also changing the ways incumbent everything from long-term goals and manage money. banks do banking, as they are to unexpected emergencies, themselves increasingly digitizing and contribute to prosperity traditional channels. and resilience.

mmc.com BRINK Compendium 31 FINANCIAL INCLUSION MORE NEEDS that could provide better options. RISING GLOBALLY TO BE DONE In Vietnam, for example, nearly 70 percent of account owners pay The Global Findex database— Yet, there is room for much more utility bills in cash only—even though the methodology can be found growth. The data points to an array three-quarters of them have a mobile here—shows that since 2011, 1.2 of opportunities to expand digital phone as well as the Internet. If billion adults (aged 15 and above) offerings in developing countries. utility providers offered good quality, have opened an account. What is Digital technology access is high affordable digital alternatives, their remarkable is that 515 million did among account owners: Globally, customers might move their cash so over the last three years. As a almost 90 percent of people have payments into accounts, improving result, an astounding 69 percent of their own mobile phone, while 58 efficiency on both sides. adults now have digital channels for percent have access to the Internet in Merchants and small businesses moving money, saving, and managing addition to owning a mobile phone. can greatly benefit from digital financial risks. One key bottleneck is that adults who financial services, particularly in We see that, for the first time, a do own a phone and have Internet countries where account owners are majority of adults around the world frequently lack attractive choices more likely to have mobile phones report using digital payments: 52 for using these technologies to than debit cards. In India, 240 percent of adults—or 76 percent of make transactions. Take utility bills. million adults have a mobile phone account owners—make or receive Many people reading this might not but do not use their bank account. digital payments. This represents remember the last time they wrote Inactive accounts are often due major growth: Since 2014, the a check or withdrew cash to pay for to a combination of inconvenient number of adults making or receiving water or electricity expenses; they access, limited financial literacy of digital payments rose 10 percentage use automatic payments instead. the users, and a mismatch between points or more in countries such as That option is not always available in customer demand and product China, Indonesia, Kenya, Malaysia, poorer countries. design. Expanding accessibility of the Russian Federation, Thailand financial services by enabling mobile and Turkey. Globally, one billion adults with phone transactions coupled with an account still pay utility bills in expanding acceptance networks, cash. And many of these adults leveraging retail outlets, can help to have access to digital technology increase use.

mmc.com BRINK Compendium 32 PERCENTAGE OF ADULTS MAKING OR RECEIVING DIGITAL PAYMENTS

Source: Global Findex database

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% Brazil China India Indonesia Iran, Kenya Malaysia Russian South Thailand Turkey World Islamic Rep. Federation Africa 2014 2017

A BILLION ADULTS WHO HAVE AN ACCOUNT STILL PAY UTILITY BILLS IN CASH

ADULTS WITH AN ACCOUNT PAYING UTILITY BILLS IN THE PAST YEAR IN CASH ONLY, 2017

Source: Global Findex database

1 million 10 million

100 million

200 million

mmc.com BRINK Compendium 33 PAST SUCCESS STORIES Other examples from Africa illustrate the cost of traditional remittance OFFER LESSONS FOR how profitability can be achieved services. Another study by Xoom at scale. Payment models with the had a similar finding, showing that THE FUTURE ability to deliver low-value payments digital remittances cost, on average, at an affordable cost tend to drive a just 3.93 percent of the amount sent How do we learn from our experience high volume of transactions, allowing compared with World Bank data to do more? We can draw on the them to reach scale in many emerging demonstrating that the average lessons from the success stories we markets. Sub-Saharan Africa cost of sending a remittance is 7.45 have witnessed around the world. claims all 10 economies worldwide percent across all remittance types. Consider the following examples where mobile money ownership Digital remittances are well on the from China, Brazil and several is higher than financial institution way to achieving the UN Sustainable countries in Africa. account ownership: Burkina Faso, Development Goal of lowering Chad, Côte d’Ivoire, Gabon, Kenya, remittances costs to less than The ability to leverage technology Mali, Senegal, Tanzania, Uganda, 3 percent. is driving use in China and other and Zimbabwe. markets globally. The Global Findex database confirms China’s emergence Reflecting on high mobile money 1.1. A BRIGHT FUTURE as a fintech innovator, in large part penetration, 97 percent of account FOR DIGITALLY ENABLED due to highly scalable e-commerce owners in Kenya use digital payment solutions designed by the payments, which is as high as the FINANCIAL SERVICES private sector. Buoyed by the rise of share in high-income economies. secure, affordable, and convenient M-Pesa’s storied and strong growth is Such services can serve as an entry nonbank payment providers, which often attributed in part to demand for point into the world’s increasingly leverage the existing penetration domestic remittances in Kenya. This digital economy, creating greater of formal bank accounts, the share shows us that the M-Pesa product access to information, transparency, of adults in China making digital addressed a specific customer need— and triggering growth through more payments shot from 44 percent in providing utility in helping people efficient and targeted customer 2014 to 68 percent in 2017. Banks in efficiently manage a part of their engagement in developing countries. China have also increasingly digitized financial lives. Tailoring financial Building from the insights of the their processes to drive adoption products to specific customer new Global Findex, leaders in the and use. needs is key to achieving scale. public and private sectors must begin Moreover, partnerships can expand to work together in new ways and The example of Brazil demonstrates accessibility. For example, M-Pesa contexts to ensure we achieve our the importance of cost control. In recently launched a partnership with collective vision of universal financial Brazil, Internet payments are low PayPal to enable Kenyan M-Pesa’s access and improved financial health but growing as new digital financial 27.8 million customers to transact for all. services entrants mount a challenge with PayPal’s 227 million users to the small group of incumbents that This piece first appeared on the around the world by combining dominate retail banking. Since 2014, World Economic Forum Agenda. mobile money providers and Internet the share of account owners using payments solutions. the Internet to pay bills or buy things This article first appeared on BRINK has nearly doubled. The lower costs Remittances are also a prominent Asia on April 25, 2018. of digital financial services could example of how fintech can provide have special appeal in Brazil, where lower-cost options. A study by unbanked adults are twice as likely the Global System for Mobile as the global average to say financial Communications Association found services are too expensive. that remittances sent between mobile networks in Africa were half

mmc.com BRINK Compendium 34 FINTECH—THE FUTURE OF FINANCIAL SERVICES

HOW FINTECH IS TRANSFORMING ACCESS TO FINANCE

Arup Kumar Chatterjee Principal Financial Sector Specialist, Sustainable Development and Climate Change Department at Asian Development Bank

The sales and profit margins of many ENTER FINTECH offered to the lender decides the loan micro-, small-, and medium-sized amount and tenor. The reticence enterprises (MSME) are highly Thanks to new technology, the of conventional banks to lend to vulnerable to seasonality, input mindset of financial institutions is MSMEs hinges on the fact that and labor costs, late payments, changing in ways that are enabling they do not possess fixed assets natural calamities, unexpected MSMEs to access loans. There is a as collateral. expenses, and myriad other factors growing trend of cash flow-based that result in lumpy cash flows. financing backed by current and Emerging financial technology Without collateral or sufficient projected future cash flows. players around the world are credit information, banks are often reshaping how MSMEs can access reluctant to lend them money, so These loans are entirely different working capital and cash flow these MSMEs face the additional risk from traditional asset-backed loans, finance. Having acknowledged of nonperforming assets. where the valuation of collaterals that MSMEs lack the capacity to

mmc.com BRINK Compendium 35 produce financial reports to enable A percentage of the digital targeted, niche innovation that financial institutions to assess their transactions that merchants receive enables fintech to compete with more repayment capacity and default are set aside to repay their advances. prominent—but slower—traditional risk, they are deploying nimble This arrangement keeps repayments banks. They are well-suited to and agile technologies to get an fluid, bite-sized, and in line with businesses that maintain very high accurate understanding of their cash cash flow. margins, but lack enough hard assets conversion cycle. to offer as collateral. In India, Capital Float, a nonbank The cash conversion cycle is the time finance company, provides instant These loans typically cater to MSMEs MSMEs need to convert investments decisions on collateral-free loans in retailing and marketing, where in inventory and resource inputs for small entrepreneurs. A risk managing and generating better cash into cash through sales of goods and profile assessment is carried out flow is crucial given their higher cost services that can help establish the in real time by analyzing MSMEs’ of debt and lower return on capital cash generation terms of the business cash flows using data from Paytm, compared to large corporations. and, thereby, help to determine their an e-commerce payment system repayment capacity and enhance and digital wallet company, mobile Rural lending is also shifting toward price transparency. After all, cash is financial services firm Payworld, cash flow-based lending, which would the only factor that can repay a loan; and smartphones. lower costs and attract big banks collateral is only the second way out and financial institutions. Fintech if money cannot be generated. Capital Float customers carry out solution providers, such as India’s electronic know-your-customer CropIn Technology, are bringing A good example is the Kenyan authentication, receive the loan offer, data, artificial intelligence, and merchant cash advance service Grow, confirm acceptance, and sign the loan machine learning to banks to help which helps MSMEs access capital by agreement on a mobile app. The loan them better assess credit risk. factoring their cash flow cycles while amount is credited to their account simultaneously encouraging them on the same day, with nil paperwork. to move away from cash and toward electronic payments accounts via the Cash flow loans help MSMEs seize Kopo Kopo transaction platform. opportunities when they arise and are an excellent example of the

mmc.com BRINK Compendium 36 HELPING MSMES AND Insurance companies looking to Access to real-time information MITIGATING RISK offer crop protection to smallholder helps to manage risk, as it allows farmers can also leverage such the lender to identify the defaulting Farmer data on KYC, geo-coordinates technology for underwriting and MSME quickly and ring-fence the of farms, history of crops they claims administration. In the dairy cash flows or suspend payments have sown, crop size, yield and sector, insurance firms are now able before overdue fees accrue. This potential earnings factor into the to finance cash flows by determining leaves no room for manipulation partner bank’s digital platform. This the amount of compensation payable of funds—a root problem of asset- information is collated with remote- to a farmer based on both quantity backed lending strategies that suffer sensing data to predict a farmer’s and quality of milk produced. diversion of cash flows through productivity, estimates of the yield, multiple bank accounts. More frequent repayments align with and selling price. the nature of cash flow lending and With a new generation of digital- The last step is plotting risk scores the risk policies of fintech lenders. It savvy MSME owners emerging in for farmers using a machine-learning involves real-time cash flow-based developing Asia, traditional players algorithm. By assessing the cost of underwriting and monitoring of may soon find themselves playing input/output, positive cash flow and highly leveraged balance sheets, second fiddle to fintech. The only profitability, instant credit disbursal using current account and merchant way to survive is to innovate in the can be made in rural areas. settlement data on large volumes of MSME finance space and accelerate small payments. The loan size and investment in technology to future- After the loan has been issued, pricing are based on the level and proof their platforms and retain and satellite imagery helps the bank stability of cash flows. grow their nontraditional customers. conduct remote monitoring and evaluation by providing periodic Since MSMEs typically have a This piece first appeared on the Asian data on whether the farmer has used single bank account, using highly Development Blog. the disbursed loan for the intended automated pricing and decision purpose. When the crop approaches engines provides a clear electronic This article first appeared on BRINK the harvest stage, the bank is alerted footprint for tracing the history of Asia on August 9, 2018. to get in touch with the farmer to the cash flows. By analyzing the net initiate the repayment process. cash flows, an accurate and real-time risk assessment of the short-term financial health of MSMEs can be made on their repayment capacity and liquidity position.

mmc.com BRINK Compendium 37 FINTECH IN ASEAN — COLLABORATION IS KEY

BRINK Asia Editorial Staff

With a population of over 600 SINGAPORE LEADS penetration rate of 85 percent, million people, the ASEAN region is THE PACK twice that of its closest contender, considered an expansion opportunity Thailand. Furthermore, 98 percent for fintech companies, given the The report highlights Singapore of its population aged 15 and above large potential customer base that as providing, “a mature market for holds a bank account. This high rate fintechs can tap into. A recent report fintechs while other countries offer of financial inclusion also presents by the Economist Intelligence Unit major potential in terms of scale.” huge opportunity. With an average states that “Given population and It also adds, “Singapore has the income higher than its ASEAN GDP growth rates, combined with most buoyant fintech ecosystem counterparts, four in 10 fintech an increase in online access and in the region.” The city-state is companies choose Singapore as their smartphone penetration, ASEAN the undisputed leader across most operating base—more than any other countries offer a fertile ground for areas of measurement, followed by regional country. In fact, Singapore fintech investment.” Indonesia, Malaysia and Thailand. is home to 39 percent of all fintech Singapore boasts a smartphone organizations among the seven ASEAN markets.

mmc.com BRINK Compendium 38 ASEAN CITIZENS WHO HAVE A SMARTPHONE % OF POPULATION

Source: BBVA Research, Newzoo

Sinapore 85%

Thailand 38%

Vietnam 36%

Malaysia 35%

Myanmar 28%

Indonesia 24%

Philippines 15%

DISTRIBUTION OF FINTECHS IN THE ASEAN REGION % OF COMPANIES

Source: UOB, Fintech Singapore

1% 6% 9%

10% 39%

15%

20%

Singapore Indonesia Malaysia Thailand Philippines Vietnam Myanmar

TOP MOTIVATIONS FOR DOING BUSINESS IN ASEAN % RESPONDENTS

Source: The Economist Inteligence Unit

Increase customer base 76%

Expand the same product opportunity in new markets 56%

New product opportunities in new markets 52%

Create a base to service the region 44%

Access to capital 32%

Access to distribution partners 16%

Access to developer talent 8%

Regulatory arbitrage 8%

Similar regulatory environment 4%

mmc.com BRINK Compendium 39 OPPORTUNITIES taken to launch a new product or RECOMMENDATIONS IN ASEAN service, while another 30 percent highlighted the advantage of easier The ASEAN region presents diverse An estimated 76 percent of fintech access to new markets. An estimated opportunities accompanied by executives have cited the potential to 48 percent of respondents said myriad challenges, considering access and service a large customer their organizations had six or more the varied socioeconomic and base as their top motivation for partnerships, indicating the high demographic composition of its engaging in business in ASEAN. The likelihood of collaboration. Among members—spanning from the small ensuing priorities include expanding financial services executives, 81 but advanced city-state of Singapore the same product opportunity percent agree their organizations to the Indonesian consumer market in new markets (56 percent) and must make an effort toward of more than 260 million people. In new product opportunities in new leveraging digital partnerships, this regard, fintech companies could markets (52 percent). “Our strategy a call to action for any fintech consider several recommendations. is to find global banks that share the company looking to expand into the ASEAN region. All ASEAN economies are growing same vision as us and partner with steadily, and fintech companies must them to provide next-generation Simon Cant, co-founder and be swift in tapping into available unified commerce solutions to their managing partner at Australia-based opportunities by identifying customers,” says Simon Lee, CEO of Reinventure stated, “Fintechs need which country is most conducive Assembly Payments, an Australia- to ensure they have a local partner.” for its offerings. In attempting to based fintech payments provider that Reiterating the necessity for local do so, they must also develop a is set to expand to Singapore by the partnerships, he added, “There are detailed understanding of its local end of 2018. Mr. Lee further added, cultural differences, and numerous regulations. Fintech companies must “We believe in the next five years geographical and other challenges, understand that each ASEAN market payments will be free,” highlighting which means that local knowledge is unique, and an association with a the fact that traditional financial and local language is critical.” regtech company could enable it to institutions typically generate profits conduct business smoothly. Likewise, from additional services, such as local partnerships can prove to be a credit cards and foreign exchange CHALLENGES boon since local actors understand and are, therefore, eager to partner the local environment and can ease with a fintech company. Forty percent of respondents the transition of doing business cited licensing requirements and in another country. Similarly, FORGING PARTNERSHIPS regulations imposed by regional collaborating with local banks and governments as significant obstacles other traditional financial institutes IS KEY to introducing new products and can also help gain customer access services in the region. Julian and knowledge. Firmness of purpose Partnerships in the fintech space are Fenwick, managing director at is key and the report aptly highlights, highly valued. A strategic partnership Governance Risk & Compliance “Many markets require time, enables companies to gain local Solutions said “Many people assume patience and investment in order to knowledge, understand how to do it can be done relatively easily, but succeed, and local business culture business in a local setup and get the culture is different and you can reward those who stay the course familiar with local regulations. have to make sure you have local without leaving too soon.” The main benefits accruing from a staff.” Established in 2012 and partnership were greater industry currently serving 250 clients globally, knowledge (cited by 52 percent), Governance Risk & Compliance This article first appeared on BRINK followed by referrals to other Solutions uses technology solutions Asia on December 14, 2018. partners (40 percent) and access to to meet local compliance rules. He customers (40 percent). further added “Old compliance techniques don’t work for new Separately, 43 percent of senior business models, such as fintech.” executives stated that digital Apart from regulatory challenges, partnerships have enabled their cultural barriers (36 percent) and a organizations to deliver more lack of people with the requisite skills innovative products and services. A (28 percent) are also major hurdles. further 30 percent cited lesser time

mmc.com BRINK Compendium 40 VALUE OF ASEAN PARTNERSHIPS % RESPONDENTS

Source: The Economist Inteligence Unit

Industry knowledge 52%

Referrals to potential partners 40%

Referrals to potential customers 40%

Project financing or funding 36%

Advice on business model 32%

Advice on technology 28%

Creating forums to meet technology to leaders 28% or entrepreneurs

Facilitating access to infrastructure 24%

Referrals to other potentialsources of finance 24% or funding

Advice on/referrals topotential sources 12% of talent

Mentoring 12%

Referras to potential suppliers 4% 8%

No value has been received or is expected

BIGGEST BARRIERS TO INTRODUCING NEW PRODUCTS OR SERVICES IN ASEAN % RESPONDENTS

Source: The Economist Inteligence Unit

Government policy 40%

Cultural barriers 36%

Lack of people with the requisite skills 28%

Lack of relationships/contacts in the region 24%

Lack of funding 24%

Lack of access to distrubution channels 20%

Risk-averse culture 16%

Lack of technolgoy capability 16%

No barriers have been faced, or are expected 8%

Lack of co-ordination amongst departments 4%

Lack of innovative ideas 4%

Switching costs (one-time cost that 0% buyers incur when switchng suppliers)

Poor understanding of consumer needs 0%

Internal information silos 0%

mmc.com BRINK Compendium 41 DRIVING GROWTH IN ASIA’S FINTECH SECTOR

Tancho Fingarov Principal at Oliver Wyman

Peter Reynolds Partner and Risk Practice at Oliver Wyman

The emergence of fintech brings to governments and regulators, However, this rapid growth in market new solutions to increase recognizing the benefits emanating fintech has the potential to expose efficiency and financial inclusiveness from fintech, have made fintech systemic risks for the banking sector in the areas of payments, lending, development an explicit policy and the broader economy. So while broking, trading, capital-raising, objective in recent years. governments in the region need to and personal financial management, continue nurturing their fintech among others. Driven by a desire to increase sectors, they must also manage the financial inclusion for significantly associated risks. The role of managing the “unbanked” or “underbanked” development of fintech in any populations, governments have market typically falls to the successfully accelerated the government and financial regulators, growth of fintech financing in who have played either a supporting the region, resulting in a surge in or inhibiting role for new entrants. fintech investment. In Asia, we have seen that many

mmc.com BRINK Compendium 42 GLOBAL AND ASIA PACIFIC FINTECH INVESTMENTS

2010 2016 US$, MN Source: APRC analysis on CB Insights data

25

20

15

10

5

0 2010 2011 2012 2013 2014 2015 2016

Rest of the world Asia-Pacific

SUPPORTING GROWTH: THE ART OF POST-SANDBOX Elsewhere, in 2018, the Australian THE ROLE REGULATORY APPROVAL. government revised and expanded The process of final regulatory its investor tax incentive scheme to OF REGULATORS approval before the “go-live” of support fintech startups; Singapore AND GOVERNMENTS any fintech company is another and Hong Kong have also maintained area of increasing importance. tax incentives for fintech investors. There are three main actions that This final stage is currently a site of regulators and governments in Asia significant uncertainty among fintech A MEASURED APPROACH. Where must take to ensure the smooth professionals, who undertake a highly necessary, governments often development of a thriving fintech iterative process going through channel funds into the fintech sector landscape, according to an upcoming multiple rounds of review with the through a mix of development grants report.* They are to (a) provide regulator teams. Dedicated teams of and direct investment. While direct innovation support; (b) ensure a financial regulators need to manage government investment is important, conducive investment environment; “final-stage” fintech approvals and it needs to be done in a way that does and (c) enhance digital and licensing and work closely with teams not compromise the free market and financial infrastructure. who run the regulatory sandboxes to does not prematurely select winners ensure more regulatory certainty. and losers. The best approach is for governments to identify the gaps in SUPPORT INNOVATION funding but take a passive investor INVEST approach to avoid government DESIGN REGULATIONS TO crowding-out effects. ALLOW EXPERIMENTATION. New Governments and regulators must entrants must be allowed to test their facilitate the right investment business ideas with real customers environment for fintech companies INFRASTRUCTURE and better understand relevant to pave the way for enhanced access regulatory boundaries. Meanwhile, to capital. TELECOMMUNICATIONS adequate oversight from regulators AND INTERNET COVERAGE. and policymakers during this process IMPROVING THE INVESTMENT In larger developing markets, must also allow for more learning ECOSYSTEM. In China, for example, many fintech applications focus regarding new fintech entities before the government has maintained a on extending financial services to actual regulations are mandated for laissez-faire approach to private unserved and underserved sectors their products and services. fintech investors, choosing not of the population. In this regard, to interfere by providing benefits mobile networks become the key or subsidies such as tax breaks. financial services distribution

mmc.com BRINK Compendium 43 channel. Countries such as India PROTECTING STABILITY: after years of preparation and and Brazil see high levels of fintech REGULATORY REFORMS debate. It is a progressive first step adoption in payments, credit and toward protecting consumers and savings services, driven by a strong FOR RISK MANAGEMENT stakeholders globally who have been foundation of broad mobile coverage. monitoring this new regulation and A fintech regulatory program adopting it across other jurisdictions. CENTRALIZED PAYMENTS needs clear goals of ensuring In addition, regulators need to SYSTEM. Increasingly, governments financial stability, coordination increase international collaboration are recognizing the importance among cross-sector regulators, on cybersecurity and must aim to of an e-payment infrastructure and strong customer protection standardize key cybersecurity rules. in developing a conducive fintech and empowerment. environment and broadening the Separately, innovative financial digital economy. However, setting up MAINTAINING FINANCIAL products and services often create a national payment infrastructure SYSTEM STABILITY. While there opportunities of misconduct, is not without practical challenges. are currently no compelling signs as technology can magnify the Launched in April 2016, India’s of fintech financial instability risks potential of unlawful actions that Unified Payments Interface (UPI) materializing, certain emerging were once subjected to intense was seen by many as a success— (macro-prudential) risks can regulatory detection. Perhaps an many major international and escalate. For example, fintech may even more important issue is that of local firms use the system as their gain prominence through indirect machine misconduct, which arises payment infrastructure (such network effects between highly when over-reliance on automated as Jet Airways and WhatsApp), connected entities in the form of decision-making processes can result resulting in the steady growth of market infrastructure, to the extent in systematic errors and/or conceal UPI transactions. However, more that the importance and prevalence biases, such as discrimination than 90 percent of UPI transactions of network complexity and associated based on race, religion, or remain peer-to-peer, and the contagion effects could be significant. geographic locations. system has not been able to scale up Regular review of the regulatory commercial transactions, reducing framework is necessary to monitor its economic value. growth and product evolution. LOOKING AHEAD

DATA-SHARING CAPABILITIES. REGULATING CROSS-SECTOR Increasing Internet and smartphone Fintech products and services INSTITUTIONS. Fintech growth penetration means that fintech are limited without a supporting has necessitated a new supervisory can become a vehicle for financial framework to ensure data is system that can address financial inclusion across the Asia-Pacific; and accessible to fintech companies. The stability risks. The same traditional fintechs can aid in the formalization wealth of financial and behavioral regulatory framework cannot of money and dramatically shrink data owned by incumbents is both be applied universally across gray economies. Facilitating a major competitive advantage and banking, nonbanking, or fintech innovation and efficiencies in the a huge barrier to entry. As such, companies, as standalone and sector will spur the emergence of governmental intervention and any uncoordinated regulations could lead adjacent digital sectors as well, such regulatory imperative to share this to fragmentation. This can result in as advanced analytics and AI. data across platforms catalyzes the businesses easily and quickly moving development of fintech companies. jurisdictions to take advantage Governments and regulators in the There are, however, technical of and arbitrage the traditional region have a pivotal role to play in challenges and liability issues regulatory framework. One approach developing fintech services: They related to data sharing. Conforming to overcoming this is activity-based must become both incubators and to universal data standards will be regulation, where regulators move protectors of the sector. costly, and scaling this framework away from regulating entities and will also run into challenges. Further, regulate the actual financial activities This article first appeared on BRINK regulators and governments need those entities are performing. Asia on November 15, 2018. to understand the importance of EMPOWERING AND PROTECTING metadata to increase traceability CONSUMERS. Regulators have and address any liability issues taken aggressive steps to protect data that may arise when data is shared privacy. For example, the General between traditional banks and Data Protection Regulation was fintech entrants. approved by the EU Parliament

mmc.com BRINK Compendium 44 THE BATTLE FOR E-WALLET SUPREMACY IN SOUTHEAST ASIA

Duncan Woods Partner and Head of Retail and Business Banking, APR at Oliver Wyman

Nihal George Principal, Digital, Technology and Analytics, APR at Oliver Wyman

Anosh Pardiwalla Associate, Financial Services at Oliver Wyman

Across Southeast Asia, there is a Riding the wave of rapidly increasing While payment volume through fierce battle raging for e-wallet mobile Internet adoption by a e-wallets is still a small proportion dominance. E-wallets, or digital or 600 million person consumer of noncash payments today, it is mobile wallets, are types of payment base, telephone companies, banks, forecasted to scale rapidly. Mobile instruments that can be used to merchants, device manufacturers, payments in the ASEAN region are transact at physical locations and transportation providers, remittance expected to reach over $30 billion by online. These wallets can be linked players, and consumer tech firms 2021, of which e-wallets will capture to debit cards and credit cards or to a have recently set up e-wallets a significant part. bank account and can also be loaded in Southeast Asia, aggressively with a sum of money, called “stored competing for both consumer and value.” In some instances, e-wallets merchant adoption. can also store cryptocurrencies.

mmc.com BRINK Compendium 45 VALUE OF NON CASH TRANSACTIONS

AS PERCENT OF TOTAL CONSUMER PAYMENTS Source: International, eMarketer, Oxford Economics, Reserve Bank of India

56 50 50 45

30 27 24 24 18 12

USA China Indonesia India Philippines

2016 2012

Sub-segment Percentage of total consumer payments (by value, 2016) No-cash 50 30 25 24 E-wallets 13 0.1 1 <0.1

Although there has been a flurry As e-wallet adoption increases among particularly e-wallets, expected to of activity in the e-wallet domain, the banked population, it also raises surge to 6 percent of payments by there are several challenges that important strategic questions for the 2022 from a tiny fraction today. must be considered for businesses to banks themselves, which have much This makes a pan-Southeast be successful. to lose in both payment flows and Asian e-wallet network difficult as consumer spend data. Payment flows integration in markets at different may shift away from banks’ credit stages of adoption is a hurdle. CHALLENGES FACED and debit cards onto stored value wallets, and even if cards are still the Investors have actively supported funding source for the wallets, then DIFFERENT these new businesses, but not all banks still lose visibility of payment WINNING E-WALLET e-wallet companies will survive. behavior made from the e-wallet. Investors and e-wallet operators BUSINESS MODELS need robust business models that can Markets in the region are at very sustain competitive differentiation different stages of evolution when As e-wallets proliferate across the and rapidly scale to stand a chance of it comes to e-wallets adoption, region, it is imperative to understand success. In markets that are well past though different e-wallet business which players and business models the tipping point of mass adoption models are emerging. For instance, will win the battle for supremacy. of e-wallets, such as in Kenya and in China, e-wallet adoption grew ARCHETYPE A China, the evidence is clear—this is beyond the tipping point early in a winner-takes-all market, in which this decade, driven by Alibaba and The “Financial Inclusion” e-wallet, the top two players capture over Tencent, setting the precedent for archetype A, targets the unbanked or 80 percent of the market. For any future evolution in Southeast Asia. underbanked, providing an e-wallet operator of an e-wallet, this should Currently, the Philippines is on the that is a digital alternative to holding ring alarm bells. cusp of a digital payment revolution, physical cash. It is likely to be one of with noncash payment methods, this demographic’s first experiences

mmc.com BRINK Compendium 46 with formal financial services. For the ARCHETYPE D Investors and operators of e-wallets unbanked, it is the closest substitute will need to manage the high costs to a bank account, with primary uses Becoming the “Lifestyle Payment of developing large networks to being cash in and cash out, domestic Partner,” archetype D, is the maintain their competitive edge, and cross-border remittances, and target end-state for many e-wallet creating ubiquitous payments use limited payments—for example, providers, but few have achieved it, cases, attracting users and motivating prepaid mobile top ups. and even fewer bank-led e-wallets regular use. The path to monetization count among those who have. While will be long and hard, but the rewards ARCHETYPE B banks might aspire to achieve this from becoming the indispensable dominance, it is the large consumer payment instrument of choice for Under “Digitally Enabling the tech platforms in frequent-use target segments will be huge. Underbanked,” archetype B, leading ecosystems, for instance, messaging players provide a wider range of platforms and e-commerce players, Meanwhile, there is no room for quasi-banking solutions to the that are emerging as leaders. complacency for banks and other unbanked or underbanked segment. These players are merging e-wallet existing payments players. With The e-wallet becomes a critical capabilities into their core offerings, e-wallets emerging as the potential instrument to enable a broader set encouraging captive users to adopt instrument of choice for small of payment use cases, and winners their e-wallet as an attractive ticket payments, it is imperative may need to provide value-added payment alternative on its platform. that incumbents respond to defend solutions that go beyond payments, The advantage of these ecosystem their turf in retail payments. Banks such as providing simple advice on players is that monetization of need to make important strategic spending and budgeting and enabling the e-wallet does not have to choices about where and how to credit solutions. come directly from payments, but compete, as they determine whether instead from driving up the average to participate directly with their own ARCHETYPE C ecosystem revenue per user. e-wallets or ensure how their own With “Payment Convenience,” payment solutions are seamlessly integrated into the wallet platforms archetype C, e-wallet operators target TIME FOR ACTION the banked segments, positioning of future winners. their e-wallets as a convenient The tipping point for mass adoption payment instrument to drive loyalty. This article first appeared on BRINK of e-wallets across Southeast Asia Asia on July 5, 2018. Various models exist, but typically is hard to predict, though trends the e-wallet either stores credit and in consumer behavior, technology debit card data to enable those cards advancement, and the evolution of to be used in mobile payments, such ecosystem-based financial services as a device wallet like Apple Pay, all point to rapid acceleration in the or draws funds into a stored value next 3-5 years. Market infrastructure facility, which is used to make mobile developments, such as real-time payments, for example, DBS’ PayLah. payments infrastructure, innovation Revenue is driven by the interchange in low-cost merchant acquiring, fees from the mobile payments made regulations on e-wallet onboarding at merchants from the e-wallet and requirements, and transaction from finding ways to monetize the value thresholds, will impact rich transaction data gathered each adoption and potentially change time the e-wallets are used. the fundamental shape of the retail payments landscape.

mmc.com BRINK Compendium 47 COMPARISON OF E WALLET ARCHETYPES

Source: Oliver Wyman

FINANCIAL DIGITALLY ENABLE PAYMENT LIFESTYLE INCLUSION PLAY UNDERBANKED CONVENIENCE PAYMENT PARTNER

KEY SUCCESS • Widespread agent • Simplified and low-cost • Wide merchant • Conversion of FACTORS network and user base cash-in to incentivize acceptance network customers in the for network eect loading core ecosystem • Superior customer to e-wallet users • Trust and brand • Multiple use cases to service and experience recognition keep customers with added functionality • Focus on “beyond engaged and e.g. spend tracking payments” wallets funded & analysis opportunities

• Merchant/agent • Monetize e-wallet data network (often to provide merchants double adjacent services as agents) to drive adoption

REVENUE • Fees and commissions • Merchant interchange • Merchant interchange • Higher engagement/ DRIVERS from cash ins/cash outs, and float income and float income loyalty to core remittances and ecosystem solution airtime top-ups • Limited micro-credit • Achieving “topp-of- referrals/credit scores wallet” status for credit/ • Merchant interchange debit cards stored and feesbeyond in the e-Wallet payment services (e.g. credit)

COST • Agent fees and cash • Merchant acquisition • Merchant acquision • Merchant DRIVERS management costs costs, agent fees and costs (e.g. for QR acquisition costs cash management costs code enablement) • Marketing spend to suppert acquisition /engagement

• Funding of loyalty programs

mmc.com BRINK Compendium 48 KEEPING PACE WITH ASIA’S EVOLVING ROBO-ADVISORY REGULATORY LANDSCAPE

David Lee Managing Director at Prive Financial

The rise of the millennial investor client’s portfolio, it is easier for a wide ‘bionic’ approach, where human is changing the dynamics of the range of customers to understand wealth advisers are supported by financial advisory industry. High the low complexity product offering. robo-advisers in advising HNWIs. accessibility to information has Robo-advisers also enable retail With the ease of personalization shaped the attitude and expectation customers to enjoy to a certain extent achievable with the robo-advisor of the millennial investor toward the private wealth management solution, the bionic advisory engine wealth management, and they service that was previously too is able to provide a unique experience are very different compared to expensive for them. to investors and allow relationship traditional investors. managers to focus more on the interaction with their clients. Due to these factors, many such INCREASING USE investors are turning to robo- OF ROBO-ADVISERS The growing emphasis on digital advisers: automated portfolio transformation in terms of wealth construction software that is fully In the High Net Worth Individual management across the entire value distributed online. Generally, a (HNWI) customer segment, chain of products and services by robo-adviser will analyze investment relationship and human connection financial institutions also leads products and propose investment are essential in gaining the to the use of robo-advisers in the vehicles on financial investment. As customer’s trust. That is why there financial services sector. From a most robo-advisers rely on exchange- is an increasing number of financial company perspective, the cost-saving traded funds (ETFs) to construct a institutions starting to offer a advantage of robo-advisers is that it

mmc.com BRINK Compendium 49 can reduce personnel and asset costs robo-advisor has to detect possible Although technology may change while serving a larger number of algorithmic failures and halt trading how an investment advisor operates, customers. By utilizing this scalable when it is necessary. As most robo- financial regulators will still expect technological solution, businesses advisers use an extremely scattered full compliance with all regulatory will be able to manage relationships variety of investment algorithms requirements. These changes in with their end clients more and methodologies, the robo-adviser regulation necessitate that clients effectively which in turn can grow solution providers are expected to form a partnership with solution their asset under management. This have a ‘suitably-qualified person’ providers that not only excel in creates a win-win situation for both to test and review the algorithm technological prowess, but also have financial institutions and investors. used to generate investment advice extensive experience in the financial and inform clients of how and management industry. With this rapid development when the algorithm will rebalance and changing trends, financial the portfolio. Coupled with such changing organizations are still adapting regulations to protect end to regulations, posing interesting In the case of Singapore, the consumers, there has also been an challenges and opportunities for regulator is implementing similar increasing push for transparency financial institutions and private changes to regulations, with around the financial advisory investors alike. Changing regulations, licenses required for robo-advisory, business. Accordingly, financial such as the implementation of compulsory independent audit institutions cannot continue the MiFID II in Europe and the 401(k) of digital advisory after first-year traditional “product pushing” retirement plans in the U.S., operations and involvement of business model and must transition transparency in disclosure and seniors who have relevant experience to a more customer-centric model decision-making, and product- in fund management. After all, it is whereby they look to personalize consumer suitability from financial not just all about the user experience their service offerings. institutions that can only be scalably or interface of the robo-advisers but achieved through a more digitized the depth of the domain expertise At the heart of this sea change is form of engagement are driving involved in the technology. the ability of institutions to truly the change. understand their end customers. In addition, the tremendous cost of STAYING ABREAST transitioning to digitized services REGULATORY OF CHANGING also requires modular “build DEVELOPMENTS IN ASIA versus buy” solutions, where a REGULATIONS close partnership with the solution Hong Kong and Singapore are provider to provide bespoke solutions With regulators introducing will add value to the end customers. two of the most developed wealth stringent suitability rules on the management centers in Asia, and To ensure successful integration sale of investment products by of robo-advisory solutions into the with the emergence of new robo- online distribution and advisory advisory platforms, both have existing product offering, financial platforms, the practitioner is institutions are now working tightened regulations to ensure required to continually learn and the suitability of advisory and with external digital solutions become technology fluent to keep providers that have extensive recommendations. The Hong Kong pace. The recent U.S. Securities and government requires all online knowledge in these areas to provide Exchange Commission enforcement a comprehensive suite of products advisory platforms to be registered against robo-advisers that were or licensed if the business involves which can be integrated. Simply making false statements about coined a “bank in a box” solution, regulated activity; online platforms their investment products should have to provide details on how this would seem a natural response serve as a reminder that registered to the necessity of implementing they determine the risk rating for investment advisers are all subject investment products, they have an integrated platform to ensure a to the regulatory requirement and digitally-transformative, holistic to inform clients of the scope of must adopt adequate policies and the services and the limitations;a service for wealth management procedures to ensure compliance. end customers.

mmc.com BRINK Compendium 50 About Marsh and McLennan Companies

MARSH & McLENNAN COMPANIES (NYSE: MMC) is a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. Marsh is a leader in insurance broking and risk management; Guy Carpenter is a leader in providing risk and reinsurance intermediary services; Mercer is a leader in talent, health, retirement and investment consulting; and Oliver Wyman is a leader in management consulting. With annual revenue of more than $13 billion and approximately 60,000 colleagues worldwide, Marsh & McLennan Companies provides analysis, advice and transactional capabilities to clients in more than 130 countries. The Company is committed to being a responsible corporate citizen and making a positive impact in the communities in which it operates. Visit www.mmc.com for more information and follow us on LinkedIn and Twitter@ MMC_Global.

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mmc.com BRINK Compendium 51 Economy • Environment • Geopolitics • Society • Technology

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m o c om m c CONTACT INFORMATION:

VADIM KOSIN WOLFRAM HEDRICH Partner, Head of DTA-APR Executive Director, Marsh & McLennan Insights, Digital Technology, Operations & Analytics (DTA) - APR Partner, Financial Services, Singapore Oliver Wyman Oliver Wyman [email protected] [email protected]

AMIT DESHPANDE SHRIKANT PATIL Principal, Principal, Financial Services, India Digital Technology, Operations & Analytics (DTA) - APR Oliver Wyman Oliver Wyman [email protected] [email protected]

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