Digital Disruption – Page 52 – Digital Finance Analytics (DFA) Blog

Banks will displace fintech lenders, predicts PwC

The fintech lending sector will eventually be cannibalised by the activities of the major banks, argues PwC as reported in Fintech Business.

Speaking on a panel at the Australian Securitisation Forum in Sydney this week, PwC Asia head of digital financial services, Thomas Achhorner, said incumbents will most likely muscle in on any innovation from disruptors and “mimic” their offerings more successfully.

“It is fair to say that an online digital mortgage is something that every bank in this country is currently working on,” Mr Achhorner said.

“Not only the mortgage itself, but a broader, ecosystem-based experience starting from the real estate purchase all the way to insurance and everything that happens downstream from the mortgage.”

Asked about the impact of fintech disruptors, the PwC partner said banks typically react to new fintech players in three ways.

“One is they might collaborate with them and establish partnerships and build them into their own platforms,” Mr Achhorner said.

“The second one is the incumbents create the capabilities themselves – they mimic what fintechs do. Or, in the third case, sometimes fintechs are ignored,” he said.

“In the long term many fintechs will disappear because the incumbents have better cards in this game. They have the means, the funding, the brand, to some extent the trust although that is eroding a little bit, and they have the customer base.

“If there is a new offering from a peer-to-peer lender, for example, the incumbent who is able to mimic what the fintech does very quickly will probably win.”

Mr Achhorner said this is already happening in other sectors, such as financial advice, where banks are dominating robo-advice.

“In the long term most fintechs disappear, with a few exceptions. About 98 per cent will disappear,” he said.

However, as banks continue to work on a digital mortgage product, one of the biggest hurdles they face is codifying credit rules.

“The first challenge is to codify those rules in a systematic fashion,” Mr Achhorner said. “Before you can even think about putting the decisioning into a machine. That will be critical. It will be critical for every financial institution to put its own rules, and its own credit rules, into this machine.”

If successful, this has the potential to increase the consistency of decision making and reduce operational risk, Mr Achhorner said. However, he warned that if everyone has the same rules or similar rules we might see fluctuations in the market very quickly.

“Which is what happened when algorithmic trading was introduced into financial markets,” he said. “Everyone did the same thing. This could happen in the credit market as well where everyone tries to lend to the same ‘good’ risks and nobody lends to the poorer risks anymore.

“So we could see a huge imbalance. A reasonable or more prudent model is something more hybrid.”

SME Digital Disruption Continues Apace

The latest edition of the Digital Finance Disruption Index, a joint initiative by Digital Finance Analytics and Moula – a fast and friendly way to give small businesses access to capital – is released today. The Disruption Index tracks change in the small business lending sector, and more generally, across financial services.

Financial Services are undergoing disruptive change, thanks to customers moving to digital channels, the emergence of new business models, and changing competitive landscapes. Using combined data from the DFA SME Survey, and from Moula on loans processed, we track the momentum of this disruption in Australia.

This quarter the index slipped a little to 38.06, from 39.26 in the previous quarter, showing the first small decline in the index in the 6 quarters since the index began, but should be read in the context of a significant increase in the previous quarter.

The reasons are mixed, however, we still see the trend moving strongly upward over the long term as all the catalysts of disruption are building : use of electronic devices, use of electronic data and a continuing trend away from bank brand loyalty to those providers who deliver the best products and service.

Looking at some of the highlights:

Awareness of non-bank funding options continues to grow among SMEs, thanks partly to greater coverage in the media of “Fintech”. However, there is more to be done to link Fintech more directly with unsecured lending in the minds of SME’s.
Business confidence rose in borrowing SME’s especially in eastern states of NSW, VIC and ACT. Less strong in SA, TAS and QLD. However, this was offset by a strong fall in WA thanks to the end of the mining boom, and second order impacts across other industry sectors there.
The proportion of SMEs with smart devices has risen – now well over half of all SMEs at 54% are using their smart device as their primary business management tool. Most smart devices are multi-function phones, rather than tablets. Younger business owners have an ever higher penetration rate.
Coupled with the increasing adoption of smart devices in SMEs, we are also seeing increasing use of cloud accounting data, not only in running a SME but also to obtain a loan (through data permissioning). In the latest results, over half of all businesses permissioned Moula into cloud accounting data.
The availability of data, and the non-reliance of traditional business plans, has meant that Moula is capable of processing SME loans within a 24 hour period – evidenced by an average approval time of 20 hrs in the most recent quarter.

The Disruption Index is an important tool which will highlight the changing face of financial services in Australia. There is no doubt that new business models are emerging in the context of the digital transformation of the sector, and bank customers are way ahead of where many incumbents are playing. The SME sector in particular is underserviced, and it offers significant opportunity for differentiation and innovation.

In the last three months we have seen a significant shift in attitudes among SMEs as they become more familiar with alternative credit options and migrate to digital channels. The attraction of online application, swift assessment and credit availability for suitable businesses highlights the disruption which is underway. There is demand for new services, and supply from new and emerging players to the SME sector.

Westpac online banking back after four days

From IT Wire.

Westpac’s online banking service has been on the blink for the last three days, with users unable to process payments and update balances.

On a Web page meant to keep customers abreast of the technical difficulties, the bank wrote: “We’re continuing to address intermittent issues with transactions, balances and Get Cash in Mobile and Online banking.

“We’re sorry for the inconvenience caused and we are working to fix this issue.”

People can log in to online accounts at times but the balances shown are way out of whack.

Update, Sunday 6pm: A Westpac spokesman told iTWire: “Our systems are currently running normally. Transactions and transfers are processing, and account balances are updating in Online and Mobile Banking.

“We’re so very sorry this has inconvenienced many of our customers, and we’d like to thank them for their patience.”

The bank said any fees incurred as a result of these issues would be refunded. It added that the Westpac Live issues (intermittent) started on Wednesday evening and stabilised at lunchtime on Saturday.

No Credit History? No Problem.

From Bloomberg.

Financial institutions, overcoming some initial trepidation about privacy, are increasingly gauging consumers’ creditworthiness by using phone-company data on mobile calling patterns and locations.

The practice is tantalizing for lenders because it could help them reach some of the 2 billion people who don’t have bank accounts. On the other hand, some of the phone data could open up the risk of being used to discriminate against potential borrowers.

Phone carriers and banks have gained confidence in using mobile data for lending after seeing startups show preliminary success with the method in the past few years. Selling such data could become a more than $1 billion-a-year business for U.S. phone companies over the next decade, according to Crone Consulting LLC.

Fair Isaac Corp., whose FICO scores are the world’s most-used credit ratings, partnered up last month with startups Lenddo and EFL Global Ltd. to use mobile-phone information to help facilitate loans for small businesses and individuals in India and Russia. Last week, startup Juvo announced it’s working with Liberty Global Plc’s Cable & Wireless Communications to help with credit scoring using cellphone data in 15 Caribbean markets.

And Equifax Inc., the credit-score company, has started using utility and telecommunications data in Latin America over the past two years. The number of calls and text messages a potential borrower in Latin America receives can help predict a consumer’s credit risk, said Robin Moriarty, chief marketing officer at Equifax Latin America.

“It turns out, the more economically active you are, the more people want to call you,” Moriarty said. “That level of activity, that level of usage is what’s really most predictive.”

The new credit-assessment methods could allow more people in areas without bank branches to open accounts online. They could also make credit cards and loans more accessible and prevalent in some parts of the world. In the past, lenders mainly relied on bank information, such as savings and past loan repayments, to judge whether to let someone borrow.

Should Central Banks Issue Digital Currencies?

A Staff Discussion Paper – Central Bank Digital Currencies: A Framework for Assessing Why and How – from the Bank of Canada raises a number of important questions concerning the role a Central Bank may play with regards to Digital Currencies.

Digital currencies have attracted strong interest in recent years and have the potential to become widely adopted for use in making payments.

Whilst public authorities and central banks around the world are closely monitoring developments in digital currencies and studying their implications for the economy, the financial system and central banks, one key policy question for public authorities such as a central bank is whether or not to issue its own digital currency that can be used by the general public to make payments. They suggest three public policy arguments for why a central bank might do this.

First, a central bank may explore whether issuing a central bank digital currency (CBDC) would improve the efficiency of its currency function. For example, as the sole issuer of bank notes in Canada, the Bank of Canada supplies bank notes that Canadians can use with confidence. In carrying out this function, the Bank is responsible for the design, production, distribution and destruction of bank notes. As such, the Bank is constantly exploring ways to improve the efficiency of currency operation and reduce the cost of cash handling. The evolution from paper bank notes to polymer bank notes—both in Canada and elsewhere—has improved the efficiency of the currency function and enhanced bank note security and durability. Going forward, it is important for a central bank to examine if it would further improve efficiency and security by issuing future generations of bank notes in digital form, taking advantage of the latest technological advances.

Second, a CBDC could improve the efficiency and safety of both retail and large-value payment systems. On the retail side, the focus is on how a digital currency can improve the efficiency of making payments—for example, at the point of sale (POS), online and peer-to-peer (P2P). There could also be benefits of having a CBDC for wholesale and interbank payments; for example, it could facilitate faster settlement and extended settlement hours.

Third, a CBDC could be an appropriate policy response to payment innovations such as privately issued e-money and digital currency that might impair the central bank’s ability to achieve its monetary policy goals and to implement policies promoting financial stability. For instance, widely adopted private cryptocurrencies could severely weaken the transmission of monetary policy and also restrict the ability of the central bank to act as the lender of last resort. Moreover, it has been suggested that replacing physical bank notes with a CBDC would remove the effective lower bound on policy interest rates, permitting the central bank to implement negative policy interest rates if that were warranted by economic circumstances.

If private digital currencies become broadly adopted, one of the main concerns is related to the safety of these systems. If privately issued digital currencies are used mainly for making retail payments, they do not necessarily pose any systemic risk to the financial system. Nevertheless, the failure of a major private digital currency scheme could potentially result in significant financial losses to users, a loss of confidence in these schemes, a disruption of retail payments and even considerable adverse economic effects. In addition, there could be a reputational risk for the regulators—including the central bank—who are seen as being responsible for oversight of the payment systems to ensure their safety. In that case, central banks and other public authorities would need to assess whether the existing oversight framework is adequate to address these concerns, and to improve the framework as required. Looking forward, if the risks related to digital currencies were to increase in a scenario where these digital currencies have become widely adopted and therefore the risks to the system have become more significant, the best course of action for central banks and public authorities would be to consider subjecting digital currencies to oversight. In this case, it is not necessary for a central bank to consider issuing its own digital currency.

Therefore, as far as the retail payment system is concerned, one possible reason for public authorities such as a central bank to issue a digital currency would be to promote efficiency.

A new payment system would be more efficient than existing alternatives if the social benefits from its introduction outweighed the social costs. Besides technological and economic factors affecting the costs and benefits, improvements—such as increasing protection of private data and providing easy access to new payment methods—would also enhance the benefits of these systems for customers and therefore the efficiency of the payment system overall.

As discussed above, it is in the context of efficiency that we discuss whether a central bank should issue its own digital currency. We propose a general framework to study this complex question.

1. Would a digital currency improve efficiency?
The first key question is whether a digital currency could improve the efficiency of payment systems in the first place. If not, there is really no need for a central bank to consider issuing a digital currency.

2. Would privately issued digital currencies provide such efficiency improvements without government intervention?
Even if a digital currency could improve efficiency, another key question that a central bank needs to answer is whether the provision of such a currency could be left to the market. In other words, it is necessary to assess whether the private sector is likely to arrive at an efficient outcome without government intervention.

Clearly, there are already a number of privately provided digital currencies today, such as Bitcoin and other cryptocurrencies. The real question is whether these digital currencies improve social efficiency to the full extent of what is technologically possible, and whether these digital currencies are broadly adopted by users. If both questions are answered with “yes,” then there is no need for a CBDC in the context of improving efficiency of the retail payment system. Nevertheless, there may still be a potential role for the central bank or government to establish rules and regulations and to monitor compliance. Rules and regulations would protect the safety of these systems. However, there would be no need for the central bank to issue digital currency directly.

Note: Bank of Canada staff discussion papers are completed staff research studies on a wide variety of subjects relevant to central bank policy,
produced independently from the Bank’s Governing Council. This research may support or challenge prevailing policy orthodoxy. Therefore, the
views expressed in this paper are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them
should be attributed to the Bank.

Digital payments taking over from cheques – APCA

A report released today by the Australian Payments Clearing Association, the payments industry self-regulatory body, shows that the drop in cheque use in the 12 months to June 2016 is the greatest annual drop in the last decade.

Today’s report shows that cheque use dropped by 17.2% to 126.4 million. This compares to a 15.7% drop in 2015 and 13.5% in 2014. Since 2006, cheque use has dropped 73%. Cheques now only account for about one percent (1.2%) of all non-cash retail payments.

Cash use also continues to drop steadily. The number of ATM withdrawals dropped by 6.6% to 675.8 million – also the greatest annual drop in the last decade – having dropped 4.9% in 2015 and 4.2% in 2014.

In contrast, the use of digital payments is growing strongly:

Direct entry transactions (direct debit and direct credit) grew by 7.2% to 3.3 billion.

Card payments (credit and debit cards) grew by 12.1% to 7.0 billion.

APCA CEO, Leila Fourie said “Australia is making great strides in moving away from paper payments – both cheques and cash. This is important from an efficiency view point, for customer convenience and for digital inclusion.”

Online payments are increasingly attractive to older Australians. Citing recent research, the Milestones Report notes that in 2015 more than half of internet users over the age of 65 made banking transactions online (53%) and just under a half (48%) had paid bills online.

The Report also highlights that:

Australia is reported second in the world for smartphone use, with 77% of Australians owning a smartphone.

7.7 million Australian households have internet access – this represents 86% of all households, up from 83% last year.

“Australia is leading the way in digital payments with continued strong growth in card payments, impressive smartphone penetration and improved digital literacy. The industry’s New Payments Platform will provide a stimulus for yet more innovation,” said Dr Fourie.

The Report notes that the New Payments Platform, new national infrastructure for fast, flexible, data rich payments, will further support the transition to digital payments. Other industry and government initiatives noted in the Report include:

The Australian Payments Council’s initiatives set out in the Australian Payments Plan

Electronic conveyancing for property settlement through the PEXA service

Government’s SuperStream for the superannuation system

SME’s Are More Connected Than Ever

We continue our series on the results from our latest SME surveys. Today we look at the digital trends of SME’s. On average, around 13% of firms are digital luddites – meaning they hardly use digital at all, but the rest are digitally aligned. This means they prefer using a mobile device, are likely to be using social media, and to use cloud based services.

We separate these digitally aligned firms into those who are natives – meaning they have grown up digital, and those who have migrated to digital. Natives have a much higher propensity to adopt new technology, and are much more interested in Fintech offerings.

Things get interesting when we look at the segments.

This is reflected in their preferred channel for banking. More than ever are now wanting their banking delivered via apps, or smart phone. Bank branches are important, for a minority, mainly because of the need to handle cash. The channel mix does vary by segment.

Many firms are now connected 24×7, but this does vary by segment. Around 20% are hardly online at all. This highlights the need to bankers to have an appropriate set of channel strategies for their SME customers. Many do not.

More are using smart devices as their main device. Some still use personal computers.

Awareness of cloud delivered services is increasing, and once again we see some interesting variations across the segments. Digital natives are most comfortable.

Finally, awareness of Fintech alternatives to the banks continues to grow. Again, digital natives are most comfortable and most likely to consider applying for funds from non-conventional lenders.

Next time we will look at business confidence, which varies across the segments, and across states.

Don’t underestimate digital disruption, warns EY

From InvestorDaily.

Australasian executives are underestimating the disruptive effect technology will have on their businesses, a new EY report has found.

Only 15 per cent of Australasian executives listed the impact of digital technology on the business model as their most prominent concern, EY’s Capital Confidence Barometer (CCB) reveals.

Globally, the impact of such technology was listed as the most prominent issue for more than a third of executives involved in the study.

EY Oceania managing partner of transaction advisory services David Larocca said Australasian executives undervalue the gravity of digital disruption.

“Digital disruption is not an issue on the horizon. It’s already here and the data suggests digital may not be high enough on the board agenda for companies in Australia and New Zealand, and the significant impact on their business [is] underestimated,” Mr Larocca said.

The CCB also revealed 54 per cent of Australasian executives see mergers and acquisitions as key to business growth amid the ‘new norm’ of digital disruption, slow economic growth and geopolitical uncertainty.

“Political instability is a growing concern among executives but it is not derailing merger and acquisition sentiment,” Mr Larocca said.

“A few years ago, it might have seen dealmakers apply the brakes, [but] now the landscape is different. We have a prolonged low-growth environment in many countries and companies have to look inorganically as well as internationally for growth at a time when their next competitor could be a new digital player or start-up.”

According to the report, 65 per cent of Australasian businesses have five or more such deals already in the pipeline, and Mr Larocca said this “uptick in deal pipelines” indicated that mergers and acquisitions would be a foremost concern for executives.

“However, the types of deals will be different – smaller, smarter – and we will see greater use of alliances and strategic partnerships to leverage capabilities,” he said.

Singapore’s FinTech journey

We get a good summary of Singapore’s approach to FinTech, from a speech by Ravi Menon, Managing Director of the Monetary Authority of Singapore, given at the Singapore FinTech Festival. They want to create a Smart Financial Centre to increase efficiency, manage risks better, to create new opportunities and to improve people’s lives. Innovative finance, he says, must be purposeful finance. Financial technology or FinTech is transforming financial services, in a way not seen before.

We have unprecedented mobility. The smartphone is becoming our bank. People can consume financial services on the go.

We have unprecedented connectivity. The Internet has compressed time and space. Interaction is real-time and unconstrained by physical boundaries.

We have unprecedented computing power. The devices in our hands or on our wrists are literally pokemons – pocket-sized monsters that pack more data and more processing power than super computers just a couple of decades ago.

Digital payments are becoming more widespread, propelled by advances in near-field communications, identity authentication, digital IDs, and biometrics.

Blockchains or distributed ledgers are being tested for a wide variety of financial operations, to make them faster, more robust, more efficient:

to settle interbank payments;

to verify and reconcile trade finance invoices;

to execute, enforce, and verify the performance of contracts;

to keep an audit trail and deter money laundering.

Perhaps the biggest potential is in what is called Big Data. We are beginning to aggregate and analyse large data sets to:

gain richer insights into customer behaviour and needs;

detect fraud or anomalies in financial transactions;

sharpen surveillance of market trends and emerging risks.

Big data is in turn being driven by advances in:

sensor networks and natural language processing to gather information from a wide universe of sources;

cloud technologies to store and retrieve large volumes of information at low cost and on-demand;

learning machines and smart algorithms that can continuously adapt and improve on their decision making with every iteration.

Smart Financial Centre Vision

Be it countries, businesses, or people – those who are alert to technology trends, understand their implications, and harness their potential will gain a competitive edge.

To be sure, many of these technologies are disruptive to existing jobs and existing business models.

But if we do not disrupt ourselves – in a manner we choose – somebody else will – in a manner we will not like.

Last year, MAS laid out a vision for a Smart Financial Centre, where innovation is pervasive and technology is used widely.

Since then, MAS has been working closely with the financial industry, FinTech start-ups, the institutes of higher learning and other stakeholders towards this shared vision. MAS’ role in supporting this FinTech journey is two-fold:

provide regulation conducive to innovation while fostering safety and security; and

facilitate infrastructure for an innovation ecosystem and adoption of new technologies.

REGULATION Conducive to Innovation

Let me start with a couple of general principles underlying our approach to FinTech regulation.

First, we believe regulation must not front-run innovation.

Introducing regulation prematurely may stifle innovation and potentially derail the adoption of useful technology.

But the regulator must run alongside innovation.

It is important to keep pace with what is going on, assess what the risks might be, and continually evaluate whether it is necessary to regulate or leave things to evolve further.

Second, we apply a materiality and proportionality test.

This means regulation comes in only when the risk posed by the new technology becomes material or crosses a threshold.

And the weight of regulation must be proportionate to the risk posed.

Third, we focus on the balance of risks posed by new technologies or solutions.

Many technologies mitigate existing risks but may create new ones.

The regulatory approach must seek to incentivise the risk mitigation aspects while restraining the new risks.

Let me illustrate our approach to the regulation of FinTech with a few concrete initiatives:

Activity-based regulation to keep pace with payments innovations.

Specific guidelines to promote secure cloud computing.

Enabling digital financial advice and insurance.

A regulatory sandbox to test innovative ideas.

Strengthening cyber security.

Activity-Based Regulation for Payments

Some of the most visible FinTech innovations are taking place in the payments space.

They are making payments cheaper, faster, better – delighting consumers and giving the banks a run for their money.

But many of these e-wallet solutions are currently caught under two separate pieces of regulation in Singapore.

MAS will streamline the licensing of payments services under a single, activity-based modular framework. This means:

holding just one licence to conduct different kinds of payment activities;

meeting only those regulations pertinent to the specific payments activities they undertake, rather than the full gamut of payments regulations;

adhering to common standards for consumer protection and cyber security.

Guidelines to Promote Secure Cloud Computing

There used to be a view within some quarters that “MAS does not like the cloud“. Lest there be any lingering doubt, let me reiterate: MAS has no objections to FIs using the cloud.

Cloud computing provides economies of scale, enhances operational efficiencies, and delivers potential cost savings.

In fact, a secure cloud infrastructure is an enabler for a variety of FinTech innovations, including banking-as-a-service (BaaS) platforms.

To put its money where its mouth is, MAS set out earlier this year specific guidelines on the use of cloud services by FIs.

FIs are free to adopt private clouds, public clouds, or a combination of these to create hybrid clouds.

But some of the distinguishing features of clouds – such as multi-tenancy, data commingling, and processing in multiple locations – can potentially pose issues for data confidentiality and recoverability.

And so we expect FIs to conduct the necessary due diligence and apply sound governance and risk management practices to address potential vulnerabilities.

Enabling Digital Financial Advice and Insurance

The digital offering of financial advice and insurance is becoming more popular, catering to the needs of a growing segment of technology-savvy, self-directed consumers.

MAS’ regulatory framework for financial advice is technology-agnostic.

But we need to update it to make it easier for consumers to benefit from the lower cost and greater choice that digital advice and insurance can potentially provide.

While at the same time ensuring adequate safeguards for these consumers.

Automated, algorithm-based digital advice on financial or investment services by robo-advisers has taken off in the United States and will soon reach our shores.

MAS will soon set out proposals on the governance, supervision, and management of algorithms for robo-advisers to ensure integrity and robustness in the delivery of financial advice.

We will consult the industry before finalising the guidance.

In insurance, MAS already allows insurers to offer online without advice simple term life and direct purchase policies with broadly standardised features.

MAS will now allow insurers to offer the full suite of life insurance products online without advice.

MAS will be issuing guidance on the safeguards to be put in place for online distribution of life insurance products.

Regulatory Sandbox to Test Innovative Ideas

In June this year, MAS launched a regulatory sandbox for financial institutions as well as new FinTech players to test their innovations. The sandbox serves two purposes:

First, it allows experiments to take place, even where it is not possible at the outset to anticipate every risk or meet every regulatory requirement.

Second, it provides an environment where if an experiment fails, it fails safely and cheaply within controlled boundaries, without widespread adverse consequences.

How will the sandbox work?

MAS and the applicant will jointly define the boundaries within which the experiment will take place.

MAS will then determine the specific legal and regulatory requirements which it is prepared to relax for the duration of the experiment within these boundaries.

We have received several sandbox applications since June, from FIs and FinTech players.

The proposals leverage a range of technologies including distributed ledgers, machine learning, and big data analytics.

MAS is reviewing the applications and looks forward to having some of these proposals launched in the sandbox soon.

Meanwhile, we will be issuing today our finalised regulatory sandbox guidelines, incorporating feedback from the industry and road-tested against the actual sandbox applications we have received.

Strengthening Cyber Security

A smart financial centre must be a safe financial centre.

As more financial services are delivered over the Internet, there will be growing security and privacy concerns from cyber threats.

Users will have confidence in new technologies and innovative services only to the extent they have confidence in cyber security.

Strengthening cyber security is therefore an important part of Singapore’s FinTech agenda. MAS works closely with other government agencies and the industry to help ensure cyber-defences are robust.

Given the interconnectedness of financial activities and systems, an effective cyber defence strategy requires close co-operation and sharing of cyber intelligence.

A good model for such co-operation among banks in the US is the Financial Services – Information Sharing and Analysis Centre, or FS-ISAC.

It is the global financial industry’s go-to resource for cyber threat intelligence analysis and sharing.

I am pleased to announce that FS-ISAC will set up in Singapore the industry body’s only cyber intelligence centre in the Asia-Pacific region.

This centre will help our financial industry better monitor cyber threats and provide better intelligence support.

It will also help deepen the capabilities of the cyber security community here.

INFRASTRUCTURE for an Innovation Ecosystem

The second key thrust of Singapore’s FinTech agenda is to facilitate the infrastructure necessary for an innovation ecosystem and the adoption of new technologies.

We need an ecosystem where people can connect and collaborate, and ideas can flow and multiply.

We need common standards and inter-operable systems so that innovations can be scaled up quickly and their potential benefits fully realised.

W want a hundred flowers of innovation to bloom but also want to ensure they make a garden.

To facilitate such an ecosystem, MAS started with itself:

Last year, we formed within MAS a new FinTech & Innovation Group under a Chief FinTech Officer – probably the first regulator in the world to do so. The Group’s task is to work with the financial industry and FinTech players and help foster a conducive ecosystem for innovation.

MAS has committed S$225 million (or US$160 million) over five years to support the development of a vibrant FinTech ecosystem.

Earlier this year, MAS and the National Research Foundation (NRF) set up a FinTech Office to provide a one-stop point-of-contact for all FinTech matters.- If you are a FinTech company interested in finding out what are the grants and assistance schemes available in Singapore or connecting with relevant government agencies to expedite approvals – this is the Office to go to.

Creating the infrastructure for an innovation ecosystem is a shared responsibility and joint effort. MAS plays the role of a facilitator, the real work is done by the financial industry and the FinTech community coming together to collaborate and create.

Let me highlight the exciting infrastructure initiatives underway:

Physical spaces for collaboration and experimentation.

Infrastructure for electronic payments.

A national “know-your-customer” utility.

A blockchain infrastructure for cross-border inter-bank payments.

An open API architecture.

Physical Spaces for Collaboration and Experimentation

A basic element of the FinTech infrastructure is having physical spaces that facilitate collaboration and partnerships among different players.

Just last week, we saw the launch of LATTICE80, Singapore’s first FinTech innovation village.

LATTICE80 offers dedicated physical space in the heart of Singapore financial district for FinTech start-ups to work, connect, and co-create with the financial industry and VC investors.

More than 20 global FIs have set up innovation centres here. You would have seen during the Innovation Lab Crawl earlier this week some of the exciting things they are experimenting with:

digital health solutions tapping on wearable devices;

telematics for motor insurance;

blockchains to streamline payments;

big data to produce customised service offerings.

MAS itself has set up an innovation lab – called Looking Glass. It aims to:

spur collaboration among MAS, FIs, start-ups, and technologists; and

facilitate consultations for start-ups by industry experts on legal, regulatory, and business-related matters.

Infrastructure for Electronic Payments: UPOS, CAS

We have a world-class infrastructure for electronic payments.

It is a 24/7, real-time inter-bank fund transfer system.

We call it FAST; short for Fast and Secure Transfers.

But FAST is grossly under-utilised and Singapore is still heavily dependent on cash and cheques as means of payments.

The Association of Banks in Singapore is working on two key initiatives to make electronic payments seamless and convenient for everyone.

First, a Central Addressing Scheme (CAS) that will allow you to pay anyone using that person’s mobile number, national ID number, email address, or any other social media address, without the need to know the recipient’s bank or bank account number.

Second, a Unified Point-of-Sale (UPOS) terminal that will allow a merchant to accept all major card brands, including those that are contactless or embedded in smartphones.

A National KYC Utility

Knowing the identity of a customer – or KYC – is one of the biggest pain points in the financial industry.

The process is costly and laborious, and hugely duplicative.

The pain is pervasive because KYC and identity authentication are involved in so many financial services, from opening a bank account to making a payment to making an insurance claim.

We need an infrastructure solution to this problem.

Singapore is in the process of creating a national KYC utility.

Now, obviously this involves several layers of identity verification depending on the purpose of the transaction, the extent of information involved, and the degree of rigour required.

The basic building block is the MyInfo service, jointly developed by the Ministry of Finance and GovTech, the lead agency for digital and data strategy in Singapore.

MyInfo is a personal data platform, containing government-verified personal details, e.g. the national ID number, residential address, and so on.

MyInfo enables residents to provide their personal data just once to the government, and retrieve their personal details for all subsequent online transactions with the government.

MAS is partnering MOF and GovTech to embark on a pilot that will expand the MyInfo service to the financial industry for more efficient KYC using trusted government collected personal data.

No more tedious form-filling and providing hardcopy documents for manual verification by the FI.

No more data entry errors. Higher productivity for the FI and greater convenience for customers.

The government will run a MyInfo pilot with two banks in Q1 2017, before scaling it up to other FIs progressively.· And beyond MyInfo, we have to think of more advanced forms of KYC for more sophisticated use cases.

A Blockchain Infrastructure for Cross-Border Interbank Payments

Another big pain point is cross-border interbank payments.

Today, banks have to go through correspondent banks to intermediate these payments. It takes time and adds to cost.

MAS, the Singapore Exchange, and eight banks have embarked on a proof-of-concept project to use blockchain technology for inter-bank payments, including cross-border transactions in foreign currency.

This effort is supported by the R3 blockchain research lab and BCS Information Systems

Under the pilot system, banks will deposit cash as collateral with the MAS in exchange for MAS-issued digital currency. The banks can later redeem the digital currency for cash.

Participating banks can pay each other directly with this digital currency instead of first sending payment instructions through MAS.

This is an improvement over current large-value payment systems that are centrally operated. It strengthens resilience and lowers cost.

The banks also have the option of using the existing common payments gateway provided by BCS Information Systems to transact on the blockchain.

The banks need not rewrite their back-end systems.

This practical capability rides on the advances made by OCBC Bank in its recently announced inter-bank payments pilot.

This project marks the first step in MAS’ exploration of ways to harness the potential of central bank issued digital currency.

The next phase of the project will involve transactions in foreign currency, possibly with the support of another central bank.

An Open API Architecture

And saving the best for the end: creating an API economy.

APIs, or Application Programming Interfaces, are likely to be one of the most important building blocks for innovation in the future economy.

APIs are basically a set of protocols that define how one system or application interacts with another, usually from the perspective of information exchange.

They allow systems to interact with one another without the need for human intervention.

Publishing these APIs allows FIs to collaborate with external users to:- seamlessly merge multiple data sets from different sources into an integrated rich data set; and- deliver more functional and customised solutions faster and cheaper.

MAS aims to establish Singapore as a centre of excellence for APIs on financial services.

We are actively pushing FIs to develop and adopt APIs, and to offer as many of them as possible to the broader community.

APIs are the essential ‘plumbing’ – the pipes – that enable the connections and collaborations that foster innovation.

The financial industry has come together, in partnership with MAS and the Association of Banks in Singapore, to develop guidance on APIs.

I am pleased to announce that we will publish today what we call the “Finance-as-a-Service API Playbook”.

The API Playbook provides guidance on common and useful APIs that FIs could make available. For instance:

Many of us struggle today to track and use our rewards points on our credit cards issued by various banks before they expire.

Imagine if the banks publish their ‘rewards points’ suite of APIs, a single aggregator app could be developed that allows us to enquire and redeem points directly with merchants and service providers.

The Playbook also provides guidance for the standardisation of APIs.

The industry has come up with standards for information security, data exchange, and governance mechanisms.

Having common standards will help promote greater data sharing and interoperability.

The API Playbook is an important milestone in our FinTech journey.

Some of our FIs are announcing their API initiatives over the course of this week. So watch this space.

Not to be outdone, MAS published last week 12 APIs for its most heavily used data sets. We will progressively expand the list.

Conclusion

Let me conclude by saying a few words about the larger picture behind what we are trying to do in FinTech.

We talk a lot about technology but it is really about fostering a culture of innovation.

In an industry facing the headwinds of lower economic growth and heavier regulatory burdens, innovation must be the way to refresh and re-energise the business model.

And innovation is not always about high-tech. It is about seeking newer and better ways to do things, about a spirit of enterprise. It is about hope in the future. The financial industry needs that.

And let us not forget the purpose of innovation. We want to create a Smart Financial Centre:

because we want to increase efficiency – to do things cheaper, better, faster;

because we want to manage our risks better – to keep our system safe and sound;

because we want to create new opportunities – to generate growth and good jobs;

and most of all, because we want to improve people’s lives – to provide them better services, to help them realise their goals.

Innovative finance must be purposeful finance.

Digitalisation Key as European Banks Adapt Business Model

Large European banks’ ability to modernise their banking platforms and improve digital services will be critical to remaining competitive in the long term, Fitch Ratings says.

Data-Grapgic

But the cost of these new systems is high and comes at a time when record low interest rates are weighing heavily on earnings and burdensome regulatory changes are eating up time and resources. Banks that take too long, or which cannot afford to invest on a continuing basis, may see their franchise fall behind.

Banks are investing to ensure their support systems are compatible with their product offerings so they can service clients’ needs as seamlessly as possible. This is part of a wider shift from product-focused to client-focused business models, which we believe perform better over time. They are also responding to smaller, digitally focused challenger banks.

These challenger banks have shown some success in retail banking niches, but we believe economies of scale should give Europe’s large banks an advantage once they have successfully updated their infrastructure. The costs of compliance, credit risk management, and regulatory systems and staff will weigh particularly heavily on challenger banks as they develop. Small retail banks, like their larger rivals, also need to invest to address the threats of digitalisation, such as cybercrime, which we see as one of the greatest risks facing banks and one of the hardest to control.

As banks plan these investments, they are also having to adapt their business models to cope with a lower-for-longer interest-rate environment and regulations that are heightening capital and liquidity needs and, in some cases, driving changes to their legal structures.

The clearest impact of low rates is in traditional retail banking, where even interest-free deposits are no longer attractive and very low interest rates on mortgage loans are hurting net interest margins. Low rates are also making it harder for Europe’s banks to generate revenue from corporate lending and fixed-income products as investment demand is very low. Wealth management operations are feeling pressure due to the disappearance of risk-free returns on client deposits and a reduction in client activity.

The ability to adapt business models to meet these challenges can be critical for ratings. Over the past year we have downgraded Credit Suisse Group and Deutsche Bank based on our view that their capital markets-focused business models have become less resilient to changes in regulation and their business environment, especially as the banks are undergoing costs of implementing turnaround strategies, in Deutsche Bank’s case including substantial IT spend.

Successful execution of the strategies introduced by new chief executives of both banks in 2015 depends on building up stronger core client franchises. For Deutsche Bank, this is primarily with European corporates, for Credit Suisse it is largely with Asian high-net-worth individuals.