Growing Local Regulatory Compliance in Asia-Pacific

Tags: asia/pacific, big data, cloud, compliance, datacenter, financial services, it governance, security, strategy

Security threats are evolving rapidly and the solutions that organizations implement to thwart such threats, play a major role in the success or failure of the organization's overall security strategy. The loss of data, threats to national security and protection for the same are receiving significant attention in Asia-Pacific (excluding Japan) (APEJ) countries.

As we mentioned in our security predictions earlier this year, the local regulatory compliance is receiving significant attention in APEJ. Many APEJ governments and enforcement institutions have initiated and are now regulating information flow and ownership issues by enacting laws and regulations or modifying to existing laws. These changes mandate the protection of data and industry-led cyber security standards. Our research shows that increased attention to sound IT-governance policies and compliance with regulatory requirements are driving overall IT security.

A few of these laws which have been implemented or proposed in various countries of APEJ are listed below (note - this is not a comprehensive list):

• Korea: Personal Information Protection Act (PIPA)
• Taiwan: Personal Data Protection Act which was just implemented from 1 October 2012
• India:

 Information Technology Act (ITA) 2000. The government of India made major amendments to ITA-2000 in form of the IT Amendment Act, 2008 and 2011.        
 Data Protection Act 2008
 RBI's 2-Factor Authentication

• Hong Kong: amendment to Personal Data Privacy Act
• Singapore: Personal Data Protection Act (PDPA) 2012
• Philippines: Data Privacy Act  
• China:

        Chinese information security laws and regulations
        The Regulations of PRC on Safety Protection of Computer Information Systems
        Regulations for the Protection of Information Network Transmission Right
        Regulations on the Commercial Passwords

• Malaysia:

 Communications and Multimedia Act (CMA) 1998
 The Personal Data Protection Act 2010 (PDPA)

The new law forces a number of organizations to make assessments, to take security seriously, and to make some positive changes in their security posture. It is certain that the security-solution providers, service providers, and end-users among others, will be engaged in the tedious job of interpreting regulatory compliance requirements. At the same time the sheer number of laws and regulations, conflicting requirements, cross-border applicability issues, unexpected additional regulations and the challenge of determining which compliances are applicable are tough decisions that organizations must make.

IDC believes that the starting point for any compliance exercise is to carry out a risk assessment to understand what information the business holds what its vulnerabilities are and what elements of the IT systems can be locked down.

As specified in a previous article on risk assessment, it is an aspect of security management that organizations can take up as a cost-effective security measure. This allows organizations to estimate potential damages and set a budget to fix these loopholes and avoid any major catastrophes in future. This process is advantageous because once these security loopholes are identified, companies can proactively determine and allocate necessary budget toward fixing the issues related to security. They can also realign their security policies to meet the required security goals. This approach also gives an organization sufficient time to educate its employees on the changes in its existing policies. In other words, it helps minimize the risks and maximizes return on investments. Further, the compliance mandate is now moving out from government agencies to large corporations. Many industries have their own codes of practice or other sets of rules. Organizations that have their security organized are demanding that those they do business with also comply or no longer willing to do business with those organizations that don't meet the standards.

As cyber-criminal activities continue to thrive and rise, the need for stricter compliance and regulatory acts will continue to grow. Many Asian countries seek to enact new laws or amendments, which supplement the Personal Data Privacy with specific focus on technological advancements and greater penalties for breaches. However, organizations need to realize that having a policy or being compliant is not enough to make an organization secure. It just means that they are following certain best practices while trying to be one step ahead of those who seek to attack them. It is important to carry out regular risk-assessment exercises and seek continuous improvements on their position on security.

Distribution of Insurance in the Disruptive Era

Tags: asia/pacific, bancassurance, distribution, financial services, insurance, online aggregator

A very cliché statement “Insurance is to be sold, not bought” highlights the eminent role of distribution channels in the growth strategy of insurance firms. The ability to utilize these channels to reach the firms’ target audience is often the key differentiator in a competitive landscape.

However, as new disruptive forces such as evolving customer preferences, maturation of modern technologies, changing regulatory standards and unpredictable global economic conditions become the new norm, the distribution channels of insurance firms must keep up to take on new challenges.

Bancassurance: From Alternative to Mainstream
With lower revenue expected from interest-based activities, banks will be keen to further explore this alternative revenue stream to derive a stable flow of commission income from distributing their insurance partners’ complementing financial solutions.

Supporting this statement, figures from Life Insurance Association (LIA) in Singapore indicate that the popularity of insurance solutions distributed through bank channels is rising. Between January to March 2012, tied agents contributed 42% of weighted new business sales, while the bancassurance channel was almost on par, accounting for 41% of all new sales. [Source: LIA Singapore press release, dated 7 May 2012, http://www.lia.org.sg/node/313]

With most banks entering into exclusive partnerships with insurance firms, bancassurance has matured and progressed as a mainstream distribution channel. However, the challenge would be to ensure a cohesive working relationship between the carrier and the bank. Aside from having a superior range of products, working out the commission structure, embarking on joint marketing promotion and providing dedicated middle office support, insurers need to be bold and creative in using technologies as a leverage to provide a more efficient support to their banking partners.

Similarly, the partnering banks need to be open to new communication links from their insurance partners – this will serve as the service differentiator which fits into the current customer-centricity movement.

Proliferation of Electronic Channels and Consumer’s New Buying Preferences
The changing customer demographic and proliferation in Internet connectivity have led to a shift in customer engagement models, affecting how information is being consumed. The next generation of customer is perfectly comfortable in scouring the Internet, forums and their social networks for advice on insurance solutions, hence leading to the rise of an emerging channel – the online aggregator.

The role of the aggregator fulfills the requirements of the customer, namely pricing transparency, ease of comparison between multiple providers and self-service transactions. While the aggregator provides another channel for insurers to distribute their solutions, it does pose other challenges such as impacting carriers’ branding, and potentially cannibalizing existing distribution channels (an example is the firm’s own e-commerce portal). Both parties - the insurer and the aggregator - also need to work on efficiently integrating data between their IT systems in order to provide real time, updated quotations on the aggregator site.

Striking the Right Balance and Mix
The advent of alterative channels such as the online aggregator is increasingly used to supplement traditional channels such as tied agents, bancassurance, financial advisors and international brokers. Hence, there really is no one-size-fits-all distribution strategy for carriers to address the disruptive conditions; they will need to adapt and harmonize the various distribution channels in order to ensure profitability.

For more insights on how insurance distribution is evolving in the current market environment, join us at the IDC Financial Insights’ Asian Insurance Congress 2012 on the 28th of August in Singapore as we hear from the industry’s leading thought leaders on this topic. Some of the speakers include:
Dr. Owen Young, Group Head, Insurance, Standard Chartered Bank

• Jeffrey Manuel, Head of Asia Bancassurance & Partnership Development, Manulife
• Calvin Foo, Asia Regional Head, Financial Advisory & High Net Worth Development, Manulife
• Douglas Hudson, Chief Partnership Distribution Officer, AIA
• Angie Tay, Operations Director, CompareXpress
  

For more information on the Asian Insurance Congress 2012, please visit our official website at http://to.idc.asia/aic2012

Asia/Pacific Financial Services: Megatrends to Watch in 2011

Tags: asia/pacific, financial services, it priorities

IDC Financial Insights' activities across thirteen markets in the Asia/Pacific point to several notable trends in 2011. Banks and technology vendors alike will have to make sense of the macro-level drivers of the 2011 scenario, ultimately deciding which strategies and investment priorities of the past years need to be intensified and which need to be discarded in light of a drastically different marketplace. 

1. Super-regionals continue to emerge. In several of our reports last year, we discussed the emergence of what we called super-regional institutions, institutions that stepped up their acquisitive activities in several markets in the region and in a short period of time created their own regional franchise. There are 10 or so super-regionals that made their mark in 2010, these banks will continue to build traction in their markets of choice in 2011. There are four others that will become super-regionals by the end of this year.  Other than Australia, super-regional stories will come out of Indonesia and China. Banks in other countries, specifically Thailand, South Korea, and the Philippines will have to address why their super-regional strategies have been slow in the making.
2. The road map to One ASEAN. A new angle to the super-regional story is the industry's increasingly serious consideration of the ASEAN Economic Community (AEC), which will, if everything happens as planned, come to fruition by 2015. Among other things, the AEC is expected to liberalize financial services in the 10-member Association of Southeast Asian Nations, allowing more and newer players to compete with domestic incumbents. The region's banks will have to seriously consider the prospects of a 700-million-strong market and anticipate the unique trade finance and corporate banking opportunities therein. Alongside the creation of the AEC is the continued expansion of trade and economic cooperation with ASEAN partners like China, Japan, South Korea, Australia, New Zealand, and India — effectively made up of the major economies of the Asia/Pacific. Furthermore, banks will continue to urge the region's central banks to establish a regional banking framework to support this economic integration and to standardize financial regulation. There will be a push to allow more centralization of IT and operations, enabling organizations to reap the benefits of technological innovations like cloud computing.
3. The race for cheap deposits continues. Three trends serve to make funding even tighter for banks in 2011 — an increasing interest rate environment that has already led to higher costs in the wholesale market, more aggressive competition domestically for customer deposits, and more stringent regulation governing reserve ratios and liquidity coverage. Banks with significant CASA bases (ratio of deposits in the form of Current Account and Savings Account to the total deposits) continue to hold significant competitive advantage. The battle for retail deposits, frenetically fought in 2010, will persist in the coming year.
4. Loan growth targets back to normal. While a few markets like Singapore and Indonesia will see their banks accelerate lending even further, we expect banks in general to moderate their loan growth targets in 2011. This "scaling back" does not portend lackluster lending activity in the next 12 months but rather underscores how exceptional the past years have been, in terms of credit provisioning, huge stimulus programs, and hypergrowth in bank lending. In some cases, this scaling back is also crucial to prevent overheating. In China, the government will likely further push up reserve ratios and more strictly enforce that loan growth targets are not breached. These measures will accompany a continued increase in interest rates that are meant to prevent overheating of the economy. Meanwhile, Indian banks are scaling down previous loan growth targets as they are not seeing robust demand for loans outside of the infrastructure sector (a sector boosted by huge government infrastructure programs).
5. Disruption in fee income. A rethink of banks' fee income strategies is needed, in light of how current sources of fee revenue are being eliminated or capped or put under question. This is not specific to the Asia/Pacific region, caps in debit card merchant fees (thanks to the Dodd-Frank Act) and the continued effort by Elizabeth Warren's Bureau of Consumer Financial Protection against the "tricks and traps" of the U.S. banking industry, all point to how this is indeed an industrywide undertaking. In Australia, new measures to cut exit fees on mortgages (although this was more to foster competition) and deposit account transaction fees (also seen in New Zealand) are already being implemented.  And in the Philippines, banks will be able to take advantage of the new one-day central clearing system but will stand to lose a key source of fee income in returned checks and draws on insufficient funds. We believe that banks will offset fee revenue they will not be able to see out of their retail business by expanding fee generation from commercial and corporate banking, investigating opportunities not only in trade finance and transaction banking but also in advisory and consulting services. Other institutions will be looking at entirely new business models — debt recovery services and cloud computing provisioning are two of the most frequently cited alternatives.
6. Midsize institutions fight back. The highest loan growth targets that we are seeing at the onset of 2011 come from ambitious midsize banks in several markets across the region. To some extent, they continue a trend we saw in 2010 of midsize players competing aggressively in the deposits business, most of the time to the detriment of margins. This aggressive drive is also seen in IT plans — if one were to look at the growth in bank IT spending for 2011, most of the highest growth rates would come from tier 2 players. These institutions will be spending on technology capabilities that will allow them to handle greater transaction throughput, bring on board many new customers, and support the expansion of their product offerings. Their aggressive spending plans belie a conviction that their best chance to make it to the big leagues is during this period of economic revival.

Welcome the Super-Regional Banks

Tags: banks, financial services

A bright light in the Asia/Pacific region's financial services industry is the emergence of super-regional institutions, which we define as Asia/Pacific-based organizations that have made aggressive moves to acquire operations across the region. Their regionalization objectives are intentionally more paced, however, and they have chosen to manage regional units that are close in proximity, and limited to one part of the region. We have tracked ten super-regionals closely this year, namely: ANZ Bank (Australia), Commonwealth Bank of Australia, DBS Bank (Singapore), OCBC Bank (Singapore), UOB Bank (Singapore), Maybank (Malaysia), CIMB Bank (Malaysia), Mitsui Sumitomo Insurance (Japan), Sumitumo Mitsui Banking Corporation (Japan) and Tokio Marine (Japan).

In the recent ASEAN Bankers Association forum which I spoke at, this super-regional theme captured a lot of attention, primarily because the bank presidents wanted to find out what their peers were up to in the Asian-wide M&A space. I also spoke of the lack of a credible super-regional story out of banks in Thailand and Indonesia – from where super-regionals should have emerged by now.

From the global realignment forced by the recent crisis, it also appears that there have also been super-regional strategies being launched out of banks in Latin America. Also, the super-regional story is apparently not just in financial services, because Asian-based companies from other industries have also made moves to go beyond their home markets, especially as the recent downturn resulted in global incumbents focusing more on their home markets in the US and Europe. It can be said that although super-regionals are filling in some of the vacuum left by retreating global players, we believe that super-regionals themselves are creating their own unique propositions as truly Asia-centric powerhouses.

What implications does the emergence of super-regionals have on technology decision-making?

The super-regionals' technology strategies are understandably distinct from domestic-focused institutions. These will be brought to life in region-wide platforms that are more than likely standardized applications and assets that will be used across the organization's various operations in the region. There will be country- or market-specific overlays, but the real and ultimate drive would be toward a common platform.

In the core banking space, a few super-regionals have just recently made decisions on their core banking vendors, and a few more decisions are tipped to be made within a year. Super-regional core banking will be a key theme in this area in the years to come. These deals will be handed to a wider number of vendors than expected, preventing an oligopoly of super-regional references for just a few core banking vendors.

IDC Financial Insights' AFS Congress returns with a stellar line up of speakers from the FSI industry

Tags: afs congress, financial services

On February 25-26, as many as 500 financial industry practitioners across the region are expected to converge in Singapore for the 6th Asian Financial Services (AFS) Congress.  This year's  Congress, which takes on the theme "Prescriptions for the Upturn - What Next?", is based around lessons learned from the recent financial crisis and how banks should set themselves up for the return of less turbulent times.

Hot topics that will be featured in the Congress include: where value can be build in the period of uncertainty; how Asia's institutions should create and rebuild their franchise; what technology investments have been pushed to the top of the agenda; and, where the opportunities for business transformation and operational innovation lie.

Here are a selection of presentations lined-up for the AFS Congress:

Weathering the Perfect Storm: Sustaining Growth During Market Turmoil
by Ray Ferguson, Regional CEO, Singapore and SEA, Standard Chartered Bank
The financial tsunami has resulted in the decline of revenue or even the failure of some institutions worldwide. While some may have failed, others are showing signs of turnaround. How do you sustain growth during the crisis and more importantly, gear your processes and resources to capitalize on the recovery? Standard Chartered Bank will share the lessons learnt from the financial crisis and how they managed to perform well during the turbulent period.

Tomorrow's Retail Bank: A Path of Transformation
by Michael Lor, Group CEO, EON Bank Group
Amid the financial crisis and dip in global consumer spending, Asia remains profitable and offers an avenue for growth. How can financial institutions leverage on the opportunities presented during this crisis? EON Bank will be sharing their journey of transformation and insights on the potential pitfalls.

The Top 10 Strategic Initiatives for Asia/Pacific Banks in 2010 - Investing for the Comeback
by IDC Financial Insights' regional team of analysts
This session highlights the business and technology issues that will be relevant to the recovery of Asia/Pacific's financial institutions, and how these priorities bear on the plans of technology providers that serve the banking industry.

At the break-out sessions, hear from other industry thought-leaders as they share their views on:

This is definitely an event not to be missed for executives in the  financial services industry.

For a full description of the agenda and speakers, you can visit AFS Congress 2010 or register here

I look forward to see you there!

Banks Turn the Spotlight on Vendor Risk

Tags: , asia/pacific, banks, economic crisis, financial services

In recent months, we received several inquiries from banks about how they are best to ascertain the business and financial viability of their vendors. The intent of the inquiries could partly be attributed to how banks are working to avoid another spectacular issue as that seen out of the former Satyam. Banks have more clearly  understood how technology failures, including the failure of technology vendors to deliver, can have dire implications for business continuity, bank reputation, and business strategy.

Indeed, the economic crisis has put in question the viability and sustainability of vendors' businesses. While several financial technology vendors have reported strong results despite a tumultuous economic environment, most players have shown their weakest performance in years. The pace of vendor consolidation has gained more speed. Early this year, we stated that 2009 will see 12 of the top 100 financial technology firms acquired or declaring bankruptcy, higher than the industry average over the past five years.
Vendors have been more mindful of fee structures and engagement margins. Banks justifiably have to be on guard for vendors drastically cutting staff levels (especially in banks' outsourcing partners), as well as those showing declines in SLA compliance and performance.

Although the fall of Satyam is not necessarily attributed to weak financial performance, the Satyam saga easily proved that lapses in reporting are possible. Financial institutions have thus intensified their scrutiny of the financial reports and balance sheets of their vendors. The lack of transparency is correctly considered a significant risk in itself. Vendors though have themselves responded with improved transparency. Disclosures made by vendors to current and potential clients have become more detailed to include other client references, new wins, and other metrics for performance and delivery.
Regulatory mandates have also scaled up to reflect the new regime of vendor transparency. There will be a greater push to report vendors' banking relationships (are vendors themselves clients of the banks they serve?) — something that we note especially in India. Although the most recent regulatory guidelines coming out of Asia/Pacific regulators speak more to data integrity, data privacy, and information security, the focus on effective governance of vendor relationships has indeed been heightened. We expect that in the medium term, more specific guidelines on vendor due diligence and monitoring will be put in place, following IT risk guidelines in Singapore (Internet Banking and Technology Risk Management Guidelines) and Hong Kong. This is similar to the developments we saw in the United States, where the Gramm-Leach-Bliley Act's mandates for privacy and integrity of customer information gave way to vendor due diligence and vendor risk management rules.

The Post-Crisis CXO

Tags: asia/pacific, banks, economic crisis, financial services

The post-crisis landscape will be a much different place for financial services institutions. Will the banks and insurers that survive the downturn be managed by a new breed of leaders?

What will the post-crisis CXO look like? We ask this question as we evaluate a good list of up-and-coming CEOs, COOs, CFOs, CIOs. In the Asia/Pacific region in particular, we are seeing that the average age of CXOs in the financial industry has fallen quite significantly. This is something worth noting, considering that we are talking about an industry composed of many different kinds of organizations - from large international and regional players, to dynamic domestic champions and small, family-run organizations.

Several qualities will be common among the industry's new leaders, foremost among which is, of course, competency in risk management. We have seen over the past years how risk management executives have become more prominent, playing ever more critical roles in the organization. The crisis will serve to underscore the need for astute risk management skills. Some other "new" qualities worth noting: marketing savvy and a keen appreciation of technology as a value-creator.

We also believe that alongside the rise of these future leaders, the industry will witness an upsurge of today's next-generation banking initiatives such as cloud computing (and its derivations), Green IT, Web 2.0, social networking and its use in financial services and Generation Y banking. It will be interesting to witness how the rise of the future CXO and the rise of new technology will change the dynamics of our industry.

Microinsurance: Beyond a Positive Social Impact

Tags: financial services, insurance

Of late, microinsurance has been generating increasing interest and momentum here in Asia. For instance, Taiwan's Financial Supervisory Commission (FSC) just this week proposed plans to provide microinsurance to a sandwich class of almost a million Taiwanese who hover near the poverty line but do not qualify to receive government subsidies. Incentives such as tax cuts would be offered to insurers to encourage the development of a variety of microinsurance coverage for accident, health and life.

Meanwhile in India, with over 90% of the country’s poor still not covered by microinsurance, insurers are getting into the thick of action. Allianz for example, partnered with Care International (an organization with extensive experience in microfinance) to focus on the provision of insurance for people who live near the coast and work in fishing, agriculture and plantations.

Microinsurance is not just a vital tool in helping to reduce poverty by providing access to financial services and economic development. It is also about extending protection to the excluded population (i.e. the world’s poor), while still being a financially sustainable value proposition for the insurers (provided of course, they have the right administration and management).

Is your company jumping into the microinsurance bandwagon?

What are some principal challenges being encountered? What is the role of technology as a tool to enable microinsurance programs?

I would think that the delivery model to clients would be one issue - in India for instance, the wide dispersal of the microinsurance target population in deep rural areas makes distribution a challenge. To keep distribution cost low, reach prospects and service existing microinsurance clients, these products need to be properly marketed through well established networks, perhaps through leveraging existing microfinance infrastructure.

However, whatever the limitations may be, it seems that microinsurance is fast moving beyond just a social service in Asia...

The Age of The Stimulus: Which Banks Will Win?

Tags: banks, financial services, government

The total price tag for government-led stimulus programs in the Asia/Pacific region will easily tip over US$1.5 trillion by mid-2009. This massive injections of liquidity will up the ante in the already fierce competition of banks. In Thailand for example, Bangkok Bank has proven that bank network reach is still king, as the bank won the right to distribute stimulus checks for over 10 million Thai citizens. A reported price of 2 baht per check is loose change for a giant institution, but is not a  laughing matter either, given the ardent competition for every revenue generation opportunity.

Meanwhile, banks are expected to realign their loan growth targets as governments highlight priority sectors and greenlight huge infrastructure build-outs. Financial Insights Asia/Pacific's average loan growth estimates for 12 key Asia/Pacific markets is now at 8.7%, reduced further from previous estimates of 10.3% in November 2008. We will get a clearer picture of the aggregate and sectoral loan growth numbers by June 2009. However, we are certain that growth rates in 2009 will still be robust relative to the dire predictions in the United States and Europe. Respectable growth rates are expected out of countries with large populations such as China, India, Indonesia, and Vietnam.

Technology implications for banks?

Banks that are able to showcase operational efficiency aside from reach and distribution will win in the governments' cash-to-the-public programs. In the public spending side, key factors of success will be capability to build out lending models and the capability to scale up growth in priority sectors. Further, loan origination systems was a strong initiative for banks in the Asia/Pacific region prior to the crisis, and will be critical area of focus now.

We estimate that about 60% of loan origination systems of the top 250 Asia/Pacific banks were (and are still) outdated and could not cope with an upsurge in lending. Leading banks are expected to invest heavily in modeling and analytics (good news for leading players like SAS, FICO, etc). Building of course on quality data, these investments in scoring, models, and analytics will help in key areas such as decisioning, pricing, servicing, fraud prevention, and even collections and recovery

The full report, Asia/Pacific Banking in 2009: Opportunities Amid a Crisis, is available on the Financial Insights' Web site. 

Banks Focusing on Credit Risk as They Reel from the Turmoil

Tags: banks, financial services, risk management

While the financial tsunami has washed up the shores of Asia/Pacific and losses to the tune of billions of dollars have resulted in banks slashing technology budgets, there is still money flowing into risk-related projects. These are more easily justified as banks seek to plug risk leakages exposed by the recent market stresses. Consequently, risk-mitigating products and techniques to empower banks to manage credit exposures more proactively becoming increasingly important.

The beneficiaries of these accelerated risk management practices? Vendors operating within the credit risk/Basel II field such as Algorithmics, Moody's Fermat, Fiserv, Misys Almonde, Oracle Reveleus, Quantitative Risk Management (QRM), SAP, SAS Institute, and SunGard.

All nine are worthy contenders in their own right. Those that stood out with particularly distinct features and extensive functionalities include Algorithmics, Moody's Fermat, Fiserv, and QRM. Oracle Reveleus, SAP, SAS Institute and SunGard meanwhile boast a varied footprint of client jurisdictions, while Misys Almonde offers rapid web-delivery deployment and is entrenched with clients in emerging markets.

To ensure alignment of strategies, policy objectives, and business processes with their credit risk framework, banks need to shore up on their current credit risk efforts and nominate a risk champion to ensure that risk awareness pervade the entire enterprise. Beyond ascertaining that vendor functionality offerings correlate with their risk management requirements, decisions also need to be made around areas like the extent of customization preferred, the choice of a multiple versus one-system solution platform, and future functionality requirements.

For a further discussion on credit risk offerings in Asia/Pacific and how banks can enhance their risk framework, please refer to Credit Risk Solution Vendors: Who's Who in Asia (Doc #FIN217509).