Big Data: A Banking Perspective

Tags: banks, asia/pacific,

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.

Cloud Computing in Financial Services: Sentiments from the Ground

Tags: asia/pacific, cloud computing, banks, it priorities

From our conversations with banking executives in the past month, we note their observation that the industry has over time repositioned outsourcing as cloud computing, even though technology has advanced well enough to differentiate both. The rebranding of the politically contentious outsourcing to cloud computing continues, not only in financial services but in other sectors as well. Relative to outsourcing, cloud computing is a new term, and is less defined, confusing critics in the meantime. The initial feedback on cloud computing, however, shows less openness by the industry toward cloud computing in general but more toward private cloud — so there is a mad scramble to talk about private cloud too, never mind the notions of application service provisioning, or virtualization, or hosted services that may be accurate descriptions of what is actually being undertaken.

All these attempts to come up with something new to talk about belie a profound transformation in how banks prefer to consume and pay for technology. As purse strings tightened amid the down cycle, IT executives found that a modular approach to the consumption of IT was more easily justifiable to the board. However, even as economic pressures have eased, we still see continued interest in utility-based consumption of technology — the model has proven to be not just a stopgap measure, it is increasingly becoming the norm.

From a business case standpoint, the on-demand model (i.e., elimination of significant upfront costs, and expenditures more closely aligned with operational usage) has created strong interests in shared, utility-style service provisioning options, especially among the smaller players. Interestingly, small-tier institutions in Australia, Indonesia, and the Philippines have pressed for cloud computing–style solutions, even for their core systems and processes. The attraction stems from a desire to avail of broader and deeper technology capabilities in line with the needs of the organization, without having to incur the hefty price points of proprietary solution offerings.

In essence, financial institutions are taking to results-based principles in IT spending: "I pay for what I need and require." We see this not only in time- and materials-based pricing, SLA-based and performance-based contracts, but also in other pricing permutations to account for risks taken (by either the bank or the third party, or both) or business objectives met. So, whatever the term that is being pushed — whether it be cloud computing, or utility processing, or "new outsourcing" — it should align with the pay-as-you-go, use-as-you-please, and results-based principles that have gained ground.

Still, the debate over the relevance of cloud computing in financial services is yet to be resolved. Just when there were signs the industry was starting to buy into the business case for cloud adoption, high-profile incidences of service failures and operational outages that involved third parties have proved damaging to confidence in innovative delivery of IT. In characteristically reactive and high-handed fashion, the regulatory response has served to diminish appetite for risks associated with third-party management of sensitive data, operating infrastructure, and technology assets, regardless of underlying benefits. The recent notice from the Australian Prudential Regulation Authority (APRA) hit the nail on the head — cloud computing has to be managed similar to outsourcing and offshoring. From the notice, the industry benefitted from a clearer definition of the regulatory framework vis-à-vis cloud computing, including considerations and contingency plans required when banks take on innovative IT delivery.

As regulatory positions gain more clarity, internal guidelines on cloud computing are expected from super-regionals and international players that aim to build cross-country technology platforms. These too will give further momentum to the take-up innovative IT delivery models. They will present best practices and critical decision factors to the industry at large. Banks, especially those from less developed markets, will also look to greater availability of bandwidth and improvement of network infrastructure to push discussions on cloud computing along.

Welcome the Super-Regional Banks

Tags: financial services, banks

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.

Asia Banking Executives Gather in Phuket to Discuss Risk Management

Tags: banks, insurance, risk management

Last month, 34 banking executives from 11 countries across the region attended the IDC Financial Insights-FICO Asia/Pacific Risk Officer Retreat. We conducted an informal survey, which was spearheaded by two participants, and found some interesting facts and expectations about the tenure of Chief Risk Officers (CROs) in banks.

Let me give a quick run-down:

• On average, CROs have been in their current roles for less than four years.
• The past crisis scaled up everyone's experience tremendously. What they could have gained in five years, they gained in one.
• The demand for risk executives has created a notable dearth of good risk officers in banks.
• A trend of CROs becoming CEOs of financial institutions is expected to emerge in the medium term.

There were snide (but well-meant) commentary about stress tests, Basel 3, modeling, and even the discipline of risk management itself. The discussions also reinforced some notions about the role of risk managers in banks: mainly, that it is a job that requires smarts, business acumen, fortitude, and a grasp of internal and external realities that confront their institutions.

The candid discussions in and outside of the Roundtable also validated our opinions about technology decision-making with regard to risk management. While IT spending in this area will remain high, admittedly, there will be some projects that will be categorized under "risk management," most probably to get immediate management buy-in.

Furthermore, justifications for risk management projects are getting more tactical, just as ROI calculations increasingly get treated differently. Also, technology has matured significantly over the past few quarters and risk officers have a better set of vendors to work with in the year to come. However, finding the right vendor for their organization's needs will continue to be a key challenge. These will find a way into our research agenda in the coming year.

The IDC Financial Insights-FICO Risk Officers' Retreat is designed to be an annual gathering of risk officers to share latest insights about the discipline of risk management, as well as operational benchmarks and best practices discovered in their respective banks. This year's event was held at Cape Sienna in Phuket, Thailand from July 29 to 31 this year. We look forward to continuing these discussions with those who attended and with other FSI executives who couldn't make it but are keen to join in the next gathering.

The retreat also shattered the myth that CROs are too straight-laced and don't have a capacity for humor, as the photos we took during the event show. Check out the photo gallery on the IDC Financial Insights-FICO Asia/Pacific Risk Officers' Retreat Facebook page.

Below: Proof that I was there and doing my job!

 Below: Ample opportunities to network and let our hair down.

Banks Turn the Spotlight on Vendor Risk

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

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.

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.