Leading the future of fintech

In an era of change, the technological landscape for financial technology (fintech) requires the right digital leadership at the helm as we prepare society for digital finance.

The changing market dynamics raise some important strategic questions for banks, including how banks will choose to fundamentally approach competition, what this means for existing business models, and what outcomes this will entail both in the short and longer term.

Bank Negara Malaysia Deputy Governor Jessica Chew said that strong digital leadership starts with an acceptance of a new normal.

“Historically, finance has been a close-knit community. But the barriers to entry are being lifted by technology. This has blurred the boundaries of what it means to be a bank, or a financial services provider.

“As a result, banks are no longer just competing with other banks. Non-traditional players – such as fintech firms and platform-based companies – are increasingly well-positioned to offer financial services.

“Digital disruptors want to not only gain market share, but to transform the market itself. This is reflected in the willingness to take loss-leading positions when entering a market,” Chew said in her opening address at the Asian Banker Digital Finance Convention 2018 on March 22, 2018.

“One strategy has been to leverage opportunities for collaboration – whether among existing players or new entrants. We see this emerging as an increasingly important, if not inevitable, response globally on several fronts.”

Initiatives of digital change

As an example, in the blockchain space, the industry in a number of jurisdictions has pooled resources to defray the cost of experimentation involved in developing scaleable use cases for the technology’s application. In Malaysia, nine banks have done this by coming together to develop blockchain applications for trade finance. Establishing shared networks, or opening up previously closed ones, is also gaining traction, Chew said. This can be seen in the growing use of Open Application Programme Interfaces (APIs). “Over the last five years, publications of APIs in the financial sector have increased exponentially, with an estimated 200 new APIs published every year. In a survey that we conducted earlier this year, more than half of banks and insurers in Malaysia indicated plans to roll out open APIs in the near to medium term.

“At the industry level, the Bank has established an open API implementation group with members drawn from the industry, fintech community and key stakeholders to develop open API standards for the financial sector as part of efforts to broaden access and promote innovation and competition.”

On the risk management front, the World Economic Forum had announced the creation of a consortium to facilitate more coordinated efforts in addressing cybersecurity risks. This entails developing common principles for risk assessments, guidance for implementation, and a scoring framework.

In the area of payments, Bank Negara Malaysia had recently issued the Interoperable Credit Transfer Framework ( ICTF), which promotes collaborative competition or ‘co-opetition’ for mobile payments.

Under this framework, banks and non-banks alike collaborate at the infrastructure level through a shared payment infrastructure, while individual players compete at the product level by developing innovative value-added features.

This approach is envisioned to expand the network reach at a lower cost, while promoting competition in areas that advance financial inclusion, higher service levels and the delivery of a superior customer experience.

Clear synergies for collaboration

With this in mind, the BNM Deputy Governor said there were clear synergies to be gained from such collaborative efforts, enabling technological infrastructure to be shared across the industry.

This shifts the competitive focus towards improving the value created for customers and the economy at large, rather than a race towards building proprietary networks that ultimately leads to market fragmentation, Chew said.

“However, the effect of this is also a sharp laser focus on bottlenecks within individual firms. By levelling the playing field, firms will face a greater urgency to address internal constraints that prevent them from capitalizing on opportunities for higher growth and productivity. This may well be the most important challenge for digital leaders.

“Digitisation offers enormous potential for the financial sector to achieve what was not possible before, at least not without prohibitive costs. Secondly, the transition to a digital economy itself calls for a re-orientation of the financial sector to meet the new business demands for financial services. On both counts, the financial industry can, and in fact ought to be, powerful agents of change.

“With a little ingenuity, digital finance can unlock new growth opportunities that were previously deemed to be not commercially viable. Indeed, disruptive innovations – whether in banking or beyond – often begin at the fringes of the market, such as the underserved and unserved segments.

“With growing inequality, environmental degradation and more uncertain global developments, the stakes are high. If banks do not take up the mantle of leadership within the community, at risk is their legitimacy in the longer term as vehicles for the efficient allocation of economic resources.”

Preparing society for digital finance

With this wave of change, the consumer experience of financial services is changing dramatically as well. This is happening on several levels.

“Historically, finance has been a close-knit community. But the barriers to entry are being lifted by technology. This has blurred the boundaries of what it means to be a bank, or a financial services provider.” Jessica Chew, Bank Negara Malaysia Deputy Governor