Rubber stamps, literally, are still an important part of everyday business in Asia, and especially in the region’s banks. But this veneration of paper and ink is slowly giving way to a more modern approach that better suits the needs of an increasingly global industry.
In recent years, banks have invested more in their coordinated treasury management, driven by requirements for greater efficiencies, increased competition from domestic and overseas players, by their own expansion into different markets, and as a response to changing regulatory environments.
Some of these banks, such as DBS, already boast a well-established regional presence. Likewise, ANZ’s acquisition of some of Royal Bank of Scotland’s (RBS) Asian businesses is part of its strategy to become a leading regional player by 2012. In Malaysia, Malayan Banking (Maybank) is looking to continue growing its regional base beyond its 2008 acquisition of Bank Internasional Indonesia (BII), while CIMB has stakes in banks in Thailand, Indonesia and Singapore.
As a result, banks are looking at more centralised and flexible hub models for high-value payments to support their transaction banking businesses. At the same time, they recognise that regional infrastructure can help them keep services in-house and reduce costs. “The minute you touch your core banking systems, you are touching all the interfaces to your payment systems. There is a kind of natural evolution that as soon as you modernise core banking, the next thing is payments infrastructure,” said Richard Davies, director of APAC global products business at Logica, a business and technology servicing company.
Low-value payments, typically managed differently in each country, are also driving the trend, with compliance requirements adding to the pressure to consolidate. “I would say on the regulatory side, Asian banks are not generally as up to speed as some of the European banks, which have reacted to the increased fines in Europe,” said Davies.
Managing these processes, connections and rules for each market may make this a difficult prospect for many banks, not least because of their legacy systems. But as volumes grow and national infrastructure become more interoperable and standardised, consolidating payments is likely to become a priority, said Davies.
Banks eying multi-billion dollar remittance flows
Another driver behind technology upgrades is the huge remittance flows from migrant workers, predominantly to the Philippines and Indonesia. The Philippines’ central bank reported $1.6 billion in remittances from overseas Filipinos in July, representing year-onyear growth of 8.2%. That brought cumulative remittances for the first seven months of the year to $10.7 billion, up by 7.1% year-on-year.
The Bank of the Philippine Islands (BPI), the largest commercial bank involved in the sector in the Philippines, reported that its remittance business rose by 15% to $4.5 billion in 2009, from $4.4 billion in 2008, thanks in part to the bank’s growing variety of consumer loans, life and non-life insurance, mutual funds, trust and non-trust funds, deposit and retirement plans.
However, money transfer operators (MTOs) such as MoneyGram and Western Union remain dominant players, with options for many banks wishing to deliver remittance services limited to establishing proprietary networks, building bilateral services with correspondents, or through open correspondent banking arrangements. These are expensive to maintain and awkward to scale up. So in some countries, banks have partnered with MTOs in order to develop this part of their business.
“A number of Asia-Pacific banks are looking at remittances and whether they can provide them using their own infrastructure in-house. At the moment all they get is fee income, but they know they are missing out not just on the money they are paying out, but also on the foreign exchange they could generate from it.”
The ultimate goal is to grow deposit accounts through capturing both the remitters and their even more important employers. “The potential reward for banks succeeding in this strategy goes beyond the remittance fees to encompass both new worker accounts and employer accounts. Asia’s regional banks have acquired or grown operations in many of the countries that make up key remittance corridors. Many are therefore looking to use their regional infrastructure instead of the MTOs to deliver competitive services,” said Davies.
Buyer beware
However, these banks need to look long and hard at the business cases supporting their purchases of new technologies before they invest.
“Replacing payments systems requires careful planning and the sensible construction of a business case that the business side of the bank also buys into,” said Davies. “We see a lot of projects, and not just in Asia-Pacific, where banks effectively opt for new technology simply because it’s new. In other words, some banks are allowing their technology departments to run the bank, and purchases of new technology are not underpinned by a solid business case.”
Rather, a business case for change should be based on the new capabilities, products and services derived from the new technology. “A bank should start with an understanding of what new products and services they want to offer, and only then go about buying the technology. Unfortunately, there are too many instances where the opposite is in fact the case,” said Davies.
One example (though not in Asia- Pacific) cited by Davies that shows how banks can go expensively wrong, was the CLS Bank gateway implementation project, after which a number of banks opted to design their own technology
“CLS then decided to offer new products and services to its customers. Those banks that did their own thing realised it was going to cost them around $1.5 million to modernise what they had, whereas banks which had brought a product were faced with a bill for less than a $150,000 as the cost was spread across the community.” The result saw a number of banks ditching their expensively developed home-grown solutions and buying third-party products instead.
That said, some banks get it right. According to Davies, one bank whose strategy the others would do well to replicate is Deutsche Bank. The German bank excels at identifying and building technology that gives it a unique selling point, but it buys its core infrastructure. The bank’s payments system is component-based, which gives it “future-proofed” product flexibility, he explained, meaning that when the component gets old, it is simply replaced rather than having to dispense with the entire payments system. “This is what a modern payments hub enables you to do. Certainly the systems we promote at Logica focus on how to make use of what already exists, and how to replace what needs replacing.”
This story was first published in the October 2010 issue of FinanceAsia magazine.
