Technology is upending traditional banking and investment business models, effectively redefining the way Asia’s financial institutions do business for both retail and corporate customers. In fact, the financial sector, more than any other, is braced for inevitable and widespread disruption, according to 97% of respondents in our survey. Examples of significant breakthroughs include blockchain, AI, machine learning, big data analytics, digitalization and auto processing. The reality today is that a shake-up in the industry isn’t just anticipated; it is already here. Now, financial institutions are stepping up initiatives to innovate and remain relevant. Innovation and digitization are happening concurrently with other issues that require navigation in today’s market complexities.
CYBERSECURITY: A GAME OF CATCH-UP
Worldwide, the threat of cyberattack has become an unavoidable part of doing business. The global “WannaCry” attack was a reminder of this and a harsh reality check that cyber incursions can happen anywhere, at any time – and more so for the underprepared and heavily exposed corporation. Since WannaCry, Equifax, a large US entity, announced cyber thieves had taken records of 143 million US citizens, including social security numbers and date of birth. Asia Pacific is no less vulnerable. Detailed and clear data breach notification laws, supported by enforcement, and a culture of compliance and transparency within organizations, are cited as often lacking across the region. For these reasons and others, cybersecurity ranks as the top complexity facing executives at the region's financial institutions in our survey.
To remain relevant, financial institutions in Asia Pacific need to digitize quickly to offer a price sensitive customer solution; tech adoption is the only way to stay ahead. Based on the time, resources, and talent required, innovation is among the top complexities facing these respondents in our survey. While internally driven R&D can sometimes provide solutions, the rapid pace of change frequently necessitates looking outside the organization for solutions. Executives in our survey say that partnering with tech firms that offer cross-sector fintech solutions is one way of achieving desired game-changing results.
DRIVING INNOVATION THROUGH PARTNERSHIPS
REGULATION: PLAYING BY NEW RULES
Compliance and adapting to changing regulations is another major complexity for financial institution executives. Regulatory change will be a top focus area for these firms in the year ahead (Figure 4). Based on the amount of new legislation and regulation in this sector, it’s easy to see why. Regulators across Asia are stepping up efforts to establish fintech and regtech legislation to encourage innovation while mitigating potential risks, with a focus on the themes of governance and supervision. Complying with international regulatory frameworks, like BASEL III, will also create challenges and increasing costs, while the European Union’s updated Markets in Financial Instruments Directive (MiFID II) brings non-EU-based financial institutions under its scope, requiring substantial work to attain compliance.
Financial institutions that make changes to their internal cultures and switch to a more innovative mindset are going to be the ones leading the discussion on the future of finance, not just listening to it.”
Gavin Raftery, Partner, Tokyo, and Head of Asia Pacific Banking & Finance, Baker McKenzie
Legacy IT systems constrain the ability of incumbent banks to innovate. These systems are incompatible with the demands of AI, big data and an open architecture approach. New entrants and start-ups have a serious advantage. Consequently, alliances between incumbents and fintechs offer the best solution. Asian banks tend to be in a better IT position than their European counterparts, many of which have compounded the challenge through historic M&A which created a blend of systems.”
Jeremy Pitts, Managing Partner, Tokyo and Head of Global Financial Institutions, Baker McKenzie
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TRENDS AND KEY COMPLEXITIES:
Cybersecurity and protecting customer data in an increasingly dangerous digital world creates challenges, and Asia may be particularly vulnerable. In the race to stay relevant to customers, innovation via partnerships with tech firms and fintech start-ups may provide better results than internally driven R&D. Complying with regional and international banking standards and implementing detailed and voluminous regulations will continue as a prevailing theme for next year and beyond.
respondents feel doing business in the financial institutions sector is becoming more complex.
55%
Figure 4: Which areas do you think will be a major focus for your industry in the next two years?
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