New technologies. New market players. New regulations.
These are just some of the developments that financial institutions are dealing with around the world, and keeping pace with the changes can be a big challenge. The Deloitte Center for Financial Services recently surveyed more than 200 financial services senior executives from G7 countries and non-G7 economies* to ask them about these changes and how they’re dealing with them. The research revealed some interesting differences and similarities between the two groups.
Even though banks in the G7 countries still dominate in terms of assets and number of transactions, lenders from large emerging markets are catching up. Data from the World Bank shows, for example, that for 2015, banks in the non-G7 economies were twice as profitable as their G7 counterparts. These financial institutions have also been able to more readily implement modern core technology platforms since they are less hampered by legacy investments, compared with their G7 peers. Insurance products, however, show much more penetration in the G7 than in non-G7 countries.
While the Philippines was not included in the study, the concerns and the trends that the executives talked about can provide insights into the challenges that local lenders also face.
Technology is a major change agent, at least in the emerging markets
More than two-thirds of the surveyed respondents believe technology innovation will play a key role in industry change. Respondents from outside the G7, in particular, feel thatthe Internet of Things (IoT), biometrics, cryptocurrencies, and mobile payments will have a significant impact on their operations, while G7 leaders are less likely to include these technologies in their current plans.
Just recently, the Bangko Sentral ng Pilipinas (BSP) noted the growing use of cryptocurrency in the Philippines – from daily transactions of about $2 million in February 2017 to the present average of $6 million a day. While the BSP has acknowledged the benefits of virtual money, it has taken a cautious stance on the currency, noting that trust in it remains low. But the tide seems to be turning in favor of this emerging technology: according to Deloitte’s survey, 70 percent of the respondents from the non-G7 economies said they are either already using cryptocurrencies or plan to do so, compared with 52 percent in G7 countries.
Regulations trump customer demand and competition
Deloitte also noted a geographical difference in the respondents’ views on customer expectations. Nearly 60 percent of respondents from non-G7 economies cite customer expectations as a driver of change, compared with 41 percent of G7 executives, suggesting that lenders in the G7 markets experience less pressure to change strategies based on what their customers want.
Respondents in general also show less concern about current and emerging competitors. Only 18 percent of G7 executives and 25 percent of non-G7 executives say competition will drive their strategy.
In the Philippines, the BSP has also expressed confidence that banks will remain resilient despite the steady influx of foreign players. According to the BSP, at least eight more foreign banks are looking to enter the local market, motivated by the country’s strong economic performance. But you have to wonder how the creation of the Overseas Filipino Bank, which will cater specifically to overseas Filipino workers (OFW), will affect banks here – homegrown and foreign alike. Last year, OFW remittances accounted for 9.8 percent of the country’s gross domestic product. If all, or most, of those funds were to suddenly be coursed through just one financial institution, how would the other banks cope?
What respondents across geographical barriers are equally concerned about are regulations. Forty-three percent of G7 executives and 44 percent of non-G7 executives cited regulatory influences as a top driver of change. Moreover, 70 percent of FSI leaders outside the G7 expect regulatory burdens to increase in the next one to two years.
Perhaps non-G7 institutions are more sensitive to regulatory changes because they are also more likely to adopt disruptive technologies, many of which, the regulatory bodies are still struggling to understand and address.
Note, for example, that while our own BSP has released guidelines on the exchange of cryptocurrencies, it hasn’t opened the door to the use of digital money in local commercial transactions. Instead, it is focusing on strengthening the digital platform:The BSP is set to release a new regulation that seeks to significantly raise the standard for cybersecurity among financial institutions, a move that is likely to entail additional security investments on the part of lenders.
As with most other sectors, the financial services industry around the world is facing a slew of challenges as technology and the rules of the game change the way organizations play. Regardless of geography, organizations that stay agile and receptive to these changes stand to win in this dynamic market.
*For the purpose of Deloitte’s report, the non-G7 economies are Australia, Austria, Belgium, Brazil, Colombia, Costa Rica, Denmark, Finland, Hungary, India, Ireland, Luxembourg, Mexico, the Netherlands, New Zealand, Nigeria, Singapore, South Africa, Sweden, Switzerland and the United Arab Emirates.
The author is a partner at the Audit & Assurance division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu Limited – comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.
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