System Migration, Integration - A Huge Hurdle, Challenge
- Huge traditional banks and financial conglomerates often have to deal with system integrations, as a legacy of its successive mergers and acquisitions across business segments and countries. To be honest, dealing with system integration is tough and challenging. Most senior management in the past don't really focus a lot on this matter. What mattered then was size and closing of the deal. Once the deal closes, change management strategies are not followed through or no one in the past has ever thought about looking at this.?Not until the Global Financial Crisis where in data are taken seriously.
- This had resulted in misjudgments from incomplete purview of the data, for example, inability to impact risks accurately such as taking outsized single counterparty exposures, inability to verify collateral or accurately assess value of collateral, etc.?
- Organizations have to rethink not only about the kind of data that they wanted, but also needed.
- Financial industry is not only about return to shareholders, it is also about ensuring that it has the interest of the public at hand, ensuring that money - and information - is kept safe with the bank.
Instant Payments Rely on Accuracy and Timeliness of Data and the Interconnectivity of the Financial Industry
- When we think about digitalizing financial industry --- my thoughts are in line with above. Banks, brokers, insurance companies, finance companies, funds/asset management companies must ensure not only accuracy but also timeliness and security of its data, transactions, and other confidential information.
- Instant payments work because of timeliness of data and the fast processing of different systems - of not only within the bank - but also with payment systems, virtual transfer networks and its peers. In any case, cyber risk and hacking become key operational risks that financial firms face.
- Fraud detection, anti-money laundering and risk and regulatory compliance are and should be at the top of management agenda.
Facelift Only -?How about governments and regulatory bodies? They must also be modernized or digitalized.
- Now comes neobanks and fintech firms. The nimbleness of their new systems and infrastructures, combined with fresher outlook and take at finance, gives the entire financial industry a?facelift.?
- At the core, these firms will also rely on the traditional infrastructure and conservative regulations to operate.
- Existing infrastructures of both all players and stakeholders – including governments and regulatory bodies – have to be modernized and this modernization is not overnight.
The Lack of Success of Taiwan Digital Banks blocked by Regulatory Oversight
- Take Taiwanese neo and digital banks for example. For them to operate as banks, they have to go through the same licensure examinations by the Financial Services Commission, the regulatory body of financial industry in Taiwan. The exams include robustness of their KYC/Account Opening processes, AML and compliance frameworks, risk exposure management, Balance sheet and liquidity management, etc.?
- While there may be lots of headwinds, they do pave the way for the new way of banking with consumers.?
- How about SMEs, large corporates, financials and governments??There are potential opportunities to apply artificial intelligence in these aspects and businesses of the bank, particularly in the areas of custody, derivatives/FX markets and risk management.
Adoption of different strategies to combat Neobanks and Fintechs
- Traditional banks have caught on this and have started to pivot different strategies.
- Regional and local banks have also created their own digital banks within their existing frameworks and infrastructures.?
- On the other hand, global banks such as Citi are now focused on banking with Corporates and wholesale market; Citi has exited most of its consumer banking globally.
Other thoughts... Application of Data and AI Beyond Consumers - How about Managing Risks, AML Detection, Capital Reduction?
- Where data can further come in handy (aside from the usual front end application on capturing new users or identifying patterns) is on assessment of risk and capital.
- If companies are able to capture their risks accurately with the help of AI technologies, there can be substantial reductions in setting aside capital for future potential risks and thereby increasing returns.