See More on Facebook

Opinion

Thriving in a disrupted world

The world suddenly stands at the cusp of the Fourth Industrial Revolution, with technological advancement in the digital, physical and biological worlds bringing change at unprecedented speed and disrupting everything – business, politics and society at large.


Written by

Updated: February 4, 2018

“CIMB is in good shape for the future, but, unfortunately, the future is not in good shape”.

This was the conclusion of my opening remarks at the CIMB Annual Management Summit in November 2017. Our T18, short for Target 2018, transformation programme has been very well-executed over the past three years and the results are showing.

However, during that same time, the future seems to have accelerated towards us. I did not want any of our senior managers in the room that day to be in any doubt about the magnitude of the strategic challenge that is now before us.

The internet and digital technology, during what is now described as the last few years of the Third Industrial Revolution, had debilitating effects on many industries – music, photography, video and television, print media and retail. Over the next few years, banking, alongside others, such as healthcare, automotive, education and telecommunication, will be facing the same fate. Incumbents in these industries must recognise the existential threat and respond, or risk marginalisation and even failure, the way of Kodak, HMV and Blockbuster.

Bill Gates’ comment, way back in 1994, that “banking is necessary, banks are not” seems more prescient than ever. His point was that banking utilities, such as payment, safekeeping, financing and advisory, do not have to be sourced from banks. Customers are increasingly agnostic about who provides these products and services, as long as they are conveniently online.

The technological threat to banks is not just coming from the digital customer interface.

It is certainly early days, but there is a fierce race – in Silicon Valley, Wall Street, Huangzhou, Beijing, Bangalore, London and elsewhere – to profit from optimizing technology in banking. Even if we cannot visualise the end state, we know that banking will be barely recognisable in just a few years’ time.

In Malaysia, say, by 2025, I think society will be almost cashless so automated teller machines will seem as retro as phone booths are today. Bank branches will have become quite a rare sight. Robotics and artificial intelligence will have displaced a large percentage of asset managers and credit analysts, and maybe even investment bankers. Peer-to-peer interactions between customers themselves will have disintermediated banks in more and more ways.

Similarly, blockchain and its automated ledger functions, as well as cryptocurrencies, will have proliferated new methods of trade finance and money transfers that bypass banks altogether. These are some predictions based on technologies we already know about; there will definitely be others with equally profound consequences on banking as we know it.

The biggest threats to banks are coming from giant platform companies. Digital technology has brought the marginal cost of new customers for Apple, Google and the likes to zero. China’s two largest platforms, Alibaba and Tencent, have taken the lead with payments, and then built on their customer base and data to challenge in other areas of banking.

They have both set up licensed banks to provide consumer loans with near-instant credit decision-making by analysing the massive accumulated customer behavioural data in their possession. With astounding results: Alipay has over 520 million users while WeChat is closing in on the one-billion users mark. In terms of loans, disbursements amounted to US$117 billion in four years for Alibaba’s Ant Financial and more than US$15 billion in 27 months up to August 2017 for WeBank. With Alibaba and Tencent both having market capitalisations of around US$500 billion and trading at price-to-earnings multiples of around 50x, their funding economics are vastly superior to those of incumbent banks.

Beyond platform companies, ecosystem players and fintechs are not to be taken for granted. Grab, AirAsia and almost every telco company are strong brands with large proprietary customer bases that are moving into payments and will want to venture into other financial products. Fintechs, on the other hand, are entrepreneurial companies sprouting everyday all over the world, trying to find the next banking product or service that can be made cheaper or more efficient. Lest we forget, Alipay was a little fintech not long ago at all.

It is game on and banks must respond. It is already late, but better late than too late.

In the face of these fierce threats, it is somewhat ironic that banking institutions have become more tightly controlled than ever. Every strategic move is heavily scrutinised by regulators. Indeed, some bankers are even conditioned to take offence if they are described as “creative” or ‘innovative”. Since the Global Financial Crisis, banks have been constantly battling re-regulation – new rules and much stricter demands on compliance to all rules. Capital requirements have been raised significantly and banking activities have been restricted by regulatory limitations or punitive capital charges.

Regulators wanted banks to become safer and boring, and we did fall asleep while technology companies barged into our playground and played with our toys. The other handicap for incumbent banks is the burden of legacy assets, such as branches and operating systems, and the people manning them. There has been hardly any talk on banking mergers these days because even the thought of combining banks quickly brings to surface the ugly sight of how much excesses there are to be written down or off.

So incumbent banks have lost a lot of ground and are up against it. Can the “empires” strike back? Yes, because banks still have significant competitive advantages.

However, it will be tough and not many will succeed. By 2025, I think that quite a number of today’s banking brands in Malaysia and ASEAN will be barely visible. The most important historical lesson from past industrial revolutions is that businesses that do not respond to the disruptive challenges, or get the answers horribly wrong, can die.

For the highly leveraged business of banking, the first rule to survival, in my book, is that banks must not find themselves exposed to large borrowers that will not survive the onslaught of the Fourth Industrial Revolution. There will be many, and few of today’s credit officers are equipped to spot them. The first strategic challenge for banks is to look into the future and identify which parts of banking are defensible and which are not. Corporate advisory and bespoke banking are more defensible; stockbroking and similarly low-value intermediation are not.

However, exiting low-margin businesses may not be the right answer; undercutting margins to fend off new players and retain customers is an option too. The core regulated savings and lending functions will remain with banks, partly because it is a low-margin, high-risk, heavy-compliance activity. It is not surprising that WeBank tends to sell chunks of loan assets to big banks, of course at bare-bone prices.

McKinsey recently estimated that the traditional balance-sheet deposits and lending risk-taking generate only 6% returns on capital while the capital-light distribution business, which is typically fee-focused, generates over 20% returns – this is where non-banks have been focusing on and where banks now need to both defend and attack.

Banks that will thrive are those that are able to hang on to their customers. It is not easy, and it starts with a better understanding of banks’ value proposition vis-à-vis customers’ needs today and tomorrow. Banks have enormous reservoirs of customer data, but they have been slow to use it. Banks remain more trusted than technology companies, at least for now, but they have been slow to build on it.

To deliver more products, banks have to get into smart partnerships with other companies yet they have been slow to do so. Similarly, to be more efficient and innovative, banks need to partner fintechs, bring their domain knowledge and capital yet banks have been slow in embracing fintechs. Banks have also been slow to respond in the war for talent – the best and brightest are turning to more exciting work environments at platform and technology companies and venture capitalists. Banks must make banking fun again.

Being slow and conservative is a natural state for banks, more so when the regulatory hurdles to do anything different is so high. However, in the Fourth Industrial Revolution, banks need to get very paranoid to survive. They need to be able to transform institutional mindsets to become fast and agile, experimental and iterative, inclusive and open because that is what the challengers are doing.

Of course, banks will need to convince regulators to be part of the solution. To quote one of Asia’s greatest finance thinkers and a former regulator, Andrew Sheng: “Those who ask incumbent financial institutions to play in regulatory sandboxes need to ask whether Asians are still kindergarten kids or adults facing the real world?” Regulators can do a lot to enable incumbents, not least by delivering on Asean integration so that we can invest and experiment at scale. They also need to act on the new systemic risks posed by juggernaut platform companies dominating global finance and unregulated fintech activities.

If China houses the largest threats to incumbent Asean banks, it also houses the most inspiring incumbent financial institutions that have transformed and thrived. Ping An, the old insurance company, has transformed itself, leveraging on technology and data, and creating powerful vertical ecosystems with smart partnerships. It reaches out to more than 430 million online users.

In 2016, about 56% of its profits came from insurance, a sharp decline from more than 80% a decade ago. The rest was derived from banking (20.6%), asset management (15.5%) and Internet finance (8.3%). Its market capitalisation soared from US$34 billion in 2006 to US$190 billion today. One empire has struck back successfully.

Boring and slow is a state of mind; it is time for Asean banks to get moving. In our region, banks still have most data, and customers still trust us more with their money, and regulators are still wary of non-banks. These favourable conditions will not last for long unless we deliver.

Back to the CIMB Annual Management Summit. In my closing remarks, I confessed that when we were building up CIMB, our definition of innovation was look West, and then copy and customise for Asean. The world of banking is now flat and no one has the answers, which also means that as incumbent banks fight back, the winners could be Western, could be Chinese or could be from Asean.

Technology is a threat, but it is also a catapult for those with the right answers. For CIMB, we have the advantage of being good at embracing change and we already have Asean economies of scale so we should be excited about what technology can do for us. Unlike the majority of banks, CIMB is not sleeping, but in the context of the Fourth Industrial Revolution, we need to get out of bed, now.

(The author, Nazir Razak, is the chairman of CIMB Group)



Enjoyed this story? Share it.


Asia News Network
About the Author: Asia News Network is a regional media alliance comprising 24 media entities.

Eastern Briefings

All you need to know about Asia


Our Eastern Briefings Newsletter presents curated stories from 22 Asian newspapers from South, Southeast and Northeast Asia.

Sign up and stay updated with the latest news.



By providing us with your email address, you agree to our Privacy Policy and Terms of Service.

View Today's Newsletter Here

Opinion

Frontier technologies pathway for prosperity, says Indonesian Finance Minister

Frontier technologies bring new opportunities as well as wide-ranging impacts and policy implications for the economy at the national, regional and global levels, writes Sri Mulyani Indrawati in an Oped. Rapid technological transformation is one of the defining factors in shaping the future of our economy — at the national, regional and global levels. Frontier technologies bring new opportunities, as well as wide-ranging impacts and policy implications. This transformation has affected economic performance, fostered production efficiency, revolutionized society and accelerated globalization. This trend is a key issue of our time and should spur renewed momentum for policy cooperation. The current wave of technological change is unique in terms of the breadth of its scope and the pace of change. It affects how goods, services and ideas are exchanged. The fast-declining costs of these technologies make


By The Jakarta Post
October 10, 2019

Opinion

The foreigner who stoked political chaos in Malaysia

For Asia News Network Editor’s Circle by Chong Lip Teck of Sin Chew Daily. Controversial Indian Muslim preacher Zakir Naik is on the wanted list in India due to his extreme religious remarks and alleged involvement in money laundering. Many Muslim countries have denied him entry. But in Malaysia, he is well received by the Pakatan Harapan (PH) government. Within the coalition, however, there is a split because of him. The ground sentiment is also divided into two, on  racial and religious lines. One side has defended him while the other side asked for his repatriation. As a Muslim preacher, Zakir Naik is popular in the Muslim community. He has his charm. While promoting Islam, he would  downgrade other religions, especially the Hindus and Christians. But, as a guest in Malaysia, he has crossed the red line. If he is merely promoting Islam, no one is against him. But he insults other religions in his sp


By ANN Members
September 16, 2019

Opinion

Is Twitter aiding India’s quest to silence Kashmiris?

The prospect of internet censorship looms. The spectre of an internet clampdown has once again reared its ugly head. This time though, the perceived cause is the social media companies — the digital gatekeepers who rally behind the idea of free expression for all. In the past few weeks, several users have complained that their accounts or tweets were suspended or withheld for posting about events in India-held Kashmir. The Pakistan government specified about 200 accounts that were suspended to Twitter, accusing the platform of aiding India’s quest to silence Kashmiris and their supporters. Among the many people whose accounts have been reported recently, President Arif Alvi also received a notice from Twitter alerting him on a complaint it received requesting for removal of his tweet on Kashmir. Although Twitter did not find the tweet to be in violation of its rules and took no action, its content m


By Dawn
September 2, 2019

Opinion

Modi’s next move

Moeed Yusuf, the author of Brokering Peace in Nuclear Environments: US Crisis Management in South Asia, writes for Dawn newspaper.  For most in Pakistan, Indian Prime Minister Narendra Modi’s move of revoking held Kashmir’s special status in the Indian constitution came as a shock — even if his government’s manifesto categorically stated his intent to do so. Shocking? Hardly. In fact, the move has laid to rest any pretence that Modi recognises the need to be a centrist prime minister and that his pandering to his right-wing RSS support base is only a way to keep them in good humour. Everything about his government’s demeanour over the past couple of weeks confirms the deep ideological conviction that underpins his actions. Sadly, the popular rebuttal that India’s democracy is robust enough to keep the minorities from being jett


By Dawn
August 21, 2019

Opinion

Editorial: Draconian measures in Jammu & Kashmir

India must treat Kashmiris like its own citizens the way it claims and not alienate them any longer. On August 5, the world’s largest secular democracy decided to unilaterally dissolve the autonomy of its only Muslim-majority state and replace it with direct rule by the federal government. Eight days since, the goings-on in what was once Jammu and Kashmir, home to 12.5 million, remain opaque. The region is under curfew, with all communication and media cut and security forces on the streets enforcing a tight clampdown. Even as international media cover Indian-administered Kashmir to shed more light on the situation, India insist


By The Kathmandu Post
August 15, 2019

Opinion

When Jakarta is hit by inconvenience: The capital’s grand blackout

Indonesians are waking up to far-flung grievances. The Sunday blackout on Aug. 4 in Greater Jakarta and parts of West Java was said to be the worst in many years. Family and friends’ gatherings were still cheerful but hot as houses lost their air-cons; the new pride of President Joko “Jokowi” Widodo and that of Jakartans, the MRT, seemed to blush in shame as the power back up, it turned out, was for the stations and not ready yet for the MRT itself – from which passengers had to be evacuated. Gone was all the talk of the digital revolution and the cashless world as people suddenly found they had to rummage for cash for transactions. We’re still waiting for results of an investigation into what happened following the president’s stone-faced response; so speculations range from inadequate back up, slow contingency measures to allegations of sabotage and even whether a single big tree g


By Asia News Network
August 12, 2019