The digitization of the Asia-Pacific financial sector has accelerated amid the coronavirus pandemic as individuals and businesses move online. While this presents new opportunities, it also poses new risks as financial criminals follow the money online. With face-to-face contact reduced for safety and hygiene reasons, it is more challenging than ever for financial institutions to stay ahead of fraudsters and money launderers.
Singapore will become one of the focal points of Asia’s digital banking evolution when the city-state awards digital banking licenses later this year. As a key fintech hub in Southeast Asia, Singapore is a natural starting point for digital banks in the region and was an early adopter of digital financial technology, which laid the groundwork for a dynamic fintech startup scene.
In recent years, the financial services industry has digitized rapidly, with transactions becoming speedier and more efficient. This transformation has mostly been a positive development for financial services providers and their customers. However, as the industry landscape has changed, illicit activity has moved in tandem. Put simply, just as it is much easier to complete certain legitimate financial transactions online than at the retail outlet of a bank, financial crime now happens just as quickly.
The gig economy is roughly defined as a prevalence of short-term contracts or freelance work as opposed to permanent jobs. As the global economy changes, the gig economy has been growing rapidly. According to a recent Mastercard report, the digital gig-economy generated ~USD 204 billion in revenue in 2018, or, for comparison, just over half (56%) of Malaysia’s economy in 2019. The size of gig-economy transactions is projected to grow by a 17 percent compound annual growth rate with a Gross Volume of ~USD 455 billion by 2023, or just over four-fifths (86%) of Thailand’s GDP in 2019.
Asia Pacific (APAC) is the fastest-growing region in the world, but also one of the most challenging. A melange of countries with different languages, cultures, economies, and political priorities has made regional, cross-border cooperation, financial or otherwise, difficult.
One of the paramount challenges for banks in the 21st century is ensuring that their technology infrastructure is optimized to support their core business. For Chinese policy banks, which are venturing into different kinds of sovereign lending, and syndicated loans in particular, certain bottlenecks exist that can be more effectively surmounted by adopting distributed ledger technology (DLT) and artificial intelligence (AI).
The global economy is growing more interconnected and digitized. As such, there is an industry-wide consensus that revenues from cross-border payments will rise from US$144 billion in 2014 to roughly US$280 billion in 2024, driven by a surge in payment volumes.
Today’s financial industry is going through rapid change. Fintech companies are combining finance and technology in new and innovative ways to completely redefine existing value chains. These fintechs are launching innovative products and services that promise to disrupt one of the oldest industries in the world, shake up norms that have been in place for decades, and change the business models of everything from payments to lending.
The Asia-Pacific region is set to be the primary engine of global economic growth in the 21st century. It is home to two of the world’s three largest economies, the two largest countries by population and more fast-growing emerging markets than any other region globally.
As the financial industry has developed, it has increasingly relied on technology to facilitate the flow of capital. Although technology increases efficiency and lowers transaction time and cost, a critical underlying need is an ability for systems to communicate effectively with each other both internally within an organization and externally with other organizations. With vast amounts of data flowing throughout the financial system every second, even the smallest miscommunication can be costly.
Regulation has always been the bugbear of the financial sector. On the one hand, it is a necessary part of stable industry growth. On the other, regulatory requirements are one of the biggest challenges for banks today; the global banking industry spends an estimated US$270 billion a year on compliance-related costs. Nowhere is the regulatory challenge more acute than in Asia Pacific, where a confluence of cultures, political systems, languages, and financial systems come together daily across the region.
Challenges for the financial industry are growing. Third party non-bank financials threaten the core businesses of traditional banks and institutions. Trade tensions are escalating between the US and China, and even the US and Canada, and threaten to take the global economy on a different path, which may ultimately have a dramatic effect on the business of banks. Further, as interest rates rise, the stark realities of a worsening economic environment may threaten existing loans and products. Finally, the biggest challenge for financial institutions over the next five years: regulations.
Since the launch of real-time payments in Japan in 1973, the financial industry has been on a path of rapid modernization as governments and financial sectors around the world move to instant payment systems. In many ways, real-time payments are a natural evolution of the industry, providing better, faster and cheaper payments domestically, and increasingly, cross-border.
As the financial industry continues to grow and innovative, banks are facing increasing challenges to keep up with the rapid pace of change, especially in the payments segment. Payment hubs could be the answer.