Quotes from the Innovation Roundtable

Neil Katkov

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Apr 25th, 2014

They said it couldn’t be done, but we held the latest installment in Celent’s series of innovation roundtables in Tokyo recently. Our innovation roundtables put the focus squarely on interactive discussion among the participants. This is a relatively untried model in Japan, where events typically take the form of conventional conferences with presentations. We’re glad we tried it though, because we got a very interesting line-up of firms. Participants included the whole spectrum: banks, capital markets firms, and insurers; Japanese and foreign firms; traditional mega-institutions and alternative new entrants.

The discussion was lively; below are some quick notes I took of some of the more interesting comments made, to capture a bit of the flavor of the day.

Why Innovate?
“Innovation is not the goal, it is a method and a tactic.”

“We need to innovate because it has become difficult to differentiate us from our competitors.”

“In today’s environment, innovation is necessary if you want to stay profitable.”

Paths to Innovation
“Incremental innovation is an axymoron. You can’t innovate by increments; innovation requires a big bang change.”

“It might be possible to rearrange existing elements to create something new.”

“When to innovate? If our clients think a new service is interesting, we try and create it for them and see if it succeeds.”

“Innovation needs to be business driven.”

“Financial institutions need to have an innovation division; an incubation unit that accumulates ideas from throughout the company.”

IT and Innovation
“IT is not the impetus for innovation, but because IT inevitably evolves, that creates need for innovation.”

“Legacy is a barrier: it is hard to throw things away.”

Cultural Challenges
“We need to justify ROI on any investment each fiscal year. It is hard to show this on an innovation project.”

“If you think about it, financial institutions don’t even have R&D departments.”

Quote of the Day
“Changing company culture is really about changing oneself. I personally enjoy innovation and change. Innovative culture is about getting a bunch of people together who enjoy change.”

Potential Growth in South Korean banks

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Apr 24th, 2014

At first, I offer my condolences for the loss and missing of beloved families or friends at the South Korean ferry disaster.

South Korean banks have faced difficulties in remaining the steady growth in the recent years. There are some reasons for this – a low economic growth and a low interest-rate environment.

Banks in South Korea took action to reduce their staff to cut down the cost. The Asia Economy Daily said that 700 staff reduced in South Korean bank industry last year. Alsonches, a number of banks are considering or start reducing branches. In such a small country, there are thousands of bank branches at this moment.

Celent believes that South Korean banks have a number of ways for the future growth with their experiences.

For example, they can expand their business model or IT models to overseas. They have been trying these strategies for decades but it is difficult to find a “success” story. They should seek the various ways to bring their businesses to overseas. In the process, they may make some changes on their business models for oveaseas expansion.

In South Korea, mobile banking services are advanced and activated. Celent believes that they have a number of case studies for mobile banking and mobile payment. They may introduce these to overseas, not only developing countries but advanced countries.

In conclusion, they should study regulations, acceptable business models and IT trends in a country and should consider and study how their case studies are applied to each country beforehand.

The Market structure debate in Asian context

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Apr 24th, 2014

The recent debate about the impact of High Frequency Trading (HFT) and on the issue of market structure in general is no more confined within the US market. Regulators and market participants worldwide are discussing this issue seriously. The chairman of the Australian Securities and Investment Commission (ASIC) recently detailed the position of the Australian authorities in this regard. Incidentally Australia, along with Japan, is one of the few Asian countries that have multiple trading venues, a necessary condition for the growth of advanced trading and order routing capabilities, including HFT. It is worthwhile to look at the state of adoption of the Asian region in terms of adoption of advanced trading tools, and the role of the Asian exchanges in that regard.

The different Asian markets are at different levels of maturity, and therefore it is difficult to analyse the region as a single homogenous entity; rather the Asian markets can be grouped into two broad categories. The first category belongs to the advanced economies like Australia, Hong Kong, Japan and Singapore which have well developed capital markets. Exchanges in these countries are at par with western competitors in terms of latency and adoption of advanced trading technologies. The second category consists of exchanges in emerging economies like India, China, Malaysia, Korea which are somewhat lagging their Asian counterparts in the first category.

However, there is a common factor that runs across the two categories of exchanges – lack of competition from alternative trading venues. This means that most of the Asian exchanges are largely national monopolies without significant competition from alternative providers, though the situation is slowly changing in some markets (e.g., Australia, Japan). This is one aspect which distinguishes Asia from the western markets where the competition among exchanges and alternative trading venues is severe.

Another key challenge in Asia is the fragmentation of markets and lack of harmonization – regulatory, economic, monetary and technological – in trading and settlement practices. This restricts the growth of cross border trading volumes and greater regional integration at an Asian level. The ASEAN initiative is a move in that direction, but it is still early days to judge its potential for achieving regional integration.

Asia has also lagged the western markets in terms of adoption of advanced trading tools and technologies (like DMA, algorithmic trading, high frequency trading etc). Some of the Asian exchanges, particularly the ones in the advanced economies, have adopted latest technologies with low latency and colocation offerings, but some of the above mentioned factors still present challenges. For example, lack of multiple trading venues limits arbitrage opportunities. Lack of regional integration means cross border flows have yet to realize its full potential. These prevent growth of trading volumes, need for advanced trading tools and technologies, and participation of foreign players in domestic markets.

Regulators in Asia are traditionally very conservative. Therefore decision making for significant changes in market structure and practices takes time. In a rapidly evolving trading world, this means Asian exchanges find hard to stay abreast with global trends. Also because domestic exchanges are perceived more as national utilities, any proposal that threatens the position of incumbent exchanges is met with resistance and difficult to implement.

Some of the Asian exchanges have been very aggressive in exploring newer avenues beyond the traditional revenue sources. The Singapore exchange is a good example of that. It started offering clearing services for commodity derivatives through its AsiaClear offering a few years ago. In addition to providing CCP services as mandated for OTC derivatives under the proposed reforms, the SGX is collaborating with the Korea Exchange to develop the latters’ OTC clearing capabilities. Therefore in some markets (like Singapore) the incumbent exchanges are taking a leading role in clearing of OTC derivatives as proposed by new regulations. It will be interesting to see if new players will be able to enter and succeed in this business. Low volumes in the Asian markets, proliferation of CCPs, and competition from international ones may result in each CCP specializing in specific niches along product lines or local currency instruments.

Challenges with China’s RMB Internationalization Process

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Feb 24th, 2014

Chinese authorities have been making concerted efforts of late to internationalize its currency (renminbi, RMB) by trying to increase its use in international trade settlement and investment. Their efforts are paying off as international RMB payments and trade settlement have grown rapidly since 2010. The whole process consists of three broad steps beginning with the use of RMB in trade settlement, then investment and then as a global reserve currency. The first step is well underway and has received the most traction of the three – around 10-15% of China’s international trade is settled in RMB at present. China has currency swap agreements with 24 central banks allowing them to directly settle international RMB trade. Use of RMB for investment purposes is still limited due to lack of development of the Chinese capital markets and strict controls imposed by the Chinese authorities. Use of RMB as a global reserve currency is the most ambitious step and likely to take the longest time. At present several central banks have expressed interest for increasing RMB holding as part of their reserve. However, the quantum of holding is small at present and primarily geared towards diversification of foreign assets.

In spite of these developments, there are challenges with China’s efforts to internationalize the RMB. Even though the Chinese currency recently broke into the list of top ten currencies globally, its share is still miniscule (~1%) in total global payments. At a broad level, RMB is mostly used to settle imports, but not exports – roughly a third of imports and less than 5% of exports are settled in RMB at present. Even in imports, invoicing is often done in US dollars while settlement happens in RMB.

A necessary requirement for RMB internationalization is to first make it fully convertible. China is planning to do this first through the offshore markets. Doing the same in the onshore market by opening capital account and liberalizing interest rate regime will be more challenging.

Then there are operational challenges for banks that need to be addressed. New systems and processes will be required to support clearing and settlement of payments in real time by domestic and international players. They also need to support different languages including Chinese, English and other regional ones and to accommodate working hours in different time zones to bring about a truly international system of operations.

These will also require strengthening of China’s anti-money laundering (AML) framework. AML practices in China have been in development for over 15 years, however, the AML regulations were largely inadequate until as late as 2006-07. As a result the internal control systems and company culture at banks in China tend to be inadequate, and they do not go beyond meeting basic regulatory requirements at present.

Given the rapid developments in the RMB internationalization process over the last three years, there has been a lot of enthusiasm and optimism expressed by several players regarding its potential to bring in major changes in the immediate future. However, it is safe to assume from past experiences that China will follow a planned, controlled, and slow but steady path in trying to raise the importance of its currency at a global level. True internationalization of RMB will require fundamental changes on many fronts including regulatory, market infrastructure, political and geopolitical aspects. An intermediate step in realizing the ultimate goal may be to first make RMB a dominant currency at a regional level (ASEAN/Asian). The extent of its adoption at a global level will however be long drawn and closely watched.