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.

Is a New Era for Japan’s Mobile Wallet Coming?

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Feb 20th, 2014

KDDI, a Japan’s mobile carrier, announced that they will launch “au Wallet”, mobile wallet which has both e-money and point reward program, in the coming May 2014. This mobile wallet is available for not only online shopping but also offline shopping at more than 30 million merchants. KDDI has pushed forward 3M strategy – multi-use, multi-network and multi-device a couple of years ago. As a part of that, they are launching new O2O (online-to-offline) payment service.

“au Wallet” can be accessed from both PC and mobile devices and will used MasterCard prepaid payment system for their payment processes. Also, they have a unique function for point program. When customers use this mobile wallet, rewarding points will be saved up and customers can use reserved points for their mobile bill payments.

KDDI has some 34 million customers as of February 2014 and based on the customer base, they are targeted to create US$ 12 billion O2O market by 2016. Also, they will utilize big data analysis to improve the service.


Source: KDDI

KDDI starts this service with a solid customer base and a significant number of acceptances. However, it might be difficult to meet the goal they are aimed at because it might take time to influence customer behaviours. In Japan, mobile payment has existed since before smartphones spread but Japan has not achieved great success in mobile payment.

However, the situation surrounding mobile wallet has been changing little by little. In Japan, the number of smartphone users has been increasing steadily and smartphones spread at a certain extent and the number of e-money users has been growing firmly. Therefore, au Wallet has a enough potential to success in O2O market. To lead this service toward success, KDDI should be sensitive to customer behaviours and try to add new twists continuously to their mobile wallet service with their CRM analysis.

Card Customer Information Leaked in South Korea

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Feb 5th, 2014

Personal data kept by three Korean card companies have been leaked. The number of leaked accounts exceeds 100 million, double the South Korean population of approximately 50 million. Although similar types of fiascos have happened in the past, this is one of the biggest leak incidents prompting card companies to revisit their efforts on maintaining sound risk management to prevent such a serious situation.

I visited a bank when this fiasco happened and there were more than 70 people waiting to either change or cancel their credit cards. Card companies’ call center lines were also flooded for over a week and according to statistics released by the government, there were some 840,000 card secessions and approximately 6 million card close and reissuance as of February 1.

Looking at it closely, the leak started from one employee at a credit bureau. This person was on loan to the card companies to develop a system to prevent loss, theft and forgery of cards. The regulator announced that they already arrested the suspect and retrieved all leaked information. Therefore, they said that they do not expect secondary damages from this incident. However, consumers are advised to be on the alert for secondary damages other than card forgery; e.g., smishing (SMS phishing) and voice phishing.

This credit card fiasco occurred because the firms ignored basic compliance. The card companies should have encrypted customer data and not allowed third party staff to use USB memory devices. This fiasco reflects card companies’ low awareness of risk management. Regulations regarding customer data have been developed but card companies didn’t follow them appropriately.

Both the regulator and card companies should reconsider initiatives to prevent a recurrence. Also, card companies need to not only upgrade data centers and peripheral systems but also thoroughly educate all staff about customer information protection. Although advanced systemization has been developed, the responsibility of each employee is still extremely important and card companies should keep in mind that they are highly responsible for keeping customer data safely.

MEMS, Emerging Technology?

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Jan 22nd, 2014

Ever heard of “MEMS”? I guess most people will answer ‘no’ to this question.
“MEMS” is an acronym for Micro-Electro-Mechanical Systems – which can be further defined as miniaturized mechanical and electro-mechanical components.
So how does this affect us?
This technology has been around for a number of years now, and is slowly becoming more and more useful in everyday life. Very small components can collect data and stream the results to an increasing number of devices, thus making data collection far easier and convenient.
No, I am not talking about invasive data collection.
But imagine a small device implanted in your arm that can collect data about your health! Such as rising blood pressure, an impending heart attack, changes to your blood composition, etc etc. Imagine further that this data can be streamed in real time to your smartphone and your doctor!
Research on “MEMS” usage is ongoing, and in some cases people are already predicting that its use will reduce disease and surgery in future. This could have far-reaching implications in the life and health insurance industry. Sometime in the future we may be pricing life and health products and using the availability and ongoing usage of MEMS devices as an input into our rating – just as we are currently using telematics data to price for auto insurance.
Is this going to be the next big change in our industry?