On the cusp: regional integration in Asia

It’s 2015, the mid-point of the decade and a good time to start looking at major trends in Asian financial services over the next five to ten years. One of the major themes will be regional integration, which is another way of saying the development of cross-border markets. There are at least two important threads here: the ongoing internationalization of China’s currency, and the development of the ASEAN Economic Community (AEC) in Southeast Asia. RMB internalization is really about the loosening of China’s capital controls and its full-fledged integration into the world economy. And everyone seems to want a piece of this action, including near neighbors such as Singapore who are vying with Hong Kong to be the world’s financial gateway to China. The AEC is well on its way to becoming a reality in 2015, with far-reaching trade agreements designed to facilitate cross-border expansion of dozens of services industries, including financial sectors. While AEC is not grabbing global headlines the way China does, we see increasing interest in Southeast Asia among our FSI and technology vendor clients. From Celent’s point of view, both trends will open significant opportunities across financial services. In banking, common payments platforms and cross-border clearing. In capital markets, cross-border trading platforms for listed and even OTC products. In insurance, the continued development of regional markets. Financial institutions will be challenged to create new business models and technology strategies to extract the opportunities offered by regional integration. It’s the mid-point of the decade, and the beginning of something very big.

「岩盤」規制解除に想うこと(その1)

2014年12月に発足した第3次安倍政府は、「日本経済再生本部」において日本経済の再生に向けた基本方針を発表 した(1)。 そこでは、「農業、雇用、医療、エネルギー等のいわゆる岩盤規制(bedrock regulations)に対して、一歩たりとも後退することなく改革を進め、新たな市場とビジネスチャンスを生み出していく。」と明言している。

岩盤規制は、省庁、行政機関や業界団体などが改革に反対し、緩和や撤廃が容易にできない規制をさす。1980年代以降、経済成長の観点から多様な分野で規制緩和が行われてきた中で、この「岩盤」規制だけは既得権益を持つ関係者の強い反対にあって、問題解決が長年後回しにされてきたといわれる。

「道路運送法」「薬事法」「医師法」「食品衛生法」「農地法」「健康保険法」「社会福祉法」「電波法」「労働者派遣法」などがその議論の対象とされるが、法律や制度以外にも、成長戦略の妨げとなる「岩盤」が存在する。

本稿では、この「岩盤」規制解除を巡る様々な議論を通じて、イノベーション機会を探る。

 

雇用市場の制度改革案

日本市場の、「岩盤」規制解除が続く。

先の農業分野、系統金融分野における、全国農業協同組合中央会(JA全中)の改革(2) に続き、全産業に関わる、雇用市場の制度改革案(3) が報道された。

グローバル市場は新たな生産性の大競争時代に突入している。そこでは、デジタル技術活用による業務プロセスの自動化、セルフサービス化が推進され、デジタル化が困難な、知的で自律的な活動のみが徹底的に追求されるようになり、従来の雇用規制の枠組みはもはや通用しない。

セレントは、かねてより規制緩和と技術革新は、イノベーションの機会でありドライバーであると提唱してきた。デジタル技術の普及は、技術革新面での可能性を高め、一方で、規制緩和は、革新的な技術の適用機会を提供する。

そして、成長戦略の加速要素として、新たなインセンティブプランの誕生に期待したい。ストックオプションに象徴される欧米型の株式報酬制度は、様々な弊害も持っていた。ここで日本型の新たなシェアプラン(組織業績と個人報酬の連動)を創造することができれば、デジタル技術を熟知し事業意欲の旺盛な企業家と、成長戦略をサポートする国家のイニシアチブとが両輪となり、イノベーションが加速するだろう。

 

(1) アベノミクス成長戦略の実行・実現について (日本経済再生本部)
http://www.kantei.go.jp/jp/singi/keizaisaisei/dai15/siryou3.pdf

(2) JA全中を「解体」 政府、改革期間3年に短縮 (日経)
http://www.nikkei.com/article/DGXLZO81656900X00C15A1EE8000/

(3) 年収1075万円以上の専門職対象 労働時間規制外す (日経)
http://www.nikkei.com/article/DGXLASFS07H4P_X00C15A1MM8000

 

Asian Vendors Looking to Pivot

I’ve just returned from a two-week swing through Asia, with stops and roundtables in Tokyo, Singapore, Melbourne and Sydney. Along with my colleague Neil Katkov I was fortunate to meet a large number of clients and market participants, both banks and their ecosystem partners, in a series of more than two dozen meetings. In each country Celent hosted a half-day session on digital innovation. Attendance was good and discussion spirited; digital and omnichannel is a topic that every bank across the region wrestles with. Their service providers, too, are keenly interested in the topic. What struck me as particularly noteworthy, however, was that a large number of providers are trying to reposition themselves in the marketplace. Their (legacy) brands are extraordinarily strong, which is a blessing and a curse. Brand strength is great, but when it’s associated with a technology that’s in decline, and not yet associated with new areas of investment, then vendors are put in a difficult position because they don’t get the calls associated with that new fintech. A common question for us was, “how do I get the message out about this new solution I’ve developed?” There’s no one answer, but I’d suggest to banks that they cast a wide net when looking to address their new technology problems; many of their historical partners are learning (or at least trying to learn) new tricks. That their marketing (broadly defined) has yet to catch up shouldn’t dissuade banks from seeing what new solutions they have to offer.

Apple Watch is a game changer

The Apple Watch unveiled a few hours ago is a game changer. Even if the “iWatch” flops, the voice input function will have a profound effect on lifestyles, finally liberating users from the tedious and clumsy digital (as in fingers) input that has dominated human-device interaction since the advent of the typewriter (actually since the invention of writing). Like the smartphone and the tablet before it, the Apple Watch marks another giant leap in usability, and in turn has the potential to boost adoption of digital financial services. In a best case scenario, mobile payments, digital wealth management services, and biomonitor-based insurance could all reach their long-awaited tipping points and achieve widespread adoption. It should come as no surprise due to Apple’s reputation for design, but the fact that the Apple Watch looks like a watch,  not a Dick Tracy-era device, will be a major factor in its adoption. The slim form factor and accuracy of the timepiece place the iWatch squarely in the jewelry accessories market as much as in the smart device market. This is a virtual first in the computing industry (it is hard to imagine many people wearing the clunky Samsung Gear as a fashion statement) and its significance in driving demand for the device should not be underestimated. No doubt we will see iWatch shops in the jewelry sections of department stores globally before long.

Nominations for the 2014 Asia Insurance Technology Awards (AITAs) are now open

The Asia Insurance Technology Awards (AITAs) recognize excellence and innovation in the use of technology within the insurance industry in the Asia Pacific Region.

Nominations for the 2014 AITA Awards are now open. Please find more information on Celent website http://www.celent.com/aita, and you can download the nomination form from there. The deadline for submitting the nomination form is 15 September 2014.

AITA AWARDS CATEGORIES

IT Leadership Award

This award honours an individual who has displayed clear vision and leadership in the delivery of technology to the business. The recipient will have been responsible for deriving genuine value from technology and has demonstrated this trait with a specific project or through ongoing leadership. Nominations accepted from insurers. Vendors are welcome to assist their client insurers with their nominations, however vendors/suppliers are not qualified to receive this award. All nominations MUST include insurer contact information, and all follow-up will be done with the insurer, not the vendor.

Best Insurer: Technology

This award honours the insurer who has made the most progress in embracing technology across the organisation. The recipient will have deployed game changing technology projects in the area of core insurance and broker processes. Nominations accepted from insurers. Vendors are welcome to assist their client insurers with their nominations, however vendors/suppliers are not qualified to receive this award. All nominations MUST include insurer contact information, and all follow-up will be done with the insurer, not the vendor.

Digital Transformation Award

This award honours an insurer or broker who has made the most progress in implementing digitization initiatives, such as sale and service of products online, eco-system integration (such as with business partners, repair shops, medical providers, distribution, etc.), leveraging social networks, work-place enablement (such as BYOD, collaboration tools, etc.), business process automation (STP), engaging user interface design, or analytics (analyse customer behavior, propensity, risks, etc.). Nominations accepted from insurers. Vendors are welcome to assist their client insurers with their nominations, however vendors/suppliers are not qualified to receive this award. All nominations MUST include insurer contact information, and all follow-up will be done with the insurer, not the vendor.

Best Mobile Application

This award recognises the insurer who has exhibited true innovation in the use of mobile technology. The recipient will have developed a unique and compelling application not seen elsewhere in the industry. Nominations accepted from insurers. Vendors are welcome to assist their client insurers with their nominations, however vendors/suppliers are not qualified to receive this award. All nominations MUST include insurer contact information, and all follow-up will be done with the insurer, not the vendor.

Newcomer of the Year

This award recognizes the best new player in the insurance technology field. The recipient will have introduced a game-changing solution to the industry. Nominations accepted from insurers or vendors.

Innovation Award

This award recognizes the innovation business model or in the usage of technology. Nominations accepted from insurers or vendors.

Beyond HFT

Last week I attended the Tokyo Financial Information Summit, put on by Interactive Media. The event was interesting from a number of perspectives. This event focuses on the capital markets; attendees are usually domestic sell side and buy side firms and vendors, including global firms active in Japan. This year there was good representation from around Asia ex-Japan as well; possibly attracted by the new volatility in Japan’s stock market. The new activity in the market was set off by the government’s Abenomics policies aimed at reinvigorating the Japanese economy. But I suspect the fact that Japan’s stock market is traded on an increasingly low latency and fragmented market structure gives some extra juice to the engine. Speaking of high frequency trading, Celent’s presentation at the event pointed out that HFT volumes have fallen from their peak (at the time of the financial crisis) and that HFT revenues have fallen drastically from this peak. In response to this trend, as well as the severe cost pressures in the post-GFC period, cutting-edge firms seeking to maintain profitable trading operations are removing themselves from the low latency arms race. Instead, firms are seeking to maximize the potential of their existing low-latency infrastructures by investing in real-time analytics and other new capabilities to support smarter trading. HFT is not dead, but firms are moving beyond pure horsepower to more nuanced strategies. Interestingly, this theme was echoed by the buy and sell side participants in a panel at the event moderated by my colleague, Celent Senior Analyst Eiichiro Yanagawa. Even though HFT levels in Japan, at around 25 – 35% of trading, have probably not reached their peak, firms are already pulling out of the ultra-low latency arms race–or deciding not to enter it in the first place. The message was that for many firms it is not advisable to enter a race where they are already outgunned. Instead they should focus on smarter trading that may leverage the exchanges’ low latency environment, but rely on the specific capabilities and strategies of a firm and its traders. Looking at this discussion in a global context, it seems interesting and not a little ironic that just as regulators are preparing to strike against HFT, the industry has in some sense already started to move beyond it.

Quotes from the Innovation Roundtable

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

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

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.

MEMS, Emerging Technology?

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?