Digital Transformation of the Securities Industry in Japan and Asia

Modularization of Industry

Industries across the board are undergoing structural change. This change extends beyond individual firms and spills across industrial sectors. Other industries that have been exposed to the tide of technology-driven structural changes have through the process harnessed technology to be reinvented as new industries befitting this evolution in industrial structure. The financial industry traditionally has been far from the vanguard of this change.

The proliferation of the Internet and digital technologies is only accelerating the evolutionary modular shift across all industries. This stands in stark contrast to the traditional non-modular, vertically integrated structure (that is to say, the antithesis of a modular structure, where all the products and services are provided through and within one exclusive value chain) that the industry has historically embraced.

However, disruptive new market players have visibly forced conservative, existing entities to begin to seek new approaches; at the same time, regulatory authorities have also started to embark on establishing a new, more robust system for regulating the financial industry.

The Securities Industry of the Future

The securities industry can be regarded as the first sector in the financial industry to have embarked down the path of modularization. A major area that has been involved in this first step toward modularization has been mutual funds.

In the closed model era of brokers and mutual fund firms, which was the norm until the 1960s, mutual fund firms would outsource sales to securities companies (full service brokers). Then, the market witnessed the emergence of no-load funds starting in the 1970s. This era was characterized solely by diversification of sales methods, and was entirely absent changes to the closed model that covered planning, manufacturing, and sales. Finally, change descended on the market in the form of the mutual fund supermarket revolution. Metaphorically speaking, this approach was akin to companies putting mutual funds on the shelves of a supermarket and charging commissions only for the products sold. The interface between mutual fund companies and securities companies opened up, with this the creation and sales components were decoupled and functionally modularized.

The Role of New Technology: Robo-advisor

Robo-advisor initiatives can be expected to accelerate the speed of advances in modular demand structure. Presumably, coming delivery channels will seek to optimize information and investment expertise provided, driven by approaches that respond to the needs of investors by sometimes providing "automated advice" and sometimes harnessing brokers as "a human support mechanism.”

In Japan, megabanks, startups, and dedicated online brokers are all jockeying to leverage their strengths in a way that accords them the most advantageous position possible. Their robo-advisor initiatives so far largely appear tailored to support the sales of mutual funds. As easy-to-use, non-face-to-face channels, they are garnering interest from investors with a level of comfort with IT and a degree of financial literacy. Moving forward, further advancements that draw on both the asset management facet and technology are expected in the 4 areas; diversity of products, diversity of services, automation, accommodating B2B.

Excluding Japan, Hong Kong, and Singapore, Asia is a fragmented market for retail investors, and therefore it’s still inaccessible. In addition, such markets as Taiwan and Korea are showing an increase in home bias. Thus, how the robo-advisor business thrives in the Asian market will depend on its distribution dynamics, along with its asset growth potential and product development.

Legacy modernization in the securities industry is much more than the application of novel technology. Rather, it portends nothing less than a wholesale structural overhaul of the securities industry that is an opportunity to envisage anew and redefine the industry’s future. There can be no doubt that this transcends the mere establishment of a digital channel; rather it will certainly impact products, services, IT units, and sourcing models, and, in so doing, provide the securities service providers of the future a chance to seriously consider exactly what kind of companies they would like to be and the corporate cultures they would like to foster.

 

Related releases:

Legacy Modernization in the Japanese Securities Industry, Part 1

Legacy Modernization in the Japanese Securities Industry, Part 2

Fintech and Robo Advisors: Booming in Japan

Legacy Modernization in Japan’s Financial Industry, Part 2: What the Auto Industry Can Teach the Financial Sector

 

Electronic Invoicing in Asia

Electronic invoicing is a low-cost transaction processing system that leverages information technology to transform a manual and paper-oriented billing process into a faster and more efficient electronic version of data messaging. As of today, it can loosely mean anything from scanned copy of a bill sent through an email network to a highly sophisticated electronic document sent through dedicated channels and maintained in an organization’s integrated system. The idea of electronic invoices stems from the increasing focus on paperless trading. Depending upon the nature of transaction, the process of paperless trading can involve a number of agents like insurers, transport organizations, excise and customs departments, banks, and financial organizations. Needless to say, the government authorities play an important role in this chain. Therefore, to facilitate greater efficiency among all participants, these public departments must set certain standards regarding components and formats of electronic bills/invoices, their transmission processes, and their legal status. From a logistical perspective, electronic bills and invoices help to reduce the amount of paper used for documenting and storing transaction information. Through e-invoicing, billers can dispense with a number of manual processes including printing, mailing, documenting, storing, and reconciling paper invoices. The adoption of electronic invoicing standards offers faster and more efficient data transfer, reducing the duration of billing cycles. Timely notifications and updates on invoice status, faster transmission of invoices for payers’ approval, and quicker dispute management systems enable better customer service. Payers get regular updates on invoice status, payment timings which enable them to estimate cash outflow with higher certainty, thereby helping them achieve better and more efficient working capital management. Eliminating costly paper invoices and reducing time and manpower required to manage them offers significant cost reduction opportunities as well. The situation in Asia Electronic invoicing in Asia is at a very nascent stage. This is due to a number of reasons including lack of regulatory framework, lack of established standards, tax impediments, lack of government initiatives, and lack of proper understanding of the overall system among the participants in the trading chain. Volumes of electronic invoices exchanged in Asia come from the business-to-consumer segment, and few technically qualify as “electronic invoice.” B2B invoices electronically exchanged are just beginning to emerge. In Asian countries, attention and investments are far more focused on the “paperless trade”. There is regular and ongoing processing of standards and regulations related to the adoption of international standards of communication. It is, however, a widespread practice at the governmental level to develop standards that adapt to the needs and uses of each individual country. The regulatory frameworks are at different stages for different Asian countries and legal aspects are regularly developed. Rather, it is taxes and fiscal constraints (for example, in China and India) to make recourse to electronic invoicing impractical. In a report titled ‘Progress of Electronic Invoicing in Asia’ Celent has studied in details the country specific developments regarding the adoption of electronic invoicing in Asia. The use of alternative transmission channels is still low in maturity in Asia. The tendency is to maintain a centrally managed, government-owned channel. Central governments and local administrations are very active in promoting the digitization of commercial documents. However, this does not necessarily mean specific recourse to the use of electronic invoices. The development and adoption of electronic billing are far more consistent in the presence of government programs devoted to the creation of procurement service centers.

Figure- Scattered levels of e-invoicing adoption in Asia (source: Celent)

The relatively low knowledge of aspects and rewards tied to the electronic processing of invoices in economically advanced countries (e.g., Japan) indicates an urgent need for greater investments in education and training. Another reason is the not yet complete integration of the procure-to-pay and order-to-cash corporate processes. Asian companies have a substantial lack of confidence in relying on banks as their technology partners. An increase in marketing, conference events, and education activities on the theme of electronic invoicing by operators who want to penetrate this market is expected in the future. While today companies are still running programs to persuade suppliers to embark on electronic invoicing, a more mandatory form of relationship building is expected.