Future of Fintech 2019

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F U T U R E O F F I N T E C H 10 Fintech in India is growing at a rapid clip. A report by NASSCOM forecasts the Indian fintech software market will command $2.4 billion in sales by 2020, up from $1.6 billion in 2016. Last year, there were an estimated 400 fintech companies operating in India, riding a rising tide of digital payments. Billionaire Vijay Shekhar Sharma and his company Paytm have helped propel India's fintech startup scene. With a valuation of $10 billion and 300 million registered users, Paytm achieved rapid growth thanks to its virtual payment wallet and spurred by the withdrawal of high denomination banknotes in November 2016. According to a 2019 report issued by India's Department of Economic Affairs, Ministry of Finance, "Fintech, while offering myriad opportunities, also poses threats – arising out of illiteracy, ignorance of risks." As a result, the PM Gramin Digital Saksharata Abhiyaan (PMDISHA) has been launched to enhance digital and financial literacy of 60 million rural citizens on the advantages and risks of digital financial services and channels. The scheme's main aim is to help rural communities fully participate in an increasingly digital world and "empower at least one person per household with crucial digital literacy skills by 2020", according to the PMDISHA website. Laws to ensure consumers have meaningful choice and control over their personal data, combat online fraud and reduce the risk of mistaken transactions are also being discussed at ministerial level. Lessons from India Indonesia tightens net on digital loan sharks hen a national financial regulator orders almost a thousand fintech startups to cease trading in less than a year, you know something's amiss. Judging by the ongoing debacle, if fintech in Indonesia was credit scored as a sector, it would never even get a micro-loan. In the first nine months of 2019 alone, the Indonesian Financial Services Authority, known as the OJK, had shut 826 unlicensed fintech firms for a range of dodgy prac - tices, ranging from charging inflated fees to strong-armed debt-collection tactics. Since the enforcement action by the OJK against rogue traders began last year, some 1,230 fin- tech firms have been forced to shut up shop. The clampdown came despite a voracious appetite for innovative banking and finan- cial services apparent across the largely unbanked Southeast Asian nation in a region renowned for lacking mass financial inclu- sion. Consultancy PwC estimates 70 per cent of individuals and small and medium-sized enterprises in Indonesia do not have access to traditional sources of finance. With over 260 million citizens, the world's largest Muslim nation has proved too tempt- ing for thousands of ambitious – and some shady – entrepreneurs seeking to lure peo- ple without credit cards or access for formal banking services to online borrowing. A report released in July by PwC estimates fintech lending will reach 223 trillion Indo- nesian rupiah (IDR) or £12.8 billion of accu- mulative loan disbursements in 2020, up 214 per cent from 2018. The sector also has the potential to add IDR19.4 trillion (£1.1 bil- lion to the financing gap of micro, small and medium-sized enterprises, while boosting credit access for individuals by 12 per cent. Tongam L. Tobing, chief of the investment watchdog at OJK, has marshalled police and public in a bid to find other illegal fintech firms, whether luring customers through social media, mobile apps or websites. Indonesia earlier this year sought to ensure Indonesians did not fall victim to fintech fraud or unethical practices – that had spec - tacularly plagued China in recent years – by tightening rules for online lending platforms. The OJK introduced caps of 0.8 per cent per day on interest rates, mandated that lenders obtain online signatures for all con- tracts, secure permission from the IT Min- istry and work with micro-insurance firms and credit-scoring firms licensed by the reg- ulator. Fintech firms must also only partner with debt collection agencies registered and licensed by the Indonesian Fintech Lenders Association (AFPI). Fintech in Indonesia has myriad trig- gers, according to PwC. The country's bur- geoning cohort of unbanked, plus its small businesses largely beyond the reach of tra- ditional financial services, have spurred the creation of hundreds of digital-only finan- cial services startups. A dearth of reliable infrastructure and professional risk management services also rendered small firms and individuals untapped by conventional lenders a ripe market for new fintech entrants. "Globally it has been the case that regula- tion generally is behind innovation and Indo- nesia is no exception to this trend," says Ravi Ivaturi, advisor at PwC's Jakarta practice. Offering a vast population scattered over 17,000 islands – only 10 million live in the sprawling capital, Jakata – given adequate coverage the reach of digital financial ser- vices trumps that of bricks-and-mortar bank branches and easily eclipses their queue-and-wait appeal. With an estimated 267,000 lenders and 5.2 million borrowers, according to PwC, Indonesia's fintech lending ecosystem is on a roll. Yet a mere 99 operators are currently registered with authorities. They have to date disbursed IDR25.9 trillion (£1.5 billion) worth of loans. PwC cites innovative approaches, such as online-to-offline (O2O) channels as well as alternative data for credit assessment, as further reasons leading to the surge in fintech in Indonesia able to attract those deemed 'credit invisible'. Startups' operating costs beat those of conventional lenders, too. Instead of physi - cal documents to determine eligibility, digi- tal identity and footprint are used by fintech startups in Indonesia. In its report, entitled Indonesia's Fintech Lending: Driving Economic Growth Through Financial Inclusion, PwC cites key drivers of fintech growth across the archipelago: surg- ing mobile phone subscriptions; soaring fintech lending due to closer links between Regulator shuts down hundreds of unlicensed firms hunting for easy prey, but what drove the explosion in illicit activity? industry stakeholders; and the roll-out of critical IT infrastructure and digital identifi- cation processes. Combined, these develop- ments result in more expansive coverage and accelerated know-your-customer procedures. "We see Indonesian regulators getting their act together and supporting the indus- try in a very constructive manner," claims Mr Ivaturi. He points to clear licensing require- ments for fintech lending companies and a code of conduct through the AFPI and Indo- nesia Fintech Association. "This initiative has created a conducive ecosystem for inno- vation while ensuring customer protection." The OJK's fintech sandbox initiative is also cited for attracting a number of fintechs to test their disruptive technology within a specified protected data set, where successes and failures can be analysed without caus- ing any form of systemic risk to borrowers or the wider economy. The collaborative approach is the key dif- ferentiator, according to Mr Ivaturi. "Learn- ing quickly from past incidents in the market and setting regulatory policy which is sup- portive of growth and at the same time pro- viding customer protection is very unique to Indonesia." W R E G U L A T I O N Richard Brown perational resilience continues to be a key focus area for the Financial Conduct Authority and other regulators. Risks facing a bank's operations have escalated as the cyber landscape continues to evolve. With many financial institutions still sit - ting on legacy systems that may be more vulnerable to attack or disruption, it is becoming exceedingly more difficult to maintain critical services. Outages could not only result in sub- stantial regulatory fines and business downtime, but also reputational damage. Banks that achieve real resilience in their operations and core services, even amid disruptions, will enjoy a competitive advantage and long-term sustainability in the years ahead. To achieve this it's cru - cial banks shift their focus from investing only in fintech innovation on the revenue side of their business to also bolster- ing their regtech (regulatory technology) capabilities on the cost side. Regtech helps organisations to digital- ise their traditionally manual processes where spreadsheets and endless email chains have long reigned. Through the adoption of smart technology, such as machine-learning and cloud computing, which banks are already implementing to offer savvier fintech products, they can address compliance requirements while supporting their cost-cutting efforts to boost profitability. "There has been a lot of innovation on the revenue side of banks, but not so much on the cost side," says Karl Viertel, chief executive of regtech firm Alyne. "Fintech began in traditional areas like payments then moved into services, such as portfolio management or algorithmic trading, which also help enhance the revenue side. How can we defend our position as a bank? How can we leverage fintech to increase our revenue capability? "Meanwhile, there have been massive costs with which banks have had to con- tend. Every time a new regulation pops up, banks hire someone new, usually a consultant, who would build yet another spreadsheet and things just get bloated. It is now time to take all the proven capa - bility we've seen transform the revenue side of banks and bring it to the back office. It's a much less sexy side, but it's where the bank's profitability really lies at the moment." While financial institutions may previ- ously have gained an understanding and generated data around specific risks or resiliency of their individual systems, there was less focus on understanding what makes an entire service opera- tionally resilient and how executives can make informed decisions on maintaining that resilience. When banks use more service provid- ers and outsourcing, the ability to ensure the stability of the financial system is paramount in allowing payments and other financial products to be accessible by customers at all times. Operational resilience becomes even more impor- tant as banks increasingly work with fin- techs because the depth of value deliv- ery drastically decreases. "We're no longer in a time where we are challenged to obtain data," says Mr Viertel. "Banks have tons of systems delivering enormous amounts of data. However, to strengthen operational resilience, so that stakeholders can make smart decisions to retain the resilience of their services, you need information. That's where regtech comes in." Alyne combines critical data to make information available to all its stakehold- ers and leverages next-generation tech- nology to make financial institutions more agile, from prevention to response and recovery planning. It can take operational risk key performance indicators and new regulatory requirements around opera- tional resilience, understand them in the context of the organisation, its processes and applications, and present relevant information to the stakeholders who need to make a decision. This capability is provided by Alyne through software as a service, which quickly and objectively evaluates criti- cality of assets, services and processes for any organisation. It automatically analyses requirements, standards, laws and regulations, and understands how they are relevant to maintaining compli- ance and operational resilience. Alyne's solution also enables firms to quantify the operational risks to the resilience of their services. Operational resilience is just one exam- ple of how regtech is assisting banks. It is also helping them to identify customers through know-your-customer processes, preventing money laundering or terrorist financing by using artificial intelligence to detect suspicious patterns. Regtech provides new ways to influence employee behaviour so they're making smart deci- sions, acting in a compliant way and not endangering information assets. However, it is operational resilience that will be the greatest differentiator in the years ahead. "If you look at any financial statement of a bank, the cost side is going to be drastic, especially on IT and compliance, compared to the gains you can make on the revenue side," says Mr Viertel. "Our customers have achieved cost-savings of 60 to 70 per cent depending on the pro- cess. Though it may be harder to quantify, risk transparency is equally as important in terms of value to banks, giving them better insights and understanding of their risk exposure and therefore avoid- ing regulatory fines. "By embracing regtech, banks can also enable their people to be more pro- ductive and do smarter things. Banks hire incredibly smart, well-trained and expensive resources in risk, security and compliance roles, but a lot of the time they just end up massaging data because that's the tooling they have available. Compliance and risk may not be directly revenue driven, but it's obvi- ous that having expensive people mas- sage spreadsheets is not the best bang for your buck. Regtech upgrades their capabilities and enables them to focus on core bank solutions." With most banks currently in the midst of digital transformation, it's impor- tant they leverage the full capability of regtech solutions, rather than for only one or two use-cases. Every digital transformation strategy involves creating a large data lake of information to draw upon. The data is there and the regtech solutions are there, but too many banks are struggling on the people, culture and change management side. "Banks lack the mature capability or have poor resilience targets. They are drowning in a sea of data, with no accu- rate sense of how resilient they really are," says Mr Viertel. "It's not enough to just provide new technology, you actually have to help people along on this change journey, embracing new technologies and doing things differently. "A lot of what's happening in com- pliance and risk is detective in nature; banks put capabilities in place so they can realise when something has gone wrong and then put out fires. Regtech will enable them to move into a more preventative approach and it's vital they reach this phase quickly because in my view regulators will soon require organisations to prevent non-compli- ance actions happening via technolog- ical measures. That's the product vision of Alyne. "We want to help people and organi- sations make smart and informed deci- sions, and at the same time consume that information in real time to detect and prevent non-compliant or risk-in- creased behaviour from happening." For more information please visit alyne.com/op-res Regtech gives banks the operational resilience they need With operational resilience set to be central to the financial services sector's success, regtech is enabling banks to improve decision-making and adopt a more preventative approach to risk Commercial feature O Regtech leverages next-generation technology to make financial institutions more agile ROOT CAUSES OF INCIDENTS REP ORTED TO THE FCA BE T WEEN OC TOBER 2017 AND SEP TEMBER 2018 91% 70% 67% 60% 37% 26% 22% 16% 22% 5% Change management Software/application issue Hardware issue Process/control failure External factors Third-party failure Cyberattack Human error Capacity management Root cause not found Financial Conduct Authority 2018 Alyne increase year over year in customers utilising operational resilience use cases within Alyne 3-4 x Globally regulation generally is behind innovation and Indonesia is no exception to this trend Commercial feature Ares Jonekson on Shutterstock

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