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A SPECIAL REPORT BY

THE FUTURE OF

BANKING A little over 20 years ago, Asia was staring down the barrel of a financial crisis that would see millions lose a generation’s worth of savings. Now, buoyed by high growth rates and a young, tech-literate population, the region’s economic prospects look more promising than ever. In this special report, Southeast Asia Globe provides an in-depth look at the emerging fintech trends shaping the region

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Survival of the fittest A growing number of digital wallets are fighting for the same slice of pie

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Pulling the strings An interview with the National Bank of Cambodia’s director general

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Insider tips Investor Markus Gnirck offers investment advice

BANKING SPECIAL REPORT / FINANCIAL SHORTS

BANKING BRIEFS $50M

Currencies Forecasted total return through end of Q4 2018

raised in a Series B funding round by CompareAsiaGroup, one of Asia’s leading online financial marketplaces. A large portion of the funds will be given to SingSaver, the company’s finance comparison platform.

10.04% 8.64% 7.64%

0.56%

0.05%

South Thai Indonesian Phlippine Malaysian peso ringgit Korean won baht rupiah The future looks bright for Asia’s currencies, with investors expected to pour $45 billion into stocks and bonds in Indonesia, Malaysia, the Philippines, South Korea and Thailand this year.

The Monetary Authority of Singapore is pushing ahead with plans to introduce regulations that will make it easier for banks to invest up to 10% of their capital funds in non-financial activities.

20%

the liquidity ratio Myanmar banks are now legally required to maintain after the country’s central bank issued a new set of regulations last month.

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“Asset quality is stabilising in most banking systems, as the negative credit cycle in many of these systems has proven to be shallow with a moderate economic upturn now evident in Asia-Pacific” said Stephen Long of Moody’s after the credit ratings firm upgraded its outlook for the region’s banks from negative to stable.

On 6 July, Cambodia’s General Department of Taxation said it would delay “until further notice” the implementation of a 10% VAT on fees for financial services offered in the Kingdom, a day after the country’s microfinance industry said it wouldn’t comply with the proposed measure.

In his first major policy decision as the Philippines’ new central bank governor, Nestor Espenilla (right) is expected to announce a relaxation of restrictions on the trading of foreign exchange.

BANKING SPECIAL REPORT / MOBILE MONEY

High smartphone penetration and a large unbanked population make Cambodia a seemingly ideal location to launch the next big digital wallet. Favourable demographics, however, are no guarantee of success Words by Euan Black Photography by Luke Ding

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IN

a dimly lit room on the outskirts of Phnom Penh, 27-year-old Em Seyha and a member of Acleda Bank’s customer services team are sitting side by side, hunched over a smartphone. The pair are discussing the bank’s new Unity ToanChet digital wallet, a mobile phone application that allows customers to top up their mobile phone, pay for bills and send and receive money to others using the app. “I heard about ToanChet from one of my friends, but I wanted to make sure how to use it properly and to learn about the benefits I can get, so I came to the bank to register today,” Seyha said. Either side of him, similar conversations are taking place against the din of squeaking chairs and the faint tapping of keyboards. And in a country where a growing number of companies are attempting to make physical cash a relic, Acleda is not alone in engaging their customers in conversations about a new way of banking. In recent years, Cambodia has seen financial technology, or fintech, startups blossom, with entrepreneurs drawn to the sector by the country’s young, smartphoneobsessed and largely unbanked population. But while the country is ripe for financial innovation, those wishing to disrupt the Kingdom’s financial sector face a tall order: they must convince customers to jump from using physical cash to adopting relatively advanced mobile phone applications. It is no mean feat – especially when everyone else is after the same slice of the pie. As Southeast Asian tech entrepeneur Steve Landman put it: “How many fricking wallets do we need on our phones?” That’s not to say that the pie isn’t a big one, or that fintech won’t play an important role in delivering financial services to previously overlooked segments of the country’s population. According to a 2016 study by professional services firm KPMG, only 5% of Cambodia’s population has SEA GLOBE

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Opposite page, clockwise from top left: a bank employee educates a customer about a fintech app; a PiPay point-ofsale payment system at Joma Cafe; two young Cambodians stand outside a TrueMoney kiosk; a woman uses Acleda’s Unity ToanChet app; Em Seyha is shown how to use Acleda’s new app

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a bank account. Addressing the needs of this population through the provision of digital financial services could increase the country’s GDP by 6%, the Asian Development Bank (ADB) estimated in January this year. Further, by bringing large numbers of Cambodia’s population into the folds of the formal financial system, fintech promises to bring much-needed financial security to millions of Cambodians. And the wider societal benefits extend far beyond the economic realm, according to In Channy, CEO of Acleda Bank. “When customers use ToanChet [the new app], it reduces road traffic as people don’t need to travel to the branch; it saves money for the government as they need to print less money; it saves money for companies as they need less staff to process transactions; and it protects the environment as less paper is printed,” Channy told Southeast Asia Globe at his high-rise office in Phnom Penh’s nascent financial district. In payments and transfers alone, the gap between demand and supply equates to $5 billion in Cambodia, according to the ADB. In short, there is plenty of room for new operators to enter the market here, said Yanese Chellapen, founder of Unkapt, a platform for Asia-Pacific SMEs to raise non-equity capital. “There are proven needs, a significant total addressable market and plenty of scope for existing and new fintech players to operate in addressing financial inclusion,” he said. “Financial inclusion is a work in progress and fintech players are yet to fully capture this opportunity.” But to exploit the country’s latent demand for financial services, startups must focus on facilitating user adoption and education, as the jump from the current way of doing things to the proposed solution is far bigger than in other countries. This means that building an aesthetically pleasing app that has lots of interesting functions is less important than tailoring your product to the needs of the market and explaining its uses adequately to your target audience, argued Chellapen. “The [right] approach is to start with a low level of complexity, easy implementation, visible advantages for the users and [something that] does not create a big disconnect from past practices,” he said. Emulating a business model that did well in another market is also no guarantee of success, said Khemara Ros, Cambodia country manager for ADB’s Mekong Business Initiative, a joint project with the Australian government to facilitate innovation in the country. “You cannot just copy the whole technology and then adopt it here and think it will work well. You need to

adjust to the culture. You need to adjust to the way people carry out their transactions,” he emphasised. And while the importance of building comprehensive adoption strategies is not lost on the CEOs and founders behind the country’s fintech companies, doing so is often easier said than done. “The holy grail is always adoption when you target the unbanked,” Jojo Malolos, CEO of mobile banking services provider Wing, told Southeast Asia Globe. “But there’s a lot of factors [to consider], right? It’s difficult to predict how [customers] will want to use their money electronically.” Since its inception in 2009, Wing has registered 700,000 account holders – 150,000 of whom are active – and claims that a total of three million people use more than 5,000 Wing kiosks to send money across the country, helping the company register a profit of $5.2m last year, according to National Bank of Cambodia statistics. But Wing’s success was not built overnight and new competitors are fast entering the market. In April, Acleda launched its Unity ToanChet mobile application, which has already picked up an impressive 61,000 users. PiPay, a slick mobile wallet supported by the Cambodian Anco Group conglomerate that says it has “thousands” of users, joined the fray a month later, adding to the already swollen ranks of companies vying for the loyalty of the country’s smartphonewielding youth. “Nowadays, it’s very easy to set up a wallet. The real issue is: sometimes there’s a tendency for [these companies] to busy themselves in one corner when in fact it’s a huge market altogether,” said Malolos, adding that Wing was continuously exploring different product offerings and avenues for expansion in order “to go viral”. As with any new product, the marketing campaigns for these mobile wallets emphasise how they can improve people’s lives. They are ‘safer than cash’. They are ‘secure’. They are ‘convenient’. But whether or not a company chooses to promote these benefits through face-to-face interactions, or via Facebook videos, the battle for the hearts of consumers will be won by the number of merchants these companies sign up, according to Ros. “The technology is just one thing to make the product work; the partnerships are more important,” he said. Coupled with the difficult task of user adoption, this level of intense competition has led some to conclude that their efforts would be better spent developing

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35% PHILIPPINES

75% CAMBODIA

40% MYANMAR

11% Source: Asian Development Bank, 2017

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THE TECHNOLOGY IS JUST ONE THING TO MAKE THE PRODUCT WORK, THE PARTNERSHIPS ARE MORE IMPORTANT” Pi Pay staff help customers in Phnom Penh with their transactions on Cambodia’s first cashless payment app

KHEMARA ROS Cambodia country manager, ADB Mekong Business Initiative

Acleda Bank CEO In Channy at his office in Phnom Penh

Photos: Matt Baddley fot SEA Globe

INDONESIA

products that serve other businesses, rather than fighting for the loyalty of fickle consumers. Chanda Pen, co-founder and managing director of Bongloy, an application-programming interface (API) that allows businesses to accept electronic payment from their customers, said he had this realisation “several years ago”. “We noticed everyone was focusing on remittance and mobile payment,” said Pen. “[We thought]: ‘Why not let the entrepreneurs develop their [own] products and Bongloy become the bridge between them and the banks?’” Only two Cambodian companies – Banhji in 2016 and Morakot in 2017 – have ever been selected in the top ten fintech companies in Asia by the well-respected accelerator Startupbootcamp FinTech Singapore. The fact that both were business-to-business (B2B) companies perhaps suggests that Bongloy, too, is heading in the right direction. Wing CEO Malolos also confirmed that B2B activities held the greatest potential for his company in the future. “B2B is the thing that will make our business expand and bring it to the fintech level,” he said. Not only do companies entering the B2B space face less competition, user adoption is far less of an issue, according to Steve Landman, CEO of Kiu Asia, a software company that helps businesses across Asia streamline their back-end processes. “The opportunity is bigger in B2B because you don’t have to change the way people are doing things. They’re already using some systems. They need working capital, they need an e-commerce marketplace to market their goods,” he said. The way Landman sees it, the lion’s share of mobile wallets in the region today won’t be around tomorrow, as few will possess the advanced technology, extensive partnerships or number of users required to fend off the bigger players when they decide to expand into the region. “Apple and Google are not here yet, but when they launch, all those other mobile wallets are going to be gone because those guys work with everyone,” he said. “The only way they can defend themselves is to become an acquisition target, where they sign up so many users that they become interesting to Apple. But I haven’t seen that happen.” According to Ros, it is about timing as much as anything. “Even big companies will sometimes need to spend years getting partnerships, so it may be cheaper for them to buy out a local startup,” he said. “But if you are still learning how to walk and a big company comes in, it could be a big problem.”

BANKING SPECIAL REPORT / THE INTERVIEW

Southeast Asia Globe sits down with Chea Serey, the director general of the National Bank of Cambodia and chair of the Cambodian Credit Bureau, to discuss the government’s controversial cap on microfinance institutions, moving the country away from the US dollar and why she believes Cambodia will reap the rewards of a cashless society

we didn’t know how to regulate them back then. But now, as the industry has grown, we are finding that this setup does limit their ability to introduce new products and services and to innovate. So over the next year, service payment providers will be able to operate on a standalone basis, but they will have to have their own minimum capital requirement and comply with reporting regulations.

By Claire Knox

What are the key policies that you would like to establish next year? In the next few weeks we will launch our Central Share Switch, which will connect all the ATMs of all the banks together [so that account holders can withdraw money from any ATM in the country]. All the banks are now required to be members by the end of 2018. We’re also taking on the regulation of payment service providers. Previously, payment service providers were [regulated] under the umbrella of the banks, as third party processors, because 74 August 2017

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What is the biggest challenge for the central bank? This year we are holding our first conference on statistics. As an organisation that does a lot of economic forecasting and analysis, the fact we are not able to gather the numbers that we need to is very frustrating for us. To make informed decisions, you need proper analysis. I want to see changes in behaviour around this. It’s so important for the country to be able to capture what is really happening. I don’t think we can do that right now, because we don’t have the statistics to analyse. Some of these foreign investors refuse to see us because they don’t want to disclose their numbers. Do you think the Ministry of Finance should be doing more about this? There is a statistical law, implemented by the NIS (National Institute of Statistics), but it’s only recently been implemented. The onus is also on the private sector. So many of them just don’t want to bother with it. The idea is to get them to understand it will be good for them in the long run, for business analysis and to formulate new strategies. Three months on from the decision to cap the interest rates charged by microfinance institutions (MFIs) at 18% per annum, what is the state of the sector? No MFIs have closed up, but it’s too early to make a meaningful analysis, especially since it only applied to new loans. Certainly, the returns will be reduced for some, but I believe that, for many, they may actually benefit, because they can increase their volume, even though it is at a lower interest rate.

Photo: Gareth Bright for SEA Globe

You’ve now been serving as director general the National Bank of Cambodia (NBC) for four years. How has banking evolved in Cambodia? I’ve seen a lot of new technology – especially 4G – coming into Cambodia. Tech plays a much more important role now in the banking system. When I first joined there were about two mobile payment providers, but now there are so many. That’s what we want to see because competition will ultimately benefit the customers. This year we’ve been able to launch FAST (Fast And Secure Transfer), which is a real-time money transfer from one bank account to another. All banks are required to be members. There are also many new instruments that allow the central bank to have more control over our monetary policy implementation. We have introduced our LPCO (Liquidity Providing on a Collateralised Operation) and we lend to local banks at a very low rate, which encourages them to lend more in local currency. We have also set up inflation forecasting and are working on GDP forecasting.

Chea Serey talks last month at her office in the National Bank of Cambodia headquarters on Norodom Boulevard in Phnom Penh

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Some have suggested it was a populist political manoeuvre. Was this a decision made in the interest of the Cambodian people and economy? This was not a decision that was made lightly. It was based on the very high interest rates that they were charging – these MFIs were making a lot of money. Sure, their argument is that it is a high-risk sector therefore investors expect high returns, which is fine in theory. But if you looked at the real non-performing loaning of the microfinance sector, it is actually very low – lower than the banks – and most of the MFI returns on assets were higher than the banks. So if the banks can survive on the lower returns there must be a way that the microfinance industry can do it too. Yes, operation costs are high for MFIs, and I would have bought that idea five years ago, but there is now tech that would allow them to provide these kinds of services at a much lower cost. Some of the MFIs are too complacent to look into these; they are simply making too much money. We want them to look into alternative services for the demographic they serve.

Chea Serey stands by the bank’s decision to cap microfinance interest rates

Many analysts – even some of the NBC’s own, who criticised the cap in November 2016 – have said interest rate caps are bad public policy and hurt the poor most, restricting their access to finance and pushing them to loan sharks with even higher rates. Well, the elites will always try to protect themselves. And I believe that we have to look after the poor’s interests. You know, banks, microfinance – they’re not charitable organisations, right? They will go anywhere that will make them money. But nobody would lend to someone with no income, even if we didn’t enforce a cap. I don’t think in the long run this will penalise the poor. In the short term, these MFIs will have to adjust their business model, and they’ll likely have to stop giving out smaller loans because they can’t charge the usual 36% they did. But the MFIs can’t give up on that demographic, because that is their income generator. They will find a way to adjust their product so that these people can still be included. And if they can’t redesign a product that suits them then they are out of business.

Photo: Gareth Bright for SEA Globe

What do you make of the opposition CNRP’s recent calls for Cambodia to revert to the riel within a year? The ideal situation for any country is to be able to use its own currency, but for Cambodia we have a long legacy of dollars circulating in our country. I believe that to achieve it overnight – or within a year – would actually be detrimental to the economy. I prefer to call it ‘rielisation’ but we are very cautious as to how we move forward with it. We also need to acknowledge the fact the dollar has brought in great benefits for us, especially when it comes to FDI. We’ve remained very competitive because of this. It also helped us lower our inflation, but then at the same time, as our economy grows, the role of monetary policy becomes very important, and this cannot be implemented if the country is using the dollar. We are bound by their monetary policies and, particularly at this moment in time in the US, it is worrying. It’s

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Le LeRoyal RoyalBusiness BusinessLunch Lunch not feasible to achieve the full transition into the riel in one year; I think it would take five to ten. How do you promote the riel to foreign companies? We’ve been lobbying the garment sector recently – it’s one of the biggest payrolls here. So it should start in that sector, and I really hope they change their mind. If the factories care enough about the welfare of their employees, why don’t they switch? The lion’s share of these workers’ expenditure, aside from their rent, is in local currency. Say they are paid $100 [a month], 40% gets sent by Wing to family in rural areas, and then these families are exchanging it into riel. When we interviewed money exchangers in the provinces, by far their biggest business is in dollars to riel conversion. So the families are copping the conversion fees. But what I want the factories to understand is that ‘rielisation’ would in fact benefit them too. If wage increases were done in riel, you could increase them at a bigger variety of rates. You have much more flexibility and control of that. You could increase 1,000 riel every three months instead of $1 every year, and the workers are happier because there are regular increments. Most businesses can’t be bothered to deal with exchanging [from dollars to riel], yet they are passing the exchange rate on to their workers and I think that is unfair. At the moment, the dollar and riel have

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been relatively stable but we are not pegging our currency to the dollar like some other countries. It’s a managed float and – I don’t want to scare people – but there may be a time when we just let it go and, depending on external factors, the riel could depreciate. If that happened, for the farmers, for the poor that had to repay loans in dollars, they would be dead.

BRED Bank Cambodia CEO Guillaume Perdon shares his vision for the future of the Kingdom’s sole European bank

How do you feel fintech can improve the Cambodian economy? I am actually a very strong believer in blockchain. Many people have tried to dissuade me on this; they say it’s too early. But I disagree. I believe it can change a lot of things and can make transacting much freer. I was at a consumer reports conference last year and the speakers were talking about the ability of fintech and data modelling to profile people by just looking at the amount of smiley faces they use on social media, or their punctuation. And I learnt about how blockchain allows people to send assets of value like they send a photo or document online, without involvement from a third party. What benefits could blockchain have for Cambodia? It wouldn’t just change the way we do finances and allow for more freedom, but it would change the way we govern the country and the way we do politics. If we were able to have a cashless economy look at how much money we could save in terms of printing, how much we could save the environment with less paper being used, less transport. We would also be able to have more transparency on what is happening and trace things more effectively. What is the NBC doing to introduce blockchain in the Kingdom? We have partnered with a Japanese startup and will have a blockchain trial in the third quarter this year, and depending on the results, we will be partnering with the parties involved, mainly the banks. At the end of the day, we need everyone to buy into the idea for it to work. I think a cashless society would benefit everyone in Cambodia, even the businesses. There is so much it can do to fight corruption.

Photos: Luke Ding for SEA Globe (1)

As governor of the NBC, your dad still calls the shots. Does his position as a top ruling party man conflict at all with the NBC’s duty to do what’s best for the country’s financial system? No, we strictly make decisions as per the hierarchy of the structure here at the NBC. So when any decision is made, everyone within the eight-member management committee has a voice. Some of the ideas I put forward are not necessarily agreed by others and don’t pass. He plays a very democratic [role] in the meeting room. He does not impose his views or beliefs, whether on his children or on his subordinates at work. Do you think the government is doing enough to promote women into senior positions? I think they are on the right track – I don’t know if it is enough, though. The new Koh Kong governor is a woman, the first in the country. The number of women in the cabinet has also increased significantly, so that is promising. But there is always room for more. More could definitely be done.

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Clockwise from top left: the National Bank of Cambodia headquarters; a woman pays for fruit using cash; the Vattanac Capital building towers above Phnom Penh’s skyline; a computer displays blockchain data

BRED Bank Cambodia CEO Guillaume Perdon (left) and BRED Bank Group CEO Olivier Klein (right).

BANKING SPECIAL REPORT / FINAL ANALYSIS

ROBOTS TO THE RESCUE?

Robots are moving into the insurance market, but humans have nothing to fear – yet

GLOBAL FINANCING FOR ARTIFICIAL INTELLIGENCE 658 493 354 253

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Disclosed Funding (millions) Value of deals Source: CBS Insights

Under its so-called AI.SG programme, Singapore will invest $107m in artificial intelligence R&D in a bid to become a world leader in the field

Human financial advisors may keep their jobs for a while, but they would be well advised to start considering a new career. On 7 June, Singapore’s regulatory body, the Monetary Authority of Singapore (MAS), released a consultation paper on how it planned to “facilitate the provision of robo-advisory services” in the city-state. By cutting out the need for human intermediaries, it said, the online, automated portfolio management services, which can often be accessed through mobile applications, have “the potential to improve consumers’ access to low-cost investment advice”. It is the reason given by MAS for promoting such services, though the regulatory body likely has its eye on becoming a leader in an industry that professional services firm Deloitte recently predicted will manage $16 trillion worth of assets by 2025.

However, in the eyes of Shankar Narayanan, co-founder of Singapore-based Active AI, such services are not advanced enough to do away with homo sapiens quite yet: a human analysing the insights of an advanced algorithm was the best option for now, he said. Narayanan’s company is one of many that have decided to focus their attention on the immediate future by developing artificial intelligence that allows people to communicate with their banks more naturally through a mixture of informal texts and voice recordings, referred to as ‘unstructured conversations’. The software powering these companies automatically corrects for spelling errors and is able to respond with contextual chit chat: where computers of yesteryear might have said “affirmative”, these robots might say “cool, no worries”. “The future of engagement will be in unstructured micro-conversations,” he said. “AI-powered conversational banking will enable banks to have intuitive customer engagement, which will create opportunities for banks to offer creative products and solutions to their customers.” Narayanan added that the technology has the potential to help the region’s fintech players overcome the challenge of low user adoption by allowing potential users to ask questions about new technologies in an exchange that more closely resembles a human conversation than perusing an FAQ section or watching a video tutorial. “AI can power agent-to-institution communication, knowledge access and transactions in a completely unstructured data format,” he said. “This will enable agents to be effective and empowered. Given that this can be done over voice or messaging interfaces in multiple languages makes the proposition of last-mile connection easier.” – Euan Black

TURNING TO TECH Why insurance companies need to embrace innovation

The insurance industry has long been plagued by the ordinary, the mundane and even the frustrating. From convoluted car policies to agents laying on the hard sell, the industry rarely evokes particularly exciting, innovative imagery. The sector is overdue for some disruption, as consumers increasingly demand to be educated, get a quote and buy a policy on their smartphone within

30 minutes. While it’s one of the last big industries to remain predominantly offline, last year saw a whopping $3 billion of investment poured into ‘insurtech’, the latest buzzword in an industry that’s scrambling to keep up with the demands of the digital era. “Today’s world is driven by data. There is a huge opportunity for insurance to leverage big data and online-scoring platforms to help improve their operations in everything from sales to underwriting,” Vladislav Solodkiy, a fintech-focused venture capital investor, wrote in Forbes. Chinese insurance heavyweight Ping An Health Cloud, for example, has completely changed its vision to utilise technology, operating a mobile healthcare app that allows users to consult with doctors through text, photos and video. Last year it completed a $500m funding round, bumping up the company’s value to $3 billion. So, what exactly does insurtech provide, and how can it benefit both companies and customers? Realtime data streaming – this could be in the shape of wearable environmental sensors, for example – will allow insurers to better manage risk. Blockchain, meanwhile, will ensure customer data and history is protected, as well as streamline the policy process.

“Insurance companies are playing catchup. They are lagging behind their financial services peers in technology implementation.” – Baker McKenzie Wong & Leow’s Stephanie Magnus

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Young people use their smartphones in various locations in Phnom Penh

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© 2017 Grant Thornton (Cambodia) Limited. All rights reserved. Grant Thornton [(Cambodia) Limited is a member firm of Grant Thornton International Limited (GTIL). GTIL and the member firms are not a worldwide partnership. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. Please see www.granthornton.com.kh for further details.

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Singapore Life, a relatively unknown insurtech startup, raised $50m in a Series A funding round in April. Investors included Impact Capital Holdings, a subsidiary of Credit China Fintech Holdings, and UK-based IPGL. The median size for Series A deals was $3m in 2016, according to Techinasia.com.

Photo: Luke Ding for SEA Globe (1); EPA (1)

China’s medical service mobile app Ping An Good Doctor provides its 70 million registered users with free diagnosis, treatment and online appointment booking, and allows them to consult doctors through text, pictures. and video. The app, which receives up to 250,000 consultation requests per day, is valued at more than $3 billion, though investors are beginning to lose confidence in the app’s ability to turn a profit.

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LOOK BEFORE YOU LEND An Acleda Bank employee talks a customer through the company’s new app

Telematics – the act of transmitting data – has helped more than 15% of the UK car insurance market transition to a usage-based insurance model, according to a recent Burnmark report. In the US, insurance companies are offering discounts to premiums of up to 15% to customers using health apps. Life and health insurance is intrinsically connected to the health industry, so advancements in wearable health hardware and the surge in medical apps makes it even more essential for insurers to jump on the bandwagon. What’s more, the consumer reliance on smartphones and apps to reach brokers makes it easier for brokers to find more business. Aggregators will be able to collate a one-stop shop for insurance, enabling more choice. “Collaborative ventures with mobile companies mean that premium payouts may be dispensed through alternative means like airtime, mobile money or loyalty wallets,” according to the website Tech in Asia. This could transform the insurance industry in Southeast Asia’s developing countries, which tend to have infrastructure deficits and where the most timeand cost-effective method of insurance coverage could be through digital and mobile solutions. According to a PwC report from 2016, 74% of insurance companies saw fintech innovations as a challenge for their industry, yet only 28% had explored partnerships with fintech companies and less than 14% participated in ventures or incubator programmes. Players that are already showing a willingness to move into the insurtech space will be well positioned as frontrunners in the new insurance era. – Claire Knox

The simultaneous rise of peer-to-peer lending and big data could drastically change the region’s banking industry

Peer-to-peer (P2P) lending first entered the wider public consciousness when it rose from the ashes of the global financial crisis in 2007. By cutting out traditional intermediaries, such as banks, the lending platforms were able to offer borrowers lower interest rates and lenders higher returns. They were populist alternatives to the casino capitalism that had brought Wall Street to its knees. Now, they are being mooted as an effective way for Southeast Asia’s emerging economies to overcome the challenge of limited access to funding – and the combination of increasing smartphone penetration and a large unbanked population means it has the potential to dramatically disrupt the regional financial order. According to a 2015 report by Deloitte, in Indonesia, Malaysia, the Philippines, Singapore and Thailand there exists “a clear disparity between what SMEs want and expect from banks and what the banks can deliver”. In Indonesia, the report found as few as 6% of SMEs were able to access bank loans. Recent statistics from the Asian Development Bank show that the situation is similar in Myanmar, which the bank says suffers from a $2 billion shortage in available credit – a shortfall that Brad Jones, CEO of Wave Money, attributes to the country’s excessively cautious banking regulations. “The banking system does not allow for unsecured credit. If you want to borrow money, you need to have collateral to base it on,” said Jones. “That makes it very hard for entrepreneurs who need funding.” Jones said that while such regulations were designed

Office blocks in Singapore’s central business district

to promote economic stability, they were unintentionally driving people towards informal lenders, who were often lending at extortionate rates. “What I’d like to see is further deregulation of the lending practices in the banks, and opportunities for fintech operators to work with banks, leveraging their balance sheets to distribute those [loan] products” he said. The region has a great need for alternative funding, but it also has the means necessary to enable such forms of finance to flourish. In addition to efficient credit underwriting processes and lender liquidity,

it boasts a large dataset due to the widespread use of smartphones. A report released by tech firms Hoot Suite and We Are Social in January revealed that 47% of Southeast Asia’s more than 600 million inhabitants are mobile internet users. According to Vishal Bhargava, vice-president of strategy for India-based financial information company Cogencis, the data captured from the usage of these devices provides insights that are more useful in determining an individual’s creditworthiness than the data captured by traditional banks. “Firms want to know what phone a person is using, which sites they are visiting. [They want access to] the pictures on the phone which show where the person goes on holiday,” he said. “These are the indicators which firms use to determine whether the borrower has the capability to repay a loan or not.” The growing importance of big data in the issuance of loans could have interesting consequences for Southeast Asia, if China’s recent experience is anything to go by, said Bhargava. “E-commerce companies are moving to floating online banks since more people buy and trade online through Alibaba than have bank accounts,” he said. “The

Highlights from the PwC Global FinTech Report 2016 (% of insurers) 74% predict disruption over the next five years

43% have fintech at the heart of their corporate strategy

28% are exploring partnerships with fintech companies

14% are investing in and/or supporting fintech incubators

In January, Indonesia released new regulations for P2P lenders, which included a loan cap of $150,000, as well as a minimum capital requirement of $186,300 for companies wishing to obtain an operating licence

Mr. Shin in the lobby of PPCBank’s main branch

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In February 2016, trust in Chinese P2P lenders plunged after an industry leader, Ezubao, was revealed to be an elaborate Ponzi scheme. The company fleeced borrowers out of $7.6 billion.

“In this process of heightened disruption, a clear insight emerges – banks and fintech players are naturally interdependent” - Deloitte, Banking on the Future: Vision 2020 Report

premise is simple and ominous: I know more about a prospective borrower than a traditional bank does. Hence, my decision to give a loan is more informed than a bank.” According to data from Singapore-based venture capital fund Dymon Asia Ventures, less than 0.1% of loans in the region currently originate from P2P lending sources, compared with 10% in China and 2-3% in the UK and US. There is, therefore, sufficient growth potential for the market in Southeast Asia. But the region won’t see the benefits of P2P lending unless regulators protect the capital of lenders by imposing “limits on lending amounts and escrow account creation so that the P2P owners can’t access the capital”, warned Bhargava. “Currently there is a contradiction between the desires of investors in a P2P platform and lenders using the P2P platform,” he said. “Investors make money when the quantum of loans and number of transactions rise, as that is what is driving valuations of P2P lending firms. But lenders make money only when borrowers repay, meaning that there needs to be careful evaluation of borrowers, which means growth should never be as brisk.” – Euan Black

PUTTING DISRUPTION ON HOLD

Photo: Luke Ding for SEA Globe

Fintech startups once wanted to replace banks – now they want to work with them

A few years ago, when startups began using technology to offer financial services to customers at a fraction of the costs charged by banks, Bill Gates’ observation in 1994 that while “banking is essential, banks are not” seemed eerily prescient. Amazon had already revolutionised the retail industry and Facebook and

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More than 50% of Cambodians own smartphones

Google how we communicate and consume information. Fintech startups dreamed of doing the same to banking. But reams of red tape mean that many will struggle to make those dreams a reality. “The regulators are basically owned by the banks and their friends,” said Steve Landman, CEO of Kiu Asia, a Vietnam-based firm that develops software that automates a company’s back-end processes. “There’s no incentive for them to create regulation that’s going to change things so that digital finance becomes the main way of moving money around.” Only 25 out of the world’s roughly 5,000 fintech startups have reached the ‘unicorn’ status of a $1 billion market valuation, according to a 2016 report by venture capital firm Life.Sreda. Fintech companies have since acknowledged that they need to work with banks in order to enjoy success on a large scale. However, the relationship is not all one-way traffic. Banks realise that customers using tellers at physical branches to send money from one account to another is not an efficient use of their infrastructure. They will cooperate with fintech companies that develop technologies that reduce the operational costs of such transactions, but only if it helps them jump ahead of the competition, according to Sothearoath Oeur, the interim CEO of Credit Bureau Cambodia. “Some [financial] institutions want to keep control of their database and will develop their own fintech solutions, but one of the limitations is that it can be quite time consuming. Another question concerns their staff’s capability to [create solutions],” he said. “New fintech startups want to cooperate with the banks; the question becomes: how can they open the door to collaboration? The clear message they need to bring to the financial institutions is that they are not here to take over the whole process.” – Euan Black

Mr. Jojo Molalos, CEO of Wing

Visit us at wingmoney.com or call 023 999 989


High smartphone penetration is inspiring tech entrepreneurs in Southeast Asia

2) Do you have a Financial Times subscription? Everyone selling financial technology needs to be aware of the global financial markets. They need to know how a higher federal reserve interest rate impacts Asian financial services. Every fintech entrepreneur needs to have a close affinity with and deep insights into the macro- and micro-economic movements that influence their business. It is more important to read the Financial Times than TechCrunch.

Startups need more than a healthy current account to thrive in Southeast Asia. Investors should ask these five key questions before jumping on board By Markus Gnirck During my time as a managing director at Tryb Capital, a techfocused investment firm, I have met a lot of entrepreneurs trying to raise capital. As an investor, one is expected to ask the obvious questions: What is your cash flow? What is your business model? What is your current cash burn rate? These are all reasonable questions, but they are not the only ones you should be asking. Here are some of the other essentials: 1) Do you have the number of a regulator in your phone contacts? Fintech entrepreneurs must have a close relationship with their regulator. Ideally, they should also have strong connections with numerous other government institutions. Get them to show you that they talk to regulators and other government institutions on a regular basis – get them to show you WhatsApp messages that prove they have built relationships with these institutions. It is not enough to have just said “Hi” once at a meeting. Keeping abreast of the latest regulatory changes and finding a champion internally to help push you through their system is key. 86 August 2017

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3) How many smart outfits are in your wardrobe? If one is selling to financial institutions, one is required to dress like someone working at such an institution. You can’t do business-to-business sales dressed in hipster t-shirts and shorts. Financial institutions are accustomed to a certain sales process and they will not change their approach for a five-man shop that is running out of cash. Everyone who knows me from two years ago will smile reading this: I learned this lesson the hard way. 4) Which large conglomerate or family is backing you? Southeast Asia is a region where large swaths of the economy are still run by large family conglomerates. It can be anything from real estate and chicken farms to logistics, media and financial services. It is crucial for every emerging business to have some kind of backing from an influential group. It can help a company to scale faster, distribute products through more channels and secure strategic funding. 5) Who are your close mentors? I will never invest in a CEO or founder that thinks they know it all. It is not only essential to have a mentor for the sake of your business, but for your life in general: you need someone to give you advice and to offer you candid feedback. They can be a member of your family, a co-founder, a shareholder or a professional acquaintance. No matter who they are, they help to keep a CEO humble and focused when times are good, and strong and resilient when times are bad.

CBC ‘s Interim-CEO Ouer Sothearoath

ADVERTORIAL

GET TO KNOW ABA BANK’S ONLINE ACCOUNT OPENING SERVICE Zokhir Rasulov, chief digital officer at ABA Bank in Cambodia, sits down to discuss its new online account opening web service What’s the idea behind the online account opening web service? The idea is to let people apply for an ABA Bank account from anywhere at any time by visiting the website join.ababank.com. From the comfort of their home or a favourite café, people can take time to learn more about the accounts that ABA Bank offers and choose the one that is right for them. We developed the service to fit the lifestyle of customers in a rapidly developing market. The average Cambodian has a busy schedule and does not have the time to drive through traffic, find a parking spot and spend an hour at the bank waiting to open a new account. Spending a few minutes to peruse our options online whenever it is convenient is much more appealing. This is what inspired us to develop our new web service. Once a customer decides what account they want, they can submit the application online. If it is successful, they get a

notification and can open the account by paying a quick visit to their nearest ABA branch, where they can proceed to a special counter called the QuickLine. Thanks to this specially designed process, they will be in and out of the bank within seven minutes. How can young Cambodians benefit from the service? The younger generation is tech savvy and easily adopts new technologies, including modern banking techniques. These people are active – they have an entrepreneurial spirit that requires equally adaptive and quick financial services. Whether its meeting with business partners, making deals with friends, placing purchases online or even splitting a lunch bill, all of it is much easier when you have a bank that properly serves you. Part of this service is interacting with customers where they already are – on the internet. That is what the online account application

is about. Responding to the behavior of our customers and really serving them. How will ABA stay at the forefront of Cambodia’s financial sector? ABA Bank has been operating in the market for 20 years now, but it started the latest phase in its development in 2009 with a new strategy built around a different market. Since then, we have gained a deep understanding of how the market is changing and what our customers need in a bank. Based on this knowledge, we introduced modern financial solutions that meet the demands of consumer in 2017. This approach helped us to significantly strengthen our market position and break into the top five commercial banks in Cambodia. And we are ready for the next chapter in ABA’s development, with a range of projects in the works that will ensure that we remain one of Cambodia’s leading financial institutions for years to come.