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Internet Ushers in Fourth Wave of Banking and Finance Innovation

Madanmohan Rao reports from the E-Finance Asia summit in Singapore

The tech market may be taking a battering on stock exchanges around the world, but practitioners of online finance seem to firmly believe that the Internet has indeed unleashed tremendous change and upheaval in their sector.

"Despite all the market sentiment and an apparent backlash against dot coms, serious players in established verticals like finance remain convinced that the Internet will have a profound impact," said Lionel Smith-Gordon, Asia head of LabMorgan (www.labmorgan.com), the e-finance unit of J. P. Morgan Chase.

Speakers and delegates from across Asia and parts of Europe and the U.S. gathered in Singapore recently for the E-Finance Asia Summit, hosted by Marcus Evans Conferences.

The Net is creating a conducive environment for changing banking and finance in Asia, Smith-Gordon said. "At one end of the spectrum—information-driven activities such as foreign exchange, brokerage, equities, and futures—the Net is a disruptive force by commoditizing these entities. At the other end of the spectrum—advice-driven activities like mergers, acquisitions, project lending, and corporate finance—the Net allows for new kinds of unbundling and rebundling," he said.

It is advice and knowledge—not products—that will differentiate financial institutes online, said Smith-Gordon.

LabMorgan focuses on integrating e-business elements with its core lines of business as well as transactions with its external partners.

LabMorgan has unveiled dozens of products and e-services for internal use and for other banking and commerce players, such as credit trading platform MarketAxess.com, foreign exchange marketplace Atriax.com, derivatives trading network SwapsWire.com, credit automation service eCredit, business to business purchasing solution Metiom.com, derivatives services site Cygnifi.com, surplus products marketplace TradeOut.com, equities network Archipelago, and car purchase information site CarClub.com.

"More people than ever before are getting access to more information than ever before, thanks to the Net," said Suresh Advani, Asia head of online ventures at Dresdner Bank (www.drkw.com).

"The Net represents the fourth and fifth waves of disintermediation in the banking industry over the decades. The first two waves of disintermediation were the rise of the capital markets and mutual funds. This was followed by the third wave: outsourcing back-office operations. The Net ushers in the next two waves of disintermediation: distribution and payment," said Kathryn Kerle, director of ratings firm Moody's Singapore (www.moodys.com).

"The Net can help lower the cost of transactions, improve customer data, increase cross-selling opportunities, and integrate new financial products. On the other hand, e-finance also leads to higher development costs for new products, accelerated homogenization of banking products, more competition from nonbanks, higher customer expectations, and more opportunities for empowered customers to click away to another site," observed Kerle.

Moody's is devising new ratings frameworks for a bank's e-development initiatives, which will impact its earnings capability, such as level of online service, reliability, speed, innovation, and customization of products.

"The Net will impact bank ratings in Asia in the medium to long term, but not the short term. Product sophistication is still developing," said Kerle. Moody's rates banks in countries across Asia, including India.

Asia exhibits a diverse variation in Internet penetration, income distribution, and customer sophistication, she observed.

"Many local banks in Asia are still struggling with the basics of IT (information technology) projects. Foreign banks like Citibank and Standard & Chartered are very proactive in this space," Kerle said.

The battle is on for the leveraging of new technologies for increased acquisition, retention, and wallet share for money-related services, said M. Ramaswami, e-commerce director of the Asia-Pacific region at Citibank. The Net in its various incarnations can be used for mediating business processes, facilitating new business models, and creating new markets, he said.

Citibank rolls out a minimum e-tool kit across all of its branches worldwide, and the various branches then exploit local patterns in IT variation. For instance, Asian countries like Japan and South Korea lead in mobile phone banking usage, while multicurrency payment services are popular in Hong Kong.

Citibank offers cash management services to more than 20,000 companies and financial institutions around the world. Its financial services cover delivery systems (CitiDirect, My-RM.com), payment systems (e-Clear, CitiWithin, WorldLink.com), and integration capabilities (e-Billing).

In the U.S. market by 2003 there will be 44.8 million online shoppers, 31 million users of e-banking services, 12.5 million online stock traders, and 15.2 million users of electronic bill presentment and payment services, said Harry Chopra, Asia Pacific managing director at e-billing solutions company CheckFree (www.checkfree.com). On the IT front, challenges arise for bank managers who are suddenly thrust into the role of managing new IT projects—an area in which they have very little expertise, observed Chopra.

Financial information accessible via the Net tends to be deep, wide and quick, said John Kuse, deputy managing director at TD Waterhouse Investor Services. Issues like taxation are beginning to loom big in market after market, he said.

Increasing deregulation coupled with globalization will lead to an integration of vertical silos of e-finance that are emerging around the world, Kuse predicted. "We view the Net as a key medium in helping us allow the Chinese diaspora in North America to tap into investments closer to home in Hong Kong. The same principle can apply to the Indian diaspora in America, Europe and Australia as well," Kuse said.

TD Waterhouse has a presence in India as well—via a joint venture with Tata Finance.

At the same time, financial institutes need to stay away from excessive "marketing exorbitance" in trying to build their brands, Kuse warned. He claimed that TD Waterhouse spent only $112 in advertising expenses per new account last year as compared with the more than $260 spent by its competitors E*Trade and Ameritrade.

At the same time as it opens up new opportunities for banks and consumers, the Net also pushes the frontier of crime. "The Net gives criminals broader access to new victims, a cloak of anonymity for perpetrators of cybercrime, access to new bank accounts and e-commerce sites, and very high speeds of operation," warned Peter Hazlewood, vice president of regional security services at J. P. Morgan Chase.

One of the most prominent cases of online fraud last year was the fake online posting about the resignation of the CEO of a publicly listed data networking company called Emulex. The company stock plunged 60 percent because of that fake rumor.

It is possible for potential criminals to buy passports—perfectly legal ones—off the Internet for countries like Argentina, Brazil, Belize, and even Ireland, Hazlewood said.

There are even nonexistent countries—like the so-called Dominion of Melchizedek—for which fraudsters advertise passport services online; these fake passports have actually been accepted by immigration authorities in India and Indonesia, said Hazlewood.

"Money laundering has become more complicated to crack, thanks to the Net. You can even go to a search engine like Google, type in offshore banks, and get a list of banks for sale," said Hazlewood.

Offline, new devices called skimmers make it easy to swipe a credit card and capture the information stored on its magnetic strip. "This data is then used to re-create duplicate credit cards at sites like Kuala Lumpur, which is the largest center for counterfeiting credit cards in Asia. These cards are then used at e-commerce sites to buy as many books or other goods as possible before the fraudulent transactions are discovered," said Hazlewood.

While business to business e-commerce is supposed to be a hot emerging arena, the truth is that on many such exchanges the final trade is still done manually. "Banks should be expanding into this market," said P. R. Balaji, Asia-Pacific financial services director at Oracle. And as increasing deregulation blurs the turf lines for banking, insurance, and financial trades, the Net as a common operational platform also raises questions about why these sectors need to function independently in cyberspace as well, he added.

Very soon, local banks that used to be protected by government regulation will face the heat of technology-savvy global players who have mastered the game in markets around the world, Balaji warned.

"Banking was one of the first industries in the world to computerize. Today, however, some of the older banks are struggling to evolve their former legacy systems with the Web-based environments of today," Balaji said. Banks now have to evolve down the entire e-chain: basic information, interactivity, transaction, and collaboration with other partners. "Exploit the Net; don't just accommodate it," he advised.

Forming alliances is a key strategic move for banks in e-space; TradeCard.com and LendingTree.com are good examples in this regard. "Collaborative commerce with a company's business partners creates value," said Camtu Macintyre, principal of financial services at SAP Asia. Collaborative commerce in open Web-based marketplaces creates new sources of revenue as well as sharing of equity stakes and revenue in co-owned marketplaces; mySAP.com is moving into this space as an infrastructure provider for market makers.

Asian banks need to approach Netsourcing more aggressively via the ASP model, said Francis Lacan, global head of risk management at IBM. They need to observe and learn from global players like Chase, which are not treating technology as a cost but as a revenue opportunity by developing and selling technology solutions to other players, he said.

Mobile Internet banking is taking off in Japan, South Korea, Hong Kong, and Singapore. European companies like Genie, the mobile Internet arm of British Telecom, are eyeing the mobile portal market not just in Europe but in Asia as well.

"Some learnings from the Internet world can be applied to the wireless world as well, but the wireless user environment is more immediate, personal, and impatient," said Minnaa Hataaja, head of mobile commerce at Genie. Though industry opinion on the performance of WAP is divided, Hataaja says it still has delivered a lot of value to customers.

U.K. banks rolling out Genie's mobile Internet banking services include Cahoot, NatWest, Halifax, Lloyds, Bank of Scotland, and Prudential. "For one particular bank, mobile services helped reduce churn from 35 percent to 10 percent," Hataaja claimed.

"By 2003, more users will be accessing the Net from cell phones and PDAs than from PCs. Mobile Internet services should definitely be on the agenda of all financial institutes," Hataaja concluded.