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Wednesday, 22 November 2017 00:00 - - {{hitsCtrl.values.hits}}
By Chathuri Dissanayake
Banks need to devise strategies that can help them grow and stay on course in the face of unprecedented regulatory and technology changes facing them, a top industry expert said yesterday.
Addressing the Association of Professional Bankers (APB) forum yesterday, State Bank of Pakistan Deputy Governor Jameel Ahmad outlined in detail the new regulatory frameworks proposed after the global financial crisis a decade ago and the growing disruption caused by technology.
“Banks are essentially required to acknowledge that times have changed and in order to stay competitive they must embrace technology and forge new partnerships to reinvent their business models. I will go to the extent of saying that the upcoming age may become the age of less or even non-intermediation where the role of intermediary institutions like banks and their regulators could become limited if they don’t embrace these changes pragmatically,” he said.
Regarding the global financial regulatory reforms, banks need to be proactive and consider adopting them at an early stage, he said. However, any implementation needs to be proportional to the complexity of the financial institutions and the system. While implementing standards and regulations, banks must be pragmatic in their approach so that the growth of the banking industry or their customers is not hampered.
“Authorities are now increasingly focusing on improving the situation of financial inclusion in their respective jurisdictions. Banks and other players of the financial industry need to come forward and help in this regard. Without compromising on the basic regulatory requirements, a technology-enabled, risk-based approach for assessing client risk and customer on-boarding may be adopted.”
Ahmad called on central banks and other regulatory authorities to work towards creating a strong, robust and ubiquitous payments system with a focus on developing an enabling legal and regulatory environment that is commensurate with the new technological environment. Some of the areas suggested include, but should not remain limited, to cloud computing, data privacy and protection, cybercrime and formalising the role of non-banks including critical service providers in the area of technology services.
“It is important that we place special focus on formalising the role of non-banks which include fintechs, Payment Service Providers and especially Critical Service Providers like technology and telecom providers because the dependence of financial entities on these players is becoming critical and their failure may threaten the overall financial stability. Regulators must especially be wary of issues relating to consumer protection, data privacy and money laundering arising due to new and complex partnerships and data sharing arrangements between banks, fintechs and IT service providers.”
Banks and the financial industry are facing threats from cyber terrorists which now have far superior capabilities, and probably a good knowledge of the internal vulnerabilities. In order to mitigate this risk, Ahmad advocated that banks should pool their resources and share their experiences with each other on a regular basis and devise strategies and programs to counter the threats they face as an industry.
“If the industry concludes that blockchain-enabled services and their providers will gain more prominence going forward then it is important to take proactive measures to contain their influence. For example, smart contracts and their legal enforceability in a court of law, role of cryptocurrencies, cross-border trade and payments and customer identity management are some of the areas that I think will be important to be looked into.”
Continuous capacity-building of bankers and their regulators is the key for growing and thriving in a digital future, insisted the Deputy Governor. Empowering finance professionals with requisite skills will be necessary in the wake of the increasing complexity of global standards and the transformation taking place in the financial industry.
The financial industry has to adopt a collaborative approach for enhancing professional capacity of their human capital through local and international solutions to keep pace with the changing financial landscape. Central banks must acquire and enhance the capacity and skill-set of their staff especially in areas of algorithmic-based system audits, system integrity and security audit and data analytics-based regulatory compliance skills, he went on to say.
“While the challenges are huge, I have full confidence in the skills and abilities of the banking community in our two countries. I am sure that you will adapt to the changing realities of times ahead, take these challenges as opportunities and deliver the best of the best to citizens of your great country.”
Pix by Upul Abayasekra
In keeping abreast with the changing dynamics of the banking sector of the country, the Central Bank is set to introduce new guidelines for mobile-based payment services while revising the Credit Card Operational Guidelines, a top official said yesterday.
The new guidelines come alongside a host of other steps taken to facilitate the new trends in the financial industry including the Fintech and e-payment platforms, Dr. Nandal Weerasinghe said while speaking at the 29th Anniversary Convention of the Association of Bankers.
Stressing the need for traditional banks to work within a changing financial industry to stay relevant, acting Governor Dr. Weerasinghe said that the banks needed to chose either to “be a shaper of the future, a fast follower or to manage defensively.”
“However, staying the same is not an option,” he said.
“The financial Inclusion agenda has led to several types of banking business models and has also taken a step forward to include new non-bank players in the Fintech space who are competing to grab a larger share of the banking value chain. Banks need to choose what stance to adopt against these changing dynamics,” he stressed.
Dr. Weerasinghe highlighted that as technology-based banking advances, financial technology and electronic payments and a funds transfer system have emerged as the twin pillars of modern banking development.
Speaking of the nexus between banks and Fintech, he said the partnership between banks and Fintech companies was evolving beyond a mere vendor-customer relationship to that of a mentorship and investment by the incumbent banks.
“Now development in Fintech is increasingly taking a global centre stage, with many applications dependent on the use of smartphones for their usage. This leads to another paradigm shift in the payment sphere as the trends move away from payment cards to mobile-based apps, these would include e-money, QR (Quick Response) code-based payments, Near Field Communication (NFC) based payments and many more. The Central Bank is currently studying these developments and their potential usage in the country,” he said. However, Dr. Weerasinghe also stressed on the need to focus on security features and customer protection as the industry moves ahead with introducing new products.
“New technologies generate new risks and do not eliminate the old ones. This provides the rationale for financial regulation in the first place. Asymmetries of information and default externalities do not disappear with the introduction of new ways of supplying financial services. Fintech does not provide an excuse for less regulation.
Warning that “future banks” may cause some disturbances to the current banking environment, possibly leading to a realignment of players in the market, Dr. Weerasinghe also stressed the need for institutions to make changes in market approach.
The banks may need to shorten the strategy cycles to months instead of years, in keeping with the changes in the industry he said. Further, he stated that banks would need to improve their skills in detecting changes and becoming tactically-focused on being operationally lean and agile in response to market conditions.
“This will result in choices being made to adopt or partner with Fintech businesses offering digital interactions and to accept that there are alternatives to core legacy IT systems offering greater speed to revenue generation, effective operations and better customer experience,” Dr. Weerasinghe said. (CD)
