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Internet Ushers in Fourth Wave of Banking and Finance Innovation in Asia

Dr. Madanmohan Rao
Internet Consultant & Writer
March 2001

The tech market may indeed 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 dotcoms, serious players in established verticals like finance remain convinced that the Internet will have a profound impact," said Lionel Smith-Gordon, Asia head of Lab Morgan (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 commoditising 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 un-bundling and re-bundling," he said.

It is advice and knowledge - not products - which will differentiate financial institutes online, according to Smith-Gordon.

LabMorgan is the e-finance engine of JP Morgan Chase; it 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, B2B 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 for online ventures at Dresdner Bank (www.drkw.com).

"The Net represents the fourth and fifth wave 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: for 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 non-banks, 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 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 projects. Foreign banks like Citibank and Standard&Chartered are very proactive in this space," Kerle said.

The battle is on for leveraging new technologies for increased acquisition, retention and wallet share for money-related services, said M. Ramaswami, e-commerce director for the Asia Pacific region for 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-toolkit" across all 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 multi-currency payment services are popular in Hong Kong.

Citibank offers cash management services to over 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 year 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 where 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 T.D. Waterhouse Investor Services. Issues like taxation are beginning to loom big in market after market, he said.

Increasing de-regulation coupled with globalisation 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.

T.D. Waterhouse has a presence in India as well, via a joint venture with Tata Finance.

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

At the same time that 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 for 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 shares plunged 60 per cent because of this fake rumour.

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 non-existent 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 to a search engine like Google and 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 stripe. "This data is then used to re-create duplicate credit cards at sites like Kuala Lumpur, which is the largest centre 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," warned Hazlewood.

While B2B 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 de-regulation blurs the turf lines for banking, insurance and financial trades, the Net as a common operational platform also raises questions of why these sectors need to function independently in cyberspace as well, he added.

Very soon, local banks who were 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 for 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 marketmakers.

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, who 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 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, she feels 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 per cent to 10 per cent," Hataaja claimed.

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

About the author

Dr. Madanmohan Rao is an Internet consultant and writer based in India. He was formerly the communications director at the United Nations Inter Press Service bureau in New York, and vice president at IndiaWorld Communications in Bombay. Madan graduated from the Indian Institute of Technology at Bombay and the University of Massachusetts at Amherst, with an M.S. in computer science and a Ph.D. in communications. He is a frequent speaker on the international conference circuit, and has given talks and lectures on Internet-related issues in about 35 countries. He has worked with online services in the U.S., Brazil, and India.

He is the editor of INOMY.com (a leading Webzine about the Internet economy in India), and is on the board of editors of the magazines Electronic Markets (www.electronicmarkets.org - published from Switzerland) and On The Internet (published by the Internet Society - www.isoc.org). Madan is also on the board of directors/advisors of yellow pages firm IndiaReference.com, steel portal SteelRX.com, investment bank CoolStartups.com, Web solutions company 4Cplus.com, content services provider FridayCorporation.com, and software development portal SoftwareDioxide.com.

The author can be reached at madan@inomy.com.

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