Banking Technology & Allied Topics

Contents WHAT IS FINTECH, AND HOW IS IT CHANGING THE FINANCIAL WORLD TECHNOLOGY-DRIVEN-GROWTH-IN-CHINA-AN-INTERVIEW-WITH-JIANG-XING PROTECTING FINANCIAL INSTITUTIONS FROM DOWNTIME AND DATA LOSS KEY CYBER SECURITY THREATS TO THE NEW CENTRAL BANK DIGITAL CURRENCIES _ WORLD ECONOMIC FORUM NEW-TRENDS-IN-US-CONSUMER-DIGITAL-PAYMENTS – FINAL JOINING-THE-NEXT-GENERATION-OF-DIGITAL-BANKS-IN-ASIA HOW-TRANSACTION-BANKS-ARE-REINVENTING-TREASURY-SERVICES HOW TO PREVENT APP-TRACKING ON ANDROID PHONES EVEN AS GOOGLE DRAGS ITS FEET_ - ASIAN NEWS FROM-TECH-TOOL-TO-BUSINESS-ASSET-HOW-FINANCIAL-INSTITUTIONS-ARE- USING-B2B-APIS-TO-FUEL-GROWTH FIVE-ACTIONS-TO-BUILD-NEXT-GENERATION-KYC-CAPABILITIES DISRUPTING-THE-DISRUPTORS-BUSINESS-BUILDING-FOR-BANKS DIGITAL BANKING_ BANKING ON DIGITAL_ FINTECH FACES STRONG BARRIERS AS IT VENTURES OUT OF MANICURED URBAN LANDSCAPES - THE ECONOMIC TIMES CBDC-AND-STABLECOINS-EARLY-COEXISTENCE-ON-AN-UNCERTAIN-ROAD BUILDING-THE-AI-BANK-OF-THE-FUTURE BEYOND-DIGITAL-TRANSFORMATIONS-MODERNIZING-CORE-TECHNOLOGY-FOR- THE-AI-BANK-OF-THE-FUTURE BAAS_ WHY YOU SHOULD KNOW ABOUT BANKING AS A SERVICE AI-POWERED-DECISION-MAKING-FOR-THE-BANK-OF-THE-FUTURE AI-BANK-OF-THE-FUTURE-CAN-BANKS-MEET-THE-AI-CHALLENGE 2021-MCKINSEY-GLOBAL-PAYMENTS-REPORT FINANCIAL-SERVICES-UNCHAINED-THE-ONGOING-RISE-OF-OPEN-FINANCIAL- DATA PLATFORM-OPERATING-MODEL-FOR-THE-AI-BANK-OF-THE-FUTURE

11/24/21, 5:21 PM What is fintech, and How is it Changing the Financial World? What Is Fintech, And How Is It Changing The Financial World? Apart from the transactions, getting finance related advice is also possible through fintech. NBFCs provide online assistance where one can reach out to the financier in case of any hurdles. Trending Published: 19 Nov 2021, Updated: 19 Nov 2021 6:58 pm Gurudwaras Open Doors For There was a time when one would have to go to a bank for something as simple as opening a fixed deposit. And when it Namaz After Restrictions On came to taking loans, there was a whole other exercise involved in that. Going to the bank meant taking time off work, Prayer Sites In Gurugram standing in lines and trying to understand what was offered in a few minutes. Goa Polls: TMC, AAP Banking Fast forward to today; one can apply for a loan before finishing breakfast. What’s more, one can also compare offers from On Anti-Incumbency Against multiple banks/NBFCs in just minutes to choose the best one. BJP And Lack Of Trust In Congress All of this has been made possible by fintech. The word ‘fintech’ stands for ‘financial technology’. It means the usage of technology that is used for providing financial services and products to the consumers. Non-banking financial companies Supreme Court Quashes like Finserv MARKETS and banks like Axis Bank, RBL Bank and others can offer products like credit cards, loans, Controversial Skin To Skin insurance, investment, and more through the power of fintech. Contact Judgement Even though fintech is comparatively new, technology has been associated with finance for a long time now. To give an PM Modi Proposes 'One Nation, example, ATMs were, at one time, considered as cutting edge technology, and so were the signature verifying technologies One Legislative Platform' At that were first used by banks as early as in the 1860s. However, the widespread usage of the internet and smart devices like 82nd Conference Of Presiding tablets, computers, smartphones has accelerated the growth of fintech in recent years. Officers In Shimla Usage of Fintech Delhi Air Pollution: Covid-19 Recovering Patients At Greater From The Magazine Risk Of Lung Disease, Experts Suggest Ways To Stay Safe India's Best B-Schools 2022: Top Private MBA Institutions In India India's Best B-Schools 2022: Top Public MBA Institutions In India The Great Indian Dream: How Youngsters Are Creating Wealth With Offbeat Ideas Indian Richie Rich: A Billion Bucks Worth Of Brash And Brilliant Minds https://www.outlookindia.com/website/story/outlook-spotlight-what-is-fintech-and-how-is-it-changing-the-financial-world/401664 1/2

11/24/21, 5:21 PM What is fintech, and How is it Changing the Financial World? Diary | 'Udham Singh' Is An Emotional Journey: Vicky Kaushal The use of fintech has changed the world of finance in different ways. That’s not all. Banks and NBFCs also offer various investment options that can be started within minutes from any part of the world. One can also link their bank account to their smartphone and keep a tab on the account 24*7. Moreover, there’s also a digital wallet facility now where a number of transactions can be made, be it a small amount or a larger one. Not just banking but the insurance and investment sector is also evolving because of fintech. Telematics-based car insurance is provided now where the customers’ driving is monitored through the data collected from their smartphone or by fitting a black box in their car. How much they pay for their car insurance policy is determined using this data. Apart from the transactions, getting finance related advice is also possible through fintech. NBFCs provide online assistance where one can reach out to the financier in case of any hurdles. That being said, the usage and evolution of fintech have paved the way for utmost convenience and a more personalised financial planning for individuals and organisations. Let’s now understand the pros and cons of using fintech. Pros of Fintech Convenient and Time-Saving Fintech products and services can be accessed and bought online. This saves the time and trouble of actually visiting the branch. Thanks to the internet and its widespread use, it is now quicker to access fintech products. Wide Range of Products and Services Consumers can now choose from a wide range of products and services. This is mainly because the access to various banks is remote, and regardless of the location, the choices are available online. Cheap Deals Fintech companies do not need to invest their capital in physical infrastructure like a banking branch network. Thus the cost is saved, and in return, the customers might be offered a cheaper deal. Personalisation The internet and technology have allowed fintech companies to gather and store more data about their customers. Therefore, more personalised services are offered to the customers based on the collected data. Cons of Fintech Lack of clarity on regulation Fintech companies are comparatively newer than traditional banking or financial companies. The customer might be unaware of the applicable laws and how such companies are regulated. The customer might not know about their rights if anything goes wrong. Rash Decisions Financial products available on fintech companies can be bought within minutes. It is possible that a customer might not make an informed decision while purchasing such products and services. The technology and zero face-to-face interaction have made it easier for consumers to make rash decisions without properly knowing the product details. Technological Risks Buying financial products using fintech might leave one exposed to various technology-based risks. The major risk of indulging in financial services online is that personal data could be misused, thereby making one fall prey to cybercrime. Exclusion of Non-Tech-Savvy People There are various products and services offered by fintech companies that are exclusively online. This means that one cannot avail them by actually visiting a branch. This leaves out many people who do not know how to use technologies and devices like smartphones, tablets, computers, etc. Being technologically challenged, they will be deprived of fintech services and products. The bottom line about fintech companies is that they are surely a major player in the global economy and society. The massive reach of such companies shows that it is here to stay. However, as customers, one should always be aware of the risks involved and ensure that the transactions are done carefully after getting proper information. https://www.outlookindia.com/website/story/outlook-spotlight-what-is-fintech-and-how-is-it-changing-the-financial-world/401664 2/2

Insurance Practice Technology-driven growth in China: An interview with Jiang Xing The CEO of ZhongAn Insurance says the industry can generate momentum for growth by taking advantage of trends, preparing for future developments, and increasing investments in digital transformation. by Violet Chung © ZhongAn October 2021

As the digitalization of every industry reshapes First, we believe cloud technology is the core driver our world, digital leaders offer lessons on both the of technological empowerment for insurance and opportunities and the challenges at play. ZhongAn improved services. ZhongAn put all core systems Online P&C Insurance was the first professional on the cloud early on, and this has given us a solid institution licensed to provide online insurance foundation for innovation and growth over the past in China. The company was formally established few years. In 2020, we upgraded our self-developed in 2013 and listed on the Hong Kong exchange cloud system, Wujieshan, to version 2.0. This has in 2017; today it is among the top ten property enabled us to process 54,000 insurance policies and casualty insurance companies in the China per second and taken us a step closer to our goal market—less than a decade after its founding. As of reaching ¥100 billion in insurance premiums. In of the end of last year, ZhongAn had served more 2020, the number of insurance policies handled by than 520 million customers and received more than our systems exceeded 7.8 billion. ¥55 billion ($8.5 billion) in premiums. Second, it’s crucial to use data as the basis For ZhongAn, which has rejected the traditional for production. In this fully data-driven age, offline distribution model, this remarkable growth digitalization can lead to improved data availability is undoubtedly underpinned by the power of and applicability, thereby unleashing the real value insurtech. Through the integration of technology of artificial intelligence. As such, we are increasing and insurance, ZhongAn has reshaped its entire our investments in data R&D. We have upgraded value chain, from product design to marketing our data-intelligence center based on big data and to claims underwriting, and has taken the lead in artificial intelligence, building data mid-ends and achieving a digital transformation. using data to drive innovation and enhancement along the entire insurance value chain. Violet Chung, partner at McKinsey in Hong Kong, recently spoke with Jiang Xing, CEO of ZhongAn The results are measurable: the rate of data Insurance, about technology-driven growth. Their utilization within ZhongAn increased by 16 percent conversation covered ZhongAn’s digital strategy, last year. Through this type of refined operation, the technology output, and vision for the future— efficiency of claims underwriting has improved by particularly in the postpandemic era. This article 20 percent. Currently, over 99 percent of ZhongAn is part of McKinsey’s Insurance Industry Leaders claims processes are automated, and the navigation and Shapers interview series and has been edited rate of our smart interactive voice response has for clarity. reached 97 percent, covering over 85 percent of customer inquiries. This has resulted in significant Sustained focus on the fusion of improvements in both internal efficiency and technology and insurance customer satisfaction. McKinsey: ZhongAn grew quickly over a short time. Third, we are leveraging ecosystem synergies to What can others learn from your experience? further enhance our technological empowerment. It is only through mutual cooperation and harnessing Jiang Xing: ZhongAn Insurance was the first online the unique advantages of each party that we insurance company in China. Over the past eight can serve the increasingly complex business years, we have been focusing on the in-depth environment and satisfy the increasingly diverse integration of technology into our insurance needs of our customers. However, true digital businesses to comprehensively serve the entire reform is a long-term, systemwide project requiring insurance value chain. large-scale investment. Finding a technology 2 Technology-driven growth in China: An interview with Jiang Xing

partner for in-depth cooperation is of critical Assisting in the digital transformation importance, particularly for an insurance company of the insurance ecosystem or group willing to embrace digital upgrades. McKinsey: In recent years, ZhongAn has started Over the past few years, ZhongAn has invested exporting technology overseas and developed heavily in technology. Since the company was partnerships in this area in Hong Kong, Japan, founded, we have invested a cumulative total of over and Southeast Asia. Could you talk briefly about ¥3.6 billion in research and development. the current development of these efforts, and if possible, could you include some examples? ZhongAn Technologies, a wholly owned subsidiary of ZhongAn Insurance, currently has three major Jiang Xing: After years of development, our insurtech products that are ready for the market. technology offering is no longer limited to a These products are digital upgrades for our single item but includes comprehensive, systemic business production, growth, and infrastructure solutions. In Hong Kong, ZhongAn has performed series, basically covering the front-end, mid-end, quite well over the past two years. In particular, in and back-end platforms of the insurance business. the first half of last year, both our virtual bank, ZA Bank, and our digital insurance company, ZA Insure, In 2020, we also became a member of the first started operation. ZA Bank, the first virtual bank to group of state partners for digital transformation, formally begin operations in Hong Kong, served over working with various leading insurers and banks 220,000 customers, ages 18 to 93, as of the end of and supplying them with our automated marketing last year, with total deposits of around HK $6 billion. platforms and our next-generation core insurance products. The compound growth rate of the revenue This past May, ZA Bank officially announced the derived from our technology offerings reached 109 launch of our life insurance product, which offers percent during the three-year period of 2017 to the highest ratio of coverage to premiums in Hong 2020. We are now at the cutting edge of the digital Kong and is available to our Hong Kong customers transformation within the industry. through our virtual bank app. In addition, with regard to other markets, we are actively exploring About the interviewee opportunities to implement digital solutions with our partners. For example, we are offering our core insurance systems to major insurers in Asia. We have also set up in-depth partnerships with internet platforms. Jiang Xing joined ZhongAn in April 2014 As of the end of 2020, ZhongAn Technologies and served as deputy general manager and had served more than 400 customers around the co-CEO of ZhongAn, as well as executive world. Going forward, we will continue to increase director and legal representative of ZhongAn our investments in technology, develop domestic Technology. In July 2019, he was appointed and overseas partnerships, facilitate digital CEO of ZhongAn Insurance. transformation in the Asian and global insurance ecosystems, and strive to become the leading brand in the global insurtech market. Technology-driven growth in China: An interview with Jiang Xing 3

Opportunities and challenges in the insurance is in a stage of rapid growth. We are more postpandemic insurance industry confident and optimistic about the growth potential of the market after the pandemic. In-depth user-data McKinsey: The pandemic has had an enormous mining and innovations driven by customer needs are impact on the insurance industry, both in China and the keys to developing core competitiveness in the in the wider world. In the post-COVID era, what core insurance industry of the future. competitiveness do you think needs to be reconsidered? We believe that the insurance industry is entering an era of customer-centric digital growth. I think that Jiang Xing: Yes, the pandemic has definitely future development is something all of us should become the keyword since its sudden emergence in look forward to. 2020. I think this has accelerated the digitalization process in the insurance industry, shifting us to ZhongAn’s future development the fast lane. Customers’ expectations for digital insurance have significantly increased, and McKinsey: What will guide ZhongAn’s traditional insurers have begun actively pushing future development? digital transformations to satisfy those needs. In addition to taking advantage of strategic Jiang Xing: We have greatly benefited from opportunities, we should plan ahead, increase our ZhongAn’s double-pronged strategy of focusing investments in digital transformation, and increase on insurance and technology, which was our support for future growth areas in our country’s clearly defined from the start. The results have economy, thereby gaining momentum from rising demonstrated that the online business model trends. Furthermore, with growing awareness and technology empowerment are potent and of health issues and the evolution of regulations constitute a core advantage. for the insurance industry, the domestic health insurance market will continue to grow. On the Going forward, we want to continue to achieve data- other hand, with the pandemic and adjustments driven, high-quality growth; invest in independent in the macroeconomy, competition will become R&D; and refine our technology capabilities to increasingly intense in the insurance industry, create long-term value for both the company and making it very difficult to generate profits. our customers. Guided by this aim, we will strive to use insurtech to drive digital upgrades in the global Online insurers may have an advantage; ZhongAn’s insurance industry. premium income showed year-over-year growth of more than 44 percent this May, proving that online Violet Chung is a partner in McKinsey’s Hong Kong office. Comments and opinions expressed by interviewees are their own and do not represent or reflect the opinions, policies, or positions of McKinsey & Company or have its endorsements. Copyright © 2021 McKinsey & Company. All rights reserved. 4 Technology-driven growth in China: An interview with Jiang Xing

Contact Violet Chung Partner, Hong Kong [email protected] Technology-driven growth in China: An interview with Jiang Xing 5

11/24/21, 5:22 PM Protecting financial institutions from downtime and data loss Ian Allton Nov 19, 2021 Protecting financial institutions from downtime and data loss Banks and credit unions face four key threats to business continuity plans: cyberattacks, systems failures, natural disasters and cloud outages. In today’s digital economy, a few minutes of downtime for critical applications and databases needed for online banking can be devastating – loss of customer satisfaction, negative press and social media, drained IT resources, reduced end user productivity, etc. Be aware of four key threats to financial services organizations when evaluating business continuity plans: cyberattacks, systems failures, natural disasters and cloud outages. In the face of these threats, which applications and databases would incur the greatest cost to your organization were they to go offline? Review your applications with other questions in mind: Would losing this system reduce employee productivity or disrupt operations? Would losing this system increase the workload of your IT team? Added work for your IT team could add to labor costs and costly delays to planned projects. Other questions can reveal Sign up for the free BAI Banking Work email costs that may be harder to Strategies newsletter and get industry insights Subscribe quantify, but are impossible delivered to your inbox. to ignore. What would losing a customer-facing application cost in terms of customer satisfaction and reputation? Negative publicity or social-media standing? If this application or database is locked by ransomware, what will that cost in terms of public confidence? Similarly, what if downtime draws regulatory scrutiny? Having used these questions to identify your most critical applications, consider the main threats they face and how best to protect them. Cyberattacks Banks and credit unions may face the challenge of protecting vital applications and data without dedicated cybersecurity experts on staff. There are some important steps every organization can take to improve cyber security, regardless of size or IT resources. The cost of ransomware and other cyber threats justifies the investment in an expert audit of regulated data and any means of accessing it – including firewall weaknesses, routers, network access points, and servers and recommended countermeasures specific to each weakness. Document and communicate policies about the acceptable use of the company’s computer equipment and network, both in office and at home. Include clear restrictions for accessing and downloading sensitive data to local laptops and PCs, use of network access points, wireless security and best practices to avoid email-borne threats. And apply software solutions for protection – this includes workstation/laptop antispam software, as well as automated security systems that hunt, detect and manage defenses against threats throughout the system. Hardware system failures Component failure within your IT infrastructure – servers, storage, network routers, etc. – is inevitable. To mitigate the cost of failure, answer these three questions: How much data can you afford to lose? This is your recovery point objective (RPO). How quickly you need to restore operations? This is your recovery time objective (RTO). What level of application availability do you need? (Annual uptime percentage) Your most critical applications – those that require an RPO of zero, an RTO of just 1-2 minutes, and true high availability (HA) of at least 99.99% annual application uptime – can be protected against hardware failure through failover clustering. For less critical applications and data, a simple backup or archiving plan may suffice. Failover clustering provides redundancy for potential sources of system failure. Clustering software monitors application availability and if a threat is detected, this software moves the application operations to a standby server where operation continues with minimal downtime and near zero data loss. MORE on TECHNOLOGY The changing intersection of banking and technology Banks and fintechs are on the partnership track U.S. banks are playing catch-up on digital technology Moving from low-code hype to successful implementation Analyzing banking data and putting it to good use https://www.bai.org/banking-strategies/article-detail/protecting-financial-institutions-from-downtime-and-data-loss/ 1/2

11/24/21, 5:22 PM Protecting financial institutions from downtime and data loss Disaster recovery Some applications may need protection from disasters that damage the local IT infrastructure. For applications needing HA, the primary and standby cluster nodes should be geographically separated, but connected by efficient replication that can synchronize storage between locations. Cloud outages Cloud infrastructure does not automatically provide application-level HA or disaster recovery protection. Cloud availability service- level agreements apply only to the hardware, which may not ensure that an application or database remains accessible. Like any computing system, clouds are vulnerable to human error, disasters and other downtime threats. HA clustering for applications in the cloud should be capable of failing over across both cloud regions and availability zones. Traditional shared storage clustering in the cloud is costly and complex to configure, and is sometimes not available. Use block-level replication to ensure the synchronization of local storage among each cluster node. This enables a standby node to access an identical copy of the primary node storage and an RPO of zero. By assessing the criticality of the applications, databases and systems required to operate efficiently and calculating the real cost of downtime for these systems, banks and credit unions can invest time and resources wisely to mitigate those threats cost efficiently. Ian Allton is solutions architect at SIOS Technology Corp. https://www.bai.org/banking-strategies/article-detail/protecting-financial-institutions-from-downtime-and-data-loss/ 2/2

11/24/21, 5:20 PM 4 key cyber security threats to the new central bank digital currencies | World Economic Forum 4 key cybersecurity threats to new central bank digital currencies For central bank digital currencies to become part of daily life, its cybersecurity Image: Getty Images must be carefully considered. 20 Nov 2021 Sebastian Banescu Senior Research Engineer / Security Auditor, Quantstamp Ben Borodach Vice-President, Strategy and Operations, Team8 Ashley Lannquist Project Lead, Blockchain and Distributed Ledger Technology, World Economic Forum This article is part of the Annual Meeting on Cybersecurity AUDIO: LISTEN TO THE ARTICLE This is an experimental feature. Some words or names may be mispronounced. Does it sound good? Yes / No -09:30 Central bank digital currencies (CBDC) are increasing in uptake. They could improve financial access and payment efficiency. To ensure trust in CBDC, central banks must ensure their cybersecurity. With G7 officials recently endorsing principles for central bank digital currencies (CBDC), and over 80 countries launching some form of initiative related to CBDC, it seems their widespread deployment is a matter time. CBDC is a digital form of central bank money that can be accessible to the general public; essentially, it consists of individuals and firms having access to transaction and savings accounts with their home country’s c bank. Those of the Bahamas, China and Nigeria have all implemented early CBDC programmes, with more ex in the future. If successful, CBDC could help policy-makers achieve goals around payment efficiency, financial inclusion, banking and payment competitiveness, access to safe central bank money in the era of digital payme and more. https://www.weforum.org/agenda/2021/11/4-key-threats-central-bank-digital-currencies/ 1/3

11/24/21, 5:20 PM 4 key cyber security threats to the new central bank digital currencies | World Economic Forum Yet like any digital payment system, CBDC is vulnerable to cyber security attack, account and data breaches a theft, counterfeiting, and even farther-off challenges related to quantum computing. For citizens to be comforta adopting CBDC, they will need to be confident in its security. Ultimately, it will not be successful if it does not ca consider and invest in a robust cybersecurity strategy. Decision-makers should look to cyber security best prac such as those published by the US National Institute of Standards and Technology (NIST) and the Microsoft “STRIDE” model. This article, which summarizes key points from the World Economic Forum’s new w paper on CBDC Technology Considerations, lays out additional imperative considerations for CBDC cybersecu How can we make sure CBDC is secure for decades to come? We discuss four major dimensions to its cyber security below: 1. Credential theft and loss CBDC access credentials are needed for accessing and transferring funds. Such credentials could be given in form of a passphrase that could be easily communicated even on paper, or a hardware token that stores the pr keys. Regardless of the form, the threat of theft and credential loss is significant, meaning account funds and d could be compromised. Theft can be physical or virtual, especially in the case of passphrases. Given the arsenal of modern attackers, techniques such as social engineering, side-channel attacks and malware could be used to extract credentials CBDC user’s device. Moreover, if passphrases or hardware tokens are lost/damaged due to fire/water or natur calamities, CBDC users should not simply lose all their funds and data. Therefore, the system should have bui credential recovery mechanisms. If a CBDC is based on blockchain technology, it might use a multi-signature (“multi-sig”) wallet where at least tw other trusted parties hold credentials to the same wallet (this could be the central bank itself and/or family mem or other contacts of the end users). The drawback of multi-sig wallets is that they are less user-friendly, since fo transfer one needs to coordinate with at least one other party. Such security-usability trade-offs are common ev nowadays with internet banking where 2 Factor Authentication (2FA) is extremely common. If CBDC is based o traditional technology, a privileged authority could simply update a database entry with new credentials. Over 80 countries are launching some form of initiative related to CBDC Image: BIS 2. Users with privileged roles One concern is that central bank or government insiders, law enforcement and other agents may have roles th allow privileged actions, such as the freezing or withdrawal of funds in CBDC accounts without the user’s cons These capabilities are in line with today’s compliance procedures in regulated payment systems. Though such are likely to be a functional requirement of a CBDC, it is possible for them to enable malicious insiders to abuse system. As with other types of information security, the central bank – and any intermediaries involved – should https://www.weforum.org/agenda/2021/11/4-key-threats-central-bank-digital-currencies/ 2/3

11/24/21, 5:20 PM 4 key cyber security threats to the new central bank digital currencies | World Economic Forum and execute a cybersecurity risk-management plan covering such privileges. Multi-party mechanisms, such as employed by multi-signature wallets or other protections, could increase the difficulty of such attacks. If the CBDC operates on blockchain technology, where nodes include non-central bank entities that have powe validate or invalidate transactions, malicious validator nodes can pose security threats. They could also underm the central bank’s monetary authority and independence by virtue of accepting or rejecting transactions that ar contrary to the central bank’s intention. Thus, it is generally not recommended for non-central bank nodes to ha transaction validation powers unless absolutely necessary. 3. System integrity and “double spending” Depending on the consensus protocol used, non-central bank nodes with privileged power could declare transa as invalid, essentially blocking them from being accepted by the network and creating a denial-of-service attac CBDC users and censorship of their transactions. Collusion by non-central bank nodes could also enable “double-spending” attacks, a form of counterfeiting whe CBDC is spent multiple times illegitimately. The nodes may also decide to “fork” the distributed ledger, creating different track and view of the ledger of transactions that disagrees with the central bank’s. CBDC end users co to spend funds from their wallets in multiple places, also constituting digital counterfeiting. Risk of double-spen higher if the CBDC in question has offline capability, depending on the technology with which it operates; in this scenario, double-spend transactions could be sent to offline entities without the high-security validation proces would normally occur online. By imposing spending limits and transaction frequency when the CBDC user is offline, the impact of such attac would be reduced. Further, once a device that is conducting transactions comes back “online”, compliance soft could sync with any transactions that have concurred during the offline period. 4. Quantum computing Quantum computing will ultimately impact all financial services as it compromises major data encryption methodologies and cryptographic primitives used for protecting access, confidentiality and integrity of data stor transmitted. CBDC is no exception. Therefore, the threat of emerging quantum computers, which can comprom the cryptography employed to secure CBDC accounts, must be taken into account during technology design. F instance, central banks should consider the vulnerability of certain primitives to forthcoming quantum computin Moreover, quantum computers in the future might be able to break the cryptography in the CBDC system witho detection. What is the World Economic Forum doing on cybersecurity Show Cybersecurity, along with technical resilience and sound technical governance, are the most important elemen CBDC technical design. Failure to implement a robust cyber security strategy and consider the risks introduced above could compromise citizen data and funds, the success of the CBDC programme, central bank reputation and broader opinions of the new currency. Based on past experiences in cybersecurity failures, the bar for sec not only about “keeping the bad guys out” or minimizing unauthorized account access. It must be comprehensi consider the full spectrum of risks, ensuring that the system works as it was designed and that its integrity rem intact. Only then will CBDC be successful in achieving its goals. https://www.weforum.org/agenda/2021/11/4-key-threats-central-bank-digital-currencies/ 3/3

Global Banking & Securities New trends in US consumer digital payments Consumers’ survey responses indicate that interest in digital payments continues to grow, including in new areas like “buy now, pay later” and cryptocurrency. by Vaibhav Goel, Deepa Mahajan, Marie-Claude Nadeau, Owen Sperling, and Stephanie Yeh © svetikd/Getty Images October 2021

More than four in five Americans used some that of online and in-app payments. The relatively form of digital payment in 2021, continuing a long- slow adoption of these two categories may also standing trend. The findings of McKinsey’s 2021 result from the pandemic’s impact on customer Digital Payments Consumer Survey—an ongoing behavior; for example, increased online shopping research initiative in its seventh year—also indicate and fewer in-person interactions involving splitting the continuation of several behavioral trends from of bills (and thus fewer opportunities for P2P). the previous year’s survey,¹ conducted during COVID-19’s initial wave. Furthermore, responses Consumers’ level of trust in financial services on cryptocurrency and “buy now, pay later” (BNPL) companies and tech firms remains similar to last financing² indicate that these topics have moved year’s, with the relative rankings of various players further into the mainstream for the American consistent across age groups. Banks and traditional consumer. payments networks (Visa, Mastercard) continue to lead in trust, although familiar tech firms (Amazon, Solidifying digital gains, amid some Apple, and PayPal) continue to narrow the gap. retrenchment Newer fintechs generally register lower consumer trust, perhaps because they have not gained name The 82 percent of Americans using digital recognition and familiarity. payments—defined to include browser-based or in-app online purchases, in-store checkout using Regardless of provider, however, younger a mobile phone and/or QR code, and person-to- respondents consistently express higher trust in person (P2P) payments—in 2021 exceeds last year’s digital solutions. 78 percent and the 72 percent of five years ago. Omnichannel use of digital payments continues to BNPL proving effective; crypto grow over time, although it experienced a dip from growing rapidly 2020’s all-time high of 58 percent. Some shifts in digital adoption during 2020 and 2021 appear to be For two of the most widely discussed industry related to the COVID-19 pandemic and may prove innovations—BNPL and cryptocurrency—our to be transitory. In-app payments are an interesting research reveals favorable yet different usage case in point: with more consumers staying at home, patterns. ride-share usage declined as would be expected, while meal delivery increased. In fact, online Asked about BNPL, 30 percent of our survey payments was the only category of digital payments respondents report having financed a purchase to register growth, up 12 percentage points in 2021, with this type of service (Exhibit 1). Although this possibly as a result of pandemic-related behavior share is only three percentage points higher than changes including more time spent at home (and 2020’s, attitudinal data seem to support the value ordering more products remotely). proposition put forth by BNPL providers—and given the product’s increased availability we believe The behavior of the 35–54 and 18–34 brackets has usage may be growing faster than penetration. converged to a greater extent than many might have expected. In-app payments is also the category Of the respondents who used BNPL, 29 percent with the widest age disparity; its adoption rates report that without this financing option they would are three times higher for 18-to-34-year-olds than have made a smaller purchase or not purchased at for customers 55 and older. Across all age groups, all. Another 39 percent say they chose BNPL over adoption of P2P and digital in-store payments lag use of a credit card, and the remaining 31 percent indicate BNPL was a substitute for a debit card or 1 Lindsay Anan, Alyssa Barrett, Deepa Mahajan, and Marie-Claude Nadeau, “US digital payments: Achieving the next phase of consumer engagement,” November 2020, McKinsey.com. 2 Puneet Dikshit, Diana Goldshtein, Blazej Karwowski, Udai Kaura, and Felicia Tan, “Buy now, pay later: Five business models to compete,” July 2021, McKinsey.com. 2 New trends in US consumer digital payments

Exhibit 1 ‘Buy now, pay later’ penetration has grown to 30 percent of respondents and is credited for incremental sales in about 30 percent of purchases. Buy now, pay later (BNPL) penetration What would have happened without BNPL % of all respondents % of BNPL purchases¹ Interested in using/potential users Purchased everything with credit card Purchased everything with debit/cash 41 Purchased only a portion 35 Would not have made the purchase 11 10 39 8 19 27 30 2020 2021 31 ¹Figures may not sum to 100% because of rounding. Source: 2021 McKinsey Digital Payments Survey cash. Separately, “a lower-cost financing option” understanding—an indication of further room was the most commonly cited reason for BNPL for growth. use (31 percent). Of past and present cryptocurrency owners, 43 BNPL’s impact on incremental sales varies percent say they are motivated by its investment significantly across verticals. We see the potential; of that group, 41 percent say they highest incremental conversion rates in certain allocate at least 5 percent of their portfolio to discretionary categories—apparel, laptops, and the vehicle. Bitcoin continues to dominate this beauty products, for instance—where up to 20 market, with three-quarters of those having percent of respondents say purchases would owned cryptocurrency including Bitcoin in their not have occurred without BNPL. Incremental portfolios. Surprisingly, however, among the broader conversion is far lower (3 to 5 percent) in less population Bitcoin’s 15 percent penetration does discretionary categories, such as tires and auto not significantly outpace that of Dogecoin and parts, home appliances, and home improvement. Ethereum (11 percent each). Turning to cryptocurrency, its penetration remains Fewer respondents own cryptocurrency for making nominal on a broad level, but its steep adoption purchases. Twenty-one percent cite transactions as curve is striking. One in five respondents report their primary objective, often pointing to anonymous holding or having held crypto assets, up from payments and international transfers as use cases. 6 percent just a year earlier (Exhibit 2). Among the Roughly one-fifth reference a lack of trust (in 74 percent of respondents familiar with but not the government, banks, or the US dollar) as their owning crypto, 41 percent say a key reason for not motivating factor. yet having used crytpo is their lack of functional New trends in US consumer digital payments 3

Exhibit 2 Cryptocurrency penetration has more than tripled, primarily because of its paostaentiinavl eastamneintvevsethmicelnet.. Cryptocurrency penetration Reasons for owning crypto % of total respondents % of respondents who have owned cryptocurrencies Interested in owning/ As an investment 43 potential users Interest in new technology 35 34 To make purchases 21 14 Popularity/trend among my peers or (internet) community 19 20 To make international money transfers 17 2021 16 Trust security that cryptocurrencies (blockchain) provide against fraud 17 10 To make payments anonymously 13 6 2020 Lack of trust in the US government 11 To use as collateral for a loan 11 Lack of trust in the US dollar 11 Lack of trust in banks 5 Source: 2021 McKinsey Digital Payments Survey Digital wallets making further dents in While the COVID-19 pandemic slowed penetration leather of some forms of digital spending, the overall trend continues toward greater use of digital Fifteen percent of digital-wallet users say they leave options. Innovations in digital payments, like BNPL their residence regularly without their old-school and cryptocurrency, are also beginning to take version. Another 11 percent indicate they consider root and show the potential for future growth. doing so only when they do not plan to purchase Consumers tell us that BNPL is enabling them anything or know they can use a digital wallet. to complete more purchases than they otherwise would. Despite cryptocurrency’s steep growth Following widespread promotional efforts designed curve, a high percentage of non-users appear to coax consumers to enter card credentials, most persuadable given further education—although respondents using digital wallets have now loaded interest to date has been driven by the instrument’s multiple cards. Of those who say they have done investment potential over its payments utility. so, 40 percent indicate that they frequently (every Given another year to adjust to the pandemic’s couple weeks or more) switch to an instrument other ongoing economic effects, it will be fascinating than their default option. The most commonly cited to see how these digital trends progress in reason given for toggling between cards is funds 2022’s survey. availability, followed by a desire to isolate different purchase types on separate cards and redemption of promotions or discounts. Vaibhav Goel is a senior capabilities and insights analyst in McKinsey’s Gurugram/Delhi office; Deepa Mahajan and Marie-Claude Nadeau are partners in the San Francisco office, where Stephanie Yeh is a consultant; and Owen Sperling is a consultant in the Chicago office. Copyright © 2021 McKinsey & Company. All rights reserved. 4 New trends in US consumer digital payments

Global Banking & Securities Joining the next generation of digital banks in Asia As the region’s regulators increase license allocations and set standards for the next wave of digital banks, there are opportunities for both incumbents and new entrants to enter the arena. By Raphael Bick, Denis Bugrov, Hernán Gerson, Alexander McFaull, Alexander Pariyskiy © Getty Images January 2021

Digital banking in Asia is primed for growth. up a digital banking license application process Amid soaring demand for online and mobile and Malaysia issued a draft licensing framework; alternatives, new digital players are shaking up the meanwhile regulators in countries including market and transforming banking for individuals Thailand and Pakistan have announced or and companies. As regulators increase license indicated plans to follow suit. allocations and set standards for a new generation of banking, there is a unique opportunity for both A word on the impact of COVID-19 on the digital incumbents and new entrants to get involved. banking landscape. As we’ve noted in other articles, COVID-19 and related lockdowns have Not every Asian digital bank is a success story, of led to an increase in the use of digital banking, course, but those that have developed a productive even among segments previously less likely business model and scaled effectively have thrived. to adopt it. On the investment side, investors, Once established, digital banks can generate particularly venture capital firms, have become higher revenues at a lower cost to serve than more cautious, lending more momentum incumbents, putting them in a position to expand to consolidation and consortia as funding market share. In addition, their digital architecture approaches for digital bank launches. enables them to access ecosystems of businesses and customers, bringing exponential benefits in On the regulatory front, caution related to terms of knowledge and data. economic uncertainty has led some regulators to delay licensing timelines; for example, While digital banks in other geographies are often Singapore licensing was delayed roughly five startups, Asian digital banking is being driven months, while Malaysia’s was delayed about six largely by established companies and consortia. months. On the whole, however, the pandemic Despite structural challenges with regard to has not shifted the path for digital banking governance, consortia bring significant advantages in Asia. In 2020, all virtual banks in Hong in terms of achieving scale. Just five years after Kong SAR China managed to launch, along launch, Tencent-backed WeBank serves some 200 with Rakuten Bank in Taiwan China in early million people, and Alibaba-supported MYbank 2021; Singapore’s regulator shortlisted four has more than 20 million SME customers. Over candidates for new digital banking licenses;² a short period, China’s digital banks now have a and Malaysia³ and the Philippines⁴ finalized roughly 5 percent share of the country’s RMB 5 their digital banking frameworks/guidelines. trillion (~$700 billion) unsecured consumer loan At the same time, as digital banking matures, market and more than 7 percent of online SME regulation tightens. In China, for instance, loans. South Korea’s KakaoBank, launched in 2017, regulators have introduced additional rules attracted more than 10 million customers in its first related to risk management (including for year and now has a roughly 5 percent share of the systems, data, risk model management, and country’s unsecured consumer loan market.¹ IT risk management)⁵ as well as limitations on online micro-lending business. ⁶ Asia’s digital licensing process began with Chinese regulators in 2015, and has since expanded around In order to reach consumers and small the region, with central banks in South Korea, businesses that have struggled to gain Taiwan China, and Hong Kong SAR China granting access to financial services, many new digital limited numbers of licenses. In 2019, Singapore set banks are seeking entry into new markets. 1All consumer unsecured loans issued by banks, excluding credit card balances. 2MAS Announces Successful Applicants of Licenses to Operate New Digital Banks in Singapore,” mas.gov.sg, December 4, 2020. 3Licensing Framework for Digital Banks,” www.bnm.gov.my, December 31, 2020. 4BSP Introduces Digital Banking Framework,” www.bsp.gov.ph, November 25, 2020. 5CBIRC Releases the Provisional Rules on Internet Loans of Commercial Banks,” www.cbirc.gov.cn, July 17, 2020. 6CBIRC and PBC Solicit Public Opinions on the Interim Rules on Online Micro Loan Business (for Consultation),” www.cbirc.gov.cn, November 2, 2020. 2 Joining the next generation of digital banks in Asia

To succeed, they need to prepare for robust two years after launch. All five Chinese digital licensing processes, and demonstrate that they banks were profitable in 2019, with WeBank and are equipped to compete in a high-performance XW bank posting ROEs of about 28 percent and banking environment. Considering business plan, 30 percent respectively, compared with a national customer proposition, and management of the average for all banks of roughly 11 percent. application, we see 10 essential elements that new digital banks should focus on, including a Successful digital banks in Asia often operate unique proposition, a strong leadership team, under a consortia business model that contrasts good governance, and a clear path to profitability. to the vertical approach seen in Europe and the The task is significant, but those companies that United States. In China, for example, both WeBank make the grade, and scale effectively, have an and MYBank are consortia, led by Tencent and opportunity to play a part in one the world’s most Alibaba’s Ant Financial, respectively. dynamic financial markets. Consortia do present challenges and complexity Digital banking licenses present an of their own, particularly in ensuring alignment opportunity between participants; but they also offer a path to scaling relatively quickly. Notably, consortia As in many regions, digital banking in Asia is were awarded the highest number of licenses in competitive, and many startups have failed to recent licensing processes in Taiwan China and scale sufficiently, or have scaled but not made South Korea, and five of the eight digital licenses a profit. In aggregate, however, Asian digital awarded in Hong Kong SAR China in 2019 went to banking has been a success. Japan’s Jibun bank, groups of companies. (In Hong Kong SAR China, the first Asian digital pure play (launched in 2008), for example, Fusion Bank is led by Tencent and reached profitability less than five years after ICBC; Standard Chartered-led Mox is backed launch. China’s WeBank and XW Bank and South by HKT, PCCW, and online finance company Korea’s KakaoBank produced positive returns CTrip Financial.) The majority of publicly known Note on methodology Globally, digital banks have proliferated over the past 20 years (Exhibit 2). However, the variety of business and operating models has led to some confusion over the distinction between digital channels, digitized traditional banks, and pure-play digital banks. In this article, we define a digital bank as a deposit-taking financial institution that provides its products and services through a digital-first or digital-only business model. Characteristics of digital banks include: — A digital front end and operations. Digital banks acquire and onboard customers, and meet most customer needs, with little or no reliance on paper documents, a physical footprint (e.g., branches, ATMs, agent point of sale), or manual processing. They also offer a high-quality user interface and experience. — A digital-native back-end core. Digital banks have configurable, modular, micro-services-based cores, with APIs that enable rapid IT delivery and innovation. — Set up and run like a technology company. A digital operating model is characterized by a horizontal structure, minimal bureaucracy, and a non-hierarchical environment, with high levels of staff empowerment and ownership, and a test-and- learn culture enabling continuous development of systems, products, and channels. Joining the next generation of digital banks in Asia 3

Exhibit Digital banks have proliferated globally since the advent of digital licensing in 2015. Asia-Pacific ING North America, DiBa (Germany) Europe, EMEA, Latin America 1995 ActivoBank (Portugal) 2000 Tangerine1,2 (Canada) ING Direct1 mBank1(Poland) (New Zealand) Sbanken (Norway) Rakuten Bank1 (Japan) Capital One 3601,3 (US) 2005 Tinkoff (Russia) Jibun (Japan) CIMB (Vietnam)¹ WeBank4 (China) 2010 Nubank (Brazil) Tochka (Russia) 86 400 (Australia) 2015 Chime(US) N26 (Germany) MyBank4 (China) 2020 Simple (US) OakNorth (UK) Up (Australia) Digibank Holvi (Finland) Revolut (UK) Jenius (Indonesia) Monzo(UK) XW Bank4 (China) by DBS (India) Starling (UK) Monese (UK) Richart (Taiwan China) Liv. (UAE) Bank Mobile (US) Kakao Bank4 (South Korea) Orange Bank (France) K-Bank4 (S. Korea) Ualá (Argentina) Xinja (Australia) Yono (India) ZA Bank4 Ant Bank4 (HK) AtomBank(UK) (Hong Kong Airstar Bank4 (HK) Marcus (US) Fusion Bank4 (HK) Imagin Bank (Spain) SAR China) CIMB Philippines Livi Bank4 (HK) Mox Bank4 (HK) WeLab Bank4 (HK) PingAn OC Bank4 (HK) LINE BK (Thailand) Rakuten Bank (Taiwan China)⁵ TNEX (Vietnam) 1Not fully digital model; has branches. 2Formerly ING Direct Canada. 3Formerly ING Direct US. 4Launched under “special” digital banking license. ⁵Expected to launch 2021. 4 Joining the next generation of digital banks in Asia

applicants in Singapore’s licensing round, which awarded licenses were consortia. (It is worth closed in December 2019, were consortia. And in mentioning that capital requirements for digital the full banking license category, which requires banks are usually, but not always, in line with those paid up capital of the equivalent of roughly US$1 for traditional physical banks [Exhibit 1]). billion, two of the four nominees eventually Exhibit 1 Digital bank capital requirements are not always lower than those for traditional ones. Minimum capital requirement for digital and traditional banking licenses in selected markets Minimum capital requirements (jurisdictions with dedicated digital banking licenses), US$ million1 Digital bank (after foundational phase2) Digital bank (during foundational phase) Traditional bank (full license) Malaysia Singapore Taiwan China China Hong Kong SAR China South Korea Philippines 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 Minimum capital requirements (jurisdictions without dedicated digital banking licenses⁵), US$ million1 75 India Australia Russia UK EU US 50 25 0 Japan 1FX rate as of end May 2020. 2“Restricted” phase in Singapore; phase with reduced capital and other requirements, but with limitations such as SGD50 million aggregate deposit book cap in Singapore and MYR3 billion total assets cap in Malaysia. 3For “digital full banks.” (For digital wholesale banks, minimum capital requirement is SDG100 million). 4Universal bank with head office only. 5Indian Payments banking licenses are not considered digital banking licenses due to significant restrictions to the payments banks (deposit amount cap, cannot issue loans and credit cards); Australian restricted ADI licenses are not considered for the same reason. Source: Central bank websites Joining the next generation of digital banks in Asia 5

In some markets, the prevalence of the consortia some leading Chinese players manage roughly model has been at least partly driven by regulation. 80 percent of customer inquiries via chat bot); In South Korea and China, the stakes of non- attractive pricing, enabled by richer data and a financial services shareholders are capped at 34 lower marginal cost of loan disbursement. percent and 30 percent, respectively, for digital banks. In some cases, regulators have stated that — Early revenue generation. Successful digital applicants for digital banks need to work with banks tend to focus early on revenue-generating other entities that have track records in operating products, including loans, remittances, and third- a digital business, which has encouraged market party offerings such as wealth management and participants to seek out partnerships. insurance. This approach both boosts profitability and fosters the development of sticky customer A consortia approach enables new banks to relationships. KakaoBank, for example, offered more easily assemble the ingredients required loans soon after launch and achieved breakeven for a successful proposition, including: customer in less than two years. Banks that can access loyalty and trust; data and touchpoints; advanced high-quality external data to enable effective technology capabilities, which support rapid credit scoring and partnerships with powerful proposition development and evolution; platforms that engender trust and loyalty are also and analytics, to leverage the data. Core more likely to thrive. banking capabilities such as risk management (credit, financial risk, compliance), and a deep — Quick scalability. Digital banks need to attract a understanding of banking products and regulation, critical mass of customers to be viable. China’s are table stakes in all markets. aiBank, for example, attracted 30 million customers in two years. Of course, globally, not all successful digital banks are consortia. Russia’s Tinkoff bank is a — Cost efficiency. An existing customer base is greenfield stand-alone operation that delivers high not just a route to scaling—it also significantly profitability (2019 return on equity of 56 percent) reduces the need to spend significantly on and growth (loan book grew by 66 percent in customer acquisition. Indeed, access to large 2019). Asian examples of stand-alone digital banks volumes of data enables better targeting and include Rakuten Bank in Japan, Hong Kong SAR therefore marketing optimization and more China license awardees Ant SME, OneConnect accurate risk management. Digital-only models Bank, and WeLab Bank, and Singaporean short- and the use of new technologies such as artificial listed candidates Ant Group and Sea Group. intelligence and robotic process automation significantly reduce cost-to-serve and fixed costs. Recent experience shows that, whether operating WeBank and XW Bank posted cost-to-income as consortia or stand-alone entities, successful ratios of 25 percent and 23 percent respectively and profitable digital banks share the following in 2019, among the lowest globally. strengths: — A truly differentiated customer value proposition. Licensing is expanding in Asia The successful value proposition extends beyond a sleek customer interface to offer Before 2015, there were very few pure-play digital seamless digital onboarding (typically just a few banks in Asia, for reasons that included limitations clicks); fast loan approval and disbursement (e.g., in infrastructure, regulatory hurdles (including MyBank’s three-minute SME loan approval); the lack of e-know-your-customer frameworks), 24/7 customer support (one Korean bank and insufficient customer interest, and incumbent bank oligopolies.⁷, ⁸ 7For Asia, we refer to the entire Asia-Pacific region, including Australia and New Zealand. 8Exceptions include Japanese pure-play digital bank Jibun Bank, launched in 2008; mixed-model internet banks such as ING in Australia (launched in 1999); and Japan’s Rakuten Bank (launched in 2000). 6 Joining the next generation of digital banks in Asia

The situation started to change in 2015, when South Korea (two licenses in 2017, one in 2019), the People’s Bank of China granted five internet- Taiwan China (three licenses in 2019), and Hong only banking licenses (Exhibit 2). In the following Kong SAR China (eight licenses in 2019).⁹ The years, several geographies followed suit, including Monetary Authority of Singapore received 9 Other Asia-Pacific jurisdictions have introduced similar frameworks (e.g., India’s payments banking licenses in 2015, Australia’s Restricted ADI Framework in 2018); these were not considered in depth in this article mainly due to significant restrictions on the licenses. Exhibit 2 Digital banking licenses in Asia have unlocked access to banking markets, ppaarrttiiccuulalarlrylyfoforrnnono-nb-abnakninkginfgirmfirsm. s. Mapping the growth of digital banking in Asia¹ Country has introduced No defined plans for Announced plans to No defined plans for digital banking licenses digital banking licenses; introduce digital digital banking digital banks operate banking licenses licenses and no Pakistan under traditional bank- known digital banks ing license India1 Digi Bank Thailand Vietnam China by DBS TMRW Timo aiBank, MYbank, Suning Bank, XW, Singapore2 WeBank 21 contenders Japan Rakuten Bank, Jibun Bank South Korea K Bank, Kakao Bank Taiwan China Rakuten, Chunghwa Telecom, Line Financial Hong Kong SAR China ANT Financial, Bank of China, Fusion Bank, One Connect, Standard Char- tered, WeLab, ZA International, MI Philippines4 CIMB Bank, ING Malaysia3 Indonesia Australia1 Jenius, Digi Bank Volt, Xinja, 86 400 1Indian payments banking licenses are not considered digital banking licenses due to significant restrictions (deposit amount cap, cannot issue loans and credit cards); Australian Restricted ADI licenses are not considered for the same reason. 2Digital banking licensing framework was introduced in 2019, successful applicants were announced on December 4, 2020; licenses yet to be granted. 3Finalized digital banking license framework issued on December 31, 2020; licenses expected to be awarded in 2021-22. 4Digital Banking Framework introduced on November 25, 2020; further developments expected. Source: Central bank websites Joining the next generation of digital banks in Asia 7

21 applications for up to five licenses in 2019, Incumbent banks are often significant participants, eventually short-listing four candidates in seeking to capture new customer segments, December 2020. The same year Bank Negara compete against potential competitors and Malaysia finalized its licensing framework and disruptors, and create a technology hedge against BSP in the Philippines introduced its Digital legacy infrastructure. For example, China’s CITIC Banking Framework. Bank of Thailand is controls AiBank, with a 70 percent stake; Standard set to launch a licensing program in the near Chartered owns 65 percent of Mox; and BOC has future. Across Greater China, South Korea, and a 44 percent stake in Hong Kong SAR China’s Singapore, some 22 licenses have now been or Livibank. Non-banking financial services firms are about to be granted. China, meanwhile, is are also often involved. A subsidiary of Chinese working to finalize rules for digital banking, which insurer ZhongAN co-owns newly-launched ZA could open the way for foreign banks to set up Bank in Hong Kong SAR China and investment firm separate digital banking platforms. Korea Investment & Securities has a stake in South Korea’s KakaoBank. Digital banking prospects are often tied to the extent of accommodation provided by licensing Telecoms, with their extensive data resources regimes. Banks operating under more stringent and large customer bases, are often part of the regulations have seen relatively limited growth. equation, typically as minority shareholders. The Reserve Bank of India granted provisional Examples include Taiwan’s Chunghwa Mobile, “payments bank” licenses to 11 entities in 2015, which is the major shareholder in Next Bank, and permitting them to accept restricted deposits and Singtel, which partnered with Grab to apply for a issue debit cards—but not to issue loans or credit license in Singapore. Electronics manufacturer cards. Seven of these entities remain active and Xiaomi has a stake in mainland China’s digital-only none are meaningfully challenging incumbent XW Bank and Airstar in Hong Kong SAR China. market share. In 2019, Australia granted Automotive components manufacturer Wanxiang “restricted licenses” to digital banks, capping total Group is one of the largest shareholders in deposits at AU$2 million and individual deposits MYBank, and conglomerates New Hope Group and at AU$250,000. These banks initially grew slowly Jardine Matheson Group are shareholders in XW and only started to achieve momentum when they Bank and Mox, respectively. Supermarket chain gained full licenses. Xinja Bank became a fully Chengdu Hongqi is a minority shareholder in XW licensed deposit-taking institution in 2019, and Bank and PX Mart has a stake in Taiwan’s saw AU$200 million in deposit inflows in its first Next Bank. month of operations. Who can compete? Asia’s sector- Next steps: Best-practice license agnostic blueprint applications There are no preconditions in Asia on the In markets where they have been awarded, license applicant business activity or sector best applications are highly competitive. In addition to suited to set up a digital bank or apply for meeting all regulatory criteria, applicants must license. Chinese tech giant Alibaba, Tencent demonstrate their right to compete against large, and OneConnect are all involved, as is Japan’s established incumbents, and that they offer a Rakuten (e-commerce, social media), Taiwan’s unique and compelling customer value proposition. LINE (social media), and Singapore’s Grab (a They must have a business model that will lead to “super-app” encompassing a range of services) positive financial performance, and a plan to scale and Sea Group (e-commerce, gaming). These so they can reach enough customers to build a companies bring tech know-how and access sustainable business. In addition, the process itself to customers and data to the table, along with is challenging, usually requiring thoroughly crafted advanced analytics capabilities. set of documents, multiple contributors, and several months of preparation. 8 Joining the next generation of digital banks in Asia

We have identified 10 success factors to consider complexity to execution. Consortia must present during a licensing application, which we group a cohesive, singular, and convincing vision, with under three broad categories: an experienced clear value added by each partner (Exhibit 3). team that can implement a plan; the vision and Companies seeking to launch with partners roadmap for a stable and ultimately profitable and should start discussions early; the necessary differentiated offering; and following the licensing strategic alignment and mutual trust take time process and engaging with the regulator. to develop. Exploratory conversations should take place before regulators finalize license An experienced team criteria. Malaysian telecom Axiata has said it is in Applicants, whether acting alone or in consortia, conversation with 11 potential partners in advance must demonstrate to a regulator that they have the of Bank Negara Malaysia’s finalization of its know-how, experience, resources, and appetite digital banking licensing framework at the end to deliver. To do so, they should demonstrate that of 2020. they are: Vision and roadmap — Diligent risk managers: Non-banks must show Regulators typically require applicants to that they are as effective at managing risk demonstrate the ability to balance the potentially as any incumbent, and that they possess (or competing objectives of encouraging innovation will develop) cutting-edge risk management and promoting stability in the banking system, and capabilities. Risk management capabilities benefiting customers and the broader community. might, for example, be based on extensive Applicants must show they have a vision for a data resources for better credit underwriting, differentiated offering that will have staying power. or on a track record of scaling and operating tech-centric businesses while mitigating IT and Successful applicants we have studied have cyber risk. Most successful applicants have articulated their capabilities in the following areas: experience of managing a financial business (typically payments or lending), or have — Leverage unique capabilities to provide a partnered with an organization that has such differentiated service: Applicants must possess experience. unique capabilities that will enable them to offer a differentiated proposition. This may be — Proven innovators, household names, and associated with the user experience (a tech- respected brands: Regulators tend to value native company may be better positioned to offer a track record of innovation and the ability a distinctive experience than traditional banks); to create novel offerings. Similarly, brands the range of services offered (an ecosystem with reputations for attracting, nurturing, and owner might leverage its deep customer retaining talent improve their chances of being relationships to provide additional use cases for granted licenses. its products); or the ability to manage risk (an e-commerce platform or telco may have access — Well-funded with strong support from parents to large volumes of data that can inform superior or investors: Applicants must be able to credit underwriting of “thin-file” customers). demonstrate they can sustain themselves as they scale up. This typically requires a four- to — Identify a clear path to profitability: Regulators five-year funding commitment. can be accommodating on timeframe (with some accepting plans for five or more years of — A strong, cohesive team with a singular vision unprofitable scaling up), but applicants must be (for JVs and consortium applicants): While able to demonstrate a clear path to profitability consortia may possess complementary skills, a based on reasonable business assumptions and higher number of stakeholders can also be an a realistic business model. impediment to decision making, and can add Joining the next generation of digital banks in Asia 9

Exhibit 3 VVarairoiuosufsinfainacinacliaanldannodnn-fionna-nfciinaalnseccitaolrsceocmtpoarncioesmapreafnoiremsianrgecfoonrsmoritniag;tcyopnicsaollrytioan;lybig tetcyhpsicaanldlyfionntelcyhbsiagptpelychsosloa.nd fintechs apply solo. License winners across Greater China, South Korea, and Singapore Main/largest shareholder Sector breakdown of shareholders with stake of 10% Main/ultimate Secondary shareholder, or more (top-3 largest) shareholder stake >30% Other Telecom Other4 Secondary shareholder, financial Big tech stake 10-30% Incumbent services2, and bank1 investments fintech3 Secondary shareholder, stake unknown China WeBank Tencent MYBank Ant Group XW New Hope Group AiBank CITIC Taiwan Suning Bank Suning.com China Rakuten Bank LINE Bank Rakuten (through Next Bank Rakuten Bank Japan) LINE (through LINE Financial) Chungwa Telecom S. Korea Kakaobank Kakao K-Bank Woori Financial Toss Bank Viva Republica Hong Kong ZA Bank ZhongAn SAR China Mox Bank Standard Chartered Bank Livibank Bank of China Ant SME Bank Ant Financial WeLab Bank WeLab Airstar Bank Xiaomi Fusion Bank Tencent Singapore Grab/Singtel consortia5 Grab Sea Sea Group Ant Ant Group Consortia led by Greenland Financial Greenland Financial Holdings Group 1Locally licensed banks. 2Eg, insurance, securities, investment holding companies; includes online-only. 3Large internet-based companies and conglomerates with core businesses in e-commerce, online gaming, social media, internet search, etc., and their financial services subsidiaries. 4Eg, manufacturing, retail. 5Not official names as licenses are freshly assigned. Source: Central bank websites; company websites; interviews. 10 Joining the next generation of digital banks in Asia

— Develop a safe and robust enterprise: product that is more fully developed and Applicants must be able to assure regulators better aligned with regulatory expectations. that they have designed their business models A dialogue that allows for an element of and target operating models to be resilient. To co-creation and regular interaction, and which do so, applicants must identify any potential deepens understanding of the regulator’s events or developments that would cause expectations, will likely be more constructive. them to exit the market (for example, if the business fails), define governance processes There should be no surprises by the time of for activation and escalation of an exit plan, the final application submission. Applicants establish a clear contingency plan, identify should demonstrate their understanding of relevant indicators to be monitored, and outline core banking concepts and digital banking a communication strategy for before, during, needs (value proposition, risk, financial and after activation of the plan. viability). Applicants may also consider showcasing their proposed offering through — Positively impact society: Many regulators live demonstrations, so that regulators can require applicants to demonstrate they can see first-hand what customers will experience, make a positive contribution to the local and provide feedback. financial services and technology sectors, and to society more broadly. Applicants — Explicitly address regulatory objectives: should articulate their intentions to hire locally, Regulators have stated that the introduction support the development of capabilities (e.g., of new licenses is intended, among other through investment in skills development and things, to boost competition, widen financial hackathons, or by offering internships to local inclusion, and accelerate innovation.10 university students), and help position the host Applicants should articulate how they plan to country as an innovator and digital financial meet these objectives, both in their ongoing services hub or leader. dialogues and final submissions. Just as the product offering and execution plan Putting together an exemplary application will be refined and tailored, so should the process applicant’s mode of communication reflect Regulators set out their broad expectations of the regulator’s expectations. applicants in exposure drafts, public statements, and published license criteria. However, Digital banking in Asia has followed a unique applicants should also expect to have to provide path to success, with large companies across specific details about their proposed offering, industries playing a leading role. The digital and further clarifications. Strong applicants will business model offers significant benefits, from consider the following steps: boosting revenues to obtaining access to new customers, technologies, and partners. To earn — Establish a dialogue with regulators: Applicants the right to compete, applicants must show that are willing to hold frequent discussions (as that they offer an outstanding proposition and often as every two weeks) on specific topics, have the strategic, operational, and financial with the aim of clarifying understanding and resources to operate in one of the world’s most testing ideas, increase the likelihood that their dynamic banking environments. A review of applications meet regulator requirements. An agile and iterative approach may allow for a 10See www.mas.gov.sg/regulation/Banking/digital-bank-licence; “Licensing Framework for Digital Banks,” www.bnm.gov.my; “Licensing Framework for Digital Banks,” www.bnm.gov.my. Joining the next generation of digital banks in Asia 11

successful endeavors shows that consortia have ability to execute, a compelling vision, and the a strong chance of success, but this model is not capacity to meet regulatory standards—and a the only one that can succeed. The key factors license application that runs like clockwork. in receiving a license are demonstrating the Raphael Bick is a partner in McKinsey’s Shanghai office, Denis Bugrov is a senior partner and Hernán Gerson is an associate partner, both in the Singapore office, Alexander McFaull is a consultant in the Kuala Lumpur office, and Alexander Pariyskiy is a consultant in the Bangkok office. The authors would like to acknowledge the contributions of Callie Cao, Hyunjoo Lee, and Wenyang Su to this report. Copyright © 2021 McKinsey & Company. All rights reserved. 12 Joining the next generation of digital banks in Asia

Global Banking & Securities How transaction banks are reinventing treasury services As clients demand solutions to enhance their corporate treasury activities, banks are increasingly partnering with fintechs and software players. by Alessio Botta, Reet Chaudhuri, Nunzio Digiacomo, Matteo Mantoan, and Nikki Shah © Baac3nes/Getty Images October 2021

Cash and liquidity have long been considered important route to market and therefore potential key indicators of corporate financial health, and partners. For their part, banks are clearly motivated the pandemic has confirmed the continued to provide broad-based state-of-the-art support relevance of this fundamental metric. During the for commercial banking functions that generate crisis, “cash excellence” proved crucial in enabling over $550 billion in annual revenue, according to continued operations for enterprises still early in McKinsey’s Global Payments Map. their development; and as a business matures, it becomes a key lever for releasing capital to invest Banks face several strategic decisions on this front. in growth. Recently, liquidity metrics have received They must first determine their desired role in this as much focus as more widely publicized measures evolving ecosystem: integrators and orchestrators like operating margins and EBIT. of a full suite of services, background service providers, or developers of proprietary front ends Meanwhile, underlying trends in digitization built in-house. Factors such as geographic footprint, and increased investor scrutiny are setting new client sector focus, and investment appetite will standards for corporate treasury professionals. inform the best path for a given bank. Cash forecasting is regularly cited among the most inefficient processes by small and large Although the classic build-buy-partner decision organizations alike. CFOs and CEOs are seeking remains relevant, recent years have seen a decided partners to help them navigate the shift from tilt toward the partnership model within the treasury reporting to predicting. Solution providers (whether space. Banks and third-party solutions usually banks or software and fintech firms) able to solve offer different functionality and strengths, with this problem will be well positioned to reinforce or all groups increasingly realizing they can exist in extend commercial relationships. harmony. With speed to market a unifying objective, bank distribution paired with software-firm agility Historically, bank-provided treasury platforms has proven to be a potent combination, whether have focused on core transaction execution central for the white labeling of third-party technology or to their corporate relationships. The advent of in scenarios where banks serve as a channel for software as a service and API connectivity has branded providers of these services. made robust, multifunctional workstations far more feasible; in response, software firms and other In this article we’ll explore the evolving needs of third-party providers have grasped this opportunity corporate treasury functions, and the complex and to create solutions that are gaining ground with fragmented provider landscape that has developed corporate clients of all sizes across an array of to address them. Based on direct input from sectors. practitioners we’ll also detail the factors that should inform each bank’s decision on how to proceed in Banks recognize the importance of being close the space, and offer examples of the components of to decisions around core underlying payments, successful bank-provider partnerships. investment, and financing flows that their corporate customers are making. Liquidity management Evolving needs of the treasurer tools—including treasury management, cash forecasting, supply-chain finance (SCF)—are Forward-thinking CFOs and treasurers have begun increasingly being embedded into the new to fundamentally rethink the treasury function, generation of corporate global transaction shifting its role from custodian of historical cash banking (GTB) portals. For fintechs and software activities to encompass a more strategic and players with a focus on customer acquisition and expansive approach of “owning” the full suite of retention, banks are increasingly viewed as an enterprise liquidity. In support of this mandate, 2 How transaction banks are reinventing treasury services

treasurers are looking for technology platforms These interviews further revealed that large offering predictive liquidity and cash-flow modeling. enterprises prioritize seamless integration with Specifically, they need robust forecast capabilities enterprise resource planning (ERP) systems and that incorporate cross-border positions and the ability to make swift decisions (for instance, exposure to various currencies. access to financing, short-term investments) based on underlying cash positions. CFOs and McKinsey recently conducted focus groups with treasurers of these businesses are exploring SCF CFOs and treasurers of large corporate and mid- programs—involving numerous internal and external cap European firms. These conversations revealed stakeholders—for an efficient and sustainable significant pain points in cash forecasting and approach to circumventing supply-chain failures currency risk, invoice processing, and payment resulting from financial disruption. Their priorities in reconciliation. Cash forecasting is considered the structuring a comprehensive SCF program include: least efficient financial workflow by both small and large organizations—in some cases requiring more — Internal systems integration. The typical than a week to gather and compile forecasting data organization supports several ERP systems from a variety of formats, causing further strain. across multiple entities, necessitating integration among platforms to allow treasury “What most interests me is the possibility to manage management systems (TMS) to work properly. my working-capital operations without manual A successful supply-chain finance program loading of data, specifically for invoice discounting requires full integration among all data sources and factoring, and to have the possibility, not only and reporting software, enabling the treasurer to have a reporting instrument, but also a predictive and other end users to make decisions based on tool for operations,” was a representative example of real-time data and analytics. such feedback. Another treasurer offered: “We are building a new digital platform, consolidating lots — Establishing multi-funder models. Price is no of data into an integrated system, to help us unlock longer the sole criterion for evaluating liquidity the potential daily processes, improve transparency financing alternatives; ease of satisfying know and access to real-time information, and enhance your customer (KYC) requirements, credit security standards.” capacity, and platform design play increasingly crucial roles for treasurers of large corporates. Overall, treasurers of large corporates highlighted Despite their typically higher nominal price, five primary needs: bank-independent technology solutions are becoming the preferred model given their added — Timely visibility into all global transactions flexibility, ability to support a multi-funder model, and often more rapid incorporation of new — Eliminating time-consuming and error-prone features addressing evolving treasury priorities. manual payment-generation workflows — Setting clear goals and objectives. Successful — Reducing exposure to nonstandardized bank programs require the clear identification of documentation and other compliance issues targets and KPIs to create a framework for causing significant delays or confusion execution. With various stakeholders involved (treasury, procurement, IT, legal, accounting) the — Protecting against fraud absence of common and measurable objectives can lead to cross-functional misalignment. — Keeping pace with industry changes to formats One treasurer suggested essential elements and technologies, particularly in the payment of a successful program include a negotiation process strategy for payment-term extensions, as well as How transaction banks are reinventing treasury services 3

a segmented messaging strategy for various be $3.5 billion annually on software addressing the suppliers. The latter point is particularly needs outlined in this article. instructive: within large SCF programs, it is important to coordinate the information coded The scope of these offerings includes (Exhibit 1): within a payment transaction based on the platforms employed by each party. — Next-generation approaches to cash and treasury management. Extending beyond basic The situation in the small and medium-size visibility and forecasting, these generate more enterprise (SME) space is quite different. accurate multicurrency forecasts, streamline Particularly at the smaller end of the spectrum, workflows, and enable more robust hedging, proprietors are less inclined to look to third-party financing, and investment decisions. providers for financing and treasury-management solutions, relying instead on bank offerings. — Order-to-cash/receivables solutions. These Keeping pace with daily operational realities streamline the accounts-receivable process, leaves little bandwidth for digitization efforts—in reducing days sales outstanding, increase fact, larger B2B buyers are often the drivers collection rates, and further enhance visibility behind modernization of smaller supplier partners. and accuracy of cash forecasts. Nonetheless, relations between SMEs and their banks are often complicated, with lending terms — Source-to-pay solutions. By simplifying frequently incompatible with client needs even accounts-payable and payments workflows, when products are available. As a result, owners they generate benefits including reduced fraud often elect to finance with personal funds or forgo losses, payments prioritization for identified debt altogether. McKinsey’s research identified suppliers, and increased visibility and accuracy the greatest SME need to be access to liquidity, of cash forecasting. access to broader B2B markets (with cross- border funding posing particular challenges), and — Integrated working-capital finance, trading, transaction complexity. While the threat of bank and investment activities. This suite provides disintermediation is not as imminent for the SME treasurers and CFOs with a wider range of market, the emergence of a compelling third-party options than previously available, including proposition certainly poses future risk. supply-chain finance, receivables financing, and short-term investment products. The liquidity management ecosystem: Players and approaches differ by geography: Solutions addressing these needs for instance, the US market is driven primarily by third-party software vendors, whereas in Asia In response to these priorities, corporate software the solutions tend to be bank-led. Cloud-based solutions are evolving to foster cash-excellence solutions have made these capabilities more capabilities throughout the organization. accessible to SMEs—even those without a formal These solutions span the full scope of CFO treasury department—thereby significantly responsibilities and offer different functionality, widening the potential addressable market. each contributing to improved cash and liquidity visibility and positioning. In recent years, a Key success factors for banks number of solutions have sought to address the partnering with fintechs on offerings evolving needs of businesses’ cash and liquidity management—including ERP providers, banks, Banks, which have historically not focused on the and third-party software including treasury cash-management software space, increasingly management systems—and a wider set of players realize that providing at least a portion of this across the liquidity management space. McKinsey functionality and embedding themselves more estimates annual global corporate spending to 4 How transaction banks are reinventing treasury services

Exhibit 1 Corporates are seeking automation and liquidity visibility across the transaction workflow. Cash event Cash event Accounts receivable automation Accounts Payments Collection Cash EIPP Credit payable manage- and application manage- automation ment disputes ment Automated Streamlined Cash and treasury Automated Automate Provide Run invoice data prioritization collections matching of customers improved capture and approval Bank account and disputes payments with credit workflow management information request to checking Puchase order to invoice pay and on both matching Regulatory Cash and liquidity electronic new and compliance management Report invoice existing Dispute and fraud relevant present- customers resolution prevention Treasury and risk taxes ment and management payments Automated (EIPP) supplier Working capital finance notification, reconciliation, Receivables financing and tax Supply-chain finance reporting fully into the corporate workflow reduces the Banks face the ever-present decision of whether risk of disintermediation from the underlying to build, partner, or acquire these capabilities. payments, investment, and financing flows of Recent years have seen a material increase in the corporate customers. Accordingly, corporate partnership model, for white labeling of third-party liquidity-management tools—including treasury technology as well as banks acting as a channel management, cash forecasting, and SCF—are or seller for such services. This model enables increasingly embedded into the next generation of quicker time to market and faster introduction of corporate GTB portals. new customer functionality. Fintechs and software players with a focus on customer acquisition and Some banks have developed vertically focused retention increasingly view banks as a priority solutions with functionality and integrations channel and an efficient path to market (Exhibit 2). designed to meet the unique needs of strategically important customer segments. The rise of open In McKinsey’s experience, the following key success banking, the ongoing search for new banking factors optimize the potential for bank-fintech revenue models, migration of services to the cloud, partnerships to accelerate their time to market as and client demand for integrated experiences are well as commercial impact. also informing these strategic decisions. DBS has been particularly active in this arena in Singapore; — Document a commercial approach determining for instance, using APIs and mobile apps to enable both ownership and roles with regard to real-time payments to online merchants and customer engagement. As an example, while delivery-service drivers (see sidebar, “Asia–Pacific initial contact might be conducted by the fintech focus”). How transaction banks are reinventing treasury services 5

Exhibit 2 Bank-fintech partnerships are ramping up in treasury services. Top bank/fintech partnership areas of focus (% of banks citing area of focus as “very important” to their fintech partnership strategies) Digital account opening 73 Payments 54 52 Lending and credit Fraud/risk management 38 New banking products 27 Personal financial management 19 Investment management 11 Insurance 6 International remittances 3 Source: Cornerstone Performance Report for Banks 2019, Cornerstone Advisors, 2019, crnrstone.com alone, subsequent meetings will be handled — Establish a dedicated IT-business governance together since customers—particularly large team with recurring meetings to address corporations—are seeking integrated product commercial challenges as well as technology offerings requiring expertise that extends enhancements, potential change requests, or beyond technology platforms. new deployments. — Develop a go-to-market strategy tailored — Develop internal expert capabilities in the to customer segments. For some segments, partnership products (likely in product specialist fintech tools may be offered as white-label and relationship manager roles) as well as new solutions via bank proprietary assets, thereby digital tools the fintech may bring to the table differentiating the commercial offer from other as key assets. When proposing client solutions, segments in which the fintech offers its platform these individuals will ask for interactive demo as a stand-alone suite backed by a bank acting sessions, during which the sales network must as a counterparty for execution of payment possess the capabilities to surf the new platform transactions. and manage the end-to-end digital process underlying the new product. — Identify and agree on an IT implementation and delivery road map to serve as the baseline — Identify KPIs by which the overall partnership from which the bank will develop its commercial will be valued and establish the proper time campaigns. frame for KPI monitoring and assessment. 6 How transaction banks are reinventing treasury services

Asia–Pacific focus While the Asia–Pacific payments sector has benefited from extensive fintech activity focused on digitizing small merchants and enhancing overall business efficiency, there has been relatively lighter emphasis on modernizing treasury solutions for large corporates. Such opportunities are limited in part by divergence in infrastructure and regulatory standards across countries (currency convertibility, real-time payment rails, and market access, for example) making it challenging for banks or software providers to create solutions capable of delivering sufficient scale and value for multinational clients operating across the region. Some banks in the region have taken the initiative to develop bespoke solutions addressing specific client needs, however—for example: — Singaporean multinational bank DBS implemented a fully automated real-time payment system for drivers at ride- hailing firm Gojek. This created a differentiating feature recognized by the client as a recruiting advantage. Rather than waiting until the end of the week for payment (as with other taxi firms), Gojek’s drivers can now transfer funds to their bank account after each trip. — ICICI Bank’s STACK offering provides customized digital banking services to companies in over 15 sectors, with the goal of facilitating operations across these clients’ entire ecosystem. The Indian bank also established eight “ecosystem branches” to support and expand the rollout of these capabilities across channel partners, employees, vendors, and other counterparties. Going forward, large Asia–Pacific corporate entities are likely to enjoy features such as dynamic cash-flow forecasting, source-to-pay solutions, and multi-funder models, similar to their counterparts in more developed markets. In preparation, banks in the region should stay ahead of the curve by rethinking their treasury-services strategies. This involves determin- ing which client groups to target (as not all capabilities will resonate equally across sectors), which features are likely to gain the most initial traction with that segment, and whether these solutions are best developed in-house or via partnership with a fintech firm. Partnership benefits — Citi’s Smart Match product, enabling corporate clients to enhance straight-through- The following examples give some insights into reconciliation rates in cash applications, is how established partnerships work to enhance the powered in part by AI and machine-learning offerings of both parties: capabilities from HighRadius. The parties formed a strategic partnership in 2018,¹ — Société Générale and Kyriba joined forces helping Citi and its clients to merge disparate to offer cloud management solutions to their pieces of payment data and reconcile corporate clients. These services include real- payments received against invoices issued time monitoring of treasury positions, payments more efficiently. automation, multibank connectivity, and ERP payment validation workflow management. 1 “Citi Partners with Fintech HighRadius to Launch Citi® Smart Match Powered by Artificial Intelligence and Machine Learning,” July 12, 2018, highradius.com. How transaction banks are reinventing treasury services 7

— DNB’s 2018 strategic channel sales partnership these clients going forward. Although buy and with Kyriba provided the bank with a new set build remain valid alternatives, in most cases a of updated financial management tools to partnership approach enables banks to introduce centralize payments, automate workflows, and new products and functionality more rapidly in an detect and prevent payments fraud in real time environment in which time to market is critical. for more than 220,000 corporate clients. These cloud-based services also address the need To successfully manage partnerships with for stronger compliance and data protection fintechs and capitalize on their opportunity to required by evolving government regulation. play a leading role in the redefinition of treasury services, banks need to enhance a variety Banks are motivated to provide broad-based of internal capabilities ranging from sales state-of-the-art support for commercial banking management and product evangelism, to robust functions that generate over half a trillion dollars commercial and IT governance, and effective globally in annual revenue. They remain in a go-to-market strategies. sound position to determine their role in serving Alessio Botta is a senior partner, Nunzio Digiacomo is a partner, and Matteo Mantoan is a specialist, all in McKinsey’s Milan office. Reet Chaudhuri is an associate partner in the Singapore office, and Nikki Shah is an associate partner in the London office. Copyright © 2021 McKinsey & Company. All rights reserved. 8 How transaction banks are reinventing treasury services

Home  Business  How to prevent app-tracking on Android phones even as Google drags its... Business How to prevent app-tracking on Android phones even as Google drags its feet? November 23, 2021  26 When Apple rolled out its App Tracking Transparency controls with iOS for iPhones back in April, Facebook, now Meta, was the most vocal critic of the move. Apple’s idea is simple – give users a clear choice of whether they wish to allow apps installed on their iPhones to track their usage across other apps and websites to eventually serve targeted advertising. Facebook, which has a fair share of interest in serving you with targeted advertising, saw it as the end of the free run with data, as did many other apps and platforms. Android phones don’t have anything similar just yet, which leaves millions of users’ data free for tracking by apps that seek to collect every bit of data to create your detailed profile. Android has 71.09% share among smartphone operating systems and as of May this year, had already clocked 3 billion users globally. That’s a lot of data for apps to collect. DuckDuckGo, the solitary soldier DuckDuckGo may have given them a handy tool, at least till Google finally gets its act together. DuckDuckGo, a company best known for a privacy-focused search engine and web browser apps, has now rolled out an add-on for the DuckDuckGo Privacy Browser app for Android phones. The feature called App Tracking Protection for Android is similar in implementation to how Apple does it on iOS for iPhones. You’ll be alerted and asked to make a choice when it detects an app trying to send data from your phone to a third-party platform. Also Read: Has Google just proved how difficult it is to make foldable phones?

DuckDuckGo says the App Tracking Protection for Android feature will work in the background, and block data-transfer requests from apps that you have disallowed from tracking you. It will work when your phone is idle, too. “Across all your apps, your personal data is being sent to dozens of third-party companies, thousands of times per week. This data enables tracking networks such as Facebook and Google to create even more detailed digital profiles on you,” says the company. The limitation with the DuckDuckGo solution is that it makes no attempt to identify between communication that is essential for certain apps as well as certain functionality and the nefarious ones that would include sending your data out for personalised advertisements on apps. The ability to distinguish traffic could be enhanced with the coming updates, but even now, you get a fair idea of what the apps in your phone are up to. Android does not have a tracking-prevention feature. The only trusted app we can really recommend is DuckDuckGo. If you happen to find apps on Google Play Store that claim to lock down Android and prevent apps from tracking you, take that with a pinch of salt. That will most likely be malware, waiting to lure you into a false sense of security, before compromising your phone’s data. You can’t imagine how you’re being tracked The data is worrying. Privacy firm AppCensus pointed out in a research last year that most popular apps for Android phones have trackers built into the code. This is also referred to as SDK or software development kit. They say the most popular SDKs for analytics and advertising are Google Mobile services (found 93% of apps tested), Firebase (83%), Facebook (62%) and Google Ads (55%). When an app sends out data from your phone without your permission, it is communicating with a recipient of that data. The research also suggests among all the third-party recipient platforms, the most popular deliverers of fresh data from unsuspecting users are Google (68%) and Facebook (45%). Google needs to act fast Google did reconfigure how Advertising IDs work on Android phones. But why is Google dragging its feet on the implementation of what it showcased in June? Back then, the company had said that an update for Google Play Services in late 2021 will enable controls for users to choose whether they want any app to track them or not. Google has not released an update since, indicating any fresh timelines. To be fair, there’s still some time left this year, and we could yet see the update in the coming days. First, phones with Android 12 will get the new controls before it is expanded to other Android iterations next year. Facebook was the most vocal critic of the App Tracking Transparency feature for iPhones. It was designed to stop what the social media giant and a lot of other apps and online platforms have done over the years – collect all sorts of user data without explicit permission. Why else do you think Facebook is able to precisely show you advertisements of things that, say, you searched for on a shopping website just a few hours ago? Apple did set the privacy agenda, and Google is yet to follow through on the talk since. An advertising technology company Lotame released a report last month that indicates tech platforms including Facebook, Twitter, YouTube and Snap lost as much as $10 billion in the two quarters since iPhone users got the controls with iOS 14.5 in April (we’ve had iOS 15 available since then). Source link

Financial Services Practice From tech tool to business asset: How banks are using B2B APIs to fuel growth Banks can use APIs to generate income growth from corporate customer segments, improve customer experience, and fuel innovation. by Alessio Botta, Nunzio Digiacomo, Reema Jain, Prakhar Porwal, Giulio Romanelli, and Adolfo Tunon © Elenabs/Getty Images October 2021

Each time someone searches for flights on a most new APIs connecting banks to systems travel aggregation site or shops online, APIs (or outside the organization. application programming interfaces) work in the background to make this happen. These lines of Although APIs represent a significant disruption software let two different systems communicate to the way B2B banking services have traditionally and exchange data with one another, whether flight been delivered, they also offer significant information from airlines or updated inventory from opportunities. In the same way that APIs make suppliers. Compared with traditional point-to-point many online products and services possible integrations, APIs are flexible, cost-efficient, and for consumers, they open up a wide range of easy to operate. possibilities for banks: with potential to generate income growth from existing and new corporate In the financial services industry, APIs are customer segments, improve customer experience, transforming the way B2B banking is done. As an and energize innovation. easy means of money and data transfer between a bank’s systems and those of third parties, these To take advantage of this potential, banks will tools pave the way for banking services to be need to see APIs as not just a tech tool for software embedded directly into a corporate customer’s developers but an important strategic asset own platforms. Instead of having to go to a bank’s and mainstream business priority. This means own app, portal, or website, for instance, APIs building a wide bridge between the business and enable customers to link their enterprise, treasury, technology functions, which too often still operate and accounting systems (such as SAP or Xero) with as distinct areas. In our survey, we asked banks financial information provided by banks. These to rate the extent of their collaboration along five companies can then initiate payments, manage key dimensions: liquidity, and download bank statements through their own systems, with the bank, essentially, 1. Strategy. Are APIs and the solutions they can becoming invisible. enable central to the decision making of your top management and a front-and-center topic APIs also enable banks to offer trade-financing for your business units? services on new B2B platforms, such as PrimeRevenue, Taulia, and Tradeshift. These 2. Operating model. Have you created agile, companies, which provide businesses with working cross-functional teams consisting of capital finance solutions, let corporate clients business and IT talent, as well as third-party offer their suppliers early-payment options or development partners? automation of invoice processing. 3. Technology enablement. Has IT adopted To understand what stage the banking industry an open-source approach to development, is at in this transformation, we surveyed financial including software development kits (SDKs), institutions of varying sizes (local, multiregional, which make it easy for outside programmers to and global). This research, part of McKinsey’s create and integrate applications? latest global survey on the State of APIs in Global Transaction Banking (GTB), found that, on average, 4. Talent. Do your IT teams understand the just over half of a bank’s B2B APIs are currently strategic and business value of APIs? Do your used to connect its internal systems, such as business units have basic literacy around front-end servers to back-office servers. However, the technical capabilities of APIs, as well as in the next three years, this ratio will shift with 2 From tech tool to business asset: How banks are using B2B APIs to fuel growth

an understanding of how they open up new are monetizing new products and services. revenue potential? Segmenting across size, geography, and maturity level, we identified a few key differences 5. Go-to-market approach. Do you have a clear and findings. and comprehensive plan for the implementation of new products and services? Smaller domestic or regional banks are head- to-head with the big global and multiregional Where are banks in their efforts institutions. Both types of banks have identified to deploy APIs as a business APIs as a strategic priority and made similar overall differentiator? progress, with some minor differences. Global and multiregional banks have progressed further Banks told us that, on average, they are more in technology enablement, such as allowing than halfway regarding the work they need to developers at fintechs and other third parties to do (Exhibit 1). We also asked them about the access their APIs and related SDKs on a convenient drivers behind their API efforts and how they public portal. Domestic and regional banks, Exhibit 1 Banks report making progress in API maturity, measured across five dimensions. API maturity self-assessment, number of respondents by % quintile Theme Bottom Middle Top Key challenges 1 Technology Lack of external-developer portal with enablement software-development kit (SDK) that is monitored and continually improved Average 67% 2 Talent While interest is growing from client side, “API first” is not yet central to key decisions of top management 3 Operating 65% API implementation and operations are often model 64% perceived as an IT problem and funded ad hoc, vs treated as part of product life cycle 4 Strategy Monetization of external APIs—how to maximize business benefits (internal and external) of APIs—is not yet clear 62% 5 Go-to-market Have not yet fully explored opportunities of approach banking as a service 61% Source: McKinsey State of APIs in Global Transaction Banking survey (n = 40) From tech tool to business asset: How banks are using B2B APIs to fuel growth 3

meanwhile, have been able to move more quickly Leaders are pulling well ahead of laggards to hire a substantial team of API developers, in part on several dimensions. Banks that give the because they have the advantage of not needing to highest scores to their API maturity level have fill as many roles. attracted and retained the right talent and invested in strong business–IT collaboration, including North American and Asia–Pacific banks lead the joint funding for the development of API-based pack. Banks in these regions have an average products and services. They have also helped maturity of 70 percent, followed by Europe future-proof their technology by providing access (65 percent), and Middle East, Africa, and Latin to SDKs that enable other developers to build on America (55 percent). The maturity of North top of a bank’s products and services. As a result, American banks is driven largely by the clarity of the banks in the top third of API maturity have their business-backed strategies and their ability been able to achieve a disproportionate impact to secure and prioritize key talent. At Asia–Pacific regarding the effectiveness, breadth, and revenue- banks, however, the go-to-market approach is generation potential of new products and services significantly more mature. (Exhibit 2). For instance, DBS RAPID, the API-powered digital APIs are seen as a driver of new revenue. More solution from Singapore’s multinational DBS Bank, than 90 percent of respondents said they use or offers its corporate customers a wide range of plan to use APIs to generate additional revenue real-time banking transactions and services that among existing customers, with three-quarters can be integrated into their systems or platforms. saying they are looking for revenue streams from A leading insurance company is using the solution new customers. A related objective is the ability to to offer its customers quicker payment of travel innovate (three-quarters of respondents also said insurance claims—from a few days to just seconds. this), followed closely by the ability to integrate Similarly, a ride-hailing company uses DBS with third-party capabilities (72 percent). Finally, RAPID to let its drivers cash out their earnings just over half of respondents said they want to instantaneously, instead of having to wait up to two use APIs to enhance operational efficiency, such working days. as by improving and streamlining integration with More than 90 percent of financial institutions use or plan to use APIs to generate additional revenue among existing customers. 4 From tech tool to business asset: How banks are using B2B APIs to fuel growth

Exhibit 2 Key differences exist in API progress across surveyed banks. API maturity self-assessment score, (0 = low; 100 = high) COVERAGE REGION LEADER VS 100 MODEL1 LAGGARD 20 60 Strategy Multi- national Domestic North Asia– Bottom Top OVERALL bank bank America Pacific Europe MEALA² third Median third Business and IT priorities API road map Monetization Operating model Life cycle responsibilities Funding Prioritization of APIs Technology enablement API management Guidelines and standards API-developer portal Talent “API first” culture Talent Go-to-market approach Maturity of current API implementation Progress of future-proof API implementation/strategy Average ¹Global and multiregional banks have presence in >10 countries; domestic and regional banks have presence in ≤10 countries. ²Middle East, Africa, and Latin America. Source: McKinsey State of APIs in Global Transaction Banking survey (n = 40) a customer’s enterprise resource planning (ERP) launch new products or services, 80 percent charge system (Exhibit 3). customers fees to use them, for example by charging for real-time payment collections and reconciliation. Customer fees for API calls are the go-to The second most popular model is revenue monetization model. When banks leverage APIs to sharing with an ecosystem partner—63 percent From tech tool to business asset: How banks are using B2B APIs to fuel growth 5

Exhibit 3 The top objectives and monetization strategies of surveyed banks emphasize revenue generation. What are the key objectives of your API What are your top 3 monetization strategies efforts? % of respondents¹ for APIs? % of respondents Additional revenue generation from existing client segments API calls supporting underlying GTB² products 91 81 Additional revenue generation from new client segments Revenue sharing with partner/developer 75 63 Driving innovation Insights from existing data in-house as a product 75 50 Seamless integration with acquired or third-party capabilities Fee from partners or developers 72 44 Cost reduction through increased operational efficiency Data sharing as per regulations with third parties 53 25 Regulatory requirements (eg, PSD2³) 44 ¹Respondents were asked to rate the importance of objectives on a scale of 1 to 5, with 1 being the lowest importance and 5 being the highest. The percentages are for respondents rating an objective 4 or 5; n = 40. ²Global transaction banking. ³Payment Services Directive 2 is a European regulation for electronic-payment services. It seeks to make payments more secure in Europe, boost innovation, foster competition, and help banking services adapt to new technologies. Source: McKinsey State of APIs in Global Transaction Banking survey of respondents said they use this. One leading channel and product strategy—while also being global bank, for instance, partnered to deliver comprehensive and granular about the specific APIs compliance checks—that is, the flagging of potential needed for customer, partner, and public offerings. money-laundering transactions. Finally, half of all The go-to-market plan should be differentiated by respondents said they generate value through data geography and segment, as well as responsive to and analytics-driven insights, such as information on customer needs, customer onboarding complexities, liquidity management and payment flows. shifting regulatory norms, and competitive threats. A call to action Bridging traditional organizational siloes. To achieve success, business and IT leaders have to Financial institutions that have moved ahead in work together to define, develop, and roll out a their use of APIs have successfully positioned these product-centric road map for new API-enabled connectivity tools at the center of their business products and services. To make sure this integrated and innovation agenda. To do this, they’ve taken five operating model functions smoothly, KPIs and critical steps: incentives should be aligned across functions and have clearly defined teams with an end-to- Establishing a holistic API strategy and road map. A end ownership of API-enabled products. This is bank’s plan for APIs has to be both wide and deep— especially important considering that 30 percent crafted in close alignment with a bank’s broader of respondents in our survey acknowledged that 6 From tech tool to business asset: How banks are using B2B APIs to fuel growth

Leading players are seeking out IT and business talent from fintechs and enterprise resource planning providers, particularly individuals with previous experience working with API-enabled banking services. no one in their organization has this end-to-end their internal systems or serve existing corporate decision-making authority and oversight of APIs. customers with basic features like payments. In our survey, over 80 percent of respondents said they Making APIs central to the customer proposition. already offer or plan to offer their clients the ability Banks need to have a clear view of how their API- to access accounts, do currency exchanges, and enabled products and services are attractive make domestic and cross-border payments using for customers. When client strategies and new the client’s own ERP or other systems. In other propositions are being formulated, product- words, instead of having to access a bank’s portal development teams must consider the ways in to do banking, a company can make payments to which APIs can open up new features, services, or suppliers or vendors directly from internal systems. customer-experience enhancements. This includes Such features are now table stakes. a deliberate focus on customer onboarding and the overall usage experience. For the next phase, banks will need to consider using APIs to embed more value-added Finding different kinds of talent. The types of services into their clients’ systems, such as the people banks need to hire is changing. In addition management of market investments, liquidity to hiring from other banks or incumbent payment management, and invoice financing (the ability providers, leading players are seeking out IT and to borrow money against the amounts due from business talent from fintechs and ERP providers, customers). Using APIs, banks can also let clients particularly those individuals with previous offer their customers options such as supply-chain experience creating or working with API-enabled finance (the ability for suppliers and vendors to banking services. For IT, an open-source approach get paid more quickly than they would otherwise). to development is a must, including the publishing, In our survey, we found that leading players are continuous monitoring, and improvement of SDKs actively pursuing these untapped areas and on public portals. This is especially important expect to triple growth in these more sophisticated considering that most of the growth in APIs at services over the next three years. Currently, 6 banks is expected to be for external connections. to 13 percent of banks say they offer factoring, documentary finance, supply-chain finance, and Innovating and broadening API offerings. Thus invoice finance services. Over the next three years, far, most banks have used APIs primarily to connect 32 to 46 percent say they plan to do so (Exhibit 4). From tech tool to business asset: How banks are using B2B APIs to fuel growth 7

Exhibit 4 Banks are currently using APIs for domestic payments and accounts; they plan to expand into trade finance. Current usage of API in GTB1 product offering, Plans to use API in GTB offering over % of respondents2 next 3 years, % of respondents Offered Planned No plan Payments, domestic Accounts Payments, cross-border Foreign exchange Investment Cards Factoring Trade finance Liquidity management Supply-chain finance Invoice finance 0 100 0 100 1Global transaction banking. 2Respondents were asked to rate the products on a scale of 1 to 5, with 1 being the lowest and 5 being the highest. The percentages are for respondents who rated the product 4 or 5; n = 40. Source: McKinsey State of APIs in Global Transaction Banking survey B2B APIs are here to stay. They are likely to However, the marketplace remains in flux and become not only the most frequent bank-client significant opportunities still exist for banks that interaction, but also primary facilitators of successfully expand their API-enabled offerings, accelerated product innovation and the means particularly in the trade and liquidity area. Over the by which banks and their clients integrate with next three years, organizations that actively pursue fintechs and the platform economy.1 a comprehensive API approach—encompassing strategy, operations, technology, talent, and Banks of all sizes and in all regions have already implementation—can drive growth and position started on their B2B API journey, with the gap themselves at the forefront of a transforming between leaders and laggards becoming evident. financial services industry. Alessio Botta is a senior partner in McKinsey’s Milan office, where Nunzio Digiacomo is a partner; Reema Jain is a senior knowledge expert in the Gurugram/Delhi office, where Prakhar Porwal is a capabilities and insights specialist; Giulio Romanelli is a partner in the Stockholm office; and Adolfo Tunon is a senior adviser in the London office. Designed by McKinsey Global Publishing Copyright © 2021 McKinsey & Company. All rights reserved. 1 Alessio Botta, Lalatendu Das, Nilesh Gupta, and Sandeep Sharma, “Reimagining transaction banking with B2B APIs,” October 12, 2020, McKinsey.com. 8 From  e™h  ool  o ¡usiness asset: How banks are using B2B APIs to fuel growth

Risk & Resilience Practice Five actions to build next-generation know- your-customer capabilities KYC programs are key in banks’ customer gain and retention, but their results aren’t optimal, despite technology and operations spend. Improving five KYC areas can generate substantial business value. by Adrian Murphy, Siggy Seibold, Allison Shi, and Scott Werner © Ivan Pantic/Getty Images October 2021

Banks have spent billions of dollars getting to more fintech vendors providing a superior KYC- know their customers but have failed to leverage program experience. According to McKinsey this intelligence beyond regulatory “check the box” analysis, banks with top customer-experience processes that can annoy customers—even driving scores have significant advantages, including some to leave their banks. But it doesn’t have to be a 3 percent growth rate, 15 percent revenue this way. By improving the quality of data collection increase, and a –4 percent efficiency ratio. and applying the right analytics during the know- your-customer (KYC) process, banks can tap deep — Poor overall data quality. Based on McKinsey customer intelligence and insights to improve risk studies, data-quality problems account for up management, the customer experience, and their to 26 percent of operational costs, driven by own ability to service customers, lower costs, and nonstandardized data formats and duplicate and boost revenue. incomplete data. Top organizations are working toward a single, global customer view and real- With that in mind, McKinsey recently conducted time data.1 its KYC Benchmark Survey of 12 top global banks. The goal is to analyze the results to quantify — Increasing costs and decreasing budgets. better the benefits of improved KYC processes Increasing KYC-program costs and tighter and identify best practices for tackling the budgets mean that banks have to invest in associated challenges. the right technological, data, and analytical capabilities to achieve sustainable growth. The urgency to improve the Based on the McKinsey KYC Benchmark KYC program Survey, the average US annual operations costs for financial-crime compliance have grown While banks have struggled with KYC-program by around 43 percent, while the majority of issues for years, a number of trends in the business respondents predict that KYC-program budgets landscape are now putting significant pressure are projected to decrease by up to 25 percent on institutions to rethink their KYC approach and versus the past 12 months, as of the fourth devise efficient solutions that will create competitive quarter of 2020.2 differentiation. The shifts include the following: — Increased focus from regulators on risk Top-notch KYC program improves effectiveness. The increased focus on risk performance effectiveness, efficiency, and innovation suggests that banks improve risk coverage Our KYC Benchmark Survey asked questions in and mitigation, automate manual processes seven topic areas, and the results revealed a wide to reduce human errors, rethink offshoring disparity in performance between banks with and outsourcing strategies, and address average KYC processes and those with superior opportunities for utilities. processes. That indicates significant opportunities to improve in the industry as a whole. The biggest — Customers seeking B2C-like experiences. differences between top and bottom results were Customer expectations for speed and in the areas of quality and risk effectiveness, convenience are constantly increasing, with data management, and technology enablement (Exhibit 1). 1 Based on McKinsey studies on KYC-program time and motion; data-quality-issue costs constituted $6.1 billion out of a total of $23.4 billion in operations costs. 2Per organization with assets worth $10 billion or more. 2 Five actions to build next-generation know-your-customer capabilities