China’s healthcare sector began privatising in the 1990s, along with the founding of special economic zones based on a famously repeated pledge not to worry about if a cat was white or black so long as it caught mice. Since then, a mostly healthy path of economic growth has played out in China, attracting international capital. In an Economist Intelligence Unit survey from November 2019, institutional investors and asset owners showed a bullish stance on the country, with 84% saying they had increased
The China position: Gauging institutional investor confidence
The China position: Gauging institutional investor confidence is an Economist Intelligence Unit report, comissioned by Invesco. It analyses results from a survey of 411 institutional investor and asset owner organisations (approximately 200 in Europe, Middle East and Africa, 100 in North America, and 100 from Asia-Pacific). The key findings of the survey are as follow:
A majority (nine in ten) of our survey respondents claim some level of dedicated exposure to China.
Investments are growing; about half of respondents with dedicated China exposure report their investments have “risen significantly” in the past 12 months.
Equities are the most-cited way organisations invest in China. Over 60% of respondents with dedicated China exposure report both equities and fixed income onshore holdings.
Respondents cited improvements to their own China expertise as the top driver for dedicated investment exposure.
Nearly four in ten respondents say environmental, social and governance (ESG) factors play a role in all of their investment decisions; fewer than three in ten say ESG is particularly important for China investments.
Chinese asset classes in our survey could see increased investment from foreign organisations over the next 12 months, with respondents highlighting technology, financial services and “new economy” sectors as most attractive.
Risk assessments are largely even across asset classes, but on a regional split respondents in APAC are more concerned than counterparts in North America or EMEA.
Respondents are mixed on the impact of US-China trade tensions, with similar numbers expecting a positive or negative effect. But a majority of respondents report that their organisations expect to increase exposure over the next 12 months, regardless of outlook.
About three-quarters of survey respondents say China’s economy will improve over the next 12 months; about two-thirds say the same for global economic conditions.
Our thanks are due to the following individuals for their time and insights:
Jimmy Chang, chief investment strategist, Rockefeller Capital Management
Mark Delaney, deputy chief executive and chief investment officer, Australian Super
Kevin Wade, chief investment officer, Superannuation Arrangements of the University of London (SAUL)
China has now emerged as the world’s largest economy by purchasing power parity and is a market that investors cannot ignore. To learn more about the confidence level of institutional investor and asset owner organisations in China and the opportunities and concerns over the next 12 months, click here to download the full report.
The shifting landscape of global wealth: Future-proofing prosperity in a ti...
In some instances the impact of this shift will be shaped by local factors, such as demographic changes. In other instances this shift will reflect shared characteristics, as demonstrated by the greater popularity of overseas investing among younger high-net-worth individuals (HNWIs) brought up in an era of globalisation. Whatever the drivers, the landscape of wealth is changing—from local to global, and from one focused on returns to one founded on personal values.
Despite rising economic concerns and a tradition of investor home bias in large parts of the world, the new landscape of wealth appears less interested in borders. According to a survey commissioned by RBC Wealth Management and conducted by The Economist Intelligence Unit (EIU), younger HNWIs are substantially more enthusiastic about foreign investing. The U.S. is a particularly high-profile example of a country where a long-standing preference for investments in local markets appears set to be transformed.
Click the thumbnail below to download the global executive summary.
Read additional articles from The EIU with detail on the shifting landscape of global wealth in Asia, Canada, the U.S. and UK on RBC's website.
Almost 90% of Australia’s 25m population uses the internet.1 According to the World Bank, all Australians over the age of 15 have a bank account, about 76% of the population makes online purchases and/or pays bills online, and about 60% of the population owns a credit card.2
These numbers indicate an already mature payments market. “People are banked, and therefore very familiar with various banking tools to make payments,” says Filippo Giachi, managing director - APAC & MENA at DOCOMO Digital, the global mobile payments solutions provider.
The shifting landscape of global wealth: Future-proofing prosperity in a ti...
In some instances the impact of this shift will be shaped by local factors, such as demographic changes. In other instances this shift will reflect shared characteristics, as demonstrated by the greater popularity of overseas investing among younger high-net-worth individuals (HNWIs) brought up in an era of globalisation. Whatever the drivers, the landscape of wealth is changing—from local to global, and from one focused on returns to one founded on personal values.
Despite rising economic concerns and a tradition of investor home bias in large parts of the world, the new landscape of wealth appears less interested in borders. According to a survey commissioned by RBC Wealth Management and conducted by The Economist Intelligence Unit (EIU), younger HNWIs are substantially more enthusiastic about foreign investing. The U.S. is a particularly high-profile example of a country where a long-standing preference for investments in local markets appears set to be transformed.
Click the thumbnail below to download the global executive summary.
Read additional articles from The EIU with detail on the shifting landscape of global wealth in Asia, Canada, the U.S. and UK on RBC's website.
To better understand the opportunities and challenges in developing a fintech business in seven ASEAN markets, The Economist Intelligence Unit conducted wide-ranging desk research supplemented by seven in-depth interviews with executives in Australia and ASEAN.
Download report and watch video interview to learn more.
“In its original form the modest fashion industry was a grassroots movement borne out of a growing generation of young Muslim women wanting to assert their Muslim identity,” says Shelina Janmohamed, vice-president of Ogilvy Islamic Marketing (an arm of the creative ad agency Ogilvy). Since then the sector has expanded beyond traditional elements such as the hijab to include loose-fitting and less revealing clothing.
The first green bonds were issued a little over a decade ago by multilateral institutions and municipalities. Green bond issuance is now growing by about 50% annually according to Sean Kidney, CEO and co-founder of the Climate Bonds Initiative, an investor-focused NGO based in London. Last year, green bond issuance reached a record of US$258bn, much of it coming from the US, France and China. “For investors, green bonds are a great way to address concerns about climate change and to put money in assets that they think are going to be lower risk,” says Mr Kidney.
The first shoots of a similar “green” instrument in the Islamic finance sector emerged not too long ago. In 2017, renewable energy group Tadau Energy issued the first “green” sukuk, raising US$59m to finance a solar power plant in Malaysia, the birthplace of conventional sukuk in the 1990s. Indonesia issued sovereign green sukuk worth US$1.25bn in 2018 and US$750m in 2019 to fund environment-related projects.
There is activity in the Arabian Gulf countries as well. In 2019 Majid Al Futtaim, a UAE-based retail company, raised US$600m with the region’s first corporate green sukuk. This was followed by a €1bn (US$1.12bn) green sukuk by Saudi-based Islamic Development Bank to finance renewable energy, green transportation and pollution control in its member countries.
Figure 1: Sukuk defined
Conventional sukuk
A financial certificate similar to a bond that compiles with sharia law.
Proceeds are used to purchase an asset, which the investor partially owns.
Investors receive a share of the profit generated by the asset instead of interest payments.
The issuer promises to buy back the instrument at a future date at par value.
Green sukuk
A sukuk to finance renewable energy or other environmental assets.
Sovereign green sukuk
A green sukuk issued by a government entity.
Corporate green sukuk
A green sukuk issued by a private-sector organisation.
Sources: Investopedia; Climate Bonds Initiative
A suitable match
Compared to conventional sukuk, the market for green sukuk is tiny. Conventional sukuk issuance totalled US$162bn in 2019, while the total outstanding debt for green sukuk amounts to only US$7.9bn, according to Mr Kidney. Yet some view it as a natural solution for low-carbon investment. Islamic finance is based on assumptions of fairness and social responsibility, and—while it has not always been observed—environmental stewardship is intrinsic to sharia principles.
“The fundamentals of Islamic finance share a lot with sustainable finance in terms of custodianship of the earth and responsible and ethical financing,” notes Michael Grifferty, president of the Gulf Bond and Sukuk Association.
Since sharia forbids the receipt of interest, sukuk are backed by assets and investors are paid an agreed share of the profits before being returned the principal at maturity. This structure gives them confidence that their capital is being used for a particular purpose. Assets eligible for green sukuk range from solar parks and biogas plants to renewable transmission networks and electric vehicles. They could also be used to finance green government subsidies.
The handful of issuances to date have been well received. Majid Al Futtaim’s sukuk was five times oversubscribed according to Hamed Ali, CEO of Nasdaq Dubai, the exchange on which it is listed. As Mr Kidney explains: “There are investors in Islamic countries who would never have invested in a green bond, but green sukuk is getting their attention. At the same time, there are international investors who invest in green bonds and like green sukuk as an extension of that market.”
Mr Grifferty says green sukuk can help issuers reach new investors. “It’s a great opportunity to access an investor-base which is much larger than the natural Islamic investor-base,” he explains. “Tapping into the sustainable and ethical investment-base could be helpful in terms of broadening the whole size and scope of the sukuk market.”
What’s holding the market up?
Still, green sukuk have not come as thick and fast as some proponents would like. This may be because issuers have been constrained by a shortage of certifiable green projects, notably in the oil-reliant economies of the Middle East.
“The big hurdle is in finding projects that are appropriate,” explains Mr Grifferty. “That means not only that they are sustainable, but also that they are measurable and appropriate in size and scope for capital markets financing.” In the Arabian Gulf, he sees more opportunity to invest in the transition to more sustainable economies—financing mitigation efforts such as reducing gas flaring or investing in carbon capture.
There are complexities in certifying the “green” credentials of an underlying asset and reporting on its performance, notes Debashis Dey, a UAE-based partner at the law firm White & Case. “I think there will be international investor demand for it [but] the question is whether GCC issuers are prepared to do the hard work to create these instruments,” he says. “You must have internal green policies, a proper framework of governance, say what you're going to do with the proceeds that qualifies to make it ‘green’, and report to investors as you use those proceeds.”
This may deter issuers, particularly in the Gulf where few companies have been pressured by regulation or shareholders to make environmental disclosures before. “If that changes, then there will be the drivers to push the market forward,” says Mr Dey.
A lack of pricing incentive may also have discouraged some issuers. “There’s a modest price benefit, a few basis points, but nothing massive,” Mr Kidney observes, though he adds that issuers favour green bonds “not for price, but [for] the strength of investor engagement”.
Growing the asset class: Leading by example
Mr Kidney hopes that more national issuance may pep up the market for green sukuk. “We are encouraging sovereigns to enter the market, like Indonesia has done, because that can play a pivotal role in benchmark pricing and growing liquidity,” he explains.
A sovereign green sukuk “is cooking” in Malaysia, he says, although it is unclear when it might be issued. Meanwhile “the Islamic Development Bank is actively encouraging its clients to do green sukuk, which is why they did their own as a demonstration,” he adds. Although the market is at a nascent stage, there are signs that it is gaining momentum. Mr Kidney is optimistic, estimating that issuance may double in size in 2020.
On the demand side, green sukuk growth will depend partly on that of the broader sukuk market. As Mr Ali of Nasdaq Dubai observes, “you need a thriving sukuk market to create a green version of it”. For conventional sukuk, he says there is demand from Western markets such as the US and Europe. The combination of investors seeking sharia-compliant investments and those with growing environmental, social and governance (ESG) priorities provides a wide investor base for green sukuk.
Mr Dey adds: “If you look at international funds, most of them now have some ESG component to their investment strategy. So if as an issuer you are wondering, ‘how do I create greater demand for my instrument?’, you could do something green, because that ticks a box for institutional investors.” If issuers can match investors’ intent with robust reporting—to demonstrate that funds are truly driving sustainable initiatives —green sukuk can play an important role in the race against climate change.
This is the first article in a series by The Economist Intelligence Unit on “Innovation in the Islamic Economy”. The next article will look at how fintech firms are reaching the next generation of Muslims.
[1] “Financing Climate Futures: Rethinking Infrastructure; Policy Highlights”, OECD/The World Bank/Un Environment, 2018. https://www.oecd.org/environment/cc/climate-futures/policy-highlights-financing-climate-futures.pdf
[2] Akhilesh Ganti, definition of “sukuk”, Investopedia, last updated April 30th 2019. https://www.investopedia.com/terms/s/sukuk.asp
[3] “2019 Green Bonds Market Summary, Climate Bonds Initiative, Februrary 2020. https://www.climatebonds.net/files/reports/2019_annual_highlights-final.pdf
[4] “Helping Malaysia Develop the Green Sukuk Market: Facilitating Sustainable Financing”, The World Bank, January 7th 2019. http://documents.worldbank.org/curated/en/586751546962364924/Helping-Mal...
[5] “Indonesia issues world’s first green sukuk bond”, Financial Times, February 23rd 2018. https://www.ft.com/content/e38ea51c-184c-11e8-9376-4a6390addb44
[6] “World’s 1st Benchmark Corporate Green Sukuk”, Majid Al Futtaim, May 15th 2019. https://www.majidalfuttaim.com/en/media-centre/press-releases/2019/05/ma...
[7] “Islamic Development Bank Achieves New Milestone with Debut Green Sukuk Worth EUR 1 Billion for Green Financing in its Member Countries”, IsDB, November 28th 2019. https://www.isdb.org/news/islamic-development-bank-achieves-new-mileston...
[8] Kudakwashe Muzoriwa, “Sukuk market to continue expanding in 2020, S&P Global”, Banker Middle East, January 13th 2020. https://www.cpifinancial.net/bme/news/sukuk-market-to-continue-expanding-in-2020-sp-global
[9] “IIFM Publishes Its Annual Sukuk Report 2019, USD 123.2 Billion Sukuk Issued Globally In 2018”, International Islamic Financial Market, July 31st 2019. https://www.iifm.net/iifm-publishes-its-annual-sukuk-report-2019-usd-123...
[10] “Green Sukuk”, Climate Bonds Initiative, 2020. https://www.climatebonds.net/projects/facilitation/green-sukuk
Trust and transparency: Twin goals for halal food certification
The halal food and beverage sector is the biggest slice of the Islamic economy pie, comprising over 60% of the total. Spending on food and drink by Muslims is forecast to reach US$2trn by 2024 from US$1.4trn in 2018 #ftnt1">[1]. Its importance and appeal are based not just on the size of the global Muslim population, estimated at some 2bn, but the concentration of Muslims in regions like South Asia. These populations will offer sizeable markets for food companies in the medium to long term.
To cater to this, many global food and drinks brands—including Cargill, Nestle and Unilever—have established halal portfolios while entrepreneurs in the West are spotting opportunities. In Italy halal-compliant mozzarella is being produced for the Muslim market and halal baby-food manufacturer For Aisha is finding success in the UK. #ftnt2">[2] In Asia, South Korea’s Samyang Foods has expanded overseas, opening a halal ramen plant in Malaysia #ftnt3">[3] and Thailand’s CP Foods plans to create an export hub in Vietnam. #ftnt4">[4] In fact, according to the Organisation of Islamic Cooperation (OIC), the main suppliers of halal products to its 57 member countries are non-Muslim, including Brazil, India, Australia and New Zealand. #ftnt5">[5]
Source: Pew Research #ftnt6">[6]
Halal food’s global footprint means that certification is all the more important. In essence, certification assures the consumer that Islamic law has been followed at multiple stages in the journey of an animal-based food or ingredient, spanning preparation methods, storage, processing and transportation. While in Muslim-majority countries such as Saudi Arabia all food and beverages are halal by law, the designation becomes crucial for Western or Asian brands that want to sell into these markets or for those targeting Muslim communities in non-majority countries.
Rules for halal meat preparation
The animal must be healthy at the time of slaughter
The animal must be slaughtered by a Muslim by hand through a single swipe of a sharp knife through the carotid artery, jugular and windpipe (to minimise pain), with blood drained out of the carcass
Halal prohibits use of alcohol to clean knives, blades and equipment, or using flavourings and ingredients based on alcohol derivatives
Swine flesh is forbidden
Source: Halal Food Authority #ftnt7">[7]
Certifiably challenging
Halal food importers are strengthening standards. In Saudi Arabia, requirements for halal food storage have recently been toughened and in the United Arab Emirates (UAE) Authority for Standardisation and Metrology has a legislative framework for a halal products control system and slaughterhouse registration. #ftnt8">[8],#ftnt9">[9] Malaysia has developed a halal business park in the south of Kuala Lumpur and adopted stricter standards for halal products. “They are taking it to the next level,” says Henrik Björkqvist, senior general manager at Arla Foods, a Scandinavian dairy company with business in Singapore and Malaysia. Indonesia has also tightened its regulations. Mandatory halal labelling for consumer products (initially food and beverages, followed by cosmetics, drugs and consumer goods) has recently been introduced and a new certification agency created. #ftnt10">[10],#ftnt11">[11]
But ensuring compliance becomes more difficult as the industry globalises, especially as a growing number of companies from non-Muslim geographies enter the fray and halal foods are produced and transported alongside non-halal foods. In addition, halal standards vary depending on the destination, explains Marco Tieman, research fellow at the University of Malaya and founder of LBB International, a consultancy that helps companies obtain halal certifications. “For non-Muslim countries, halal and non-halal food can be in the same container but it should be on different load carriers or pallets. But if you are sending [halal food] to a Muslim country like Malaysia or Saudi Arabia, it must be transported in a designated container.” Adhering to different sets of rules across a sprawling supply chain is a challenging undertaking.
Another aspect is the lack of harmonisation among halal certification bodies which makes it difficult for businesses to choose the right one. In Muslim countries, halal certification is led by government departments. In non-Muslim countries it is led by private sector organisations, non-governmental organisations or mosques—partly due to governments’ general separation from religious matters. “You have over 400 certification bodies in the world and most of them are private-sector,” says Mr Tieman. “In [many] non-Muslim countries there’s no accreditation for halal certification bodies, no regulations to follow, so there is a lot of fraud.”
Some countries, including Indonesia, the UAE and Saudi Arabia, require halal food imports to be certified by government-approved bodies. For companies exporting halal food from Western production sites to Islamic markets, this creates a potential business risk if the government authority decides not to recognise—or to revoke its agreement with—their respective certifier. Malaysia’s Department of Islamic Development (JAKIM) or Singapore’s Majlis Ugama Islam Singapura (MUIS), for instance, approve certification bodies in Europe but the process is unpredictable, says Mr Björkqvist. “One [European] certification body could be approved by the Indonesian halal authorities but not by the Malaysian or by the Singaporean ones. It changes over time, so that's one of the challenges.” To hedge against changes, Arla Foods works with more than one European certifying authority. This increases the administrative workload but reduces the risk of the company suddenly being locked out of an Asian market.
All of this points to the need for greater harmonisation of halal standards between countries. At the international level, Standards and Metrology Institute for Islamic Countries (under the mandate of the OIC) is developing an accreditation scheme. #ftnt12">[12] As part of this, Mr Björkqvist calls for a global certification system for halal food. “There's definitely a huge opportunity there,” he says. Emerging technologies are offering compelling solutions on this front.
In tech we trust?
There is hope that technological innovations could help improve the efficiency, transparency and reliability of halal food certification and compliance. Blockchain, a distributed database or “ledger” deemed to be highly secure and transparent, is gaining interest from industry participants.
Singapore-based WhatsHalal has launched platforms to connect players across the value chain and ease applications for halal certifications. In South Korea—whose halal market is surprisingly large thanks in part to returning emigrants from Islamic countries after the 1970s—collaboration between three entities is under way. Telecom company KT, a blockchain company called B-square Lab and the Korea Muslim Federation (KMF) have set up a blockchain-based platform for halal certification.
On this platform “every movement along the chain is time-stamped with notifications to all parties,” says Minsuk Kim, CEO of B-square Lab. “You have a real-time chain of custody: who touched what, what the product contains, when it went from one place to another. The entire chain of life of a product is [captured] on the blockchain.” Stakeholders are required to apply to KMF to gain access to the platform.
Huhnsik Chung, a blockchain expert and advisor to the project, sees blockchain as a powerful intervention that does not actually require massive process overhauls. “You can add the blockchain [solution] to critical points in your existing platform rather than replacing everything,” he says. “On the front end the platform is very intuitive and it doesn't change much from what people are using already.”
The group hopes their system could lay the foundations for global blockchain-based certification approaches. Each government’s certifying authority would review the journey to ensure the product has met the halal requirements in their country. The potential for automation adds value, says Mr Tieman. A breach in protocols can be flagged and the specific source of contamination can be identified in real time. Overall, the traceability it offers allows for better enforcement, he claims.
But there are broader challenges with the system that blockchain cannot resolve. Although technology can capture some information and feed it into the blockchain automatically—such as identifying other items halal food is stored with using radio-frequency identification (RFID) tags—there are physical elements of the process that are not tamper-proof. Halal authorities still need to inspect slaughterhouses to see if Islamic requirements are followed, explains Mr Tieman.
Rethinking halal
In the future, certification could expand to include more dimensions of increasing relevance to conscientious consumers. “I think we could weave in more quality aspects within the halal certification,” says Mr Björkqvist. These could refer to exclusion of additives, environmental sustainability of products or promotion of animal welfare. In China in particular, the halal sector enjoys popularity partly for food safety and hygiene considerations. #ftnt13">[13]
“Now you see companies are slowly addressing halal throughout the supply chain from a risk and reputation management point of view,” says Mr Tieman. The overlap with food safety and hygiene could mean that the same authorities could verify that halal standards are being met, creating operational efficiencies.
Looking ahead, the industry might also need to grapple with esoteric innovations like “clean meat”. This is meat grown from animal cells in labs which therefore cannot meet halal compliance over slaughter yet do not breach any principles of Islamic law. #ftnt14">[14] The challenge for the industry will be to uphold the essence of Islamic law in an era that its authors could scarcely have imagined.
1 "Report: State of the Global Islamic Economy”, Salaam Gateway, November 11th 2019.
2 Tom Kington, “25% of Italy’s buffalo mozzarella made for halal market”, The Times, August 21st 2017.
3 Pearly Neo, “Ramen expansion: Korea’s Samyang Foods ramps up overseas investment”, Food Navigator Asia, February 28th 2019.
4 "Thailand’s CP Foods to set up $200 million Vietnam export hub”, Agroberichten Buitenland, May 14th 2019.
5 https://www.oic-iofs.org/post/48
6 “The Future of World Religions: Population Growth Projections, 2010-2050”, Pew Research Centre, April 2nd 2015.
7 “Definition of Halal”, Halal Food Authority, 2018.
8 "New storage rule for halal supplies to Gulf countries”, ANBA, March 16th 2020.
9 https://www.wam.ae/en/details/1395302795798
10 Viriya Singgih, “Indonesia’s Mandatory Halal Labeling Leaves Firms in Disarray”, Bloomberg, October 15th 2019.
11 Ayman Falak Medina, “Indonesia’s Halal Law Takes Effect, Impacting Products and Services”, ASEAN Briefing, October 25th 2019.
12 https://www.smiic.org/en/smiic
13 Aza Wee Sile, “Why China wants a bite of the booming halal food market”, CNBC, August 24th 2015.
14 Salama, “USA: Is High-tech ‘clean Meat’ Kosher and Halal?”, Halal Focus, January 23rd 2018.
Halal for health: Scaling up halal pharmaceuticals
Halal standards govern lifestyle choices for 1.9bn Muslims around the world. But spending on halal products accounted for just 7% of global consumer spending on pharmaceuticals in 2018, compared with 17% of global spending on food. Moreover, predictions of growth have disappointed. The sector was expected to expand from US$92bn in 2018 to US$132bn in 2022, but that has now been pushed back to 2024.
One reason for this is a lack of awareness. In contrast to pharmaceuticals, halal food is part of everyday life worldwide, and many people, Muslim or not, can name some of its rules—the prohibitions on pork- and alcohol-based products, for example. By contrast, halal standards for pharmaceutical preparation are ambiguous (see box).
Perhaps most importantly, Islamic law allows for the consumption of non-halal products in life-threatening situations. As many medications are arguably meant to prevent the occurrence of life-threatening situations, the halal question is often seen as irrelevant when it comes to drugs. As a result, halal pharmaceuticals have largely been unexplored by Muslims.
But there are aspects of pharmaceuticals that may be of concern to halal-conscious consumers. Some medicines and vaccines contain animal material, including cell lines (such as E. coli, yeast and animal cells) and recombinant genes, as well as animal- or alcohol-derived ingredients, according to James Noh, president of the Korea Institute of Halal Industry (KIHI), a halal product promotion organisation that works with South Korean producers. Raising awareness of these elements may create a broader ethical consumer base for halal pharmaceuticals.
Defining halal pharmaceuticals
Pharmaceuticals are halal if:
Ingredients are safe and free from ethanol, blood, pork, parts of carnivorous and omnivorous animals, and human parts.
Maximum hygiene and minimum contamination with any potential toxic, najis (ritually unclean) or khabith (impure) ingredients are applied.
The process of cultivation, manufacture, preparation, packaging, storage and distribution are ensured to be clean, pure and compliant with Sharia.
Every element of halal production is physically separated from non-halal production.
Any potential cross-contamination between halal and non-halal ingredients and products is avoided.
Hotspot for halal health: South-east Asia
In the absence of strong demand for halal pharmaceuticals, it has fallen to governments—mainly those of Muslim-majority countries—to raise awareness. As far back as 1998, the Malaysian government began pushing for halal standards in drug production. Neighbouring countries followed suit, establishing national regulators and encouraging local producers, which in turn stoked domestic demand.
National champions soon emerged. Malaysia’s Duopharma Biotech started producing halal vitamins and healthcare supplements in the 1990s, and the company is now seeking to develop prescription medicines. Duopharma is halal by default, according to Seri Azalina Binti Mohd Ghazalli, an executive at the company, meaning that all of its facilities and ingredients are halal-compliant. This avoids the cost of having separate production lines for halal products.
South Korean drug and cosmetic manufacturers have also invested heavily in halal production, with encouragement from the authorities in Seoul. The government, which sees the sector as an avenue for increasing exports to countries with large Muslim populations, provides free halal training sessions. Today, 11 South Korean drug and cosmetic manufacturers have dedicated production lines for halal-certified products.
Indonesia—home to the largest number of Muslims in the world—is a target for South-east Asia’s exporters. Three South Korean companies, Daewoong, Chong Kun Dang and Donga ST, recently established a joint venture to enter the Indonesian market. Another, Aekyung, has had its brand certified by the Indonesian Ulema Council (MUI), the country’s Muslim clerical body. “Indonesia is recognised as a strategically important market for Korean pharmaceutical companies,” says Mr Noh. He argues that Indonesia is not only a fast-growing market for pharmaceuticals but can also serve as a hub for the export of halal-certified pharmaceuticals to other Islamic countries.
But the industry has so far remained regional, focused on South-east and East Asia. Malaysia’s Duopharma, for example, has significant sales volumes in neighbouring Indonesia as well as in the Philippines and Brunei, but has made few inroads in the Middle East. South-east and East Asia’s 300m Muslims (who provide a broad consumer base for halal pharmaceutical companies) may be the primary reason for this, but there are signs that demand is growing in regions other than Asia.
Beyond South-east Asia
At conferences and workshops over the past five years, Rozi Osman, a halal consultant to the government and the pharmaceutical industry in Malaysia, has detected a shift towards a “halal for everything” mentality among Middle Eastern delegates. Previously, she says, halal was primarily associated with food. Meanwhile, Duopharma's Ms Ghazalli says that the company is seriously considering entering the Middle Eastern market, with an eye to tapping demand among wealthy consumers in the Gulf states.
Crucially, governments in the Gulf are playing a part, mirroring the early moves made by Malaysia and other Asian countries in the 1990s. National standard-setting bodies for halal products of all kinds have proliferated in the region. Saudi Arabia plans to build domestic halal industries as part of the country’s ambitious economic development plans. AJ Pharma, a Saudi Arabian and Malaysian joint venture, is focusing on developing halal vaccines.
But the fragmented and uneven nature of halal demand means that it remains a niche market in global terms and is not attractive to the multinationals that dominate the pharmaceutical industry. While giants like Cargill and Unilever have embraced halal food, pharmaceutical behemoths such as Roche and AstraZeneca have been slower to engage with the halal market. Ms Osman describes a workshop she gave last year to companies looking to grow sales in Association of South-East Asian Nations (ASEAN) countries: “Multinationals were there, but I didn’t feel their interest [in halal]”—and that in a region where the halal pharmaceutical industry is most developed.
Creating demand, expanding supply
To address the underlying challenges of weak demand and the complexities facing suppliers, experts point to vital steps that governments and manufacturers must take.
On the demand side, the first step is approving halal labelling. Without labels, it will be hard to raise awareness of the difference between halal and non-halal products and demand is unlikely to grow. “Our branding is always next to the halal logo,” says Ms Ghazalli, “and in Malaysia [the regulatory agency] allows the halal logo to be on product labels, so that helps a lot in enabling people to make an informed decision.”
But when Indonesia proposed mandatory halal labels on pharmaceutical products last year, the International Pharmaceutical Manufacturing Group (IPMG, the global industry body) pushed back, warning that essential medicines would disappear from the country. In an interview, the IPMG's head, Parulian Simanjuntak, said that Indonesia’s market was too small for the companies he represents to make the investment required to manufacture halal products. The Indonesian government eventually relented, and the proposed changes have been postponed. Introducing halal labels, while essential to raise awareness and grow demand, may be an uphill battle for policymakers.
Another significant step in terms of increasing demand for halal pharmaceuticals, according to halal consultant Ms Osman, would be for institutional buyers—such as public healthcare bodies and major drug buyers like the World Health Organisation and the Bill and Melinda Gates Foundation—to consider halal when making purchases. Their sheer market power could drive up demand.
On the supply side, the proliferation of standard-setting and certification bodies is creating a complex environment for halal pharmaceutical companies to operate in. As Gulf states add their own standard-setting regimes to those that already exist in ASEAN countries, this is further complicating the situation. In addition, this year a report identified limitations in Malaysia’s certification process—one of the world’s most well-established—including a lack of skills and knowledge of halal pharmaceuticals among auditors.
With the halal pharmaceutical sector still in its infancy, halal authorities must learn from the mistakes of more established halal industries (such as food) and harmonise regulation as they are being developed. These efforts are underway. In Dubai, the International Halal Accreditation Forum has been set up as a membership body for disparate standard-setting organisations. Producing companies, including Duopharma, have also started meeting to discuss common standards that all bodies could endorse, although this initiative is now on hold due to Covid-19. “We are looking forward to this global standard so there is clarity and consistency on how we interpret halal pharma,” says Duopharma's Ms Ghazalli.
For KIHI's Mr Noh, the problem is not so much different standards—most countries’ rules are similar, he says—but the lack of mutual recognition between different bodies. “If this problem is not solved, the smooth trade of halal products is restricted and it is Muslim consumers who are ultimately affected.” An agreement has been proposed between the Malaysian government’s Department of Islamic Development (JAKIM) and Indonesia’s Halal Product Assurance Organising Agency (BPJPH) that would allow products certified by either body to be sold in both countries. This would go some way towards reducing the bureaucratic burden on pharmaceutical companies.
Beyond the issue of standards, pharmaceutical companies must focus on product innovation. For now, they mainly develop halal alternatives to existing medicines. Thinking “halal first” and developing products for the Muslim consumer will be critical to future growth. “It is the right of people to have access to medicines that are true to their beliefs,” states Ms Ghazalli. The efforts of Asian players in harmonising standards and driving innovation indicate that a global expansion of halal pharmaceuticals will have to be led not by Western brands but by Asian incumbents.
RMB to CBDC: Implications of China's digital currency
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The shifting landscape of global wealth: Future-proofing prosperity in a ti...
In some instances the impact of this shift will be shaped by local factors, such as demographic changes. In other instances this shift will reflect shared characteristics, as demonstrated by the greater popularity of overseas investing among younger high-net-worth individuals (HNWIs) brought up in an era of globalisation. Whatever the drivers, the landscape of wealth is changing—from local to global, and from one focused on returns to one founded on personal values.
Despite rising economic concerns and a tradition of investor home bias in large parts of the world, the new landscape of wealth appears less interested in borders. According to a survey commissioned by RBC Wealth Management and conducted by The Economist Intelligence Unit (EIU), younger HNWIs are substantially more enthusiastic about foreign investing. The U.S. is a particularly high-profile example of a country where a long-standing preference for investments in local markets appears set to be transformed.
Click the thumbnail below to download the global executive summary.
Read additional articles from The EIU with detail on the shifting landscape of global wealth in Asia, Canada, the U.S. and UK on RBC's website.
To better understand the opportunities and challenges in developing a fintech business in seven ASEAN markets, The Economist Intelligence Unit conducted wide-ranging desk research supplemented by seven in-depth interviews with executives in Australia and ASEAN.
Download report and watch video interview to learn more.
AI will separate the winning banks from the losers, 77% of executives in the industry agree
Covid-19 may intensify the use of AI, making effective governance all the more urgent
A review of regulatory guidance reveals significant concerns including data bias, “black box” risk and a lack of human oversight
Guidance has so far been “light touch” but firmer rules may be required as the use of AI intensifies
17469
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Financial Services
Forging new frontiers: advanced technologies will revolutionise banking
66% of banking executives say new technologies will continue to drive the global banking sphere for the next five years while regulatory concerns around these technologies remain top of mind for banking executives (42%).
77% of bankers believe that unlocking value from AI will be the differentiator between winning and losing banks.
With 45% of respondents set on transforming their existing business models into digital ecosystems, banks will continue to adapt their internal structures to digital technologies in order to enhance customer experience, product offerings and new revenue streams.
The coronavirus crisis has focused the attention of banks firmly on new challenges. Bank branch traffic was already falling before the pandemic, and this trend will only intensify with society in lockdown: customers are unable to leave their homes while employees are working remotely or frequently absent due to illness. “Banks have planned for years for disaster recovery if their technology failed but have never planned for disaster recovery if their buildings closed,” says Chris Skinner, a leading influencer and champion of digitalisation in finance. “This is the big lesson of the crisis.”
The lockdown will most likely accelerate the digitisation of banking,1 a sector which already faces intense competition from payment players, big technology and e-commerce firms. According to the latest global banking survey conducted by The Economist Intelligence Unit (now in its seventh year and for the first time expanded to include respondents from commercial and private banks), 45% of respondents say their strategic response to this challenge is to build a “true digital ecosystem”. This aim to integrate self-built digital services and third-party offerings was cited more than any other response and has increased from 41% of respondents in 2019.
This article explores three central elements of banking digitisation: where banks currently are in their digital journey; what they are doing, not only to overcome challenges but also to increase user engagement through different technologies and channels; and how they are seizing opportunities through reorganisation into more agile structures.
Methodology
In February-March 2020 The Economist Intelligence Unit, on behalf of Temenos, surveyed 305 global banking executives on themes relating to the digitisation of banking. The survey included respondents from retail, corporate and private banks in Europe (25%), North America (24%), Asia-Pacific (18%), Africa and the Middle East (16%) and Latin America (17%). Respondents performed different job functions: marketing and sales (18%), IT (13%), customer service (7%) and finance (14%), while almost half were C-suite executives (49%). The coronavirus pandemic emerged half-way through the survey.
The survey is part of a worldwide research programme on new frontiers in a global age of banking. It draws on in-depth interviews with retail, corporate and private wealth banks, regulators, international organisations and consultancies around the world. The survey research and interviews will be featured in a series of articles and an infographic throughout 2020.
New technologies will continue to drive global banking for the next five years while regulatory concerns around these technologies remain top of mind for banking executives.
A large majority of respondents (66%, up from 42% in 2019) cite new technologies such as artificial intelligence (AI), machine learning, blockchain or the Internet of Things (IoT) as having a significant impact on the sector. This highlights the importance of these new tools in fending off the competitive threat posed by tech-driven, non-traditional entrants to the banking sector such as payment players PayPal and ApplePay (cited by 50% of respondents globally), or big tech firms like Google, Facebook and Alibaba (34%).
Regulation of digital technology (such as data protection) has weighed on banks’ profit and loss (P&L) since the 2008 financial crisis and is now considered the second most impactful trend in the industry (as cited by 42% of respondents). New regulation could be a game changer for the development of open banking in certain regions, but it could also allow non-traditional competitors to enter the sector.
There is slightly less apprehension about neobanks (a concern cited by 20%) which have not managed to dent savings or lending volumes to a significant extent. Some early challengers are shifting their strategies from directly offering financial products to selling their expertise to existing banks with bigger brands, more reach and higher capital.2 In fact, 84% believe that fintechs will continue to have a material cost advantage over traditional banks: investing in fintechs is a priority innovation strategy for over a quarter of respondents (26%), and even more so in the retail space (33%).
As the importance of advanced technologies rises, that of changing customer behaviours and demands—while still viewed as impactful by 28% of respondents—continues to decline. In 2019, 31% of respondents cited it as highly significant compared with 58% in 2018. This may be due to the fact that banking clients now display higher digital adoption rates and have established digital expectations. Moreover, a majority of respondents (59%) agree with the statement that “the traditional branch-based banking model will be dead” by 2025, up from 44% in 2019.
In the shift towards enterprise agility, DevOps—a set of practices which bring together software development and IT operations—and modern cloud-based platforms could be transformative, according to 84% of respondents. The computing power and flexibility of cloud-based technologies and services remain of prime interest to banks with 27% of respondents focusing their technology investment in this area (see also below). Unsurprisingly, 81% believe a multi-cloud strategy will become a regulatory prerequisite after several years of regulatory focus on cloud technologies in the UK and the US.3
Banks are adapting their internal structures to digital technologies in order to enhance customer experience, product offering and new revenue streams.
An overwhelming majority of respondents (83%) believe that platformisation of banking and other services through a single entry point will steer the market. This is driving banks towards transforming their existing business models into true digital ecosystems according to 45% of respondents.
Where are banks focusing their digital efforts? For many, technology investment hinges on cybersecurity (35%), which reflects widespread concerns about data breaches. The development of AI platforms like digital advisors and voice assisted engagement channels is cited by 33% of respondents and cloud-based technologies by 27%. AI will undoubtedly play a central role in the digital shift: 77% of respondents agree that unlocking value from AI will be a key differentiator between winning and losing banks.
However, banks may be missing a trick by focusing purely on AI’s customer-facing capabilities while downplaying other benefits in the value chain, which focus more on productivity, customer retention and monitoring functions (see chart 2 below). There are concerns among customers about how AI technologies will use their data and whether it is safe: 34% of respondents expressed concern about lack of clarity surrounding data use while 40% were unsure about the security of their personal financial information. Despite these reservations, there are signs of greater product innovation within the sector: 30% of respondents expect to maintain their own product offerings and become an aggregator of third-party banking or non-banking products (up from 28% last year).
Increasing numbers of banks anticipate AI will help generate new business. “As investment algorithms get more advanced, they will be used more widely in portfolio management. Not to use the over-hyped AI term, but advanced algorithms for investment strategies will gain strength,” explains Nic Dreckmann, chief operating officer and head of intermediaries at private bank Julius Bär.
For the entire customer journey to succeed, respondents report that broader deployment of AI in fraud detection (16%) and backoffice functions (8%) are likely to feature more heavily in future business plans. At HSBC Private Bank, AI is already integrated in back office functions, according to chief operating officer Anil Venuturupalli. For banks worldwide of all sizes, cultural change will be central to deploying technologies such as AI effectively.
Building greenfield banks is an increasingly popular strategy to achieve digital agility.
Last year, building a greenfield digital bank was a top innovation strategy among retail bankers (cited by 36%). A priority again this year for respondents globally (35%), it was particularly strongly expressed by respondents in the wealth sector: 52% believe this to be the best way to compete most cost effectively (see chart 4).
Open bank hub initiatives that give customers access to third-party offerings remain important as respondents’ second preference (29%). This is followed by investment in fintech start-ups, which 26% of respondents cite as part of their innovation strategy. Although less of a concern than in 2019, 25% of banks are looking to participate in sandboxes to collaborate with fintechs and other technology providers to test new propositions.
Banks are also developing digital strategies to move away from their current operating models and promote greater agility. Improving product agility and the ability to launch new products is cited as the third most important strategic priority (26%), after improving customer experience and engagement (32%), and mastering digital marketing (31%). Migrating client usage to digital from physical channels tops the list of priorities for retail banks (35%, compared with 31% globally). Some banks, such as HSBC, have started to build out from existing operations and draw in third-party expertise where necessary to deliver digital private banking around the world. “We are looking at developing a hybrid engagement model where technology will handle all of the administrative touchpoints for our clients,” says Mr Venuturupalli.
Traditional means of banking such as cash will fall by the wayside as agility becomes increasingly aligned with the digitisation of transactions and products. A majority of respondents (75%) think paper notes will represent less than 5% of all retail transactions globally by 2025.
As technology and demand changes at an ever-faster pace, banks in general will need to adopt new working practices and administrative structures that align with their business strategies and priorities, particularly if they are to capitalise on different digital advantages by 2025.
However, it seems developing agile structures that break down internal barriers is not yet a widespread priority given that only 17% of respondents said this was a focal point for their technology investment. This further raises the question of whether banks will be able to achieve their strategic greenfield bank and broad ecosystem plans on time and within budget drawing only on in-house resources.
AI with a profitable purpose
Many banks are clear on what they want to achieve from AI. The dual priorities for CaixaBank of Spain are freeing up staff time and improving employee productivity. The bank processes over 12,000 transactions per second in peak hours and boasts a 900 terabytes data pool to improve the customer experience.
The bank’s 100-strong business intelligence unit uses big data, AI and machine learning to communicate with customers more efficiently. As a result, branch staff levels are half the euro zone average and CaixaBank’s costs are the lowest of its domestic peer group. AIdriven virtual assistants used by advisors and customers have more than doubled sales conversion rates in just one year.
Lessons from lockdown
While the coronavirus pandemic has highlighted how quickly financial institutions need to adjust when the unexpected hits, it has also demonstrated many opportunities to be seized from a digital banking perspective.
As lockdowns were introduced, bank phone services were overwhelmed in the UK and the US.4 Operational processes struggled to incorporate government relief financial schemes, but some banks managed to demonstrate the real value of agility.
Citizens Bank of Edmond, Oklahoma, has just one branch and 55 members of staff. The bank was quick to send out loan relief forms to borrowers and modify overdraft arrangements to offer early access to direct payments from the US government: its speed of response left larger competitors trailing behind. Chief executive Jill Castilla made use of the bank’s social media platforms to offer advice and reassurance—and a personal line of contact for worried customers. Some banks, such as US-based Atlantic Union Bank, moved to streamline their loan application workflows with new digital platforms,5 while others looked to increase their customer outreach via digital channels.6
However, the need to introduce a human touch to the digital experience predates the covid-19 pandemic. Banks were already looking for innovative ways to achieve this, often by providing opt-in communication channels to clients. For example, two US banks— Oregonbased Umpqua Bank and Iowa-based Hills Bank—have been using mobile banking apps that give customers direct access to a digital banker of their choice for a variety of services including bank-account opening and transfer of funds.7 In Turkey, VafikBank has a fleet of direct sales agents who visit digital banking customers at their office or home to provide expert advice on more complex products such as loans.
US digital banking gets a boost
Fintechs have found it harder to challenge the established banks in the US than they have in Europe and Asia. That may be about to change.
Last year, we highlighted progress at Varo Money, a mobile banking firm that offers loans alongside checking and savings accounts. After a three year wait, the Federal Deposit Insurance Corporation approved Varo’s application for a bank charter earlier this year. Once final approval is granted, the licence will eventually allow Varo to offer its accounts to US customers with the same US$250,000 deposit guarantee that established bank customers enjoy.
Varo subsequently received more good news from a surprising source. In March 2020 its New York-based fintech competitor Moven surprised the market by closing its consumer-facing business, blaming market conditions for a lack of development funding.
Moven then chose Varo as the destination of choice for customers facing account closures, citing its core focus on financial wellness. “We care deeply about our Moven banking customers which is why we made the thoughtful decision, as we transition away from our consumer business, to recommend Varo for their banking needs,” said Moven CEO Marek Forysiak.
For Varo Money, finally receiving that national bank charter will be the icing on the cake. Its founder and CEO Colin Walsh comments that “becoming a fully chartered bank will give us greater opportunity to deliver products and services that positively impact the lives of everyday people around the country”.
Click here to view the infographic.
[1] See, for example: https://www.investorschronicle.co.uk/shares/2020/03/11/will-uk-banks-cat... ; https://gulfbusiness.com/howfintech-is-revamping-the-financial-landscape... ; https://www.finextra.com/newsarticle/35561/rush-to-digitisation-will-see...
[2] Moven shuts all consumer accounts, pivots to B2B-only service for banks, Fintech Futures, 26 March 2020 https://www.fintechfutures.com/2020/03/moven-shuts-all-consumer-accounts...
[3] See, for example, https://www.fintechfutures.com/2016/12/fca-green-lights-cloud-technologies/ and https://uk.reuters.com/article/us-usacongress-cloud/u-s-house-lawmakers-...
[4] The inability of some banks to process loans at the start of the crisis was widely reported in the press, for example: https://www.theguardian.com/ business/2020/apr/15/covid-19-bailout-loans-issued-uk-firms-banks
Customer experience: learning from online personal finance conversations
New research from The Economist Intelligence Unit, based on an analysis of over 10m conversations in public forums about personal finances, has sought to better understand consumer preferences when it comes to retail banking services. It finds that:
Fintech start-ups are strongly associated with financial empowerment, but also twice as likely to be associated with security and privacy concerns when compared to traditional banks.
Traditional banks retain strong associations with trustworthiness, a wider range of services and perks such as loyalty programmes.
In the battle for consumers, there remains everything to play for.
Digital and traditional banks are engaged in a fierce battle for customers. Start-up, digital-first banks and investment services, such as Monzo, N26 and Robinhood, have come to market promising superior customer experience and a rich array of services, such as budgeting apps and automated, low-cost investment tools. But traditional banks still benefit from trust, reliability and a wider range of services. And increasingly, spurred on by a crowded field of agile new digital upstarts, they are investing heavily in their digital capabilities—to great effect.
Key to this battle between old and new is whether innovators can scale up and broaden their appeal faster than incumbents can innovate.
A deep understanding of customer behaviour and sentiment will be essential to success for any financial player, new or old. One resource to help firms do this are the millions of conversations that consumers are having about personal finance in public online forums. What banking tools and services are customers most frequently discussing, in what terms? Which keywords relating to banking services are rising and falling in frequency over time? Which associations are there between discussions of negative customer experience and different types of bank?
To answer these questions, The Economist Intelligence Unit (EIU) developed a natural language processing model to analyse over 10m online English-language conversations about personal finance. The resulting clusters, associations and patterns show key strengths and weaknesses of traditional and challenger banks in terms of how well they are meeting customer needs.
Our research methodology
We analysed over 10m online conversations about finance and banking dating back to 2013, drawn from English-language personal finance forums on Reddit, a social discussion website. The sample reflects a global community of English speakers, predominately from the UK and US. Using machine-learning algorithms, we sifted millions of comments into distinct word clusters to reveal which words and phrases appear most frequently, and which are most regularly associated with each other.
Financial empowerment and customer loyalty
Largely, next-generation banks have proven popular because they have used technology to offer customers richer services than their conventional counterparts, from spending analytics to budgeting tools and low-cost investment platforms.
Discussions about “investment” have grown in frequency since 2015, and our analysis shows that 14.4% of conversations that discuss challenger banks include associations with financial empowerment capabilities such as tracking and budgeting, compared with just 2% of conversations that discuss traditional banks. In response to low interest rates being offered by conventional savings accounts, more everyday consumers have taken advantage of low-cost investment portfolio services offered by fintech firms and algorithm-driven “robo-advisors”.
According to a survey of 305 global banking executives carried out by the EIU, investments (self-executed or robo-advisory) are the number one area where new entrants are expected to gain market share in the coming years.
Jason Bates, co-founder of app-based banks Monzo and Starling, as well as 11:FS, a fintech consultancy, believes that challenger banks have done a better job of understanding customer’s financial lives and building products around them. “Banks haven’t been great at delivering services to help deal with the realities of day-to-day life. They just say, ‘great to see you, here’s your balance, here are your transactions, here is how you move money. Good luck. And if you spend more than you’ve got, we’ll charge you".
He distinguishes here between “digitisation”, where banks simply move their paper or in-person branch processes online and into apps, to truly “digital” innovation that imagines new services. Digitisation is analogous to the re-creation of a newspaper on an iPad. Digital transformation, in contrast, is exemplified in new media platforms, such as iTunes or Spotify. “The operating model here fundamentally changed. It’s not only about music—it is also about discovery and sharing.” In the financial services space, Mr Bates believes, truly digital innovations will be those that are real-time, intelligent, social or contextual.
But while many consumers are turning towards disruptive fintech platforms for enriched tools and services to bolster their personal finances, traditional banks remain heavily associated with rewards and loyalty programmes—one of the most discussed subjects overall. In our analysis, a quarter (24.9%) of conversations about traditional banks were related to credit cards or reward programmes, compared to just 2.4% of those involving challengers. Here traditional banks benefit from their age and experience, having built up significant loyalty with customers (whose perks accumulate over the years), and leveraging the reputation and reliability needed to strike commercial partnerships with companies in sectors like air travel and hospitality.
In the future, loyalty programmes and points schemes will be a customer experience domain that will benefit from better data and analytics about customer preferences and behaviours, leading to more tailored offerings. In this environment, it is more than possible for fintech firms to excel in points and perks services, provided that their brands are strong enough to form the right partnerships.
Fintech firms are already making in-roads. Point, a new US challenger bank whose investor roster includes backers of N26 and TransferWise, offers cash-redeemable points for groceries as well as services like Netflix and Spotify. Another US digital bank, Current, offers points on transactions at participating merchants, which include Subway and Rite Aid, although currently the cash can only be spent on upgrading to the bank’s own premium service. Some firms are flipping the entire points model on its head: US-based Tally gives users points for saving, which they can redeem for gift cards at retailers such as Amazon and Target, and services including Uber. Time will tell if non-traditional banks can sustain points systems, given their net cost, especially during the early (usually lossmaking) years.
Safety and security: favouring the tried and trusted
If challenger banks have brought to market better customer experience and enhanced services, traditional banks still have an important advantage in terms of trust and reliability. Our analysis found that 13.7% of conversations about challenger banks included associations with concerns about safety, security or privacy, compared with only 6.7% of those about traditional banks.
Privacy is a major subject, particularly for fintech services that link different institutions’ financial data. In discussions of retail banking, safety was the only language cluster to experience significant proportional growth over time, a consequence of a broader concern about digital privacy in recent years, heightened by high-profile cyber hacks and data breaches.
Many prominent challenger banks have slipped up on security and reliability, including through service outages and glitches. They have also had run-ins with regulators and faced criticism over issues such as capital adequacy ratios, anti-money-laundering protocols, audit quality, and consumer vulnerability in areas like investing. With challenger banks and fintech platforms often still in the venture-funded, pre-profit phase, there are questions about their long-term survival that could limit their ability to become primary providers of services—especially in a time of such economic uncertainty. This may put pressure on their appeal as they seek to develop from scale to profitability.
Customer experience: the survival imperative
For newcomers and incumbents, customercentricity is a widely shared priority. In the global banking survey conducted by the EIU as part of this research programme, improving customer experience and engagement, including personalisation, was cited as the top strategic priority through to 2025 and a topthree factor impacting banks.
“Core financial services are becoming more commoditised, and price competition only goes so far,” says Millie Gillon, global head of retail banking customer experience at Standard Chartered bank. “If we can’t win on price alone, we need to focus on experience. That will help us to differentiate”. Some incumbents have strengthened their customer experience offering through acquisitions, such as CapitalOne’s purchase of Adaptive Path, a design and user experience consultancy.
To flourish in customer experience excellence, banks must find new ways to listen to their clients—and to understand customer trends more broadly. “There’s a heightened awareness among established companies about the importance of putting clients first and centre, and then building our offerings around them, as opposed to the old method of, ‘If we build it, they will come,’” says Ms Gillon.
Innovators are those who understand the “brutal realities” of customers’ daily lives, says Mr Bates. “We never ask customers, ‘what would you like us to build?’ because they are experts at talking about their problems and experience, not product development. Our approach to creating new digital services is to talk to customers about the issues in their daily life and then look at how you can deliver against that.”
Ethnographic research, for instance, is allowing Standard Chartered to “dig deep into customer’s psychographics”, says Ms Gillon, helping them to understand their motivations, goals and fears. “By doing this, we can start to really understand, empathise and put ourselves in their shoes”.
“We want to try to be much more empathetic, because once we have empathy, we’re more human. When we’re more human, that’s when we can truly be client-centric”.
An open thread: customer experience in transition
Amid the coronavirus crisis, customer priorities are rapidly changing. “A lot of people are just thinking ‘What’s truly important to me right now?’ Because this year, most people’s goal is just to survive,” says Ms Gillon. They’re also saying, ‘what’s important is not just me as your client but servicing the needs of my entire family.’ It’s much more familial. It’s really about getting down to the root of what’s most important now”.
Such shifting priorities threaten the business model of start-ups that have built offerings on perks such as free currency exchange services and spending analytics tools, which are losing relevance at a time of falling earnings. Incumbent banks have seen some advantages, in the form of increased saving (the US savings rate hit a record 33% in April). But additional income from fees and deposits is being more than offset by falling margins and the need to put aside large quantities to cover loan losses. In this environment, a smart “listening” strategy will not only help banks to know whether their services are hitting the mark; it will also give them insights into market changes.
More optimistically, banks are realising that the field of “financial services” is far bigger than ever before. Open banking regulations, which allow third parties to build financial products linked to customers’ payment accounts, are likely to herald a period of evolution into a broader “open finance” era that will apply the same principles to savings, insurance, mortgages, investments, pensions and credit.
This could see fintech become ubiquitous in areas far beyond core banking. Our analysis shows many domains in which consumers discuss personal finance with no associations with their banks at all: the entire class of retail banks (incumbents and challengers) are only associated with 18% of total personal finance discussions, with the rest covering everything from divorces and wills to car buying (see graphic). This suggests there is room for banks to assist customers in many more areas of their personal finances.
The EIU’s survey also backs evidence of banking shifting towards becoming an ecosystem of interlinked services: the most commonly cited business model transformation, by 45% of respondents, was “acting as a true digital ecosystem (offering own and third-party banking and non-banking products and services to own customers, as well as to other financial services organisations)”.
Incumbent banks will move at different speeds in capturing new markets; some may deploy new offerings while others will remain the infrastructure “pipes”, as with telecommunications companies in the 4G transition, who facilitated, but were not innovators in, breakthroughs like streaming. We will also see more partnerships between fintech firms and established players. Accelerators, direct acquisitions and service agreements are all ways that big banks are already working with rather than against newcomers to leverage the strengths of each party, and the commercial logic of cooperation will grow as banking expands its service offering.
“In an ideal world,” says Ms Gillon, “there will be a combination where fintechs and established banks can play together. Then you have the winning combination of speed, drive, innovation, a willingness to experiment, sound risk management, trust and the learning that comes from more established companies.
While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor.
Despite the prospect of a prolonged recovery to economic normality, covid-19 could be transformative for financial and social inclusion in some emerging markets.
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The shifting landscape of global wealth: Future-proofing prosperity in a ti...
In some instances the impact of this shift will be shaped by local factors, such as demographic changes. In other instances this shift will reflect shared characteristics, as demonstrated by the greater popularity of overseas investing among younger high-net-worth individuals (HNWIs) brought up in an era of globalisation. Whatever the drivers, the landscape of wealth is changing—from local to global, and from one focused on returns to one founded on personal values.
Despite rising economic concerns and a tradition of investor home bias in large parts of the world, the new landscape of wealth appears less interested in borders. According to a survey commissioned by RBC Wealth Management and conducted by The Economist Intelligence Unit (EIU), younger HNWIs are substantially more enthusiastic about foreign investing. The U.S. is a particularly high-profile example of a country where a long-standing preference for investments in local markets appears set to be transformed.
Click the thumbnail below to download the global executive summary.
Read additional articles from The EIU with detail on the shifting landscape of global wealth in Asia, Canada, the U.S. and UK on RBC's website.
To better understand the opportunities and challenges in developing a fintech business in seven ASEAN markets, The Economist Intelligence Unit conducted wide-ranging desk research supplemented by seven in-depth interviews with executives in Australia and ASEAN.
Download report and watch video interview to learn more.
Over recent decades the fast-paced change driven by technology and globalisation has shaped our digital past and present and will most certainly continue to disrupt our future.
Related content
Financial Services
The shifting landscape of global wealth: Future-proofing prosperity in a ti...
In some instances the impact of this shift will be shaped by local factors, such as demographic changes. In other instances this shift will reflect shared characteristics, as demonstrated by the greater popularity of overseas investing among younger high-net-worth individuals (HNWIs) brought up in an era of globalisation. Whatever the drivers, the landscape of wealth is changing—from local to global, and from one focused on returns to one founded on personal values.
Despite rising economic concerns and a tradition of investor home bias in large parts of the world, the new landscape of wealth appears less interested in borders. According to a survey commissioned by RBC Wealth Management and conducted by The Economist Intelligence Unit (EIU), younger HNWIs are substantially more enthusiastic about foreign investing. The U.S. is a particularly high-profile example of a country where a long-standing preference for investments in local markets appears set to be transformed.
Click the thumbnail below to download the global executive summary.
Read additional articles from The EIU with detail on the shifting landscape of global wealth in Asia, Canada, the U.S. and UK on RBC's website.
To better understand the opportunities and challenges in developing a fintech business in seven ASEAN markets, The Economist Intelligence Unit conducted wide-ranging desk research supplemented by seven in-depth interviews with executives in Australia and ASEAN.
Download report and watch video interview to learn more.
Overseeing AI: Governing artificial intelligence in banking
AI will separate the winning banks from the losers, 77% of executives in the industry agree
Covid-19 may intensify the use of AI, making effective governance all the more urgent
A review of regulatory guidance reveals significant concerns including data bias, “black box” risk and a lack of human oversight
Guidance has so far been “light touch” but firmer rules may be required as the use of AI intensifies
The ability to extract value from artificial intelligence (AI) will sort the winners from the losers in banking, according to 77% of bank executives surveyed by The Economist Intelligence Unit in February and March 2020. AI platforms were the second highest priority area of technology investment, the survey found, behind only cybersecurity.
At the time, the covid-19 pandemic was in full effect in Asia and the rest of the world was beginning to understand its gravity. Since then, the depth and extent of covid-19’s impact on consumer behaviour and the global economy have come into clearer focus.
Covid-19 has already triggered an uptick in digital banking—in the US Citibank is reported to have seen a tenfold surge in activity on Apple Pay during lockdown, for example1. But the disruption to businesses and households has only just begun, and banks will need to adapt to rapidly changing customer needs.
As such, the criticality of AI adoption is only likely to increase in the post-pandemic era: its safe and ethical deployment is now more urgent than ever.
In common with most matters of governance and safety, banks will look to regulatory authorities for guidance on how this can be achieved. Until a few years ago regulators adopted a wait-and-see approach but, more recently, many have issued a number of studies and discussion papers.
In order to assess the key risks and governance approaches that banking executives must understand, The Economist Intelligence Unit undertook a structured review of 25 reports, discussion papers and articles on the topic of managing AI risks in banking. The main findings are summarised in the table on page 3 and examined throughout this article.
Risks known and unknown
The nature of the risks involved in banks’ use of AI does not differ materially from those faced in other industries. It is the outcomes that differ should risks materialise: financial damage could be caused to consumers, financial institutions themselves or even to the stability of the global financial system.
Our review reveals that prominent risks include bias in the data that is fed into AI systems. This could result in decisions that unfairly disadvantage individuals or groups of people (for example through discriminatory
Some AI models have a complexity that many organisations, including banks, have never seen before. Prag Sharma, senior vice-president and emerging technology lead, Citi Innovation Labs
lending). “Black box” risk arises when the steps algorithms take cannot be traced and the decisions they reach cannot be explained. Excluding humans from processes involving AI weakens their monitoring and could threaten the integrity of models (see table for a comprehensive list of AI risks in banking).
At the root of these and other risks is AI’s increasingly inherent complexity, says Prag Sharma, senior vice-president and emerging technology lead at Citi Innovation Labs. “Some AI models can look at millions or sometimes billions of parameters to reach a decision,” he says. “Such models have a complexity that many organisations, including banks, have never seen before.” Andreas Papaetis, a policy expert with the European Banking Authority (EBA), believes this complexity—and especially the obstacles it poses to explainability—are among the chief constraints on European banks’ use of AI to date.
Governance challenges
The guidance that regulators have offered so far can be described as “light touch”, taking the form of information and recommendations rather than rules or standards. One possible reason for this is to avoid stifling innovation. “The guidance from governing bodies where we operate continues to encourage innovation and growth in this sector,” says Mr Sharma.
Another reason is uncertainty about how AI will evolve. “AI is still at an early stage in banking and is likely to grow,” says Mr Papaetis. “There isn’t anyone who can answer everything about it now.”
The documents that banking regulators have published on AI range from the succinct (an 11-page statement of principles by MAS—the Monetary Authority of Singapore) to the voluminous (a 195-page report by Germany’s BaFin—its Federal Financial Supervisory Authority), but the guidance they offer converges in several areas.
At the highest level, banks should establish ethical standards for their use of AI and systematically ensure that their models comply. The EBA suggests using an “ethical by design” approach to embed these principles in AI projects from the start. It also recommends establishing an ethics committee to validate AI use cases and monitor their adherence to ethical standards.4
For regulators, paramount among the ethical standards must be fairness—ensuring that decisions in lending and other areas do not unjustly discriminate against individuals or specific groups of people. De Nederlandsche Bank (or DNB, the central bank of the Netherlands) emphasises the need for regular reviews of AI model decisions by domain experts (the “human in the loop”) to help guard against unintentional bias.5 The Hong Kong Monetary Authority (HKMA) advises that model data be tested and evaluated regularly, including with the use of bias-detection software.6 “If you have a good understanding of your underlying data,” says Mr Sharma, “then a lot of the algorithmic difficulties in terms of ethical behaviour or explainability can be addressed more easily”.
Monitoring the modellers at Citi
Bias can creep into AI models in any industry but banks are better positioned than most types of organisations to combat it, believes Prag Sharma, senior vice-president and emerging technology lead at Citi Innovation Labs. “Banks have very robust processes in place, learned over time, that meet strict external [regulatory] and internal compliance requirements,” he says.
At Citi, a model risk management committee reports directly into the bank’s chief risk officer and operates separately from the modellers and data science teams. Consisting of risk experts as well as data scientists, the committee’s task, says Mr Sharma, is to scrutinise the models that his team and others are developing exclusively from a risk perspective. The committee’s existence long predates the emergence of AI, he says, but the latter has added a challenging new dimension to the committee’s work.
Maximising algorithms’ explainability helps to reduce bias. Once a team is ready to deploy a model into production, the model risk management committee studies it closely with explainability one of its key areas of focus. “[The risk managers] instruct us to explain all the model’s workings to them in a way that they will completely understand,” says Mr Sharma. “Nothing hits our production systems without a green light from this committee.”
Ensuring the right level of explainability, as Mr Papaetis suggests, is arguably banks’ toughest AI challenge. Most of the regulator guidance stresses the need for thorough documentation of all the steps taken in model design.
Ensuring the right level of explainability is arguably banks’ toughest AI challenge.
The EBA, says Mr Papaetis, recommends taking a “risk-based approach” in which different levels of explainability are required depending on the impact of each AI application—more, for example, for activities that directly impact customers and less for low-risk internal activities.
Are more prescriptive approaches needed?
Regulators generally consider banks’ existing governance regimes to be adequate to address the issues raised by AI. Rather than creating new AI-specific regimes, most regulators agree that current efforts should instead be focused on updating their governance practices and structures to reflect the challenges posed by AI. Ensuring that the individuals responsible for oversight have adequate AI expertise is integral, according to DNB.
Fit for purpose? Applying existing governance principles to AI
In Europe, bank adoption of AI-based systems may be described as broad but shallow. In a recently published study the European Banking Authority (EBA) found that about two-thirds of the 60 largest EU banks had begun deploying AI but in a limited fashion and “with a focus on predictive analytics that rely on simple models”.7 This is one reason why Andreas Papaetis, a policy expert with the EBA, believes it is too early to consider developing new rules of governance for the EU’s banks that focus on AI.
Mr Papaetis points out that the EBA’s existing guidelines on internal governance and ICT (information and communications technology) risk management are adequate for AI’s current level of development in banking. The existing framework is sufficiently flexible and not overly prescriptive, he says. “That enables us to adapt and capture new activities or services as they develop. So at the moment we don’t think that AI or machine learning require anything additional when it comes to governance.” In any event, the EBA’s approach, he says, will be guided by European Commission policy positions on the role of AI in the economy and society.8
Mr Papaetis does not exclude the possibility of more detailed regulatory guidance on AI in areas such as data management and ethics. Should bias and a lack of explainability prove to be persistent problems, for example, regulators may need to consider drafting more specific rules. But at present, he says, “no one can predict what challenges AI will throw up in the future”.
More regulatory guidance will almost certainly be needed in the future, says Mr Sharma, and some of it may require the drafting of rules. He offers as an example the uncertainty among experts around the retraining of existing AI models. “Does retraining a model lead to the same or a new model from a risk perspective?” he asks. “Does a model need to go through the same risk review process each time it is retrained, even if that happens weekly, or is a lighter-touch approach possible and appropriate?”
Should a major failure be attributed to AI— such as significant financial losses suffered by a group of customers due to algorithm bias, evidence of systematic discrimination in credit decisions or algorithm-induced errors that threaten a bank’s stability—authorities would no doubt revisit their previous guidance and possibly put regulatory teeth into their non-binding recommendations.
The need to monitor and mitigate such risks effectively makes it incumbent on regulators to build AI expertise that meets or betters that of commercial banks. As AI evolves, strong governance will inevitably be demanded at all levels of the banking ecosystem.
[1] Antoine Gara, “The World’s Best Banks: The Future Of Banking Is Digital After Coronavirus”, Forbes, June 8th 2020. https://www.forbes.com/sites/ antoinegara/2020/06/08/the-worlds-best-banks-the-future-of-banking-is-digital-after-coronavirus/
[2]Top three responses shown. For full results “Forging new frontiers: advanced technologies will revolutionise banking”, The Economist Intelligence Unit, 2020. https://eiuperspectives.economist.com/financial-services/forging-new-fro...
[3] The Economist Intelligence Unit reviewed 25 reports, discussion papers and articles published in the past three years by banking and financial sector supervisory authorities, central banks and supranational institutions, as well a handful of reports from universities and consultancies, on the theme of managing the risks associated with AI. The points of guidance listed below are distilled from studies and discussion papers published in the past two years by financial sector supervisory authorities, regulatory agencies and supranational institutions. These include the European Banking Authority, Monetary Authority of Singapore, DNB (Bank of the Netherlands), Hong Kong Monetary Authority, CSSF (Financial Sector Supervisory Authority of Luxembourg), BaFin (Federal Financial Supervisory Authority of Germany), ACPR (Prudential Supervision and Resolution Authority of France), and the European Commission.
[4] European Banking Authority, EBA Report on Big Data and Advanced Analytics, January 2020. https://eba.europa.eu/file/609786/ download?token=Mwkt_BzI
[5] De Nederlandsche Bank, General principles for the use of Artificial Intelligence in the financial sector, July 2019. https://www.dnb.nl/en/binaries/ General%20principles%20for%20the%20use%20of%20Artificial%20Intelligence%20in%20the%20financial%20sector2_tcm47-385055.pdf
[6] Hong Kong Monetary Authority, Reshaping Banking with Artificial Intelligence, December 2019. https://www.hkma.gov.hk/media/eng/doc/keyfunctions/finanical-infrastruct...
[7] ibid.
[8] The commission launched a public debate on AI policy options in early 2020 and is expected to announce its policy decisions later this year.
Forging new frontiers: advanced technologies will revolutionise banking
66% of banking executives say new technologies will continue to drive the global banking sphere for the next five years while regulatory concerns around these technologies remain top of mind for banking executives (42%).
77% of bankers believe that unlocking value from AI will be the differentiator between winning and losing banks.
With 45% of respondents set on transforming their existing business models into digital ecosystems, banks will continue to adapt their internal structures to digital technologies in order to enhance customer experience, product offerings and new revenue streams.
The coronavirus crisis has focused the attention of banks firmly on new challenges. Bank branch traffic was already falling before the pandemic, and this trend will only intensify with society in lockdown: customers are unable to leave their homes while employees are working remotely or frequently absent due to illness. “Banks have planned for years for disaster recovery if their technology failed but have never planned for disaster recovery if their buildings closed,” says Chris Skinner, a leading influencer and champion of digitalisation in finance. “This is the big lesson of the crisis.”
The lockdown will most likely accelerate the digitisation of banking,1 a sector which already faces intense competition from payment players, big technology and e-commerce firms. According to the latest global banking survey conducted by The Economist Intelligence Unit (now in its seventh year and for the first time expanded to include respondents from commercial and private banks), 45% of respondents say their strategic response to this challenge is to build a “true digital ecosystem”. This aim to integrate self-built digital services and third-party offerings was cited more than any other response and has increased from 41% of respondents in 2019.
This article explores three central elements of banking digitisation: where banks currently are in their digital journey; what they are doing, not only to overcome challenges but also to increase user engagement through different technologies and channels; and how they are seizing opportunities through reorganisation into more agile structures.
Methodology
In February-March 2020 The Economist Intelligence Unit, on behalf of Temenos, surveyed 305 global banking executives on themes relating to the digitisation of banking. The survey included respondents from retail, corporate and private banks in Europe (25%), North America (24%), Asia-Pacific (18%), Africa and the Middle East (16%) and Latin America (17%). Respondents performed different job functions: marketing and sales (18%), IT (13%), customer service (7%) and finance (14%), while almost half were C-suite executives (49%). The coronavirus pandemic emerged half-way through the survey.
The survey is part of a worldwide research programme on new frontiers in a global age of banking. It draws on in-depth interviews with retail, corporate and private wealth banks, regulators, international organisations and consultancies around the world. The survey research and interviews will be featured in a series of articles and an infographic throughout 2020.
New technologies will continue to drive global banking for the next five years while regulatory concerns around these technologies remain top of mind for banking executives.
A large majority of respondents (66%, up from 42% in 2019) cite new technologies such as artificial intelligence (AI), machine learning, blockchain or the Internet of Things (IoT) as having a significant impact on the sector. This highlights the importance of these new tools in fending off the competitive threat posed by tech-driven, non-traditional entrants to the banking sector such as payment players PayPal and ApplePay (cited by 50% of respondents globally), or big tech firms like Google, Facebook and Alibaba (34%).
Regulation of digital technology (such as data protection) has weighed on banks’ profit and loss (P&L) since the 2008 financial crisis and is now considered the second most impactful trend in the industry (as cited by 42% of respondents). New regulation could be a game changer for the development of open banking in certain regions, but it could also allow non-traditional competitors to enter the sector.
There is slightly less apprehension about neobanks (a concern cited by 20%) which have not managed to dent savings or lending volumes to a significant extent. Some early challengers are shifting their strategies from directly offering financial products to selling their expertise to existing banks with bigger brands, more reach and higher capital.2 In fact, 84% believe that fintechs will continue to have a material cost advantage over traditional banks: investing in fintechs is a priority innovation strategy for over a quarter of respondents (26%), and even more so in the retail space (33%).
As the importance of advanced technologies rises, that of changing customer behaviours and demands—while still viewed as impactful by 28% of respondents—continues to decline. In 2019, 31% of respondents cited it as highly significant compared with 58% in 2018. This may be due to the fact that banking clients now display higher digital adoption rates and have established digital expectations. Moreover, a majority of respondents (59%) agree with the statement that “the traditional branch-based banking model will be dead” by 2025, up from 44% in 2019.
In the shift towards enterprise agility, DevOps—a set of practices which bring together software development and IT operations—and modern cloud-based platforms could be transformative, according to 84% of respondents. The computing power and flexibility of cloud-based technologies and services remain of prime interest to banks with 27% of respondents focusing their technology investment in this area (see also below). Unsurprisingly, 81% believe a multi-cloud strategy will become a regulatory prerequisite after several years of regulatory focus on cloud technologies in the UK and the US.3
Banks are adapting their internal structures to digital technologies in order to enhance customer experience, product offering and new revenue streams.
An overwhelming majority of respondents (83%) believe that platformisation of banking and other services through a single entry point will steer the market. This is driving banks towards transforming their existing business models into true digital ecosystems according to 45% of respondents.
Where are banks focusing their digital efforts? For many, technology investment hinges on cybersecurity (35%), which reflects widespread concerns about data breaches. The development of AI platforms like digital advisors and voice assisted engagement channels is cited by 33% of respondents and cloud-based technologies by 27%. AI will undoubtedly play a central role in the digital shift: 77% of respondents agree that unlocking value from AI will be a key differentiator between winning and losing banks.
However, banks may be missing a trick by focusing purely on AI’s customer-facing capabilities while downplaying other benefits in the value chain, which focus more on productivity, customer retention and monitoring functions (see chart 2 below). There are concerns among customers about how AI technologies will use their data and whether it is safe: 34% of respondents expressed concern about lack of clarity surrounding data use while 40% were unsure about the security of their personal financial information. Despite these reservations, there are signs of greater product innovation within the sector: 30% of respondents expect to maintain their own product offerings and become an aggregator of third-party banking or non-banking products (up from 28% last year).
Increasing numbers of banks anticipate AI will help generate new business. “As investment algorithms get more advanced, they will be used more widely in portfolio management. Not to use the over-hyped AI term, but advanced algorithms for investment strategies will gain strength,” explains Nic Dreckmann, chief operating officer and head of intermediaries at private bank Julius Bär.
For the entire customer journey to succeed, respondents report that broader deployment of AI in fraud detection (16%) and backoffice functions (8%) are likely to feature more heavily in future business plans. At HSBC Private Bank, AI is already integrated in back office functions, according to chief operating officer Anil Venuturupalli. For banks worldwide of all sizes, cultural change will be central to deploying technologies such as AI effectively.
Building greenfield banks is an increasingly popular strategy to achieve digital agility.
Last year, building a greenfield digital bank was a top innovation strategy among retail bankers (cited by 36%). A priority again this year for respondents globally (35%), it was particularly strongly expressed by respondents in the wealth sector: 52% believe this to be the best way to compete most cost effectively (see chart 4).
Open bank hub initiatives that give customers access to third-party offerings remain important as respondents’ second preference (29%). This is followed by investment in fintech start-ups, which 26% of respondents cite as part of their innovation strategy. Although less of a concern than in 2019, 25% of banks are looking to participate in sandboxes to collaborate with fintechs and other technology providers to test new propositions.
Banks are also developing digital strategies to move away from their current operating models and promote greater agility. Improving product agility and the ability to launch new products is cited as the third most important strategic priority (26%), after improving customer experience and engagement (32%), and mastering digital marketing (31%). Migrating client usage to digital from physical channels tops the list of priorities for retail banks (35%, compared with 31% globally). Some banks, such as HSBC, have started to build out from existing operations and draw in third-party expertise where necessary to deliver digital private banking around the world. “We are looking at developing a hybrid engagement model where technology will handle all of the administrative touchpoints for our clients,” says Mr Venuturupalli.
Traditional means of banking such as cash will fall by the wayside as agility becomes increasingly aligned with the digitisation of transactions and products. A majority of respondents (75%) think paper notes will represent less than 5% of all retail transactions globally by 2025.
As technology and demand changes at an ever-faster pace, banks in general will need to adopt new working practices and administrative structures that align with their business strategies and priorities, particularly if they are to capitalise on different digital advantages by 2025.
However, it seems developing agile structures that break down internal barriers is not yet a widespread priority given that only 17% of respondents said this was a focal point for their technology investment. This further raises the question of whether banks will be able to achieve their strategic greenfield bank and broad ecosystem plans on time and within budget drawing only on in-house resources.
AI with a profitable purpose
Many banks are clear on what they want to achieve from AI. The dual priorities for CaixaBank of Spain are freeing up staff time and improving employee productivity. The bank processes over 12,000 transactions per second in peak hours and boasts a 900 terabytes data pool to improve the customer experience.
The bank’s 100-strong business intelligence unit uses big data, AI and machine learning to communicate with customers more efficiently. As a result, branch staff levels are half the euro zone average and CaixaBank’s costs are the lowest of its domestic peer group. AIdriven virtual assistants used by advisors and customers have more than doubled sales conversion rates in just one year.
Lessons from lockdown
While the coronavirus pandemic has highlighted how quickly financial institutions need to adjust when the unexpected hits, it has also demonstrated many opportunities to be seized from a digital banking perspective.
As lockdowns were introduced, bank phone services were overwhelmed in the UK and the US.4 Operational processes struggled to incorporate government relief financial schemes, but some banks managed to demonstrate the real value of agility.
Citizens Bank of Edmond, Oklahoma, has just one branch and 55 members of staff. The bank was quick to send out loan relief forms to borrowers and modify overdraft arrangements to offer early access to direct payments from the US government: its speed of response left larger competitors trailing behind. Chief executive Jill Castilla made use of the bank’s social media platforms to offer advice and reassurance—and a personal line of contact for worried customers. Some banks, such as US-based Atlantic Union Bank, moved to streamline their loan application workflows with new digital platforms,5 while others looked to increase their customer outreach via digital channels.6
However, the need to introduce a human touch to the digital experience predates the covid-19 pandemic. Banks were already looking for innovative ways to achieve this, often by providing opt-in communication channels to clients. For example, two US banks— Oregonbased Umpqua Bank and Iowa-based Hills Bank—have been using mobile banking apps that give customers direct access to a digital banker of their choice for a variety of services including bank-account opening and transfer of funds.7 In Turkey, VafikBank has a fleet of direct sales agents who visit digital banking customers at their office or home to provide expert advice on more complex products such as loans.
US digital banking gets a boost
Fintechs have found it harder to challenge the established banks in the US than they have in Europe and Asia. That may be about to change.
Last year, we highlighted progress at Varo Money, a mobile banking firm that offers loans alongside checking and savings accounts. After a three year wait, the Federal Deposit Insurance Corporation approved Varo’s application for a bank charter earlier this year. Once final approval is granted, the licence will eventually allow Varo to offer its accounts to US customers with the same US$250,000 deposit guarantee that established bank customers enjoy.
Varo subsequently received more good news from a surprising source. In March 2020 its New York-based fintech competitor Moven surprised the market by closing its consumer-facing business, blaming market conditions for a lack of development funding.
Moven then chose Varo as the destination of choice for customers facing account closures, citing its core focus on financial wellness. “We care deeply about our Moven banking customers which is why we made the thoughtful decision, as we transition away from our consumer business, to recommend Varo for their banking needs,” said Moven CEO Marek Forysiak.
For Varo Money, finally receiving that national bank charter will be the icing on the cake. Its founder and CEO Colin Walsh comments that “becoming a fully chartered bank will give us greater opportunity to deliver products and services that positively impact the lives of everyday people around the country”.
Click here to view the infographic.
[1] See, for example: https://www.investorschronicle.co.uk/shares/2020/03/11/will-uk-banks-cat... ; https://gulfbusiness.com/howfintech-is-revamping-the-financial-landscape... ; https://www.finextra.com/newsarticle/35561/rush-to-digitisation-will-see...
[2] Moven shuts all consumer accounts, pivots to B2B-only service for banks, Fintech Futures, 26 March 2020 https://www.fintechfutures.com/2020/03/moven-shuts-all-consumer-accounts...
[3] See, for example, https://www.fintechfutures.com/2016/12/fca-green-lights-cloud-technologies/ and https://uk.reuters.com/article/us-usacongress-cloud/u-s-house-lawmakers-...
[4] The inability of some banks to process loans at the start of the crisis was widely reported in the press, for example: https://www.theguardian.com/ business/2020/apr/15/covid-19-bailout-loans-issued-uk-firms-banks
The shifting landscape of global wealth: Future-proofing prosperity in a ti...
In some instances the impact of this shift will be shaped by local factors, such as demographic changes. In other instances this shift will reflect shared characteristics, as demonstrated by the greater popularity of overseas investing among younger high-net-worth individuals (HNWIs) brought up in an era of globalisation. Whatever the drivers, the landscape of wealth is changing—from local to global, and from one focused on returns to one founded on personal values.
Despite rising economic concerns and a tradition of investor home bias in large parts of the world, the new landscape of wealth appears less interested in borders. According to a survey commissioned by RBC Wealth Management and conducted by The Economist Intelligence Unit (EIU), younger HNWIs are substantially more enthusiastic about foreign investing. The U.S. is a particularly high-profile example of a country where a long-standing preference for investments in local markets appears set to be transformed.
Click the thumbnail below to download the global executive summary.
Read additional articles from The EIU with detail on the shifting landscape of global wealth in Asia, Canada, the U.S. and UK on RBC's website.
66% of banking executives say new technologies will continue to drive the global banking sphere for the next five years while regulatory concerns around these technologies remain top of mind for banking executives (42%).
77% of bankers believe that unlocking value from AI will be the differentiator between winning and losing banks.
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Financial Services
Overseeing AI: Governing artificial intelligence in banking
AI will separate the winning banks from the losers, 77% of executives in the industry agree
Covid-19 may intensify the use of AI, making effective governance all the more urgent
A review of regulatory guidance reveals significant concerns including data bias, “black box” risk and a lack of human oversight
Guidance has so far been “light touch” but firmer rules may be required as the use of AI intensifies
The ability to extract value from artificial intelligence (AI) will sort the winners from the losers in banking, according to 77% of bank executives surveyed by The Economist Intelligence Unit in February and March 2020. AI platforms were the second highest priority area of technology investment, the survey found, behind only cybersecurity.
At the time, the covid-19 pandemic was in full effect in Asia and the rest of the world was beginning to understand its gravity. Since then, the depth and extent of covid-19’s impact on consumer behaviour and the global economy have come into clearer focus.
Covid-19 has already triggered an uptick in digital banking—in the US Citibank is reported to have seen a tenfold surge in activity on Apple Pay during lockdown, for example1. But the disruption to businesses and households has only just begun, and banks will need to adapt to rapidly changing customer needs.
As such, the criticality of AI adoption is only likely to increase in the post-pandemic era: its safe and ethical deployment is now more urgent than ever.
In common with most matters of governance and safety, banks will look to regulatory authorities for guidance on how this can be achieved. Until a few years ago regulators adopted a wait-and-see approach but, more recently, many have issued a number of studies and discussion papers.
In order to assess the key risks and governance approaches that banking executives must understand, The Economist Intelligence Unit undertook a structured review of 25 reports, discussion papers and articles on the topic of managing AI risks in banking. The main findings are summarised in the table on page 3 and examined throughout this article.
Risks known and unknown
The nature of the risks involved in banks’ use of AI does not differ materially from those faced in other industries. It is the outcomes that differ should risks materialise: financial damage could be caused to consumers, financial institutions themselves or even to the stability of the global financial system.
Our review reveals that prominent risks include bias in the data that is fed into AI systems. This could result in decisions that unfairly disadvantage individuals or groups of people (for example through discriminatory
Some AI models have a complexity that many organisations, including banks, have never seen before. Prag Sharma, senior vice-president and emerging technology lead, Citi Innovation Labs
lending). “Black box” risk arises when the steps algorithms take cannot be traced and the decisions they reach cannot be explained. Excluding humans from processes involving AI weakens their monitoring and could threaten the integrity of models (see table for a comprehensive list of AI risks in banking).
At the root of these and other risks is AI’s increasingly inherent complexity, says Prag Sharma, senior vice-president and emerging technology lead at Citi Innovation Labs. “Some AI models can look at millions or sometimes billions of parameters to reach a decision,” he says. “Such models have a complexity that many organisations, including banks, have never seen before.” Andreas Papaetis, a policy expert with the European Banking Authority (EBA), believes this complexity—and especially the obstacles it poses to explainability—are among the chief constraints on European banks’ use of AI to date.
Governance challenges
The guidance that regulators have offered so far can be described as “light touch”, taking the form of information and recommendations rather than rules or standards. One possible reason for this is to avoid stifling innovation. “The guidance from governing bodies where we operate continues to encourage innovation and growth in this sector,” says Mr Sharma.
Another reason is uncertainty about how AI will evolve. “AI is still at an early stage in banking and is likely to grow,” says Mr Papaetis. “There isn’t anyone who can answer everything about it now.”
The documents that banking regulators have published on AI range from the succinct (an 11-page statement of principles by MAS—the Monetary Authority of Singapore) to the voluminous (a 195-page report by Germany’s BaFin—its Federal Financial Supervisory Authority), but the guidance they offer converges in several areas.
At the highest level, banks should establish ethical standards for their use of AI and systematically ensure that their models comply. The EBA suggests using an “ethical by design” approach to embed these principles in AI projects from the start. It also recommends establishing an ethics committee to validate AI use cases and monitor their adherence to ethical standards.4
For regulators, paramount among the ethical standards must be fairness—ensuring that decisions in lending and other areas do not unjustly discriminate against individuals or specific groups of people. De Nederlandsche Bank (or DNB, the central bank of the Netherlands) emphasises the need for regular reviews of AI model decisions by domain experts (the “human in the loop”) to help guard against unintentional bias.5 The Hong Kong Monetary Authority (HKMA) advises that model data be tested and evaluated regularly, including with the use of bias-detection software.6 “If you have a good understanding of your underlying data,” says Mr Sharma, “then a lot of the algorithmic difficulties in terms of ethical behaviour or explainability can be addressed more easily”.
Monitoring the modellers at Citi
Bias can creep into AI models in any industry but banks are better positioned than most types of organisations to combat it, believes Prag Sharma, senior vice-president and emerging technology lead at Citi Innovation Labs. “Banks have very robust processes in place, learned over time, that meet strict external [regulatory] and internal compliance requirements,” he says.
At Citi, a model risk management committee reports directly into the bank’s chief risk officer and operates separately from the modellers and data science teams. Consisting of risk experts as well as data scientists, the committee’s task, says Mr Sharma, is to scrutinise the models that his team and others are developing exclusively from a risk perspective. The committee’s existence long predates the emergence of AI, he says, but the latter has added a challenging new dimension to the committee’s work.
Maximising algorithms’ explainability helps to reduce bias. Once a team is ready to deploy a model into production, the model risk management committee studies it closely with explainability one of its key areas of focus. “[The risk managers] instruct us to explain all the model’s workings to them in a way that they will completely understand,” says Mr Sharma. “Nothing hits our production systems without a green light from this committee.”
Ensuring the right level of explainability, as Mr Papaetis suggests, is arguably banks’ toughest AI challenge. Most of the regulator guidance stresses the need for thorough documentation of all the steps taken in model design.
Ensuring the right level of explainability is arguably banks’ toughest AI challenge.
The EBA, says Mr Papaetis, recommends taking a “risk-based approach” in which different levels of explainability are required depending on the impact of each AI application—more, for example, for activities that directly impact customers and less for low-risk internal activities.
Are more prescriptive approaches needed?
Regulators generally consider banks’ existing governance regimes to be adequate to address the issues raised by AI. Rather than creating new AI-specific regimes, most regulators agree that current efforts should instead be focused on updating their governance practices and structures to reflect the challenges posed by AI. Ensuring that the individuals responsible for oversight have adequate AI expertise is integral, according to DNB.
Fit for purpose? Applying existing governance principles to AI
In Europe, bank adoption of AI-based systems may be described as broad but shallow. In a recently published study the European Banking Authority (EBA) found that about two-thirds of the 60 largest EU banks had begun deploying AI but in a limited fashion and “with a focus on predictive analytics that rely on simple models”.7 This is one reason why Andreas Papaetis, a policy expert with the EBA, believes it is too early to consider developing new rules of governance for the EU’s banks that focus on AI.
Mr Papaetis points out that the EBA’s existing guidelines on internal governance and ICT (information and communications technology) risk management are adequate for AI’s current level of development in banking. The existing framework is sufficiently flexible and not overly prescriptive, he says. “That enables us to adapt and capture new activities or services as they develop. So at the moment we don’t think that AI or machine learning require anything additional when it comes to governance.” In any event, the EBA’s approach, he says, will be guided by European Commission policy positions on the role of AI in the economy and society.8
Mr Papaetis does not exclude the possibility of more detailed regulatory guidance on AI in areas such as data management and ethics. Should bias and a lack of explainability prove to be persistent problems, for example, regulators may need to consider drafting more specific rules. But at present, he says, “no one can predict what challenges AI will throw up in the future”.
More regulatory guidance will almost certainly be needed in the future, says Mr Sharma, and some of it may require the drafting of rules. He offers as an example the uncertainty among experts around the retraining of existing AI models. “Does retraining a model lead to the same or a new model from a risk perspective?” he asks. “Does a model need to go through the same risk review process each time it is retrained, even if that happens weekly, or is a lighter-touch approach possible and appropriate?”
Should a major failure be attributed to AI— such as significant financial losses suffered by a group of customers due to algorithm bias, evidence of systematic discrimination in credit decisions or algorithm-induced errors that threaten a bank’s stability—authorities would no doubt revisit their previous guidance and possibly put regulatory teeth into their non-binding recommendations.
The need to monitor and mitigate such risks effectively makes it incumbent on regulators to build AI expertise that meets or betters that of commercial banks. As AI evolves, strong governance will inevitably be demanded at all levels of the banking ecosystem.
[1] Antoine Gara, “The World’s Best Banks: The Future Of Banking Is Digital After Coronavirus”, Forbes, June 8th 2020. https://www.forbes.com/sites/ antoinegara/2020/06/08/the-worlds-best-banks-the-future-of-banking-is-digital-after-coronavirus/
[2]Top three responses shown. For full results “Forging new frontiers: advanced technologies will revolutionise banking”, The Economist Intelligence Unit, 2020. https://eiuperspectives.economist.com/financial-services/forging-new-fro...
[3] The Economist Intelligence Unit reviewed 25 reports, discussion papers and articles published in the past three years by banking and financial sector supervisory authorities, central banks and supranational institutions, as well a handful of reports from universities and consultancies, on the theme of managing the risks associated with AI. The points of guidance listed below are distilled from studies and discussion papers published in the past two years by financial sector supervisory authorities, regulatory agencies and supranational institutions. These include the European Banking Authority, Monetary Authority of Singapore, DNB (Bank of the Netherlands), Hong Kong Monetary Authority, CSSF (Financial Sector Supervisory Authority of Luxembourg), BaFin (Federal Financial Supervisory Authority of Germany), ACPR (Prudential Supervision and Resolution Authority of France), and the European Commission.
[4] European Banking Authority, EBA Report on Big Data and Advanced Analytics, January 2020. https://eba.europa.eu/file/609786/ download?token=Mwkt_BzI
[5] De Nederlandsche Bank, General principles for the use of Artificial Intelligence in the financial sector, July 2019. https://www.dnb.nl/en/binaries/ General%20principles%20for%20the%20use%20of%20Artificial%20Intelligence%20in%20the%20financial%20sector2_tcm47-385055.pdf
[6] Hong Kong Monetary Authority, Reshaping Banking with Artificial Intelligence, December 2019. https://www.hkma.gov.hk/media/eng/doc/keyfunctions/finanical-infrastruct...
[7] ibid.
[8] The commission launched a public debate on AI policy options in early 2020 and is expected to announce its policy decisions later this year.
Customer experience: learning from online personal finance conversations
New research from The Economist Intelligence Unit, based on an analysis of over 10m conversations in public forums about personal finances, has sought to better understand consumer preferences when it comes to retail banking services. It finds that:
Fintech start-ups are strongly associated with financial empowerment, but also twice as likely to be associated with security and privacy concerns when compared to traditional banks.
Traditional banks retain strong associations with trustworthiness, a wider range of services and perks such as loyalty programmes.
In the battle for consumers, there remains everything to play for.
Digital and traditional banks are engaged in a fierce battle for customers. Start-up, digital-first banks and investment services, such as Monzo, N26 and Robinhood, have come to market promising superior customer experience and a rich array of services, such as budgeting apps and automated, low-cost investment tools. But traditional banks still benefit from trust, reliability and a wider range of services. And increasingly, spurred on by a crowded field of agile new digital upstarts, they are investing heavily in their digital capabilities—to great effect.
Key to this battle between old and new is whether innovators can scale up and broaden their appeal faster than incumbents can innovate.
A deep understanding of customer behaviour and sentiment will be essential to success for any financial player, new or old. One resource to help firms do this are the millions of conversations that consumers are having about personal finance in public online forums. What banking tools and services are customers most frequently discussing, in what terms? Which keywords relating to banking services are rising and falling in frequency over time? Which associations are there between discussions of negative customer experience and different types of bank?
To answer these questions, The Economist Intelligence Unit (EIU) developed a natural language processing model to analyse over 10m online English-language conversations about personal finance. The resulting clusters, associations and patterns show key strengths and weaknesses of traditional and challenger banks in terms of how well they are meeting customer needs.
Our research methodology
We analysed over 10m online conversations about finance and banking dating back to 2013, drawn from English-language personal finance forums on Reddit, a social discussion website. The sample reflects a global community of English speakers, predominately from the UK and US. Using machine-learning algorithms, we sifted millions of comments into distinct word clusters to reveal which words and phrases appear most frequently, and which are most regularly associated with each other.
Financial empowerment and customer loyalty
Largely, next-generation banks have proven popular because they have used technology to offer customers richer services than their conventional counterparts, from spending analytics to budgeting tools and low-cost investment platforms.
Discussions about “investment” have grown in frequency since 2015, and our analysis shows that 14.4% of conversations that discuss challenger banks include associations with financial empowerment capabilities such as tracking and budgeting, compared with just 2% of conversations that discuss traditional banks. In response to low interest rates being offered by conventional savings accounts, more everyday consumers have taken advantage of low-cost investment portfolio services offered by fintech firms and algorithm-driven “robo-advisors”.
According to a survey of 305 global banking executives carried out by the EIU, investments (self-executed or robo-advisory) are the number one area where new entrants are expected to gain market share in the coming years.
Jason Bates, co-founder of app-based banks Monzo and Starling, as well as 11:FS, a fintech consultancy, believes that challenger banks have done a better job of understanding customer’s financial lives and building products around them. “Banks haven’t been great at delivering services to help deal with the realities of day-to-day life. They just say, ‘great to see you, here’s your balance, here are your transactions, here is how you move money. Good luck. And if you spend more than you’ve got, we’ll charge you".
He distinguishes here between “digitisation”, where banks simply move their paper or in-person branch processes online and into apps, to truly “digital” innovation that imagines new services. Digitisation is analogous to the re-creation of a newspaper on an iPad. Digital transformation, in contrast, is exemplified in new media platforms, such as iTunes or Spotify. “The operating model here fundamentally changed. It’s not only about music—it is also about discovery and sharing.” In the financial services space, Mr Bates believes, truly digital innovations will be those that are real-time, intelligent, social or contextual.
But while many consumers are turning towards disruptive fintech platforms for enriched tools and services to bolster their personal finances, traditional banks remain heavily associated with rewards and loyalty programmes—one of the most discussed subjects overall. In our analysis, a quarter (24.9%) of conversations about traditional banks were related to credit cards or reward programmes, compared to just 2.4% of those involving challengers. Here traditional banks benefit from their age and experience, having built up significant loyalty with customers (whose perks accumulate over the years), and leveraging the reputation and reliability needed to strike commercial partnerships with companies in sectors like air travel and hospitality.
In the future, loyalty programmes and points schemes will be a customer experience domain that will benefit from better data and analytics about customer preferences and behaviours, leading to more tailored offerings. In this environment, it is more than possible for fintech firms to excel in points and perks services, provided that their brands are strong enough to form the right partnerships.
Fintech firms are already making in-roads. Point, a new US challenger bank whose investor roster includes backers of N26 and TransferWise, offers cash-redeemable points for groceries as well as services like Netflix and Spotify. Another US digital bank, Current, offers points on transactions at participating merchants, which include Subway and Rite Aid, although currently the cash can only be spent on upgrading to the bank’s own premium service. Some firms are flipping the entire points model on its head: US-based Tally gives users points for saving, which they can redeem for gift cards at retailers such as Amazon and Target, and services including Uber. Time will tell if non-traditional banks can sustain points systems, given their net cost, especially during the early (usually lossmaking) years.
Safety and security: favouring the tried and trusted
If challenger banks have brought to market better customer experience and enhanced services, traditional banks still have an important advantage in terms of trust and reliability. Our analysis found that 13.7% of conversations about challenger banks included associations with concerns about safety, security or privacy, compared with only 6.7% of those about traditional banks.
Privacy is a major subject, particularly for fintech services that link different institutions’ financial data. In discussions of retail banking, safety was the only language cluster to experience significant proportional growth over time, a consequence of a broader concern about digital privacy in recent years, heightened by high-profile cyber hacks and data breaches.
Many prominent challenger banks have slipped up on security and reliability, including through service outages and glitches. They have also had run-ins with regulators and faced criticism over issues such as capital adequacy ratios, anti-money-laundering protocols, audit quality, and consumer vulnerability in areas like investing. With challenger banks and fintech platforms often still in the venture-funded, pre-profit phase, there are questions about their long-term survival that could limit their ability to become primary providers of services—especially in a time of such economic uncertainty. This may put pressure on their appeal as they seek to develop from scale to profitability.
Customer experience: the survival imperative
For newcomers and incumbents, customercentricity is a widely shared priority. In the global banking survey conducted by the EIU as part of this research programme, improving customer experience and engagement, including personalisation, was cited as the top strategic priority through to 2025 and a topthree factor impacting banks.
“Core financial services are becoming more commoditised, and price competition only goes so far,” says Millie Gillon, global head of retail banking customer experience at Standard Chartered bank. “If we can’t win on price alone, we need to focus on experience. That will help us to differentiate”. Some incumbents have strengthened their customer experience offering through acquisitions, such as CapitalOne’s purchase of Adaptive Path, a design and user experience consultancy.
To flourish in customer experience excellence, banks must find new ways to listen to their clients—and to understand customer trends more broadly. “There’s a heightened awareness among established companies about the importance of putting clients first and centre, and then building our offerings around them, as opposed to the old method of, ‘If we build it, they will come,’” says Ms Gillon.
Innovators are those who understand the “brutal realities” of customers’ daily lives, says Mr Bates. “We never ask customers, ‘what would you like us to build?’ because they are experts at talking about their problems and experience, not product development. Our approach to creating new digital services is to talk to customers about the issues in their daily life and then look at how you can deliver against that.”
Ethnographic research, for instance, is allowing Standard Chartered to “dig deep into customer’s psychographics”, says Ms Gillon, helping them to understand their motivations, goals and fears. “By doing this, we can start to really understand, empathise and put ourselves in their shoes”.
“We want to try to be much more empathetic, because once we have empathy, we’re more human. When we’re more human, that’s when we can truly be client-centric”.
An open thread: customer experience in transition
Amid the coronavirus crisis, customer priorities are rapidly changing. “A lot of people are just thinking ‘What’s truly important to me right now?’ Because this year, most people’s goal is just to survive,” says Ms Gillon. They’re also saying, ‘what’s important is not just me as your client but servicing the needs of my entire family.’ It’s much more familial. It’s really about getting down to the root of what’s most important now”.
Such shifting priorities threaten the business model of start-ups that have built offerings on perks such as free currency exchange services and spending analytics tools, which are losing relevance at a time of falling earnings. Incumbent banks have seen some advantages, in the form of increased saving (the US savings rate hit a record 33% in April). But additional income from fees and deposits is being more than offset by falling margins and the need to put aside large quantities to cover loan losses. In this environment, a smart “listening” strategy will not only help banks to know whether their services are hitting the mark; it will also give them insights into market changes.
More optimistically, banks are realising that the field of “financial services” is far bigger than ever before. Open banking regulations, which allow third parties to build financial products linked to customers’ payment accounts, are likely to herald a period of evolution into a broader “open finance” era that will apply the same principles to savings, insurance, mortgages, investments, pensions and credit.
This could see fintech become ubiquitous in areas far beyond core banking. Our analysis shows many domains in which consumers discuss personal finance with no associations with their banks at all: the entire class of retail banks (incumbents and challengers) are only associated with 18% of total personal finance discussions, with the rest covering everything from divorces and wills to car buying (see graphic). This suggests there is room for banks to assist customers in many more areas of their personal finances.
The EIU’s survey also backs evidence of banking shifting towards becoming an ecosystem of interlinked services: the most commonly cited business model transformation, by 45% of respondents, was “acting as a true digital ecosystem (offering own and third-party banking and non-banking products and services to own customers, as well as to other financial services organisations)”.
Incumbent banks will move at different speeds in capturing new markets; some may deploy new offerings while others will remain the infrastructure “pipes”, as with telecommunications companies in the 4G transition, who facilitated, but were not innovators in, breakthroughs like streaming. We will also see more partnerships between fintech firms and established players. Accelerators, direct acquisitions and service agreements are all ways that big banks are already working with rather than against newcomers to leverage the strengths of each party, and the commercial logic of cooperation will grow as banking expands its service offering.
“In an ideal world,” says Ms Gillon, “there will be a combination where fintechs and established banks can play together. Then you have the winning combination of speed, drive, innovation, a willingness to experiment, sound risk management, trust and the learning that comes from more established companies.
While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor.
The halal food and beverage sector is the biggest slice of the Islamic economy pie, comprising over 60% of the total. Spending on food and drink by Muslims is forecast to reach US$2trn by 2024 from US$1.4trn in 2018 #ftnt1">[1]. Its importance and appeal are based not just on the size of the global Muslim population, estimated at some 2bn, but the concentration of Muslims in regions like South Asia.
Why read this report
Sukuk are an attractive tool for financing African infrastructure. Africa faces a severe infrastructure deficit but government budgets have come under pressure due to low commodity prices. Sharia-compliant bonds, or sukuk, have been used in five countries to raise capital.
Islamic finance has a presence in 21 African countries, from established systems like Sudan through to new entrants like Uganda
While countries such as the populous Nigeria stand out as potential markets due to population size and religious makeup, interest in Islamic economy goods and services is not reliant on majority or even large Muslim populations
Political tensions mean that some populations are concerned about Islamic economy discourse. Educational campaigns could help promote public understanding.
Ignore the Sharia-conscious consumer at your peril. With the world’s Muslim population now at around1.8 billion and rising, few in business can turn their back on such a demographic. Since more than 50% of Muslims worldwide are under the age of 25 and, together, account for more than 10% of the world’s population, the prospects for the future look remarkably bright. From food and Islamic finance, the industry is spreading its wings into pharmaceuticals, fashion and tourism, among many other areas. But given the global nature of the business, the industry will grow at varying speeds in different regions, while certain segments will garner more attention than others.
The principal findings of the survey and a series of interviews with senior experts are as follows:
The Sharia-conscious consumer is an increasingly important segment across the world. More than one-half (54%) of survey respondents say that the market for Sharia-compliant products and services is already significant for their business. Asked the same question but for their business in three years’ time, the number of respondents giving the same answer jumped to 68%. Businesses are seeing this translate into sales: over one-half (51%) of respondents are currently enjoying annual growth in revenue of at least 5%, while 34% are registering higher than 15% growth. The same participants are sanguine about the future: over 60% of respondents foresee at least 5% growth in three years, while 43% envisage growth in revenue higher than 15%.
There are a collection of issues helping to promote growth in the Sharia marketplace. When asked to select up to three factors, the majority (56%) of survey respondents chose the growing acceptance of Islamic precepts and Muslim population growth in both Muslim (46%) and non-Muslim (39%) countries as important drivers of demand.
Three categories of regions are propelling demand: the “Muslim heartland” or Muslim majority countries; “mixed culture” countries such as those in South-east Asia; and non-Muslim countries such as those in North America and Western Europe. However, it is Muslim-majority countries that are seeing the fastest-growing demand. When asked to select the top three regions where Sharia oriented demand is currently growing strongest, 70% of respondents chose the Arabian Gulf countries, followed by North Africa (36%) and South Asia (34%). In three years’ time, respondents see largely the same trend: around 62% selected the Arabian Gulf countries, while 41% picked North Africa and 38% see growth in demand coming from South Asia.
Although areas such as halal-friendly tourism and Islamic fashion are growing in demand, halal food and Islamic finance are still the mainstays of the broader sector. Respondents see food and finance as having the fastest growth, both now and in three years’ time. Improving standards related to issues such as labelling and marketing communications could help to grow the businesses. No fewer than 81% of respondents to our survey agree that labelling products as halal, which is an integral part of the food industry, is important. This is a higher percentage than those (77%) who judge corporate branding, a key thought for banks, to be important.
Barriers to growth in the industry do exist. No fewer than 44% of those surveyed say that a lack of professional management and awareness on the part of the seller is holding business back. Almost as many respondents (42%) worry about a lack of convincing branding for products and services that comply with Sharia. Standardisation and certification, a troublesome issue within the global market for halal food, is seen by industry experts as a chief concern within the segment’s development.
There is no question that Islamic finance is seen as a vitally important enabler of the broader industry. More than one-half (55%) of survey respondents cite access to Sharia-compliant finance as important. An even higher percentage (58%) believe that easy access to such finance is crucial for their customers as well.
Demand for Islamic bonds (or sukuk) is expected to grow. Nearly 30% of survey respondents say they expect demand for sukuk to grow strongly, a view shared especially by those who work in finance. With international banks, particularly European ones, lending less in order to meet stricter requirements for capital, there is little doubt that banks and other such institutions in the Middle East and North Africa (MENA) will be encouraged to take up the slack, particularly in raising money for infrastructure and the like. As a result, Islamic bonds are likely to grow in popularity as a means of financing projects, particularly around the Gulf.
In the future, firms will have to show that they share the values of integrity and community to which Muslims aspire if they are to build a brand which endures. When considering what best promotes demand for goods and services that comply with Sharia, just over one-half (52%) of survey respondents point to a reputation for honesty and integrity on the part of the company offering the goods or services.
The Next Frontier: The future of finance in the Middle East, Africa and Sou...
The Middle East, Africa and South Asia (MEASA) region is already poised to shape financial innovation. With a combined population of over 3bn, deepening mobile connectivity, and growing prominence as a trade and investment hub, MEASA will be a source of both demand and supply for more and better financial services. For companies that move quickly, this is a multi-billion-dollar opportunity to bank on the future of a diverse region.
Some firms are at the vanguard of financial innovation, using smarter business models and the latest technologies. The rise of “challenger” providers—often from different industries, such as telecommunications and e-commerce—is bringing even more varied financial services offerings to a far larger community of individuals and businesses. This report, which draws on expert interviews and country analysis, assesses the state of finance in MEASA, the factors shaping the future of key financial subsectors, and the regulatory framework and best practices required to enable the delivery of these services.
Key findings of the report:
Gaps in financial services present an opportunity for financial companies—both traditional and nontraditional players. A growing young population across MEASA is increasing demand for digitally delivered financial services. In addition to this, women’s access to finance substantially lags behind that of men, particularly among low-income groups, as regulatory requirements for accessing formal finance, such as official ID or billing documentation, create bias against them. Even among wealthier segments of the population, many individuals remain underbanked. Taken together, this untapped potential presents an attractive opportunity for companies providing financial services. As trade and investment increase in the MEASA region, there will also be a growing market for wholesale banking and capital markets.
Overcoming a strong preference for cash in the MEASA region will be imperative to move towards a cashless economy. Across the region, the majority of utility bills, school fees and even wages are paid in cash. Building trust in digitally delivered finance will take time, despite a growing preference for it among the younger generation. A fully cashless economy may be decades away.
Blockchain has the potential to change the financial architecture in MEASA, particularly for banking. Blockchain is helping to reduce high money-transfer and exchange costs by bypassing intermediaries, and blockchain-based digital registries could tackle other problems, like land expropriation. While these applications are experimental and pose regulatory difficulties, the core technologies can help to overcome some of the challenges of the existing financial system, such as money-laundering and corruption in a cash economy. More importantly, they are expected to reduce costs for financial institutions, particularly around compliance with anti-moneylaundering (AML) and Know Your Customer (KYC) rules.
New business models are being developed to reach the “missing middle” of retail investors and medium-sized businesses. The rise in equity crowdfunding platforms and lower-cost portfolio investment products is unleashing new capital for entrepreneurs and businesses, and is giving middle-and lower-middle-income citizens the ability to become investors. Growth in the provision of credit, an increasing interest in private equity and a rise in venture capital are also helping to drive growth in the middle market.
In Islamic finance, the approach is shifting from “sharia-compliant” to “sharia-based”. The approach to Islamic finance thus far has been to adapt existing products and services so that they comply with sharia law, for instance eliminating interest charges on credit cards and loans. Enabled by technology, companies are now developing fresh products and services that follow the spirit rather than adhering strictly to the letter of sharia principles.
Governments and regulators have a crucial mandate to drive financial innovation. Governments and regulators must ensure that regulation keeps pace with advances in technology in the financial sector. There are examples across MEASA of legislation that enables a wider array of providers to enter financial services, from postal systems and telecoms companies to e-commerce platforms. Developing regulation around the latest developments, such as blockchain, will prove challenging, but governments in the region are adopting strategies to test the water. Other key roles including increasing financial literacy to ensure that widening access to finance does not lead to debt spirals, and ensuring that government payments systems are also digitised and technologically advanced, to help drive the shift away from cash.
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