Financial Services


Liberalizing the Financial Services sector

A key component in the Asean Economic Community 2015 vision is the liberalization of the financial services industry.

At the Financial Services roundtable discussion, held as part of the recent Network Asean Forum in Singapore, participants, including the heads of banks in the Asean region, had a robust discussion identifying the barriers to realizing this vision.

Research partner, BCG, set the tone for the discussion with a presentation that questioned long held assumptions by both banks and regulators.

In kicking off the discussions, Vincent Chin of BCG challenged the participants to consider two questions – whether regionalization was necessarily a good thing for Asean banks and whether liberalization was such a bad thing for regulators to consider.

Financial services in Asean: Background

The financial landscape in Asean is as disparate as the economies of Asean in their development. In the more developed parts of Asean, the banks are well capitalized, robust and have regional expansion under their belt. In the less developed parts of Asean, banking services are still in their infancy and access to banking services is still a challenge for the rural poor.

Financial regulators in most Asean countries have historically, been reluctant to liberalize the sector because they believe that domestic banks would be weakened by competition. They also largely see their role as protecting the domestic bank industry.

This landscape combined with the different legislative framework and regulations governing each Asean member state create some significant barriers to achieving the aims of full sector liberalization by 2015.

Financial Services Regulation

BCG’s Mr. Chin played devil’s advocate when he asked participants if financial regulators have become more nationalist?

It was clear from the response of those at the roundtable that many felt that instead of helping pave the way toward full liberalization, individual governments and regulators were themselves throwing up roadblocks in the form of protectionist and nationalist policies.

Budi Gunadi Sadikin. CEO of PT Bank Mandiri, Indonesia’s largest bank felt the financial services sector was one of the most regulated and heavily legislated industries, describing financial regulators as “the most powerful among industry regulators, most nationalistic and very conservative.”

Haryanto T. Budiman, Managing Director, J.P. Morgan added that it was more likely that governments were nationalist and that regulators reflected that in setting protectionist legislation.

Participants pointed to the recent failed bid by DBS Bank of Singapore for Indonesia’s PT Bank Danamon Indonesia as an example of governments and legislators failing to “walk the talk”.

Indonesia, last year, imposed foreign ownership limits that prompted DBS to recently drop its 66.4 trillion rupiah acquisition of Danamon Indonesia.

Although Indonesia’s central bank claims it has itself been seeking reciprocity, currently unmet, in Singapore for its biggest banks too.

Henry Ho, President Director, PT Bank Danamon Indonesia said financial regulators have their work cut out for them – they have bigger stakeholders than just the banks and have to deal with political pressure.

Mr. Chin, BCG questioned whether liberalization would truly hurt the domestic market, citing the example of Singapore with its Open Skies policy.

“The Open Skies policy has not hurt Singapore Airlines, which remains a leading airline, but it has made Singapore, a regional air transport hub,” he claimed.

Nonetheless, participants pointed to the current economic climate which has led many financial regulators to tighten up legislation on foreign banks setting up branches.

As a result of the collapse of Icelandic banks in 2008, which left UK depositors empty-handed, many financial regulators now require banks to have complete subsidiarisation in the country, believing this to be easier to police.

Mr. Budiman explained, “The tendency for financial regulators to prefer full subsidiarisation within retail banking is so they can ensure that funds are ringfenced in a crisis without the hurting the consumer.”

Mr. Ho echoed the sentiment, “Financial regulators get very tetchy when regional banks want to set up in a country as it normally involves retail or consumer funds.”

Is regionalization the way forward for Asean banks?

Given the seemingly insurmountable legislative barriers currently in place, Mr. Chin, BCG challenged participants to consider if regionalization was the best way forward for Asean banks.

He highlighted some commonly held beliefs by Asean banks about regionalization.

1) Banks believe that regionalization helps them grow because their home markets are limited
2) Bank customers want a pan-Asean bank to serve them
3) Unfettered market access is the only way to build a regional bank

Looking at the available data between 2007 and 2012, however, BCG noted that banks which only focused on their domestic markets were usually able to deliver better shareholder returns than regional banks.

BCG also looked at the volume of intra-Asean trade versus the trade with non-Asean economies. Figures show that 70% of the trade by Asean members is currently with non-Asean partners and Asean’s largest trade partner by 2020 is likely to be China. BCG believes this demonstrates customers don’t necessarily want an Asean bank presence, but a pan-Asian service in their banks.

However, Neeraj Swaroop, Regional CEO, Standard Chartered Bank insisted that bank customers increasingly want to be serviced across the region, wherever their businesses take them.

He conceded this didn’t necessarily have to be done through a branch network.

Another participant who felt that acquiring a branch network to build a regional footprint was not the most practical nor cost effective solution was Seow-Chien Chew, Partner, Bain and Company.

She claimed banks too often overpay when they acquire a retail bank with a ready-made branch network in another country; before realising the synergies were too different to work well.

Mr. Ho of Danamon Indonesia felt the case for a regional retail banking strategy may make more sense in countries where there have been historical closeness, the free movement of people and labour and cited the example of Singapore and Malaysia.

What did come across in the discussions was the acknowledgement that sectoral differences in the banking industry called for different approaches to the regionalization strategy.

Ms. Chew of Bain and Company admits that multi-national banks serving large corporates needed a regional footprint and increasingly, for SME banks to be relevant to SME players, then a regional footprint is also important.

The way forward

Mr. Ho of Danamon Indonesia recommended that as a first step, there needed to be more robust discussion with financial regulators so that a road map could be put forward to make regulation in the region more homogeneous.

This roadmap would also need to be defined by sectors so that the resulting legislation would not be a one size fit all solution for corporate, SME and retail banking.

Mr. Swaroop of Standard Chartered agreed that the harmonisation of policies and regulations in Asean would go a long way to help facilitiate customers.

“Some standardisation would result in faster decision making and less paper work,” he added.

Participants also raised and wanted clarity around the scope of the AEC 2015. There remained some confusion about what was meant to happen by 2015 within the financial services industry and how binding these would be, especially on smaller, less developed Asean member states.

In response to a question about whether a common currency was on the cards for Asean, Mr. Swaroop of Standard Chartered spoke for many in the room, when he said most of the Asean states were wary of financial integration after watching the state of play in the EU.

Mr. Budiman of J.P. Morgan suggested that some areas of legislation would be easier to harmonise than others and might be quicker to implement.

These include regulations around USD settlements, money laundering and terrorist financing regulations which are already being implemented in many countries globally.

“Areas where achieving uniformity may be difficult include banking secrecy legislation and around potential crisis situations such as the 1997 Asian Financial Crisis, where financial regulators will want the flexibility to implement solutions,” he said.

Another issue which the AEC 2015 needed to address was the issue of talent. Within Asean, there are still significant barriers to the movement of talent which could be pivotal in helping to develop the financial services industry.

Mr. Budiman suggested the solution could be for Asean financial regulators to prioritise talent from within Asean when filling the talent gap in the financial services sector.

BCG’s Mr Chin also challenged banks to consider strategic linkages and alliances as a mean to overcome regulatory and nationalist challenges.

He highlighted examples from the aviation industry where airlines had formed alliances to extend their reach and footprint, while providing value-added services to their customers.

Mr. Swaroop of Standard Chartered pointed to the historical alliances the financial services have always had to facilitate the transfer of money such as the networks of correspondence and receiving banks.

However, whether these linkages could be extended to other banking services remains unproven and untested.

In summing up, Chartsiri Sophonpanich, President of Bangkok Bank and chair of the roundtable said it was evident that the financial services sector was more diverse and complex than other sectors under the purview of the AEC 2015.

“In order to overcome the barriers preventing financial institutions from serving customers effectively across region, there needs to be a clear, actionable road map towards further standardization and a harmonization of regulations for the industry,” he said.

This would need to start with bringing regulators from across Asean together with the industry players to effectively identify the roadblocks and to work together to decide how to meet the aims of AEC 2015.

Sector Champion

Chartsiri Sophonpanich,
President, Bangkok Bank PCL

Budi Sadikin,
CEO, Bank Mandiri Indonesia

Research Partner
Boston Consulting Group
Vincent Chin, Senior Partner of BCG & Managing Director of BCG South East Asia
Jens Lottner, Senior Partner, BCG
Ken Timsit, Partner, BCG Jakarta
Ong Ching-Fong, Partner, BCG KL
Deepak Ravindran, Financial Services Practice
Boriwat Pinpradab, Financial Services, Insurance and Strategy Practice
Ernest Saudjana, Financial Services and Telecommunications
Bosky Subramaniam, Knowledge Expert

Vincent Chin, Senior Partner of BCG & Managing Director of BCG South East Asia

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