It’s been about a year since Jayne Opperman took on a Singapore-based role as head of consumer technology for Asia, Europe, the Middle East and Africa. Her mandate: to drive and accelerate the digitalization of Citi’s consumer business across 17 markets (12 in Asia Pacific).
And to do that, she and her team have embarked on a multi-year project to make the bank’s technology stack simpler.
Citi, given its breadth, is trying to use technology to create or improve cross-border scale. The Asia-Pacific region is vast and diverse, traditionally defying global players the economies of scale they crave. Can digitalization change the equation – and can a huge incumbent pull it off?
Opperman says the answer is already yes, citing the group’s fourth-quarter 2018 financial results. Expenses were down 6% year on year, while the bank’s consumer business saw net income increase by 17% for the year.
But she acknowledges the process remains challenging.
From messy to clean
“The difficulties are not about technology,” said the technologist, who has also held chief information officer roles at ANZ and Westpac. She now reports to New York-based Gavin Michael, global head of consumer tech.
Before she joined, the bank had already embarked on a sweeping drive to use APIs – code that links software between different organizations – to connect to partners’ customers. Many of these relationships derived from the corporate and investment banking group, which has longstanding relationships with airlines, retailers, and other consumer-facing businesses. Through APIs, the bank is able to offer its products to third parties’ customers, either under its own brand or on a white-label basis.
At the same time the bank began working with fintechs to improve the customer service for retail banking and credit cards, especially on mobile.
Opperman comes in with a mandate to keep adding more features digitally, while putting everything on a platform with standards around data and security.
That requires revamping the layers of apps, programming languages, tools and business logics – the tech stack – to make them simpler and clean. This is not a direction that bank I.T. departments are known for.
But Opperman isn’t looking to banks for inspiration: “It took Amazon five years to do this for its own service stack,” she said.
As the bank addresses these challenges, her focus is on the usual incumbent internal issues; on regulation; and on further innovation.
Challenge one: Incumbent issues
Like its peers, Citi has a lot of legacy – history, processes, systems. Challenger banks and platform technologies lack these problems. Moreover, the biggest budget items still go to maintaining the status quo and to cyber-security.
Maintenance is a huge cost, and fintech is making it harder. New software doesn’t exist in a vacuum. Any change requires multiple systems be checked for accuracy and precision. So the bigger the digital change, the more maintenance required. “It’s a challenge when regression test suites are large,” Opperman said, referring to the scenario testing required every time software undergoes a change.
But Citi is learning how to use new technology to make maintenance easier.
“We’re taking lessons from using external APIs to deploy APIs internally, and using more microservices,” Opperman said. “This de-risks any changes we make, and shortens the timeframe” to test them.
(Microservices, or microservice architecture, structures an application like a collection of loosely related services, rather than as a monolithic, single-focus program. Setting up a tech stack this way enables the continuous deployment of large, complex applications.)
Opperman says the wealth platform has been at the forefront of this style of technology work. Previously, the entire platform – investment reports, product information, research – consisted of vast lines of code in one big system. In such a setup, a traditional regression analysis around, say, onboarding a new partner would take weeks or months.
Now Citi’s divided that into modules that let it test them in isolation. Testing can be cut down to days.
Challenge two: Regulation
The actions of governments and regulators are beyond the control of the tech department, but their decisions create plenty of stresses as well as opportunities.
Digitalization is easier to deploy end-to-end (starting with customer onboarding through execution) in places with digital national identities. Banks such as Citi depend on local infrastructure, such as electronic KYC or faster payment rails.
But even in countries where such things exist, banks can face operational uncertainty: last September, for example, India’s Supreme Court, while upholding the government’s Aadhaar biometric identity scheme, ruled it could not be used by banks or telecom companies to verify I.D.s
Countries such as India have also passed laws requiring citizens’ data be localized, which makes it hard for global institutions to gain scale when it comes to storing or computing that data.
Banks don’t have a ready solution for such roadblocks. “These rulings won’t stop the globalization of data,” Opperman said. She says letting banks and other companies access biometric I.D.s would make it easier for customers to access products or services.
It’s not clear that the arguments over Aadhaar or data localization will impact other countries with digital I.D.s, so Citi isn’t about to reconfigure its global tech stack as a result. “I have to wait and see,” Opperman said.
From local to global
But some government actions are powerful enough that the bank assumes they will have global influence, and can prepare accordingly. Europe’s GDPR standards for data protection, for example, are viewed as leading a trend.
“European Union regulators are clearing putting customer data in customers’ hands,” Opperman said. That means the bank had to amend its systems to meet new requests, such as deleting certain records under Europe’s “right to forget” strictures, or share information via open APIs.
Opperman said Citi expects similar measures are likely in other parts of the world, so it is rolling out these capabilities elsewhere. “It forces us to be disciplined,” she said of GDPR.
Europe’s open API rules have created a new set of challenges, though. A big one involves standards for digital banking and sharing data. SWIFT has worked with its member banks to develop standards with regards to payments, but beyond that, it’s every bank for itself.
“There’s no taxonomy for other parts of data,” Opperman said. For example, open banking has been the law in Britain for 10 years, but there’s not yet an industry standard for in what fields banks report P&L data such as net interest margin. Instead, each bank’s chief technology officer has devised a report.
Such nitty-gritty can make open banking easier, or a nightmare. The result, Opperman says, will be more standards for data.
Challenge three: Innovation
U.S. banks are known for having the biggest tech budgets in the business – but also for centralizing them, with decisions and tech stacks dictated by executives in New York.
Given the size of Citi’s Asia business – it is the largest consumer banking region for the bank – Opperman says the Asia-Pac business enjoys some flexibility.
For example, the bank recognizes that customer experience is furthest advanced in China. “We can test and learn there, and bring something back to [the rest of] Asia and the U.S.,” she said.
The bank is also learning from its fintech partners, especially in Asia. “We’re in discussion” with some big technology names in China, although Opperman would not reveal anything about that.
Working on a better user experience is prompting her team to review the entire tech stack. “What’s the end-to-end customer journey?” she asked. “What steps need to be digitized to make it as simple as possible? And what can we reuse across products?”
A simpler stack
She predicts the bank is headed toward a simpler stack, even as it grapples with Asia’s fragmented markets. “My objective is to build as many features and products on the regional platform so that each market can use and tailor them,” she said, with security and reliability the underlying standard.
She sees other banks also harnessing fintechs to create a broader customer proposition. Citi’s competitive advantage is its breadth. “It’s that last mile into countries, combined with our scale, where we can innovate.”
The bank now has more than two dozen customer-facing API partners. Some of these are complex relationships – she says one service requires 44 APIs to run – whereas others are simple payment channels.
Busting six myths about China’s e-RMB (part 1)
There’s a lot we assume about the PBoC’s digital yuan – and we’re often wrong.
While politicians and central bankers in the U.S. and Europe wrangle over Facebook’s proposed Libra coin, one government is moving to seize the initiative: China.
The People’s Bank of China has been studying central bank digital currencies (CBDCs) for several years and probably has the greatest technical understanding of any public institution. Introduction of a digital yuan could come any day now.
There are a lot of unknowns and misconceptions about this, however. Here are the first three out of six myths about the digital yuan that tend to crop up in media, conferences (shout out to NexChange), and cocktail conversation (DigFin drinks at nerdy bars).
China will be the first to issue a central bank digital currency.
Nope. The first digital currency has already come and gone: for six months, from November 2017 to April 2018, the Central Bank of Uruguay deployed a live e-Peso, using mobile phones to enable payments and transfers. Hats off to Mario Bergara, the CBU’s governor, for making history.
The pilot program saw the CBU issue 20 million pesos’ worth of digital notes to 10,000 users of local telecoms operator Antel.
The central bank wanted to see whether digital money would be easier to trace for tax purposes, if it would encourage the unbanked to enter the formal financial system, if it would help CBU save money on minting banknotes, and prove safer to use.
The authorities also wanted to see if digital cash might compete against banks’ high-fee credit cards, with a view to nudging those rates down.
CBU also enabled, but didn’t activate, its e-peso to bear interest – something that physical cash can’t do. Enabling currency to charge interest is a way central banks can encourage its adoption; similarly, they could charge users to hold digital cash, if they wanted to take it out of circulation.
The experiment suggested digital cash works well among the already-banked and digitally connected. There was some evidence it began to seep its way into the more remote parts of the country. Uruguyans very quickly found ways to arbitrage transactions across platforms for the best deals.
The short period of circulation meant other questions were not answered, such as its impact on tax evasion or how people would respond to interest-bearing cash.
CBDCs are based on blockchain.
No! Libra is based on blockchain, and of course a central bank could use similar technology. But Uruguay didn’t use blockchain, and China won’t either.
The PBoC will mint these tokens and assign them an identity on its own servers. Conditions such as whether coins bear interest can be baked into the coins themselves, with no need for smart contracts.
It will disseminate these among select wholesale banks, but to the extent that banks pass these on to individuals or businesses, they can do so via banks’ phone apps (Uruguay issued e-pesos directly to Antel).
In fact, banks in China have developed the technology to allow people to exchange digital tokens using near-field communications tech – which is to say, phones in proximity can transfer money without even needing the mobile network to be operating.
There are scenarios, however, in which distributed-ledger technology could come into the picture, but centralized. In particular, the PBoC could opt to issue “synthetic CBDCs”…for that discussion, see Myth 5.
This is some seriously cool stuff that DigFin covered at the beginning of the year, which you can check out here.
China’s capital controls will make a digital yuan a domestic event.
Setting aside the exciting talk about using digital renminbi for payments in China’s Belt and Road Initiative, a digital yuan could have a big impact on monetary policy in countries with extensive ties to China.
Central banks the world over enjoy seigniorage when they print money – that’s like the fee they charge users for the privilege of accepting freshly minted cash. And when your citizens go abroad and spend, or foreign banks accumulate your currency, the issuer still keeps the benefits of that seigniorage. The Federal Reserve gets indirectly paid by all the non-Americans holding or spending greenbacks.
The renminbi does not do this today for China, because it’s not used for trade settlement. When Chinese tourists go abroad, they turn their renminbi into local currency, and (essentially) pay the local central bank for the pleasure.
A digital yuan could help internationalize the use of crossborder renminbi for payments, by allowing Chinese citizens to pay for local goods with Chinese money – assuming local merchants accept it (and that the local central bank allows them to).
Today, Chinese tourists may pay for things overseas with WeChat Pay or AliPay, but the final settlement is in the local currency. But the nature of CBDCs is that, if a Chinese tourist uses her Xiaomi phone to pay for dinner in Bangkok using digital RMB, the final settlement takes place in renminbi: the transaction ends up being more like if a Thai restaurant sold a dinner to someone in Shanghai.
For countries like Thailand that receive vast numbers of Chinese tourists, the prospect of tens of millions of people de-facto paying for everything in their own currency is a threat to the Thai monetary base: baht won’t circulate as much.
Moreover, customs will no longer be able to control the amounts of cash that enter the country. It’s risky and difficult for people to smuggle loads of cash through airports, but easy to move digital currency (as Bitcoiners know). Now consider the spending binges that Chinese visitors could go on, using their own cash, in Bangkok or Paris.
The French government might be prepared to ban digital renminbi from circulating in France. But would the Thai government be prepared to make the same call?
Just as Libra has emerging-market central banks running scared (because in a local financial crisis, their people would flee to Libra, potentially bankrupting the domestic monetary system), the idea of big economies – China, the European Union, India – issuing CBDCs and insisting these be allowed to circulate with their citizens and businesses means that smaller countries could see their monetary sovereignty at risk. This isn’t new: in Latin America it’s called dollarization.
We’ll be back later with three more myths!
Three questions for incoming virtual banks
CEOs from three licensed startups in Hong Kong highlight issues they are still working through.
Many Hongkongers are eager to sample services from among the eight virtual banks that have been licensed. That’s according to a survey by KPMG of over 2,000 residents, most of whom express readiness to give virtual banks a try, says the consultancy’s head of fintech, Avril Rae.
The promise is new banks that solve real pain points, not just serving up a snazzy mobile app: fast and easy account opening, services to help people organize their finances, and blending banking in with lifestyle activities, among other things. They are doing so by leveraging artificial intelligence, big data analytics, cloud computing, and open APIs, to ensure a widely accessible, 24/7 business.
But there remain plenty of questions as to how to actually implement a virtual bank – which is probably why several V.B.s have been reportedly warning their launches will be delayed well into 2020. The noise around this is acute enough to prompt a statement yesterday from Arthur Yuen, deputy CEO at Hong Kong Monetary Authority. He told the audience of the Hong Kong Institute of Bankers – gathered for HKIB’s annual conference – that there never was a launch period mandated by the regulator.
“Our objective is to ensure that virtual banks are prepared,” he said, adding that he expects a few will soft-launch basic services before the end of 2019.
Question 1: regulation
On paper, there should be no question marks about regulation. The law is clear: virtual banks have the same capital requirements and the same legal obligations as convention ones, with the single exception that they must be branchless.
The HKMA is keen to see these new players provide better tailored services to retail customers and small businesses, to better drive competition and keep Hong Kong’s banking industry relevant. Its supervisory stance is “risk based and technology neutral”, which sounds the same as how it treats conventional banks.
But it’s clear already that regulating V.B.s is not at all like regulating conventional banks. There is a greater focus on technology risk management and data privacy, as well as ensuring anti-money laundering and other compliance checks.
Customer protection is an even greater challenge for virtual banksArthur Yuen, HKMA
“Customer protection is an even greater challenge for virtual banks,” Yuen said, “as they use behavior data analytics as they design and market products and services. That raises very different protection challenges,” notably data privacy.
Yuen sited the government’s Privacy Commission as a font of ethics and best practices. Those are indeed fairly well developed. But they are also voluntary, and the Privacy Commission lacks enforcement powers.
Question 2: compliance
The flip side to HKMA’s concerns about supervising virtual banks is how they themselves approach issues around compliance.
Frederick Lau, CEO of Airstar Bank – owned 90% by Xiaomi and 10% by AMTD, where Lau also works – says meeting regulatory standards is not straightforward.
“Doing implementation with our vendors, we encounter a big number of [projects] that are not up to our [banking] standards or up to the regulator’s standards,” he told the HKIB forum. “We have to go back and forth to keep improving the final products.”
He says this is not unique to Airstar. Miscommunication stems from differing expectations. Virtual banks are new, for the industry and for the HKMA, which hasn’t issued a big banking license for decades. These may be “virtual” banks but they still must submit small mountains worth of paper documentation.
Moreover, with eight V.B.s on the drawing board, there is fierce competition for hiring in I.T., risk management, and compliance. Hiring bottlenecks impact the pace of other aspects of building the bank.
Running a technology company is different from running a bankFrederick Lau, Airstar Bank
But the biggest challenge, at least internally, is that most of the leading shareholders of V.B.s are not banks. Of the eight, only two have major bank owners (Bank of China and Standard Chartered), while local fintech WeLab has been operating electronic marketplaces for several years.
“Running a technology company is different from running a bank,” Lau said. “When Apple launches a new version of the iPhone, it’s not perfect. There may be bugs. But they want to launch their product fast and grab market-share. In banking we cannot do that. We have to do everything 100 percent perfectly, to reach our standard and the HKMA’s standard.”
Which is a way of saying the tech shareholders in V.B.s still need time to better understand what is expected of a bank in Hong Kong – in a way that doesn’t compromise the innovation that’s at the heart of these new businesses.
Question 3: metrics
Tat Lee, alternate CEO at WeLab, says the newness of virtual banks means equipping the bank’s teams, including its bankers, with a tech mindset.
“When we build a virtual bank, we want to change the traditional way to build a bank,” he said. “It’s not a business-driven bank. Business is important, but technology is a key success factor. Everyone needs that mindset.”
Internally that means moving away from traditional decision-making processes (such as waterfalls, that is, sequential and hierarchical decisions) and more inclusive formats that encourage innovation.
“Compliance and risk-management people need to be trained, to combine their traditional wisdom with the technology,” he said.
We want to change the traditional way to build a bankTat Lee, WeLab
But where does the business side – revenues – come in? And if it’s not the main driver (at least not for the next few years), how do banks intend to benchmark their progress?
Deniz Güven, CEO of Standard Chartered’s virtual bank, says traditional metrics won’t work. Everyone gives lip service to the “customer-first” proposition but he doubts that’s how banks actually operate. But customers will really be the first priority among virtual banks (aside from necessities such as security).
“I tell the board and our shareholders, our first KPI is heartshare, not marketshare.”
Which makes for a great soundbite, but what does it mean? When Anthony Thompson launched Metrobank in the U.K., he too had a single KPI for all of his staff, which was customer satisfaction, as measured by net promoter scores. If Güven is implementing metrics for happiness, he isn’t sharing what those are.
“Of course we can talk profits and customer numbers,” Güven said, but then declined to do so.
To be fair to Güven, the other V.B.s aren’t talking such numbers either – and it may be a while before this becomes relevant. All the newcomers share the goal of making their customers happy and winning their trust, and that is going to take a few years.
But that doesn’t mean metrics go out the window. There will still need to be business models against which these banks are judged – and it’s not clear what any of those will be.
APIs are about to get real in Hong Kong
October marks a key deadline for open banking, and the issues are mounting.
Open banking, which regulators around the world are pushing, is about sharing customer and product data among banks, fintechs and merchants.
It’s a move that banks have resisted, but those in Hong Kong are meant to meet an escalating schedule of openness as laid out by the Hong Kong Monetary Authority, which wants data shared via API (application programming interfaces – software that connects other software).
October is something of a “crossing the Rubicon” moment for the industry. Instead of simply listing bank-product information, banks must now have to actually begin to share sensitive data.
“Open banking is revolutionary,” said Bi Mingqiang, president and CEO at China CITIC Bank International, speaking at the annual conference of the Hong Kong Institute of Bankers.
Sharing code will make banks transparent – which means at some point they may be hard to distinguish among a variety of intermediaries and vendors, with customers free to cherry pick products and services.
“We need to further segment the market and customize our services,” Bi said. “In the future we may not keep strong relationships with our clients. Our only strength with be offering the best products…open API is a game-changer to the banking society.”
What’s the hurry?
In theory. The HKMA’s “Phase 1” implementation, which seems simple enough, is a listing of bank product information for the public to see. Although a handful of banks such as Citi have been proactive, many banks are simply uploading links to their corporate websites. This is legal, as the HKMA simply urges banks to make a “best effort”.
Hardly any banks are likely to meet the October deadline for Phase 2, to let fintechs onboard customers using their data that exists on bank records (meant to be mandatory upon customer request).
Fintechs are predictably annoyed. But the HKMA has been clear from the outset that it is not going to follow the U.K. and European examples of mandating open APIs.
Instead the authorities believe it is up to the industry to come up with the use cases, set standards, and drive this. The HKMA sees its role as spurring competition, but not dictating how everything should work.
In July it said it would set up a technical working group to hash out such matters, including representatives from the banking, fintech and merchant worlds.
Could be messy
This is crucial for the simple reason that right now there are no standards for APIs, which means a customer of Bank A asking for her data to be released to a third party might have to go through the same rigmarole if she also asks Bank B for the same service.
Worse, Hong Kong has 154 licensed banks, plus another eight virtual banks coming online. If APIs aren’t standardized, fintechs would go insane trying to connect to them all.
“We need to create a common base line of what to communicate,” said Mary Huen, Hong Kong CEO at Standard Chartered Bank, speaking at HKIB.
There are some market-based solutions to this. Jetco, an ATM consortium of banks (basically everyone ex-HSBC), has launched its APIX (API Exchange), with a number of smaller banks participating. It is a “many-to-many” network, so banks, fintechs and merchants uploading data can connect easily with multiple players. But so long as banks can drag their feet – or the extent to which third-party service providers don’t see the benefit of such integration – then this will remain an incomplete solution.
And there is even less clarity about the HKMA’s phases 3 and 4, which should jump from sharing information to enabling transactions via API.
SWIFT is one player hoping to leverage this uncertainty to its advantage.
SWIFT handles messaging for crossborder payments among correspondent banks. It manages the identity and security around those messages, which are formatted according to ISO 20022 rules (ISO, International Standards Organization, is a global organization that designs such things for many industries).
“Open banking needs a stable baseline for development, and innovation can come on top of that,” said Lisa O’Conner, SWIFT’s head of capital markets and standards for Asia Pacific. SWIFT has applied its functionality to an API gateway to enable exchange of data (instead of payments information) across its network.
“It’s like a global version of Jetco,” she said when asked to compare the two platforms.
Some banks might want to share data in one locale, others might want a systematic way to do so worldwide, but she says the goal is interoperability, so that an API exchange here can be replicated seamlessly there.
As open banking gets more complex and burrows more deeply to banks’ core I.T. systems, such alignment will be important to avoid huge costs and fix-its – as is happening in Europe today.
(She also says that regulators and banks looking for models for open API shouldn’t look to Europe: it’s India that has had the best rollout, where banks have long since been trained to focus on end-user experience, and where the government’s API Stack clearly defines APIs.)
More uses cases
Angus Choi, CEO at Jetco, is optimistic more third-party service providers like merchants and fintechs will use Jetco to connect with member banks, and with each other. “APIX will become a venue for more use cases,” he said.
For example, local insurtech CoverGo has recently joined the platform, hoping to market itself to anyone in the market for using its tech to digitalize their services.
Today, Choi says banks don’t see connecting to third parties as core to their business. But digitalization is changing this. “What other industries can they reach, what new customers can they find, what channels can they use to promote their products?” Choi said. “My priority is more use cases.”
That cuts to the heart of open banking: what’s in it for banks? If the HKMA isn’t going to crack the whip to enforce adherence to its four-step outline, then the industry needs to come up with incentives.
The first obvious argument is that it will open new sales channels. But for many banks, that’s not a happy tradeoff if they have to open up information about customer account balances to fintechs or merchants (which is phase 3).
Another challenge is around standards for data – sharing it, embedding instructions around its use, ultimately letting customers transact in third-party environments with their bank data.
That also implies common legal agreements so consumers have recourse if something goes wrong. Banks are almost surely going to own responsibility, just as they do in the case of credit-card fraud. This is another reason why they’re reluctant to embrace open APIs.
A third challenge is getting the balance right between opening up data, and abusing it. Aside from the obvious cyber threats, will protocols be set up so that customers have a clear idea of what data they are sharing? How to prevent banks, fintechs or merchants from collecting more data than they need? Should that data come with expiration dates? What’s the procedure should a customer wish to limit data sharing?
A final challenge is how banks and others deal with the unknowns. StanChart’s Huen said, “With new things there are always new risks you can’t anticipate. We need the ability to detect abnormal trends or identify what’s gone wrong.” Just as banks have “fire drills” for conventional breaches and crises, they need to develop playbooks to react to issues arising from open APIs, Huen says.
Ultimately in Hong Kong’s case, this is an experiment in allowing commercial forces to determine the outcomes to these questions. India’s experience involved a much stronger government hand in setting the ground rules, and a culture in which banks were mentally prepared for the change. Europe has been very government-driven, with banks mostly reluctant compliers, but with many unsettled arguments.
Hong Kong is taking an even more free-market approach, and no doubt when October has come and gone, there will be little sign of customer onboarding made easy via APIs. But banks can’t ignore this, either. If there’s no progress, the HKMA could ask the government to legislate stricter rules – an outcome banks would surely regret.
On the other hand, fintechs and merchants should not assume the onus is on the banks. When it comes to inventing use cases, it’s in their interest to invent ideas that will make money for the banks. Data exchange will fail if it’s a blind ally. Better to make it a three-way street.