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Page 1: Banking Digest

● Reducing the risk of staff fraud ● China payments unwelcoming to foreign investment

● Rise of Asia-Pacific payments hub • App to the future for wealthy clients ● Is the industry ready for mobile banking?

India under scrutinyAlleged fraud at Citi highlights

regulatory loopholes

February 2011 Issue 24 www.vrl-financial-news.com

Page 2: Banking Digest

New report for the financial services industry

Social Media in Financial Services

Since the publication of Web 2.0 in Financial Services social media has become an established part of the marketing and product mix for companies across the globe.

In developed FS markets, social media is poised to leapfrog the call centre and stand second only to the branch as the most important customer channel. In many emerging markets it is set to lead the branch. This report uses non-public domain data and exclusive interviews to provide a comprehensive analysis of global best practice in social media and retail finance

For full details visit www.vrl-financial-news.comPlease quote reference code: SMiFS/Ad

EMEA [email protected]

+44 (0) 20 7563 5605

Asia [email protected]

+ 65 6383 4688

The mixed experiences of banks operating in virtual worlds Understanding, assessing and mitigating the risks from social media Integrating social media with other delivery channels

The growing role of social media in wealth management Social media as an internal communication, HR and training tool

What does the report cover?

Case studies and examples involving: ANZ, American Express, Barclaycard, Deutsche Bank, Royal Bank of Canada, and Toyota FS.

Page 3: Banking Digest

February 2011 y 1

commentBanking & Payments Asia news

www.vrl-financial-news.com

contents02-03 coverstory citiscamhighlights regulatoryloopholes

Citibank India’s alleged $86 million fraud throws a spotlight on the gaps in regulations around investment advisory services in the world’s second-fastest growing wealth market. The industry is left wondering whether the fraud will tarnish Citi’s and India’s reputation or if the damage will be short-lived

06-07 herebedragons

China is a payments market with vast untapped potential. But, after a period of welcoming cooperation with western banks and processors, the market is proving difficult to penetrate. Chinese banks and China UnionPay have been unwelcoming to foreign investment. Janecooper asks whether this could damage the market

14-16 Foreigninsurersmarket sharewoes

When it comes to gaining market share, foreign insurers in China have come to terms with the reality that, for now at least, this is unlikely to happen. But despite this and other challenges in the regulation and bancassurance spaces, there is a general air of optimism that premium growth will remain robust

18 voiceidentiFicationcomes oFage

For call centre operators, precise identification of customers is a key priority and one that, in an era of rampant identity theft, is becoming ever-more onerous. BPA examines a user-friendly solution, voice identification, and the significant benefits two Australian insurers are enjoying from its implementation

22-24 micropayments:istherea silverbullet?

The payments industry is awaiting a ‘silver bullet’ universal solution to capitalise on the growing interest in micropayments. Who would have thought €1 transactions would generate so much interest? louisenaughton looks at a new report that analyses the different approaches to low-value payment processing

trends

Google replaces financial advisers

editor’sletter

When the going gets tough

Google has overtaken branch-based financial advisers as the primary source for UK-con-sumers to seek advice on retail banking serv-ices, according to a report from Greenlight.

The survey from the UK-based digital media agency reported an increase of 59 per-cent in the UK for searches relating to retail banking products between July and October on Google.

Greenlight classified 750 of the most popu-lar search terms that are typed into Google and then profiled consumer search behaviour for retail banking-related terms such as bank accounts, credit cards, debit cards, mortgages, ISA’s, online banking and loans (see charts).

Greenlight also identified the banks, and related service providers, who were best posi-tioned on page one of Google and thus more visible online. In addition, Greenlight moni-tored paid searches, analysing the advertise-ments appearing in sponsored links for the top 120 of the 750 terms, retrieving data daily throughout October.

Based on the volumes for each keyword and their ranking on Google, Halifax, part of the Lloyds Banking Group, was the brand with the most visibility. It scored 27 percent and ranked third overall behind price comparison websites moneysupermarket.com and money-savingsexpert.com.

In November, the Digital Economy and Structural Change survey by Deutsche Bank

market researchers GfK and Google reported that the internet played a much bigger role as a source of information than transaction or sales channels.

More than 90 percent of all online searches are typed into Google. <

n onlinevisibility

uk–mostvisibleretailbankingwebsitesinnaturalandpaidsearch,october2010(%)

website naturalsearch

paidsearch

overallranking

halifax.co.uk 27 13 2

hsbc.co.uk 9 23 4

natwest 6 23 6

firstdirect.com 0 24 9

lloydstsb.com 17 7 10

barclays.co.uk 17 6 11

rbs.co.uk 4 15 14

nationwide.co.uk 13 5 15

santander.co.uk 12 3 20

santander-products.co.uk

0 14 22

barclaycard.co.uk 3 10 23

ingdirect.co.uk 0 11 26

co-operativebank.co.uk

2 7 33

Note: % of natural search taken from two million searches; paid search taken from 120 searches. Source: Greenlight

Just when you thought it was safe to venture into Asia’s high-growth markets, the story of staff fraud in Citibank India broke (pages 2-3). Looking further east into China, foreign entrants are already feeling hot under the col-lar from aggressive domestic players.

Adding even more salt to wound, domestic counterparts both in the payments (pages 6-7) and the insurance (pages 14-16) markets are imbued with renewed vigour after seeing the big brand-name banks in Europe and North America topple like dominoes during the recent global financial crisis.

It is not safe to stay at home either. As Douglas Blakey from our London office reports (page 8), the worst-performing mar-kets for bank shares in 2010 are in Europe, with the North American banks not perform-ing much better.

What is an up-and-coming banker to do? From what we hear in the headhunting circles, a lot of executives are crossing borders to hunt for the next big wave. American bankers are looking to move to Europe, European bank-ers to Asia, Indian bankers to Singapore and Malaysian bankers to the Middle East.

That does not mean the core issues will go away. Dodgy deal-making, a blatant disregard for rules, inscrutable locals, constantly mov-ing goalposts and “rubber time” are part of everyday business in parts of Asia.

Banking in Asia is still a work-in-progress in many respects. But given the grim outlook for Western economies for the next couple of years, this region’s potential upside and burgeoning consumer market may still prove attractive to many. <

Titien Ahmad

Page 4: Banking Digest

2 y February 2011 www.vrl-financial-news.com

Citibank India Banking & Payments Asiafraud

An alleged scam at a Citibank branch in the Indian city of Gurgaon has brought India’s wealth management industry under the microscope.

As the legal process to prosecute former Citi relationship manager (RM) Shivraj Puri begins, the talk in the market is not only around Citibank’s Indian operations but also possible repercussions to one of the fastest growing wealth markets in the world.

A spokesperson for Citibank told BPA: “We recently initiated an investigation into a certain set of suspicious transactions based on documents forged by an employee involving a few accounts in our Gurgaon branch.

“We immediately reported the matter to all the relevant regulatory and law enforce-ment authorities. Identified suspicious transactions have been isolated and we are providing full assistance to the authorities in their investigations.

“This issue does not impact other accounts, transactions or customers of the bank.

“Subsequent to our complaint naming the involved employee and other external indi-viduals who appear to be perpetrators in these suspicious transactions, the Gurgaon police has registered a First Information Report.”

The bank has promised to compensate investors that were caught in the fraud scheme.

“We have since been in contact with our impacted customers and are committed to safeguarding our customers’ legitimate interests.

“During this interim period, we have been reconciling amounts involved with impact-ed customers and are now commencing the process of working towards a fair compen-sation for them,” added the bank’s spokes-person.

The circumstances of the scam have been well-documented in both local and foreign media but questions remain over the impact from the scandal fall-out. How will this impact Citibank’s reputation in India and its operations?

What will be the larger repercussions on the wealth management industry in a mar-ket with the second highest growth rate in the world?

asystematicissueSam Luft, chief executive officer of Glo-bal Economic Investments, a consultancy focused on the private banking and wealth management sector, believes that this issue is systemic and needs to be addressed urgently.

“The Citibank India investment debacle is not unique to any one financial institution or country, but is something that unfortu-nately has been increasing in severity glo-bally over the years,” Luft said.

Luft outlined the major players that will need to take an active role in addressing potential fraud.

“A major step needed to correct these type of fraudulent activities will be greater education and training of personnel at all levels of the financial institution,” Luft con-tinued.

“As trading vehicles become more compli-cated and complex, both external regulators and internal compliance must be trained and given the tools to detect unusual activities in clients’ portfolios.

“I believe it will be prudent on the Indian regulators to ensure that all financial insti-tutions dealing with clients' assets have the necessary technical and operational exper-tise in house and training is an on-going process.”

“Unless this type of activity is coordinat-ed between external regulators and internal management as the complexity of global asset management increases, the risk of fraudulent activity increases,” he added.

According to a seasoned industry observ-er who has been with the private banking industry in Asia for more than 20 years.

“This is not the last chapter in the book and most likely just the beginning, the observer said.”

“We can’t compare the compliance in New York versus Dubai versus Mumbai. Offshore regulations are more stringent but it is a different story onshore.

“This will catch a lot of press from now

until June but that’s the price of doing busi-ness in India.”

likelytoaffectrevenueinnear-termWhile Citibank’s solid brand and financial strength will be able to see it through the ongoing investigations and relentless media spotlight, the short-term impact on its India operations should not be discounted.

In a statement to the media, ratings agency Fitch said: “The fraud in the wealth man-agement business of Citibank India’s Gur-gaon branch will not have any impact on the branch’s national short-term rating. The rat-ing continues to factor in the financial profile of the parent of which the branch is a part, supported by the well-established funding franchise of the bank’s operations in India.”

However, the impact from adverse media coverage can affect the bank’s reputation and consequently revenue in a business where trust and confidence is paramount.

Fee income accounted for up to eight per-cent of Citibank India’s net income in the financial year to March 2010 while funding costs may be affected if investors were to withdraw their funds.

Citi scam highlights regulatory loopholesCitibank India’s alleged $86 million fraud throws a spotlight on the gaps in the regulations around investment advisory services in the world’s second-fastest growing wealth market. The industry is left wondering whether the fraud will tarnish Citi’s and India’s reputation or if the damage will be short-lived

n citiFraudvictims

Puri’s prey The 40 clients whose funds were diverted by Puri into the account of his relatives included:

client amount($m)

Hero Exports 21.2

Munab Braej 15.5

Spaid 13.5

Aero Infratec 5.4

Satyam Auto 5.4

Mayar Infratech 5.2

Hero Corporate Services 3

Karopat Pad 1.7

Rekha Munjal 1

Source: BPA

Page 5: Banking Digest

February 2011 y 3www.vrl-financial-news.com

Citibank IndiaBanking & Payments Asia fraud

“Any erosion of investor’s confidence could slow down growth or even reduce profits in this business, particularly if some of the existing clients choose to exit,” the Fitch spokesperson highlighted.

“Investments in improved surveillance and processes would also affect profitabil-ity.”

Increased costs either due to investment in risk mitigation or compliance will have an impact possibly not just on Citibank but also other financial institutions in India.

According to a market observer: “Finan-cial stocks or investor confidence has not been affected but I would expect to see more regulations around wealth management. The increased cost of compliance will affect the short-term profitability of the sector.”

regulationssorelyneededPresently, there are no specific regulations for wealth management for high net worth individuals (HNWIs).

These come under general standards for portfolio management services that and are within oversight of the Securities and Exchange Board of India (SEBI), a capital markets regulator.

Deepak Parekh, chairman of India’s sec-ond-largest private bank, was reported to have blamed the lack of guidelines in an industry that services one of the fastest-growing HNWI segments in the world.

“Wealth managers and companies man-aging wealth for other people have mush-roomed and there are no guidelines for that,” Parekh told reporters at the sidelines of a conference.

“I think the government will come out with guidelines for the industry. The coun-try should have a good system and audits in place to prevent the recurrence of such frauds.”

The scam has prompted India’s banking regulator, the Reserve Bank of India (RBI) to review existing procedures for the portfolio management services of banks.

The present standards do not clearly dis-tinguish between investment advisory and non-discretionary portfolio management services – an issue that will be addressed with the revised guidelines.

Now that the RBI’s inspection report on the Citibank fraud is ready, RBI is planning to put together a comprehensive report on the loopholes found in current guidelines. The board for financial supervision will then discuss the report and revise guidelines based on feedback.

Guidelines are to be expected for relation-

ship managers even though there are none currently.

The lengthy process of revising and form-ing guidelines may affect some government-owned banks that were planning to offer portfolio management services as they would now have to wait for revised regula-tory policies before starting operations.

Given that the high growth rates of India’s wealth market is likely to continue, proper legislation is a necessary foundation to pro-vide a sound structure and support future growth. <

• Armed with a fake circular from the Securities and Exchange Board of India (SEBI), Shivraj Puri, a relationship manager with Citibank India, approached investors claiming he operated a custodian account. He lured them with promises of high interest rates, of up to 36 percent.

• The duped investors agreed to park their funds in a scheme recommended by Puri, which he diverted into trading accounts held by his relatives in brokerage firms Normans Martin Brokers Private Limited (firm owned by his father, Raghuraj Puri), Religare and Bonanza. His grandparents Prem Nath, Sheila Nath and his mother Deeksha Puri are also alleged to have been involved.

• In December 2010, Puri was exposed after the Citibank Gurgaon branch received several queries from customers about the SEBI-sanctioned high-interest schemes. Citibank began probing high-value transactions from some accounts.

• The head of the Gurgaon branch, Amit Zarpuri, and investment counsellor Nitin Chawla allegedly received kickbacks from Puri totalling $67,900. Sanjay Gupta, an assistant vice president of the Hero Group, along with Ganpat Singh and Gaurav Jain

who worked in the accounts department, are named as major suspects.

• SEBI is investigating whether stockbrokers collected Puri’s income proof documents, a mandatory requirement for trade in the derivatives market. In its preliminary probe, SEBI found lapses on part of the brokerage firms in collecting all the required financial documents from Puri and others through whose accounts he invested in stock market.

• The Reserve Bank of India (RBI) is questioning whether Citibank allowed these accounts to be opened after following the mandatory KYC (Know Your Customer) procedures. These make the verification of customer details such as valid identity and residence proof with documents like passports and utility bills mandatory. Banks are required to physically verify the identity and address of customers.

• RBI is also probing whether Citibank followed India’s STR (suspicious transaction reporting) procedures, which require banks to immediately inform the regulatory and enforcement agencies about high-value and unusual transactions in any of its accounts. <

n keydevelopments

How the fraud unfolded

Indian Wealth Management:Strategies, Products and PlayersA new industry report for the wealth management sector

For more information, please contact asiapacifi c@vrlfi nancialnews.com.sg

Page 6: Banking Digest

4 y February 2011 www.vrl-financial-news.com

checks & balances Banking & Payments Asiaopinion

sanjaysingh,vice-president,

business&Financialservices,

Frost&sullivan

The recent fraud discovered at Citibank in New Delhi appears to be more of a one-off case rather than some-thing systemic nor raising any doubts on the Indian Banking structure.

Nonetheless, I think it highlights two key issues – flexibility and importance given to high performers in areas like private banking AND adherence to the risk management processes with-in an organisation.

Private sector banks in India have very good risk management processes. The recent fraud may have been avoided if the processes were strictly implemented.

For example, many banks have a mandatory vacation time for all their employees. While an employee is on his two week break, he is not supposed to work.

However with technology tools like Blackberrys and remote access, this hardly happens.

Ideally such issues can be unearthed during the audit

carried out within the man-datory vacation time.

High performers in pri-vate banks do have certain privileges extended to them including awards and huge bonuses.

While it is only fair that the high performers be rewarded, it is also important for these high performers as well as their supervisors to drive the message of integrity/ethics in the way they do business.

There are currently limited guidelines for wealth man-agement in India.

Stricter regulations and stronger internal checks and balances will not only reduce operational risks, but also cli-ent risks as well for the banks (and I understand banks are following the Know Your Customer norms very care-fully).

The clients/customers, especially high net worth individuals, too need to do their due diligence before investing in schemes that appear “too good to be true”. <

Reducing the risk of staff fraud Two senior industry players – Frost & Sullivan’s Sanjay Singh and Himansho Kohli of Client Associates – give their opinions on the alleged Citibank India fraud by a member of staff and how private banks can reduce their exposure to this risk. shubhreetk reports

himanshukohli,Founderpartner,clientassociates

The Citibank episode has taken everyone by a surprise as the element of trust has been dilut-ed and also shows a systematic failure at the institution’s level.

To reduce the operational, reputation and client risk pri-vate banks should take the fol-lowing steps:• Always have a four-eye

principle (two-member team) of working on a rela-tionship! Ensure that this two-member team is not the family members.

• There should be an audit report generated client wise at a regular frequency which compares the updated cli-ent report with the back-up data on investments.

• No relationship manager should be allowed to get any blank forms/papers/cheques signed from a cli-ent. The Power of Attorney if required from a client should be very specific and allows the bank to invest in the schemes approved by the Bank.

• Most important is to build the DNA which should be

more of advisory & client centric. Besides this the banker should look at this profession as a long term career option and not as a sales job (where advisory takes a back seat). The way banks look at Know Your Client, similarly they should also follow a prac-tice of Know their own Relationship Manager who advises the clients and see if the RM is actually follow-ing an advisory process or just selling the products to increase their incentive.

• The whole focus should be on quality – where training private bankers would play a very critical role, advi-sory process on selection of products is very critical and also the process/audit to ensure if the advisory proc-ess is followed is extremely important.

I am sure these are the points in the pitching book of all private bankers but the most important element is to build check and balances and see if they are actually followed. <

Page 7: Banking Digest

February 2011 y 5www.vrl-financial-news.com

digestBanking & Payments Asia news

payments

Gemalto launches new NFC trial in JapanDigital security software pro-vider Gemalto has joined forces with Japanese mobile opera-tor Softbank Mobile to launch a mobile contactless pilot in Japan, which allows customers the choice to pay via different credit card accounts.

Softbank Mobile customers will be able to use their mobile phones to pay for goods and serv-ices in convenience stores, fast-food restaurants and theatres. The programme allows users the option to choose between two Japanese credit card issuers – Orient Corporation and Credit Saison.

“The advent of NFC in Japan will enable us to deploy mobile contactless services in payments and other domains,” said Tan Teck-Lee, president of Gemalto Asia.

payments

MasterCard acquires Travelex prepaid programme

Travelex has sold its prepaid card programme management (CPM) to MasterCard for £290 million ($458 million) to “accel-erate investment” in Asian and Latin American regions.

Under the terms of the trans-action, which is expected to close in the second half of 2011, MasterCard has agreed to pro-vide programme management services for the Travelex Cash Passport prepaid card, which is sold throughout Travelex’s stores and online channels.

Travelex CEO Peter Jackson said: “The sale of the CPM will allow us to accelerate our investment plans, particularly in higher growth regions such as Asia and South America, and in the growing e-commerce chan-nel.”

Along with the agreed sum MasterCard will pay for Trave-lex’s CPM, a further £35 million has been promised by the card association if certain perform-ance targets are met.

payments

Maybank introduces 2-for-1 credit cardMalaysia-based Maybank is aiming to attract half a mil-lion new credit card customers by the end of 2011 with a new, two-for-one product: Maybank-ard 2 Cards.

Maybank is offering two credit cards – one issued by American Express, the other by MasterCard – with a single application.

The offer is part of the bank’s strategy to grow credit cards issuance by 20 percent by the end of June, although it did not disclose how many cardholders were signed up with the bank already.

The two-for-one credit card deal offers a rewards pro-gramme, a 5 percent cashback at weekends and an interest rate of 8.88 percent per year on out-standing balances.

Customers will have a choice of gold and platinum cards and be able to use the bank’s online banking channel. Maybank will launch an advertising campaign in 2011 to promote the cards launch.

strategy

OCBC seeks retail growth in Malaysia

Singapore-based OCBC Bank is looking to grow its retail bank-ing business in Malaysia and generate 40 percent of country revenue from its retail unit by 2014.

Retail banking currently accounts for 27 percent of Malaysian revenue. But the director and chief executive of OCBC Bank Malaysia, Jeffrey Chew, told local media that the bank saw “tremendous opportu-nity to grow the consumer busi-ness”.

Chew said that the bank had invested heavily in customer relationship management tools, product deployment and deliv-ery, and driving down costs in 2010.

He added that the bank aims to gain a greater market share

both in the retail and in Islamic banking segment; the bank cur-rently has a market share of 5 percent in each segment.

In Islamic banking, OCBC aims to grow the segment’s con-tribution to Malaysian by three percentage points to 10 percent. OCBC will expand its Malay-sian-based Islamic subsidiary, OCBC Al-Amin, by opening new branches and rolling out new products.

Malaysia accounts for one-fifth of OCBC group turnover and is the lender’s biggest market outside Singapore.

strategy

Korean banks bid for troubled Samwha

Three South Korean banks are eyeing up troubled Samwha Mutual Savings Bank (Samwha), which was suspended from operating because it did not meet regulatory capital require-ment levels.

Woori Financial Group, Hana Financial Group and Shinhan Bank have all reportedly sub-mitted their letters of intention to bid for Samwha, according to the Korea Deposit Insurance Corporation (KDIC).

The KDIC suspended Samwha Mutual Savings Bank’s opera-tions for six months on 14 Janu-ary, after the bank failed to meet regulatory capital requirement levels.

The suspension comes as part of the government initiative to strengthen the country’s bank-ing industry, as Korea’s savings banks continue to suffer from toxic loan books following excessive financing in the real estate market during the pre-2008 property boom.

The official bidding is set to commence in mid-February and the government is looking to select a buyer by the middle of March.

strategy

Citi rolls smart banking branches in Hangzhou

Citibank continues to roll out more smart banking branches

in its key markets and has added the Chinese city of Hangzhou to its list of cities with the state-of-the-art branches.

The launch of the branch fol-lows those in New York, Tokyo, Bucharest, Hong Kong and Sin-gapore.

The chief executive of Citi’s China business, Andrew Au, said that business in China was “per-forming strongly” and that the bank would continue to expand in the country.

“We will continue to execute on our growth plans in support of our wide cross section of cus-tomers in China,” he said.

Citi said that Hangzhou was one of the country’s most flour-ishing cities.

The smart banking branch features Wi-Fi, interactive touch screens, the Citi work bench, Citi Assist (a video conferenc-ing service customers can use to communicate with Citibank spe-cialists at another location on a real-time basis via video phones) and an internet kiosk, which has state-of-the-art computers to access external websites.

strategy

Vijaya Bank remittance service for NRIs

India’s Vijaya Bank has partnered with digital payment software provider TimesofMoney in a bid to offer an online remittance platform to its migrant workers around the world.

The deal is part of Vijaya Bank’s strategy to strengthen its relationships with its customers who are non-residents of India (NRI’s).

Using the bank’s website, the NRI’s will be able to transfer money online from 22 countries using TimesofMoney’s branded remittance service.

The two parties have also joined forces to introduce Vijaya Bank’s customers to a new online payment gateway solution.

The service, provided by TimesofMoney, will allow Indian consumers to use their internet banking facility to shop while online “in a safe and seamless manner”, claims the bank. <

Page 8: Banking Digest

6 y February 2011 www.vrl-financial-news.com

payments processing Banking & Payments AsiaChina

With its vast population, massive cash economy and untapped cred-it cards potential, China has long been heralded as the biggest pay-

ment cards market of the future.Its recent growth has been phenomenal,

especially as some observers only a decade ago did not think that China would be able to develop a healthy cards market. Debit card usage has been booming, along with the devel-opment of the domestic payments network China UnionPay (CUP).

For foreign players looking to get a piece of the pie, however, the excitement has waned. The buzz about China’s boom has passed and foreign executives who have been trying to break into the rapidly developing market are now beginning to sound jaded and almost defeated.

Conditions are becoming increasingly dif-ficult for foreign players, particularly in the processing market, and almost impossible for those who are attempting to go it alone without the aid of a Chinese partner or co-operating with CUP.

Executives of international companies argue that there is not a level playing field in China, and the dominance of CUP – also known as UnionPay – means that the market is closed to foreign entrants. “The environment is becom-ing much tougher,” comments Huainan Zhao, an associate professor of finance, and China expert, at Nottingham University.

changingattitudeIn the past, Zhao tells Banking & Payments Asia, Chinese companies welcomed their Western counterparts because they wanted to gain their know-how. However, since the financial crisis, the view of the international landscape has changed.

“Prior to the financial crisis, many US firms did not focus on expanding outside their domestic market because they thought that they were the largest market in the world and being successful in their domestic market was everything,” he says. “The same is happen-ing with China now – they do not want to do business with the outside, and they will not invite the foreign competitors to come in.”

Observers comment that as China grows in

its self-esteem, it has even less reason to allow foreign competition into its borders. One payments executive says that if companies do want to do business in China, they could be asked to hand over their technology and expertise to their Chinese partners first.

While the door is closed on the process-ing market in China, and CUP maintains its monopoly, the Chinese network has been able to expand its international acceptance beyond China’s borders.

International payments executives feel aggrieved that CUP has been able to compete in the international marketplace and develop its business, yet there has been no reciprocity when it comes to foreign companies entering China.

When China joined the World Trade Organisation in 2001, it signed an agreement to open up its borders to foreign competition and pledged to allow players in the payments world, as well as other industries, to enter the Chinese market. So far this has not happened and CUP remains the only processor of pay-ments within China. These concerns prompted the US trade representative to file a trade com-plaint with the WTO in September 2010. The companies reported in the press to have initiat-ed the complaint were Visa, American Express, MasterCard, Discover Financial Services and First Data. There is a high degree of sensitiv-ity around the issue and for this reason many industry executives did not want to be quoted when commenting on the current state of the market.

CUP is China’s only domestic payment network and foreign players are not allowed to issue, or process, cards in Renminbi. This leaves few opportunities for foreign compa-nies hoping to issue, accept or process under their own brands.

The only option for the international net-works – such as Visa, MasterCard, Ameri-can Express and Discover – has been to enter into partnerships whereby the cards are co-branded. The major banks in China have issued a number of dual cards that carry both the UnionPay logo alongside that of the international acceptance brand, such as Visa. The card is processed on the CUP network for transactions within China, but once the

cardholder travels overseas the payments are processed on the Visa network, for example.

However, as CUP’s international acceptance network has grown, this arrangement has been the cause of disputes. There were reports that these co-branded cards were being processed on CUP’s international network for transac-tions outside China. Visa, to protect the trans-actions that should have occurred on its inter-national network, reportedly placed a ban on this practice. News outlets reported that Visa threatened to fine any bank that processed the international transactions of these co-branded cards on the CUP network instead of Visa’s network.

Despite these difficulties, however, and the fact that the international networks are unable to process transactions domestically in China, the co-brand partnerships are still a profitable venture.

The increasing number of Chinese travellers overseas means that the co-brand deals have added a large volume of transactions onto the Visa, MasterCard and American Express net-works.

Signing such agreements with CUP has been the main way for networks to take a slice of the growing market share of the growing Chi-nese payments industry.

Likewise, PayPal entered into a co-opera-tion agreement with CUP, which means that CUP cardholders are able to use their cards where PayPal is accepted.

This opens up the payments market to international merchants who trade on eBay, for example, and would not be able to accept CUP transactions themselves. Through the agreement between CUP and PayPal, those merchants are now able to accept payments

Here be dragonsChina is a payments market with vast untapped potential. But, after a period of welcoming co-operation with western banks and processors, the market is proving difficult to penetrate. Chinese banks and China UnionPay have been unwelcoming to foreign investment. Janecooper asks whether this could damage the market

n china

shapeofthecardsmarket(2009)bankcardsinissue:1.89 billion debitcards: 1.74 billioncreditcards: 150.5 million (8%)POS terminals: 1.84 million atms: 167,500 issuingbanks: 196 (2008)Source: People’s Bank of China

Page 9: Banking Digest

February 2011 y 7www.vrl-financial-news.com

payments processingBanking & Payments Asia China

from CUP cardholders through the US-based network.

Such agreements are common for the inter-national networks. In November 2010, Amer-ican Express announced that it is expanding its agreement with CUP and signed a memo-randum of understanding that would allow the companies to “explore the expansion of their current cooperative activities”.

Exactly what this will entail, and what busi-ness opportunities would hopefully emerge from such an agreement, was not revealed. Some industry observers, however, remain pes-simistic about the ability of any foreign com-pany to operate freely on its own terms in the Chinese market. What the agreement could mean for Amex is an increase in transaction volumes on its network outside of China.

When asked to comment on American Express’ challenges in operating in China, a spokeswoman for the company responded: “American Express operates a partnership model in China – we have been able to grow our card and prepaid business through part-nering with local banks. Our business has grown in line with our expectations.”

MasterCard signed a memorandum of understanding with CUP in September 2010, with a similarly vague intention of establish-ing a “mutually beneficial relationship”.

Ling Hai, MasterCard Worldwide’s divi-sion president for Greater China, elaborated on MasterCard’s business in the market.

“China is an emerging market. For many businesses in China, market entry can be challenging. MasterCard established itself in China over 20 years ago and we were the first to launch a payment card in China. Since then, MasterCard has been building its brand and reach in China. MasterCard’s business advantage is innovation. The penetration of electronic payment is still relatively low and cash is widely used,” says Hai.

“In a broader context, the biggest battle for us is actually against cash. The opportunity ahead is to demonstrate the benefits of using a card – the speed, the convenience and the security. Consumers are increasingly recognis-ing the value, both locally and overseas, hence the payment card market is growing rapidly,” he adds.

These comments reflect the potential of the Chinese market and how even the debit card market has not yet fully developed, let alone the credit card market.

For this reason, foreign companies are keen to get into the market and grow their share, but for now they are hindered from competing on a level playing field because of the domi-nance of CUP. For now, the only way com-panies can compete in the Chinese market is by entering into cooperation agreements with CUP.

theprocessor’spositionThe international networks are able to oper-ate in the market because cards are issued on their network – albeit only for interna-tional transactions – through the existing issuing banks in China. For compa-nies, such as processors hoping to enter the market without such partnerships, it is much harder to break into and compete in the payments space.

Gaining a licence to operate has been an uphill struggle for processors, and industry experts comment that it is almost impossible for a processor to do it alone without the support of a Chinese company.

Entry into the Chinese market has been very much based on building relationships over a number of years with local payments execu-tives, and many expats are left frustrated by their years of effort and the lack of progress they have made in advancing in the Chinese domestic market.

CUP is the only processor in the market, despite a number of discussions of how the market could be opened up to allow foreign processors to compete freely and process domestic payments in China.

CUP was established in 2002 by the Chi-nese central bank as a means to establish a unified interbank network. With this, heritage has effectively been state-sponsored which has thus made it difficult for international compa-nies to compete.

technologytroubleWhile the domestic processing market remains closed to outsiders, the cards market in China is in danger of becoming stagnant in terms of the development of its technology.

One executive says the infrastructure is lacking in sophistication and there is not the established internet protocol (IP) processing infrastructure that would be found in other markets. One large international retailer, for example, had to build its own processing net-work before it was able to accept payments in China, whereas in other markets it would plug into an existing infrastructure.

The processing technology is in danger of not being developed if there is no pressure from competitors to make things better. The same executive adds that the systems that have been built are not necessarily the best and most effective, but rather the cheapest and the quickest to put in place.

Professor Zhao says that CUP has no incen-tive to innovate if there is no competition. Many in the industry comment that competi-tion would only improve the market by bring-ing better payments infrastructure, new invest-ment in technologies, and giving merchants and

consumers in Ch ina a choice.

For companies still trying to crack the Chi-nese market, their atten-tions have focused on other ways to build a profitable business in the region. Acquiring processors, for example, may find more opportunities in focusing on regional retailers who have large outlets through-out Asia, as well as China. This way the processor has access to the Chinese mar-ket, and is able to monitor developments in the country, without relying on that market for all of its revenue and future business.

Even for those who are able to enter the processing market in China, there are some doubts about how successful such players would be in building a profit-able business.

At the moment, the vast majority of trans-actions are made on debit cards, but the mar-gins on these payments are likely to decrease, comment observers. If interchange rates on the cards continue to come down, it will become difficult for those players to compete in the market, even if they are able to gain access to the Chinese payments industry.

The international networks continue to see revenue come from their existing co-brand agreements, allowing them to get a share of transactions from Chinese travellers making payments overseas. However, those transactions could be threatened as CUP continues to build its international acceptance net-work, which could outpace the growth of its US-based rivals.

While the disputes and disagreements about the status of CUP rage on, there are varying degrees of optimism – and cynicism – about whether the situation will improve for the international players in China. Many are hopeful about the opportunities that could be developed, while others are more negative and jaded about the opportunities for them in the rapidly developing market. <

Page 10: Banking Digest

8 y February 2011 www.vrl-financial-news.com

bank shares Banking & Payments Asiaperformance

Another poor year, with few exceptionsBanking sector shares again performed poorly in 2010, underperforming global equities by a double digit rate. With a few exceptions in the emerging markets, it was another year to forget. Looking ahead to 2011, it is banks in these markets that are likely to offer superior growth prospects. douglasblakeyreports

n sharepriceperFormanceworldwide–selectedbanksandtheirsharepriceperformance,31dec09-31dec10

name priceindex(%change)

Citigroup 42.90

Royal Bank of Scotland 33.80

Lloyds Banking Group 29.61

State Bank of India 23.86

JPMorgan Chase 1.79

Barclays -5.20

Royal Bank of Canada -7.23

HSBC -8.14

Deutsche Postbank -8.77

Bank of America -11.42

BNP Paribas -14.83

Crédit Agricole -23.10

Banco Santander -30.48

UniCredit -30.79

Bank of Communication -41.39

BBVA -43.63

Source: BPA

n marketsentiment

worldwide–stockmarketperformanceofbankingindustriesin30selectedcountriesyearto31december2010

Source: BPA

The worst-performing four markets for bank shares in 2010 – Portugal, Ireland, Greece and Spain – will raise few eyebrows.

Macro economic storms are likely to harm sector prospects in the short term in the four markets, with bank sector perform-ance likely to remain depressed.

The top four markets – Sri Lanka, Argen-tina, Taiwan and the Philippines – are more noteworthy.

Asia is expected to remain the fastest-growing region in the world in 2011, with GDP growth of 7.2 percent in 2011 help-ing the majority of banks there to continue experiencing top-line growth.

Banking sectors forecast to perform strongly in 2011 include Indonesia and the Philippines.

Low credit penetration, favourable demographics and strong balance sheets will all help to boost banking sector per-formance in the emerging markets.

In the more developed markets, depressed credit demand will remain a key issue in 2011.

Margin pressure is also expected to per-sist while gloomy market expectations over a return to dividend payments will all serve to bear down on share prices.

In 2010, banking sector shares in the UK and US recovered only modestly – up by 3.45 percent and 11.39 percent respec-tively.

While US banks appear to be well fund-ed and credit trends are improving, mar-gin pressure and increased regulations are expected to deter investors.

littletocheerinvestorsIn particular, the impact of bearing down on overdraft fees and a slower rate of mortgage refinancing will adversely affect non-interest income and provide hardly any cheer for investors.

Mature markets which may offer better prospects in 2011 include Canada – the sector is well capitalised and has a strong record of capital distribution; higher divi-dend payments are expected for 2011.

In 2010, BBVA, UniCredit and Santander were among the worst-performing shares out of a selected group of the world’s larg-est bank stocks (see table, right).

With increasing concerns over Spain’s sovereign debt, exposure to local govern-ment banks and margin pressure, it is dif-ficult to be positive about share price pros-pects at Santander or peers Sabadell and Banco Popular. <

Page 11: Banking Digest

February 2011 y 9www.vrl-financial-news.com

corporate paymentsBanking & Payments Asia strategy

Strong balance sheets have given lead-ing domestic banks the opportunity to acquire other institutions, achieve scale and invest in new services, and

payments are at the heart of these activities. In the past, many of Asia’s emerging region-

al banks operated with semi-autonomous, in-country frameworks that primarily serviced local companies. Now, as banks and their customers expand into different markets, regional banks have recognised the need to provide a more unified treasury management solution.

Asian regional banks are no strangers to competition from larger global players keen to grow transaction banking business in the region. However, these regional banks see their core strengths in local relationships and willingness to lend as major advantages. Another benefit is that the foreign multina-tional corporations that would previously work with one lead bank from their home market and use an Asian bank for local needs are now diversifying.

The Asian corporate market is often described as unsophisticated in comparison to North American and Europe due to a greater reliance on paper- and fax-based pay-ment processes. The need to avoid time delays in paper processing and payment authorisa-tion between subsidiaries has significantly increased the appetite for electronic payments. Corporates are expecting the same level of integration with their banks and online serv-ices as global multinationals in the region.

Corporates are also demanding that their banks help them achieve a greater understand-ing of cash flow. For payments, particularly in the SME market, the most pressing require-ment is for notification of incoming payments or receipt of payment by counterparty via SMS and email alerts.

lowvaluepaymentsandremittancesSouth-East Asia and the Pacific are home to an incredibly mobile workforce. The Philippines and Indonesia are two of the largest sources of migrant workers. The World Bank and the G8 have been promoting programmes to help reduce the cost of remittances for migrant workers. But cost is also an issue for banks

wanting to get into this remittance market, which has traditionally been dominated by money transfer operators (MTOs) and infor-mal channels.

Options for banks delivering remittance services have traditionally included establish-ing a proprietary network, building a bilat-eral service with a correspondent or using open correspondent banking arrangements. But these are costly to maintain and scale. In some countries banks have partnered with MTOs in order to scale this part of their busi-ness. But Asia’s regional banks have acquired or grown operations in many of the countries that make up key remittance corridors. Many are therefore looking to use their regional infrastructure instead of the MTOs to deliver competitive services.

The potential reward for banks succeeding in this strategy goes beyond the remittance fees to encompass opportunities for gaining both new worker accounts and employer accounts.

alessfragmentedinfrastructureSouth-East Asian countries are significantly improving interoperability between their capi-tal markets and Real Time Gross Settlement (RTGS) system linkages. Hong Kong is the major hub for RTGS and multi-currency set-tlement. But for many banks, the use of CLS Bank, SWIFT and traditional correspondent banking relationships meets their cross-border high-value payment needs.

Numerous developments are also underway to increase the interoperability of low-value payment systems across the region. Many linkages between national ATM networks have been put in place to make life easier for tourists and migrant workers.

These are now being strengthened with the potential for cross-border POS and low-value funds transfers. Interestingly, the Asian Pay-ment Network Forum says it will soon offer cross-border funds transfer and e-POS serv-ices, in addition to the existing cross-border ATM cash withdrawals.

Another driver of interoperability of low value infrastructures is the adoption of SWIFT’s low value clearing solution and pos-sible use of the ISO 20022 message standard.

Work being carried out in Australia and New Zealand will demonstrate how well this works in practice.

movingtowardsthehubFaced with growth pressures, customer demands and new opportunities, banks are increasingly looking to modernise and improve their infrastructures. It is a complex task when so many parts of the banks’ opera-tions are running on legacy systems, making investment prioritisation essential.

Many are now considering the payments hub model for high value payments to support their transaction banking business because this promises a centralised infrastructure to handle payment flows. It also offers genuine flexibility and business functionality.

Low value payments, which are easier to process by nature, are typically managed dif-ferently in each country. Regional banks are therefore increasingly interested in the con-vergence of these onto a single hub. However, the difficulties in managing processes, connec-tions and rules for each market often mean this is not an immediate priority. This is likely to change as volumes grow and infrastructures achieve more interoperability.

Whether banks begin the payments hub journey with low-value or high-value pay-ments, they must work with partners that understand the intricacies of both and the business process change required.

Banks in the Asia-Pacific must look at the big picture for payments. Faced with growing customer demands and business opportuni-ties, creating a payments hub represents the best strategy to overcome domestic and cross-border payments challenges.

It’s paramount that a payments hub is intro-duced in conjunction with a fully coordinated payments strategy. Without this, the hub can’t be fully exploited, further fuelling the disjointed banking environment. By taking an integrated approach to modernise operations, banks in the region can realise a faster return on investment and ultimately gain market share from the larger global players. <

Richard Davies is director of APAC at Logi-ca’s Global Products Business

Interoperability in Asia-PacificThe global financial crisis that rocked the US and Europe has left banks in Asia-Pacific relatively unscathed. When it comes to transaction banking for corporates, they are now well positioned to battle global players for market share, writes richarddavies

Page 12: Banking Digest

10 y February 2011 www.vrl-financial-news.com

analysis Banking & Payments Asianews

Great Eastern Life Assurance Company (GEL), Singapore’s largest and oldest life insurer, made a significant move into Malay-sia’s Islamic, Sharia law-compliant takaful market with the launch of Great Eastern Takaful in December 2010.

Great Eastern Takaful is a joint venture with Koperasi Angkatan Malaysia Berhad, a finan-cial services company serving the 140,000 regular, voluntary and civilian members of Malaysia’s armed forces.

The launch followed the granting of Fam-

ily Takaful (life insurance) licences in Sep-tember 2010 to GEL, Dutch insurer ING Groep, Malaysian financial service company AMMB Holdings and American International Group’s Asian unit American International Assurance. American International Assur-ance listed on the Hong Kong Stock Exchange in October 2010.

Great Eastern Holdings chairperson Fang Ai Lian said: “Malaysia is a key and signifi-cant market for the Great Eastern Group.

“This makes it the perfect platform for us

to launch our takaful business. The market penetration rate for the takaful business in Malaysia remains relatively low.”

She added that, as part of the GEL, Great Eastern Takaful will be able to leverage on the 17,000 agents from GEL’s Malaysia distribu-tion channel. GEL, which holds a market share of over 20 percent in Malaysia’s conventional life market, is targeting premium income of MYR180 million ($57 million) from Great Eastern Takaful in its first full year of operation. <

companies

Great Eastern eyes Malaysia’s takaful market

Sweeping reforms to Australia’s A$1.3 trillion ($1.3 trillion) superannuation (super) market are on the way, following the government’s acceptance in large measure of recommenda-tions made by a committee chaired by a former deputy chairman of the Australian Securities and Investments Commission (ASIC) Jeremy Cooper. Reforms are due to come into effect in July 2013.

“The government is acting to reduce the unnecessary fees and charges on working Aus-tralians’ retirement savings, and to remove barriers to a low cost and efficient superannu-ation system,” commented Federal assistant treasurer and minister for financial services and superannuation Bill Shorten.

As an example of reform benefits, a worker aged 30 can expect up to A$40,000 more in retirement, according to the government.

The reforms, dubbed “Stronger Super reforms” by the government, include the intro-duction of a low-cost workplace default super product called MySuper. Through the pro-posed “SuperStream” package of measures, it is also intended to slash costs of processing of super transactions.

“The superannuation industry processes an estimated 100 million transactions a year at a total cost of A$3.5 billion,” said Shorten. He added: “Contributing to this inefficiency, each working Australian has, on average, three superannuation accounts.”

Another key feature of proposed reform is the banning of fees charged to super fund members for compulsory financial advice which a large proportion of members never use.

Supporting its aim to cut super fund mem-bers’ costs, the government proposes to increase surveillance of trustees with addi-tional powers, in this respect, to be given to

the ASIC, the Australian Prudential Regula-tory Authority and the Australian Taxation Office.

The government estimates that efficiency improvements will eventually save super mem-bers A$2.7 billion a year in fees, while overall, it predicts that supers will have total assets of A$6.2 trillion by 2036, of which A$550 bil-lion will result directly from reforms.

Commenting on reforms, the Institute of Chartered Accountants’ head of superannua-tion Liz Westover said changes to the super system over the last 20 years have unsettled fund members and eroded confidence in the super system.

“What we have now is a firm commitment to superannuation reform in the best interests of Australians saving for their retirement,” she said.

Also enthusiastic was super industry body Industry Super Network CEO David Whiteley.

He commented: “MySuper prohibits some of the most inappropriate practices in our compulsory system, such as payment of com-missions to financial planners where no advice is provided, flipping, and the payment of commissions by members for financial advice given to employers.”

Flipping refers to a practice by corporates of shifting people into personal super accounts with higher fees when they leave their jobs.

However, Westover stressed that while super reforms are a good start, serious tax issues must be resolved. The government acknowl-edged this in its reform proposal report, not-ing that more than 3 million low- and middle-income earners obtain no tax concession on their mandatory super contributions, with some of the lowest income earners paying more tax on their contributions than on their

ordinary income. The report added that under the existing

regime, the largest tax concessions typically accrue to the highest income earners.

However, reform is just one aspect of the super system that is attracting attention in Australia. Also under the spotlight is the use to which super members, particularly the less affluent, are putting funds obtained from their super investments. Regrettably, the picture is bleak, according to a study by Industry Super Network.

Specifically, Super Network found that only about 12 percent of households with less than A$100,000 in super-derived retirement savings make any allocation to pension prod-ucts, and in this savings range the allocation represented around 5 percent of savings on average. <

pensions

Australia embarks on reforms to superannuation market

Source: Australian Prudential Regulation Authority; Australian government

n superannuationmarkettotalassets(30June)

Page 13: Banking Digest

February 2011 y 11www.vrl-financial-news.com

digestBanking & Payments Asia news

eXpansion

HSBC continues Asia expansion in VietnamHSBC continues to expand in Asia and has opened two branches in southern Vietnam. The banking giant now has 17 branches in the country.

The bank said that one of the branches, based in the city of Dong Nai, was the first branch in the city to be operated com-pletely by a foreign lender.

The bank also said that the branch will offer business prod-ucts and services as well as cater for retail banking customers with personal financial services.

Another branch, based in Phan Dang Luu, will run as HSBC-HCM City Branch. Earlier this month, HSBC announced that it would target a growth in its retail banking business in Thai-land following the local govern-ment’s easing of its restrictive banking rules.

eXpansion

Korean bank Hana to increase China presence

South Korea’s fourth largest lender by assets, Hana Financial Group (Hana), has announced it is collaborating with China Mer-chant Bank (CMB) to strengthen its business in China.

A statement issued by Hana said that the co-operation agree-ment was part of the bank’s strat-egy to grow global sales.

The partnership with China’s sixth largest bank by assets will cover all areas, including retail banking, with a particular focus on growing Hana’s credit cards business in China.

Hana’s credit card unit, Hana SK Card, will eventually form a synergy with CMB, which has a 23 percent market share in the sector in China.

Although both lenders agreed to invest in each other, CMB will not participate in Hana’s financ-ing of a 51.02 percent stake in the Korea Exchange Bank, esti-mated to be around KRW4.69 trillion ($4.2 billion).

Hana has already financed

KRW3.49 trillion of the deal and is looking to raise the remaining capital by issuing common and preferred shares to complete the takeover in February.

eXpansion

ICBC bids for US-based Bank of East Asia

Industrial and Commercial Bank of China (ICBC), the world’s largest lender by market cap, has become the first Chinese bank to acquire a US-based retail bank, Bank of East Asia.

ICBC will pay about $140 million for an 80 percent stake in Hong Kong-headquartered Bank of East Asia’s US subsidi-ary, and acquire 13 branches in New York and California. ICBC already owns 70 percent of Bank of East Asia’s Canadian subsidi-ary, which has six branches.

This will not be the first attempt by a Chinese bank to acquire a US-based lender.

In 2008, China Minsheng Banking Corporation (Minsh-eng) made a bid to increase its 9.9 percent stake in United Com-mercial Bank (UCB), based in California, to become a majority shareholder, but US regulators rejected the deal.

eXpansion

French lender BPCE Asia and Africa move

France’s BPCE, created by the merger of Banques Populaires and Caisse d’Espargne in 2009, is to expand in Africa and East Asia through organic and inor-ganic growth.

The bank is shifting its retail banking business focus on emerg-ing markets as higher capital and liquidity reserves required under Basel III are straining its domes-tic retail banking operations.

The chief executive Francois Perol said that the banking sec-tors in Western and Central Afri-ca and East-Asia provided more business potential with faster and stronger growth.

The bank has 8,200 branches and 37 million customers in France.

BPCE already has operations

in Cameroon, the Congo, Tuni-sia, Morocco, Mauritius and Madagascar.

BPCE said that it has a budget of €1 billion for acquisition, but might raise this if needed.

eXpansion

ICBC makes push into Singapore

Industrial and Commercial Bank of China (ICBC), the biggest bank by market capitalisation worldwide, has applied for a full banking licence in Singapore.

If ICBC gets the approval from the Monetary Authority of Sin-gapore, it could set up branches and ATMs across 25 locations across the country – and become the first Chinese bank with a full banking licence in the country.

ICBC’s Singapore unit said it plans to introduce a credit card and accept more retail deposits in the Chinese currency yuan.

Its push into the Singapore market comes after China Con-struction Bank (CCB), the second biggest bank by market capitali-sation in the world, upgraded its banking licence in Singapore to wholesale in 2010.

But unlike ICBC, CCB is not planning to expand into the retail segment in Singapore for now, instead pushing into private banking.

regulation

RBI backs local incorporation for foreign banks

A discussion paper from the Reserve Bank of India has con-cluded that local incorporation for international banks provides more effective control in any future banking crisis.

To encourage lenders to oper-ate wholly owned subsidiaries – instead of operating India-based branches of a foreign bank – the government proposes to exempt conversions to a local subsidiary from capital gains tax.

There are currently 34 foreign banks with branch networks in India. Combined, the 34 interna-tional lenders’ assets accounted for about 7.65 percent of total

sector assets as at 31 March 2010, down from 9.03 percent the prior year.

Current Indian regulations do not permit an international lend-er to own in excess of 5 percent of a local bank.

strategy

ANZ set to upgrade website

Australia and New Zealand Banking Group (ANZ) has announced that it will be spend-ing $100 million to improve the functionality of its online plat-form.

The revamp of the bank’s online offering is an aggressive initiative to create and generate more online sales, the bank said.

ANZ’s chief executive Mike Smith has mentioned upgrad-ing the online platform since he came into the office in 2007.

The revamp is expected to begin this year and may last up to three years, the bank said.

ANZ also announced that it will target growth in the high net worth client segment.

insurance

CIMB Thai agrees Thai Life Insurance bancassurance deal

CIMB Thai bank (CIMBT) has agreed a ten-year bancassurance deal with Thai Life Insurance to offer insurance policies via the bank’s multi-channel banking services.

CIMBT will offer Thai Life Insurance’s services and policies in the bank’s branches, ATMs, online banking and mobile bank-ing channels.

The deal is an opportunity for CIMBT, a subsidiary of CIMB Group, to expand its bancassurance business, the bank said.

CIMBT said it is targeting income from the bancassurance business to contribute 20 per-cent to the bank’s fee income in 2011.

On a separate topic, the bank announced that it will roll out credit cards that feature a full-range of financial offerings. <

Page 14: Banking Digest

12 y February 2011 www.vrl-financial-news.com

mergers & acquisitions Banking & Payments Asiastrategy

The pursuit towards global growth for Asian banks is the basic rationale behind most cross border M&A activ-ity. With increased competition, it has

more or less become a necessity for banks to have a solid set up across geographies. But starting a new set up from scratch in an unfa-miliar territory is tough due to changing regu-lations, difficulty in obtaining licences and high costs. Hence, a merger or acquisition is a viable solution in such cases.

According to Li-May Chew, associate research director at IDC Financial Insights Asia-Pacific: “There is a strong push factor for outbound cross-border geographic expansion, especially for Asian institutions attempting to venture into neighbouring.

“These markets may be exhibiting expo-nential growth, but unfortunately, still present difficulties for new players to get business licences and a foot into the door in terms of an entrenched branding.

“As such, acquisition of already established local peers would provide for a quicker point of market entry in these instances whereby organic growth is not financially viable, or too painstakingly long.”

acquiringcapabilitiesIt would be much easier for a bank to gain expertise and enhance their skill-set via an overseas M&A rather than develop it organi-cally.

According to PwC report, What Lies on the Horizon? New Players – New Rules – New Opportunities, financial institutions across Asia-Pacific face some prevailing growth inhibitors including shortage of employees with the appropriate skill-sets and limitations stemming from a lack of investments and efficiencies in technology platforms to support evolving business requirements.

“Asian banks are either buying in order to become a main stream bank in a market they consider critical or they are buying to augment a needed but lacking expertise,” explains Johnson Chng, Bain and Company’s leader for Greater China.

The right acquisition can enable a bank to offer a wider array of products and services to its customers.

In some cases, an Asian bank may embark on an adventurous M&A because a good opportunity has presented itself. Given the devaluations of some Western banks during the financial crisis, such opportunities came to light.

A good example would be Nomura’s acqui-sition of Lehman Brothers in Europe.

“On one hand, it showed the need of Asian banks to step up their expertise and take advantage of a good opportunity; and on the other hand, it also exposed the challenges in integration between the Asian and Western cultures,” says Chng.

Chew expects more such opportunistic tac-tics to come into play going ahead.

“There are several Asian players that are highly capitalised and cash-rich, and foreign institutions exiting from this region would provide these Asian behemoths with potential acquisition opportunities,” says Chew.

However, building a strong case for a well planned investment is not as easy as it seems. M&A deals are notorious for falling short of value creation expectations. Cross border M&A deals tend to pose greater challenges than domestic deals.

challengesChanging regulations is an on-going challenge for many banks. With governments across the region looking to protect the interests of the domestic corporate sector, the guidelines for M&A are becoming increasingly stringent.

The bigger the deal, the tougher it may be to pull off. Sizeable deals lately have started rais-ing eyebrows and end up coming under the regulators’ microscope.

According to Chew: “Cross-border acquisi-tions for sizeable deals could raise concerns from local regulators regarding issues such as loss of price competition and consequen-tial job losses. This could result in regulators imposing specific measures [such as permissi-ble limits to job cuts] or a veto of the proposed merger.”

Operational issues include lack of reli-able and sufficient information to conduct a fair valuation, difficulty in extracting cost synergies and smoothly integrating opera-tions. Chng states the ability to integrate and

retain talent as the biggest challenge that a bank faces during a cross border acquisition.

According to the PwC report, once a tar-get is marked for acquisition, danger during execution lies in oversimplifying the valuation process when acquirers, in their enthusiasm to seal a deal, push aside doubts, or sacri-fice steps within the due diligence process. A good deal can sometimes turn into an ordeal if acquiring companies get caught up in the need to close the deal at all costs, and not heed warning indicators.

The report also states the dangers of mis-alignment between the perceived values of buyers and price expectations of sellers -when this chasm is too wide to bridge, arriving at a consensus, fair pricing, and determining what each party gets out of the consolidation, becomes a challenge.

Complex cultural challenges are always expected by both parties during overseas deals.

“Cultural differences, clash or resistance can definitely throw a spanner in the works – the cultural factor may be seen more as a soft issue but could turn out to be the most challenging to resolve,” says Chew.

“A collision of corporate cultures could mean staff not fitting into the new corporate culture and result in an exodus of talent. This in turn, could lead to disruptions in produc-tivity during the transitional period, higher than intended expenses from having to pay for severance packages and new recruitment, and shake shareholder and consumer confi-dence.”

m&aactivityexpectedtogainpaceThe pros of an overseas M&A for Asian banks will far outweigh the cons and the region is expected to see an increase in such activities by Asian banks. With the return of consumer and business confidence, banks are placing more importance on new avenues of growth instead of just focusing on ‘business-as-usual’.

Most industry experts expect M&A activity in the region to grow in the next 12 months. The formation of super-regional institutions and aggressive market share battles will encourage banks to actively step up their acquisitive ventures. <

Asian banks go bigger and bolderThe outlook for the mergers and acquisitions landscape among Asia-Pacific banks looks a lot busier once again. With many institutions looking for global expansion following the financial crisis, expectations of increased cross-border activity in the next 12-24 months are high. shubhreetk reports

Page 15: Banking Digest

Financialservicesprofessionalsacrosstheasia-pacificregionoperateintheworld’smostdynamicmarkets.Fromthesuperpowersofindiaandchinatofast-growtheconomiessuchasvietnamandindonesia,opportunitiesaboundforsuccessfulbankers,paymentprofessionals,technologyprovidersandmarketinnovators.

Banking & Payments Asia, anewpublicationlaunchedbyvrlandeditedoutofsingapore,continuesatraditionofhigh-qualityeditorialcoverage,andfocusesonkeyissuesinprivatebanking,retailbanking,cardsandpayments.

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Page 16: Banking Digest

14 y February 2011 www.vrl-financial-news.com

China Banking & Payments Asiacountryreview

While no one expects entering a market dominated by established players to be easy, foreign insur-ers in China appear to be finding

the going tougher than they had imagined. This comes through strongly in a survey by PricewaterhouseCoopers (PwC), Foreign Insurers in China.

Significantly, PwC found that all 21 for-eign life insurers and 10 foreign general insurers that participated in its survey have “dramatically lowered” their expectations of any increase in market share for 2010 and for the next three years.

Life companies expect their total market share to continue to hover at the current level of 5 percent in 2013, while general insurers expect their total market share to remain at around 1 percent in 2013.

PwC noted that this is a “dramatic” reduction in expectations compared with a survey it undertook in 2009, which found that private life insurers expect their com-bined share of China’s life market to reach 8 percent in 2012.

A PwC survey conducted in 2008 found that foreign life insurers were looking to achieve a combined market share of 10 per-cent in 2011.

Foreign life insurers enjoyed their highest market share in 2005 when their combined premium income stood at some CNY32 bil-lion ($4.8 billion), 8.9 percent of the total.

stiffdomesticcompetition“Foreign insurance companies operating in China have tried in vain to gain traction and increase their market share,” commented PwC insurance industry leader for Hong Kong, Peter Whalley.

He added: “Established domestic insurers and the aggressive geographic expansion of the smaller insurers are giving the foreign players a run for their money. Because of the stiff competition, some foreign partners are considering diluting their shareholdings, and looking towards domesticating their operations.”

Indicative of the gulf between foreign and domestic life insurers, the largest market share held by a foreign player in the first half of 2010 was 0.69 percent by Generali China Life. By comparison, domestic indus-try giant China Life held almost a 38 per-cent market share, second runner Ping An held an 18.3 percent share, and third in line New China Life held a 10.3 percent share. Generali China Life’s market share ranked it joint 12th among all 55 life insurers in China.

PwC actuarial practice leader for China Shu-Yen Liu said: “In the post-financial cri-sis era, many European insurers have been forced to re-examine their China positions. Other foreign players that have been in the market long enough and have failed to gen-erate satisfactory profits are also taking a

long, hard look at the future feasibility of their relationships with the local partners.”

A number of moves in this respect have already been seen by foreign players. In July 2009, Canadian insurer Sun Life Financial and state-owned conglomerate China Ever-bright Group announced a restructuring of their Chinese joint venture (JV) Sun Life Everbright Life. This entailed the introduc-tion of new strategic investors to Sun Life Everbright, a move aimed at more than dou-bling its registered capital to about CNY3 billion and reducing Sun Life’s equity stake in Sun Life Everbright from 50 percent to 20 percent.

In December 2009, ING Group followed with an agreement to sell its 50 percent stake in Pacific Antai Life, a JV with China Pacific Insurance to China Construction Bank, for an undisclosed sum. The deal is still subject to regulation approval and is part of the Dutch group’s restructuring under which all its insurance operations are being sold.

Notably, China Pacif ic Insurance announced in December 2010 that it intends on selling its 50 percent stake in Pacific Antai Life. China Pacific is seeking about CNY940 million for its stake.

In another reshuffling of stakeholders involving ING, its original JV partner in ING Capital Life, Beijing Capital Group, sold its 50 percent stake in the insurer to Bank of Beijing for CNY682 million in Feb-

Foreign insurers’ market share woesWhen it comes to gaining market share, foreign insurers in China have come to terms with the reality that, for now at least, this is unlikely to happen. But despite this, and other challenges in the regulation and bancassurance spaces, there is a general air of optimism that premium growth will remain robust

Page 17: Banking Digest

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ChinaBanking & Payments Asiacountryreview

ruary 2010. ING Capital Life was subse-quently renamed ING-BoB Life.

But restructuring in China is not always straightforward. In September 2009, Stand-ard Life announced it was in the final stages of talks with Chinese regulators for state-owned Bank of China to take a major-ity stake in its 50:50 JV with state-owned investment agency Tianjin TEDA Interna-tional, Heng An Standard Life.

15 months later, Standard Life issued a statement noting: “It has not proved pos-sible for the parties to reach agreement. Standard Life will continue to develop Heng An Standard Life in partnership with its existing joint venture partner.”

At the time the proposed deal with Bank of China was announced, Standard Life said the rationale was to gain the benefit of Bank of China’s extensive distribution capability. In the first half of 2010, Heng An Standard Life was one of only two foreign life insur-ers to experience a fall in premium income compared with the same period in 2009. It reported a 9.6 percent fall in premium income and Pacific Antai Life a 3 percent decline.

Views among foreign life insurers on fur-

ther consolidation or otherwise are mixed. PwC found that 15 of the 31 companies sur-veyed expect the number of foreign life and general insurers to stand at between 50 and 59 in 2013. A further six companies antici-pate a more significant increase in numbers to between 60 and 69.

Taking an opposite view, 10 respondents anticipate that consolidation will reduce numbers. There are currently 46 foreign insurers in China – 28 in the life insurance sector and 18 in the general insurance sec-tor.

Among potential new entrants cited by respondents are Japanese insurer Sony Life, Korean insurer Korean Life and US insurer Prudential Financial. A more definite future entrant is the US’ largest health insurer Well-Point, which announced in January 2010 that it is seeking a JV partner in China’s health insurance market.

WellPoint clearly has its eye on the poten-tial of China’s under-developed private health insurance market. In a recent study, rating agency Standard & Poor’s noted that China’s government plays a modest role in health care with its spending stable at about a quarter of total costs over the past

three decades. However, with an increasing number of people not enjoying employer sponsored health insurance, the proportion of total health expenses covered by individ-uals has risen from 30 percent in 1980 to about 40 percent at present.

bancassuranceForeign insurers participating in PwC’s sur-vey also expressed concern over the direc-tion of bancassurance as more banks enter the insurance space as direct competitors. This development follows recent relaxation of regulations limiting banks’ direct involve-ment in insurance and vice versa.

Illustrating the blurring of boundaries between banks and insurers, China’s larg-est bank, Industrial and Commercial Bank of China, announced in November 2010 that it is to acquire a 60 percent stake in life insurer Axa-Minmetals Assurance Compa-ny (AMAC) from Axa, Axa Asia-Pacific and Chinese metals and mineral trading com-pany Minmetals. The deal is worth about $180 million.

On completion of the deal, Axa’s direct stake in AMAC will fall from 26 percent to 14 percent, Axa Asia-Pacific’s from 25 per-cent to 13.5 percent and China Minmetals’ from 49 percent to 12.5 percent.

Also of note was the announcement in June 2010 by Ping An that it was to increase its stake in Shenzhen Development Bank (SDB) to 51 percent, in a deal worth CNY29 billion. Of the total consideration, CNY2.7 billion is in cash with the balance being con-tributed by the merger of Ping An’s 90.75 percent-owned Ping An Bank with SDB. Ping An acquired a 30 percent stake in SDB in September 2009.

In response to developments, PwC found that while some foreign insurers are re-as-

n chinaliFeinsurancemarket

Foreigninsurers

premiumincome*(cnym)

marketshare**(%)

marketshare***(%)

change****(%)

Generali China Life 4,052 13.39 0.69 46.1

AIA 3,866 12.78 0.65 3.4

Huntai Life 3,741 12.36 0.63 48.6

Sun Life Everbright Life 2,950 9.75 0.5 480

Aviva-COFCO Life 2,791 9.22 0.47 34.4

CITIC Prudential Life 2,691 8.89 0.46 38.9

CIGNA & CMC Life 1,282 4.24 0.22 278.2

Sino-Us MetLife 1,091 3.61 0.18 29.2

Aegon-CNOOC Life 956 3.16 0.16 9.8

Manulife Sinochem Life 871 2.88 0.15 22.5

Allianz China Life 830 2.74 0.14 18.1

United MetLife 706 2.33 0.12 119.9

Heng An Standard Life 669 2.21 0.11 –9.59

ING-BoB Life 614 2.03 0.1 65.9

Axa Minmetals Life 517 1.71 0.09 49

Pacific Antai Life 484 1.6 0.08 –3

Skandia-BSAM Life 427 1.41 0.07 63.6

Cathay Life 351 1.16 0.06 19.4

BoComm Life 323 1.07 0.05 822.9

Great Eastern Life 301 0.99 0.04 230.8

Haier New York Life 210 0.69 0.03 –7.9

Other seven 538 1.78 0.09 n/a

total 30,261 100 5.09 44.9

Notes: *January to June 2010; **Private insurers only; ***Total market; ****Compared with first half of 2009 Source: PwC

Notes: *First 11 months. Source: China Insurance Regulation Commission

n chinaliFeinsurancemarketpremiumincome

4

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China Banking & Payments Asiacountryreview

sessing their distribution channels, others are hoping to ride the bancassurance wave by leveraging on their bank partnerships.

PwC found that 11 foreign life insurers already distribute 50 percent or more of their products through the bancassurance channel and that for five the channel was responsible for between 70 percent and 100 percent of product distribution.

Eight life companies indicated that tied agents account for 30 percent or more of their product distribution with one insurer at 100 percent and another at 70 percent.

Only eight life insurers made use of bro-kers for distribution with the proportion of their products distributed through this chan-nel ranging from 5 percent to 35 percent.

Domestic insurers are also pursuing the bancassurance channel. Notably, China Life reported 70 percent of its CNY183.6 billion premium income in the first half of 2010 had been generated through bank branches.

At the end of June 2010, China Life had almost 43,000 employees dedicated to the bancassurance channel while its bank branch outlets stood at some 97,000.

Bancassurance is also significant for New China Life which in the first half of 2010 generated 54 percent of its CNY52.3 billion premium income through bank branches. By contrast, Ping An’s strategy has favoured its agent force with only about 15 percent to 20 percent of its premium income generated through bank branches.

discriminationA source of major irritation for foreign insurers in their quest for market share is that they compete with their domestic counterparts on a far from level playing field. This was highlighted by the American

Chamber of Commerce in China (AmCham) in April 2010.

AmCham noted: “International insurance companies want to compete fairly in the China market. Although they are allowed market entry, their ability to compete fully is hampered, to the detriment of Chinese consumers. An overwhelming number of American and other foreign insurers oper-ating in China are registered in China and are therefore Chinese companies; yet, they still face regulation discrimination.”

Expanding on foreign insurers’ problems, AmCham said that while establishment of branches and sub-branches is critical to market expansion, there is persistent une-qual treatment of foreign insurers compared with domestic insurers.

AmCham added that under the new insur-ance law that came into force in 2009, the insurance regulation authority must exam-ine applications to establish a branch and render a decision within 60 days of receipt of an application.

AmCham stressed that foreign insurers experience much longer waits before receiv-ing approval to establish branches while domestic insurance companies, even if newly established, characteristically receive multiple branch approvals concurrently on the same day or within days of each other. In addition, AmCham noted that foreign insurance companies rarely, if ever, receive multiple branch approvals concurrently.

determinedtostayHowever, despite challenges foreign insurers are not about to give up on China.

“Foreign insurance companies see China as an underinsured market with huge upside potential,” said Whalley.

He also noted that foreign insurers “are on a hiring spree again as staff turnover is expected to return to pre-crisis levels”.

Specifically, PwC found that among life insurers, a 60 percent increase in total staff numbers (from a current 18,799) is antici-pated by 2013 while the number of agents is expected to increase by 134 percent, from 107,200 to 250,000.

Despite the growing importance of the bancassurance channel, tied agents remain a significant factor in the distribution equa-tion. This was highlighted by a bank con-sumer study by Allianz China Life which revealed that one out of two bank customers prefer to purchase insurance from an insur-ance agent, 11 percent through banks and 4 percent through brokers.

Growth in staff numbers on this scale will be no easy task with “finding and retaining good personnel” cited by foreign insurers as by far their biggest operational challenge.

Foreign insurers also face competition for agents from major domestic insurers that have deployed agents in vast numbers. China Life, for example, reported having about 777,000 agents at the end of 2009. Ping An has some 420,000 agents.

Despite an overall stagnant market share, PwC found that four foreign life insurers are anticipating that their premium income will double in 2010, while five anticipate pre-mium income growth of between 50 percent and 70 percent. Only two insurers expect their premium growth to be below 20 per-cent.

By 2013, 17 of the foreign life compa-nies surveyed expect their combined gross premium income to increase by 70 percent, from CNY62.3 billion in 2010 to CNY106 billion in 2013. <

4

n ForeignliFeinsurancecompaniescombinedmarketshare

Notes: *First half of 2010 Source: PwC

n chinaliFeinsurancemarketdomesticinsurers(firsthalfof2010)

Notes: Total premium income CNY509 billion Source: PwC

Page 19: Banking Digest

February 2011 y 17www.vrl-financial-news.com

James Richards, IEBanking & Payments Asia comment

Juniper Research recently predicted that one in five mobile users will use some kind of financial service on their device by 2013. However, this adop-

tion will not be without its challenges and the risk associated with mobile, as perceived by many banking customers, is one of the most significant to overcome.

In order to ensure 2011 delivers on its promise, it is crucial banks offer mobile appli-cations that deliver a high-quality customer experience within a secure environment.

The problem is the necessary security tech-niques often make a mobile application too cumbersome which turns away many poten-tial users and dilutes the value of this interac-tive channel.

driversimpactingmobileadoptionProving the business benefits of delivering a mobile banking service, IE commissioned a YouGov survey that found that one in four of Generation Y (aged between 18 and 34) would improve their opinion of their bank if it offered mobile phone banking services.

A separate IE poll of the financial services industry itself demonstrated UK bank execu-tives are tuned into these customer needs. 36 percent rated increased customer satisfaction as the primary driver for investing in mobile services.

However, banks and consumers are wary about the security challenges that must be navigated. According to KPMG, 79 percent of global consumers are concerned about potential unauthorised access to personally identifiable information (KPMG, Consumers & Convergence IV, 2010).

Financial institutions that are develop-ing their mobile banking strategies must weigh up the different routes to market. Two approaches are ‘apps’ and mobile web – both of which have their own advantages and drawbacks.

choosingtherightformatApps allow organisations to provide a highly tailored and valuable service to their cus-tomer base. Apps are viewed by many as the preferred approach for providing the richest mobile experience to the end consumer and

one which represents the greatest potential for innovation.

On the other hand, the major benefit of mobile web is its wide range of accessibility – any device which can connect to the internet can access mobile web pages. This means it is easier to support from an IT perspective but the trade-off is a less rewarding end user experience.

When it comes to security, mobile appli-cations can cryptographically secure your data which means that all a user needs to do is prove that they are authorised to use the app with a simple but secure password. This delivers a straight-forward and relatively rapid check for the consumer but one that is also very secure.

it’snotallabouttheappstoreMobile security also varies significantly between different platforms. The most preva-lent platforms that are driving the adoption of mobile apps are RIM (Blackberry), iPhone, Windows Mobile and Android.

Blackberry is more traditionally associ-ated with the business user and is, therefore, subjected to the potential of usage restric-tion by corporate IT departments, whereas iPhone and Android are rapidly becoming the defacto choice for the consumer.

There are currently no mobile app security standards across the industry and as a result, each platform has its own requirements for banks seeking to launch financial services applications.

For example, applications being put for-ward for the AppStore for Apple undergo stringent security tests and can be crypto-graphically signed by both the vendor and Apple itself, whereas on the Android plat-form, there currently isn’t a trusted distribu-tor of applications.

It is important to consider the various secu-rity requirements and factor them into the mobile development project timeline. Some financial institutions are opting to roll out one app at a time to make the process easier, reflecting the challenge that in-house teams currently have in terms of the right resource to deliver their mobile strategy.

However, this approach is not ideal as it

means the service is not available to the wid-est pool of customers.

balancinguserexperiencewithsecurityHow a bank asks its customers to identify themselves and then check they are who they say they are is critical to both security and the user experience.

There are multiple approaches around cus-tomers supplying various inputted credentials but banks need to be careful that the proc-ess is not too complex as this increases the likelihood that customers will revert to other banking channels. Instead, security must be balanced with the end user experience; for example, relatively light authentication to simply check a balance but more additional layers added for tasks such as paying a bill or transferring money.

Maintaining customer security in the event that a customer loses their mobile device is also an important factor.

thefutureofmobilebankingIt is clear the threat of malicious activities aimed at mobile consumers will never go away and that these threats should be tack-led pro-actively.

However, mobile applications and services may be more secure than many realise and in the case of smartphone apps, they offer a degree of security in advance of the online world. Spreading this message will be cru-cial if the anticipated widespread adoption of mobile financial services in 2011 is to become a reality.<

James Richards is director of mobile at IE

Is the industry ready for mobile banking?Numerous analyst reports have recently highlighted what many in the industry already knew: 2011 will represent a tipping point in the mass adoption of mobile financial services. But is the financial services industry truly prepared for this game-changing event?, asks Jamesrichards

n surveywouldmobilephonebankingservicesimproveyouropinionofyourbank?

agerange positiveresponse(%)

18 to 24 27

25 to 34 24

35 to 44 16

45 to 54 10

55+ 3

Source: YouGov/IE

Page 20: Banking Digest

18 y February 2011 www.vrl-financial-news.com

biometrics Banking & Payments Asiaindustrytrends

For financial services companies, the essence of security is verification of customer identities – a task that has become more onerous with increasing

use of remote communications, such as call centres, in an era when identity theft is rife. As a simple, highly successful security solu-tion in the call centre space, a growing number of financial services companies are turning to voice biometrics.

Australian financial institutions have been particularly proactive in adopting voice iden-tification, including insurer Aviva Australia which was acquired by National Australia Bank (NAB) in June 2009.

“We began exploring the use of voice bio-metrics in 2008,” Aaron Tunks, Aviva Aus-tralia’s manager, operations reengineering and project delivery, told BPA.

“The more we explored voice biometrics, the more we knew that we could use it effec-tively,” continued Tunks. The end result was the adoption of a voice recognition solution supplied by Salmat VeCommerce (SVC), a unit of Salmat, an Australian company specialising in customer communications technology.

SVC’s solution, which is integrated into Avi-va’s Genesys telecommunications platform, incorporates voice recognition technology developed by US speech and imaging technol-ogy specialist Nuance. By coincidence, NAB had at the same time as Aviva begun exploring voice identification using SVC’s solution. Both Aviva and NAB launched their voice recogni-tion services in June 2009.

To use the voice biometric service, custom-ers must enrol by speaking a unique identifier which is converted to a numerical algorithm and entered into a database. Enrolment takes about three to four minutes and whenever an enrolled customer phones the call centre their voice is compared to those existing in the database to determine a match, using some 100 specific identifiers.

According to SVC, accuracy rates of more than 99 percent can be achieved with voice verification. This compares with accuracy rates of 92 percent for fingerprints and 75 per-cent for face recognition technologies. Only iris scanning verification accuracy exceeds that of voice.

limitedenrolmentSo far, enrolment into Aviva’s voice identifi-cation service has been limited to high-fre-quency callers, especially financial planners, said Tunks. He explained that in part, limited enrolment is because a great deal of attention has been focused on the integration of Aviva into NAB.

At present, fewer than 5 percent of Aviva’s customers are enrolled but it is envisaged that up to 15 percent will eventually be. Aviva has about 300,000 customers.

But despite the low enrolment level, benefits of voice identification are strongly evident, said Tunks. From a customer perspective, he explained that voice identification provides the “wow factor” in terms of swifter service compared with wading through a set of iden-tification questions and enabling call centre agents to immediately greet customers by name.

From Aviva’s perspective, time is money and faster processing adds up to cost savings. Tunk said the average time saving using voice identification is about 20 seconds per call and given that financial planners often call several times a day this adds up to a considerable amount of time saved.

“We have already been able to reduce our call centre headcount by about three,” said Tunks. At annual salaries of around A$40,000 ($40,000) each that is already a tidy sum, he added.

Cost savings run further. For example, Tunks said voice identification coupled with an account number enables queries to be directly routed to the correct department in a partly processed form. This can cut turna-round times on queries by up to a few days, he added.

anotherpioneerWhile Aviva and NAB’s adoption of voice identification puts them ahead of most com-petitors, in Australia they are by no means the only converts to the solution. Among the most notable pioneers in the field is health insur-er Australian Health Management (AHM) which launched a SVC-based voice identifica-tion service in late-2006.

“We knew that verbal identity checking was no longer as secure as it could be,” said AHM operations manager Melinda Charlesworth. “After all, sometimes the people most likely to commit identity theft are those closest to us who are aware of our name, address and date of birth.”

According to Charlesworth, more than 420,000 calls are received through AHM’s main contact number each year. At least 80 percent of these calls require caller verifica-tion, which using conventional means takes on average 28 seconds, or 11 percent of the total average agent talk-time per call.

Charlesworth explained that AHM custom-ers enrolled in the voice identification service simply say their membership number to be identified.

“We’ve had overwhelmingly positive feed-back,” she said. By November 2010, of AHM’s 250,000 customers, 97,288 (39 percent) had enrolled for its voice identification service.

technologyfortodayVoice identification is a technology that is available at a time when consumers are grow-ing increasingly concerned about the level of security offered by conventional means such as passwords, PINs and personal questions. Growing security concerns were highlighted by a survey conducted in Australia on SVC’s behalf in 2009 in which 67 percent of respond-ents expressed fears that conventional iden-tification processes do not provide adequate protection of their personal information.

The attraction of voice identification was found to be significant with the highest pro-portion of respondents – 45 percent – selecting it as the preferred method. In a parallel survey conducted in New Zealand for SVC, 52 per-cent of respondents selected voice verification as the most preferred security measure. <

“weknewthatverbalidentitycheckingwasnolongerassecureasitcouldbe”Melinda Charlesworth, Australian Health Management

Voice identification comes of ageFor call centre operators, precise identification of customers is a key priority and one that, in an era of rampant identity theft, is becoming ever-more onerous. BPA examines a user-friendly solution, voice identification, and the significant benefits two Australian insurers are enjoying from its implementation

Page 21: Banking Digest

February 2011 y 19www.vrl-financial-news.com

digestBanking & Payments Asia news

regulation

RBI restricts PayPal services in IndiaPayPal has been forced to restrict its services in India as a result of new transaction guide-lines set by the Reserve Bank of India (RBI).

In a bid to comply with the new rules laid out by the RBI regarding the processing and settlement of export-related transfers via online gateways, Dickson Seow of PayPal’s cor-porate communications team confirmed in a statement on the company website that PayPal will be altering its Indian serv-ices.

From the beginning of March 2011, Indian merchants will no longer be able to receive pay-ments of more than $500 from countries abroad.

Furthermore, Indian mer-chants will no longer be able to make purchases directly from their PayPal accounts. All funds must be transferred into Indian bank accounts within seven days of the confirmation of receipt from the buyer.

“We hope this 30-day advance notice period will enable you to plan your future use of our serv-ices accordingly,” said Seow to PayPal’s Indian users in a state-ment.

“We sincerely thank you for your understanding and patience as we continue to com-ply with the RBI guidelines in a timely manner.”

This is not the first time PayPal and the RBI have encountered difficulties with each other.

PayPal had its payments sus-pended for a month in February 2010 until they received approv-al from the RBI.

regulation

South Korea’s ailing savings banks to tap emergency funds

The South Korean government is to consolidate individual emergency funds set up by the country’s commercial, invest-ment and savings banks, insur-

ers and brokerages to insure against potential bankruptcy of savings banks.

South Korea’s banks continue to suffer from toxic loan books following excessive financing in the real estate market during the property boom pre-2008.

The Financial Services Com-mission (FSC) announced that it wants to generate KRW20 trillion ($17.9 billion) for the consolidated fund to prepare for potential market instabil-ity and avoid excessive deposit withdrawal.

Half of the fund will come from combining the individual funds that the financial sectors, such as commercial banks and insurers, have set up for emer-gency bail-outs for companies in their respective sector.

Another KRW5 trillion will be generated from the govern-ment budget set aside for cor-porate restructuring; KRW2 trillion from the fund set up by the Korea Federation of Savings Banks; the savings bank associa-tion will also contribute KRW2 trill ion and the remaining KRW1 trillion will be paid in by commercial banking groups and the Korea Asset Management Corporation.

strategy

HSBC joins Dubai Trade’s Rosoom

HSBC is set to join forces with the online portal and trade facil-itator of Dubai World, offering its direct debit services to Dubai Trade customers through the centralised e-payment gateway Rosoom.

According to Middle Eastern website ameinfo.com, the agree-ment will allow Dubai’s trade community access to their HSBC accounts online and give them the ability to carry out transac-tions with terminal operators DP World, Jafza and DMCC.

“We are pleased to welcome HSBC to Dubai Trade’s expand-ing family of trade enablers,” said Mahmood Al Bastaki, director of Dubai Trade.

ameinfo.com reported that HSBC will work closely with its

customers and Dubai Trade to roll out this functionality over the coming months.

The deal was signed in the presence of Al Bastaki by SVP and managing director of DP World UAE region Mohamed Al Muallem and deputy CEO of HSBC UAE Marcus Hurry.

payments

DOCOMO and KT unveil cross-border NFC

Japanese mobile operator NTT DOCOMO and South Korean telco KT Corporation have announced that they are work-ing together to develop cross-border near field communica-tion (NFC) services.

The two companies are look-ing to incorporate NFC into their respective devices, networks and billing platforms to facilitate payments between Japan and South Korea.

DOCOMO is also working with a number of companies including Visa Inc, electronics manufacturer Samsung, digital security company Gemalto and e-money services provider bit-Wallet to develop other cross-border payments capabilities.

“Based on our long commer-cial experience in various finan-cial convergence services, the NFC collaboration between KT and DOCOMO will contribute to building a sustainable global ecosystem,” said Hyunmi Yang, executive vice-president of KT.

The mobile operator has been providing NFC-based Osaifu-Keitai mobile-wallet services in Japan since 2004, while KT has been operating a post-paid mass transit service in South Korea since 2002.

strategy

SBI targets unbanked villages by March 2012

State Bank of India (SBI) is tar-geting representation in 12,421 unbanked villages by March 2012, as it ramps up implemen-tation of its financial inclusion plan.

SBI said that it had provided basic banking services to 2,012

villages with populations of at least 2,000 by the end of Janu-ary and aims to cover more than 5,000 villages by the end of March.

SBI said that this would take its share of branches located in rural and semi-urban areas to nearly 67 percent.

In the past four years, SBI has set up more than 15,000 customer service points of busi-ness correspondents as well as 13,000 business facilitators, to increase its outreach.

SBI chairman O P Bhatt said: “The bank has already reached out to more than 100,000 unbanked villages.”

In January, SBI announced plans to grow its mobile bank-ing channel – a central plank of its financial inclusion strategy – by teaming up with India’s largest mobile phone provider, Bharti.

eXpansion

UBP applies for Singapore licence

Union Bancaire Privée (UBP) has applied for a banking licence in Singapore as part of its strategy to grow its business in Asia.

The Swiss private bank seeks approval for a merchant bank-ing licence to extend its current advisory presence, allowing it to book private and institutional clients across Asia.

UBP’s chief executive Michel Longhini said the merchant banking licence for the regional headquarters in Singapore will ensure a complete presence in the bank’s Asia wealth markets.

As part of its growth strat-egy across Asia, the bank has appointed Stephan Repkow as chief executive of Private Bank-ing in Asia.

Repkow has more than 10 years banking experience in the Asia-Pacific, having worked for Deutsche Asset Management, Citigroup Private Bank and BNP Paribas.

UBP has shifted its focus on emerging markets since 2008, in particular to Asia, Eastern Europe, Latin America and the Middle East. <

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interchange Banking & Payments Asiaregulation

The Federal Reserve Board’s new inter-change rules usher in changes to debit rewards, current account products and an era of tighter margins for issuers.

An amendment in the Dodd-Frank Act gives the Fed the duty of establishing interchange rates that are “reasonable and proportional” to the costs that issuers incur on transactions. Financial institutions with less than $10 bil-lion in assets and prepaid cards are exempt from the provision.

Depending on what the Fed does, the pro-vision could result in the loss of up to $9.1 billion in yearly revenue for issuers, according to a recent study by CardHub.com, a website that tracks card products.

Issuers' debit portfolios already took a hit from the overdraft rules that took effect in July, requiring banks to obtain customer consent before charging fees to cover certain overdrafts.

That, combined with the debit interchange provisions of the Dodd-Frank Act signed into law in July, has issuers considering add-ing account fees, raising minimum balance requirements and reducing rewards to recoup revenue losses.

JPMorgan Chase & Co was the first to dis-close its plans when an executive said at a con-ference in December 2010 that it would stop issuing debit rewards cards in February.

Then, US Bancorp announced it will begin instituting a combination of ending debit card rewards, instituting debit card annual fees and ending free checking in the next six months.

Industry representatives objected loudly to the plan, warning it would set precedents for government price controls in other industries and describing the rules as anticompetitive.

A key question is who will ultimately ben-efit from the savings? The Federal Reserve's proposal to cap interchange fees at 12 cents per transaction would enable retailers to pass on annual savings of $10 billion to $13 bil-lion to consumers – if they ever get to the consumers.

Banks and card networks maintain that retailers will pocket the savings, leaving con-sumers with little more than higher costs for banking and reduced rewards programmes.

In releasing its proposal in January, the Fed

said it found the cost to banks for process-ing is between 7 and 12 cents per transaction. On the average debit card transaction of $40, for example, the fee is around 24 cents. Wall Street and the banking industry were expect-ing that the proposed cut would call for fee cuts of no more than 60 percent. The proposal is close to a 73 percent cut.

whatalternatives?The proposal left plenty of room for the Fed to manoeuvre as it works on a final rule but sug-gested the central bank is seeking to cap such fees at closer to the 12-cent mark.

The proposal would also seek to limit net-work exclusivity. Under one alternative, a card issuer or payment card network would have to ensure a debit card transaction could be car-ried on at least two unaffiliated networks.

The Fed said that could include one signa-ture-based network and one PIN network as long as those networks were not affiliated.

Under another alternative, an issuer or card network would have to ensure a debit transac-tion could be processed on at least two unaf-filiated signature-based networks and two unaffiliated PIN-based networks.

Fed staff noted that banks use revenue from interchange fees to offer reward programmes and cut costs on deposit accounts, and noted that they realise that as a result, banks could trim reward programmes and raise fees on consumers if the proposal is finalised.

Fed officials indicated they would listen very carefully to comments on the plan, noting that this is a new area for the central bank.

“Sometimes when we put out a proposed rule, we’re pretty convinced that we basically got it right absent something we didn't expect getting in,” said Fed Governor Dan Tarullo.

“The difficulties in implementing this leg-islation, the subtleties the staff have had to deploy trying to come up with a proposal both suggest that we should be more than perhaps usually open to a variety of comments.”

Fed staff also made it clear the impact of the proposal would depend largely on how merchants and banks implemented the new rules. The Fed voted to open the proposal up to public comment and set a target date of 21 April 2012 by which a new rule must be ham-

mered out; banks will then have another three months before it goes into effect on 21 July.

Visa declined to comment on the proposal. MasterCard issued a press release that said the Fed had failed to follow Congress’ “statutory directive to consider the full range of costs incurred by issuers”.

Tien-tsin Huang, an analyst who covers the payments networks for JPMorgan Securities, said in a research note that the Fed’s proposal did little to clear up the potential negative results that Visa and MasterCard face from a lower interchange environment.

According to Huang, under the proposal, the Fed said banks could receive a potential safe harbour for rates of seven cents or below but would be allowed to set them up to 12 cents to pay for processing costs of the trans-action. Under another option, the Fed would not offer a safe harbour but would still cap rates at 12 cents.

A rate of 7 to 12 cents per transaction rep-resents an 80 percent to 90 percent cut in the “blended average” for current signature and PIN rates, Huang said.

All change in the USThe Federal Reserve Board’s new interchange rules promise to reshape the US payments landscape. charlesdavies looks at the wide-ranging impact of the decision, the winners and the losers, and considers the new restrictions and opportunities that are opening up as a result

n usinterchangeproposals

Interchange fees paid by merchants to large banks

$22.8bn

Maximum potential amount affected by Durbin Amendment

$18.2bn

Fed drops fees by 20% Interchange fees decrease by $3.6bn

Decrease per card: $7.30

Fed drops fees by 35% Interchange fees decrease by $6.4bn

Decrease per card: $12.84

Fed drops fees by 50% Interchange fees decrease by $9.1bn

Decrease per card: $18.35

Fed drops fees by 65% Interchange fees decrease by $11.8 billion

Decrease per card: $23.85

Fed drops fees by 75% Interchange fees decrease by $13.6 billion

Decrease per card: $27.52

Source: CardHub.com

Page 23: Banking Digest

February 2011 y 21www.vrl-financial-news.com

interchangeBanking & Payments Asia regulation

Jaret Seiberg, an analyst for the Washington Research Group, said in a note to clients that “we have trouble seeing much that is positive here [for banks]”.

“Issuers will lose more on higher cost pur-chases and may gain on very small purchases,” Seiberg said.

Retailers, who had successfully pushed Congress to adopt a provision in the regula-tory reform bill that required the Fed to set debit card rates that were “reasonable and proportional” were ecstatic.

“Today’s announcement is a step forward for the effort to bring relief to merchants and consumers who for too long have faced excessive fees and unfair rules imposed by big banks and credit card companies,” said Kath-erine Lugar, executive vice-president for public affairs for the Retail Industry Leaders Associa-tion. “Proposed cost reductions will undoubt-edly result in savings for consumers.”

The Fed acknowledged its proposals still let banks profit from interchange fees, since the financial reform legislation that led to this round of rule-making only specifies that fees have to be “reasonable and proportionate”, not that banks cannot still earn profits.

Supporters of lower fees say the loss of debit rewards won't be too painful. The pro-grammes are not that widespread. Only about 16 percent of checking accounts have pro-grammes, and an estimated 30 to 50 percent of rewards are unused.

As an early mover on debit rewards, JPMorgan Chase offers a potential blueprint for how US banks will deal with the reduced interchange. From February the bank will no longer issue debit rewards cards to new cus-tomers, Chase CEO of retail financial services Charlie Scharf told analysts at the Bancana-lysts Association of Boston Conference.

Scharf told the analysts the legislation will likely result in “a transfer of value from lower mass-market consumers to merchants” and will force banks to increase account fees for most customers in order to compensate for operational costs that debit interchange fees help to offset.

Chase is developing several new current account products, it plans to introduce in February 2011 that will require customers to maintain a specific balance and have multiple accounts in order to avoid fees, Scharf said.

Issuers could also explore explicit fees for debit cards, maintenance fees on the checking accounts the cards are linked to and the elimi-nation of debit rewards programmes, among other options.

newrewardsOptions are emerging, including Bling Nation FanConnect, Clovr and Cardlytics, among others.

Bling Nation is using NFC-enabled stickers that turn cell phones into mobile wallets and has added social networking capability. With the help of Merchant360 to supply targeted rewards and discounts, BlingNation allows customers to ‘like’ merchants on Facebook at the point-of-sale. Merchants, meanwhile, can use FanConnect to track buying behaviours.

Cardlytics also offers merchant-funded rewards to debit card users in the form of dis-counts based on their transaction histories.

Cardlytics uses the data feeds of its bank partners to analyse the debit card activity of online banking customers, and then matches retail merchants up with customers based on their purchase behaviours. The merchants then can direct loyalty offers to customers who spent a preset amount at their stores.

Clovr, a rewards start-up based in Mas-sachusetts, offers merchant-funded rewards targeting customers based on their purchase histories, but by making the card-linked offers mobile, moves banks and merchants a step closer to the ultimate in rewards: a location-aware, POS-targeted solution.

Clovr enables card issuers to send text-based rewards based on the transactions of bank customers that opt in to the programme. Users click on web-based ads, then link the offer to the credit or debit card they agreed to use in the system. Card accounts are credited with discounts after the purchase, with confir-mation coming via text.

Though many issuers will cut debit rewards across the board, others may offer the pro-grammes to “premium customers” who maintain high balance levels or use multiple products. The changes could also usher in a renewed emphasis on the use of merchant-funded rewards programmes as a way for

banks to continue offering programmes with-out having to pay their full cost.

But even with the uncertainties surrounding future funding of debit rewards programmes, there can still be a positive business case for many issuers supporting debit rewards because of the popularity of debit payments and the product's central role in customers' relationships with banks.

To date, US banks have largely failed to adequately promote their existing debit card rewards programmes to consumers, accord-ing to data from Discover Financial Services’ 2010 Debit Issuer study.

Pulse recently released additional findings of its 2010 Debit Issuer based on a survey by Boston-based consulting firm Oliver Wyman Group conducted among issuers in February and March last year.

Pulse says 58 percent of issuers in 2009 still offered some type of rewards programme, up from 53 percent in 2008. However, only 17 percent of survey participants said they are considering launching a debit rewards pro-gramme in 2010, down from 24 percent last year.

The data shows that, in programmes where as many as 75 percent of bank customers were automatically enrolled in a debit rewards pro-gramme, as few as 9 percent actually registered on the rewards programme's website. Several issuers already have rewards tied to bill pay-ment and other transactions, according to a recent report from Corporate Insight.

Broadening debit rewards programmes to cross-promote other bank products could be a key to success in the future. But the days of mass-market debit rewards are coming to an end, and free current account banking could be close on its heels. <

n us

numberofcardholderstakingadvantageofmonthlymerchant-fundedrewardsatselectedbanks

Source: Aite Group

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micropayments Banking & Payments Asiaanalysis

The movement to digital content has been a gradual process and one that has given way to a strikingly different business model for many organisa-

tions, especially that of the media. Dwindling advertising sales has forced

many publications to introduce a paywall on their online content offerings. In 2009, Rupert Murdoch’s News Corporation was the first to try to monetise their publications’ digital content by announcing online content would no longer be free.

Other big players in the media, such as the Wall Street Journal and the Financial Times, soon followed suit and in doing so have cre-ated a culture in which people now expect to pay for access to news and features from well-known national newspapers.

Subscription-based business models rep-resent the ideal case for digital content pro-viders as they generate regular and reliable revenue streams. But there is a fundamental flaw in their design, since the model does not attract single-use customers who do not want to commit to an on-going commercial relationship.

International consultancy firm Value Partners has acknowledged this trend and has released a report, Capturing the Micro-payments Opportunity, which analyses the status of the market and examines whether the expectation placed on the industry is a realistic one.

“Through research and client experience Value Partners has identified and presented a number of critical success factors that any successful micropayments solution will have to exhibit to successfully compete for a piece of this growing opportunity,” says the report.

The report was published in partnership with the Welsh Assembly Government and Banking & Payments Asia’s parent company, VRL. It was launched by Sheriff Fiona Woolf, on behalf of the Lord Mayor of London, at a breakfast briefing in January.

Micropayments is one of a number of areas the industry is keeping a close eye on but payment providers have not yet brought a universally viable, cost-effective solution to the market – at least not publicly.

On the one hand, this reluctance to step out of the shadows and be the first to mar-ket with a micropayments solution is under-standable. It is a relatively new phenomenon and its uncertainty can hinder investment plans. Value Partners estimates the European micropayments market is currently worth €6 billion ($8 billion) and is set to grow to over €15 billion by 2015.

According to the report: “This [prediction] corresponds to a 15 percent annual growth rate over the next four years; a rate that is unique to micropayments and unparalleled in most other channels or payment types.”

This projection should stir some enthu-siasm and drive the payments industry to quicken the creation of a solution.

howlowismicro?Micropayments are universally known as low-value transactions but its definition can vary widely between different organisations.

Alternative payment method PayPal defines the term as “transactions of less than $12”, consultancy firm InnoPay claims a “micropayment is a payment of very low value, often under a euro” and advisory firm Cartio.com says it is where “small sums are

transferred from one person to an organisa-tion quickly and without fuss”.

For the purposes of the report, Value Partners has defined micropayments as “an online or mobile, real-time or deferred, finan-cial transaction below €5, which initiates the instantaneous delivery of digital goods.”

In an effort to explain the lack of devel-opment in the industry, the report claims “online, cost and technology constraints have so far hampered the development of economical and convenient solutions to sub-€5 transactions”.

While there are a number of payment serv-ices currently in use for processing micropay-ments, to-date no emerging micropayment service has been able to fully address each stage of the micropayments service experi-ence. These stages include customer reach, fast transaction speeds, economic individual transaction costs and a simple payment user interface.

The report suggests the clients of a micro-payments service are collectively crying out for a universal micropayments solution, which would introduce a level of consistency and control over the market.

This would involve a collaborative effort

Is there a silver bullet?The payments industry is awaiting a ‘silver bullet’ universal solution to capitalise on the growing interest in micropayments. Who would have thought €1 transactions would generate so much interest? louisenaughton looks at a new report that analyses the different approaches to low-value payment processing

n micropayments

positioninthepaymentslandscape

Source: Value Partners analysis

realworld(shops,

restaurant,transport,

mailorder)

virtual(internet,

mobile)

under€5

cash

cheques

over€5

credittransfer/directdebit

cardpaymentschemes

ewallets

telecoms&ispbilling

aggregators

micropayments

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micropaymentsBanking & Payments Asia analysis

on behalf of the industry – a move that tradi-tionally takes a great deal of time to put into place due to different agendas that usually, but not always, send conflicting messages.

Another challenge in the construction of a universal solution is that there is fragmenta-tion on both the supply and demand side of micropayments – meaning neither the pay-ments industry nor the customers of such solutions have a cohesive, clear view on how to proceed.

Value Partners claims there is scope to increase its original prediction that the micropayments market will grow to €15 bil-lion by 2015 but only if the market is at its full potential. For this to occur, all suitable technologies, including video on demand (VoD) enabled set-up boxes, fast broadband connections and smartphone mobile devices, should become ubiquitous across Europe.

Should this happen, the consultancy firm says its projection would then double, taking its estimate to €30 billion.

emergingbusinessmodelsThe report classifies the available and emerg-ing business models serving micropayments into four distinct categories – payment cards and payment service providers; eWallets; aggregators, virtual payment interfaces, online payment transfers and P2P internet payment service providers; and telcos and ISP billing systems.

“We have researched and interviewed a number of online payment providers, both as part of our project work and for this piece of research, from incumbent domestic and pay-ment schemes to new entrants,” says Franc-esco Burelli, principal at Value Partners.

“We have also looked at the potential of industry players in related industries to extend their billing and payments capabili-ties into the micropayments space.

“Our research suggests, in line with the current market situation, that it is unlikely any one player will dominate the market. Rather there will be a number of successful models each suitable to a specific industry, audience, platform or type of transaction.“

Electronic payment cards, traditionally Visa and MasterCard, currently serve the micropayments business but it is difficult to see how they can continue doing so.

While the networks provide their clients with a strong payment infrastructure designed to cope with a high volume of transactions, the cost of acceptance to merchants arguably renders the micropayment almost worthless.

Value Partners worked with a major media producer that collected small payments of between €1 and €2. It faced fixed and vari-able charges ranging from 5 percent to 60 percent of the transaction value. Broadly

speaking, the report claims the general cost of accepting card transaction varies between acquirers, which has to take into account a fixed processing cost that can range from €0.04 to €0.35.

“Fees of this kind can prohibit a compa-ny from accepting micropayments and as a consequence puts pressure on the industry to come up with a better solution,” says the report.

Undeterred by the fees challenge, the payment card industry is looking upon the micropayments opportunity with excite-ment. One unnamed international card scheme interviewed for the report said it saw a “significant opportunity” associated with mobile payments as a potential extension of the person-to-person (P2P)/money transfer value proposition.

An unnamed top-tier global payment processor also told Value Partners that it has recently invested in the growing micropay-ments processing opportunity.

However, as the report says, the interest in the micropayments opportunity may be grow-ing throughout the payment card industry, but the issue around creating a “viable price competitive offering” is not going away.

eWallets store their value in either real or virtual currencies and is typically funded through a payment card or automated clear-ing house (ACH) transaction – ie, credit transfer or direct debit.

It is claimed to represent an effective solu-tion for those merchants and consumers willing to engage in a “dedicated payment relationship”. This is because merchants benefit from prepayment and low transac-tion frequency, as the transaction costs can be spread over a number of micropayments, and consumers enjoy a perceived seamless and instantaneous functionality.

Value Partners warns those eWallet provid-ers interested in developing a micropayments opportunity to be conscious of the payment provider’s role in the user’s payment experi-ence and the ownership of the client’s finan-cial arrangement.

“While the offering might be convenient and well-designed, the merchant must sur-render the financial relationship to the third party eWallet as well as access to the most granular customer data,” says the report.

Players in the aggregation, virtual payment interface, online payment transfer and P2P internet payment markets often have a similar business model to those of eWallets. The pay-ment is initiated by an account and password authentication, and the transaction funded in real-time by a card or ACH transaction.

As the funds are not pre-loaded, the cost of the transaction can be higher than that of a payment card or ACH transaction as an addi-

tional cost layer is added. Again, the report says the pitfalls of such

a solution are that digital content providers lose ownership of the customer as well as a lack of control over deposited funds. Aggre-gators are also closed-loop, which forces a customer to maintain multiple log-in details with multiple merchants.

A well-known example of an aggregat-ing business model is Apple’s iTunes store. It monetises its low-cost music and app pur-chases by aggregating up consecutive pay-ments.

“Apple does not process each purchase separately but delays processing with the expectation that as customers tend to buy music in waves, the customer is likely to make subsequent purchases at the iTMs in the near future,” says the report.

“By consolidating a series of purchases, Apple makes a smaller number of larger transactions and therefore pays a smaller amount overall due to processing costs.

“If Apple were to incur typical payment costs in the region of £0.50 per transaction, given that record companies typically get up to 70 percent of the sale price as royalties, this level of payment cost would render the business unviable.”

Telecom companies and Internet Service Providers (ISPs) have begun to offer mer-chants third-party billing services, which the report claims “exploits the telco’s pre-existing financial relationships and billing infrastruc-ture”.

In light of developments such as the oppor-tunity to differentiate and exploitation of ‘sunk costs’ – whereby proprietary billing systems can perform billing for the operators core activity, Value Partners has seen increas-ing investments being made by telecoms and ISPs operators.

While there are benefits to this platform, the report outlines that “inherent limitations” exist in the offering made by telcos and ISPs reselling their billing capabilities.

“The merchant must surrender its financial relationship with its consumer to the billing telco operator and accept that its reachable customer base is restricted to that of the tel-co’s own customer base,” says the report.

“Given that merchants are traditionally reluctant to give up financial relationships and that no telco operator can provide uni-versal reach, there is likely to be some devel-opment before this can occur.”

“As the industry grows we will see more activity and it is probable there will be new entrants in the medium term. However, as the overall model of any payments business is dependent on achieving critical mass, we believe we are likely to see a wave of con-solidation taking place in the not too distant 4

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micropayments Banking & Payments Asiaanalysis

future,” says Henry Alty, a consultant at Value Partners.

“However, as the overall model of any payments business is dependent on achieving critical mass, we believe we are likely to see a wave of consolidation taking place in the not too distant future.”

newmediaAccording to the report, TV Video-on-demand (TV VoD) is poised to become the greatest growth area for micropayments as it acts as a complement to existing TV sub-scriptions and as a service allowing those consumers who choose not to take part in pay-TV services, access to on-demand shows and films.

Value Partners forecasts Europe will grow to approximately 30 percent of the global TV video-on-demand industry. PC VoD is expected to remain a relatively small part of the total micropayments opportunity as it is likely to be supplanted by TV VoD as it becomes easier and more convenient for consumers.

The increasingly widespread penetration of smartphones, as well as new app-based devic-es such as tablets, is forecasted to drive the

number of app users and more importantly, more apps per device will increase the aver-age revenue per user.

The report claims it remains to be seen how successful more general news providers will be in driving revenues. Initial indications are that The Times’ paywall has not been met with immediate success, with a reported 105,000 subscribers and pay-per-use con-sumers, including those who have paid for the iPad and Kindle editions. There has also been a 62 percent fall in monthly unique visi-tors.

As monthly subscriptions generally exceed the €5 value of micropayments, Value Part-ners has only sized one-off payments and has found them to be a relatively small oppor-tunity compared to other micropayments opportunities.

“Our research has indicated that there are a number of critical factors that a success-ful micropayments solution should fulfil,” says Alty.

“It will be necessary to ensure that all the key constituents are satisfied – consumers, merchants and regulators. This will involve tailoring the provider’s business model to suit the type of product, customer and transac-

tion that is being undertaken, ensuring that the process is price-competitive and maximis-ing merchants’ ability to create a holistic view of their customers and transactions.

“Any micropayments platform that can meet these challenges will be well placed to take a share of the growing industry.”

The report concludes there is currently no single answer to the desire for a universal micropayments solution and the aspiration for a ‘silver bullet’ solution is unrealistic.

“In order to capture the largest potential customer base, it is suggested that a digital content provider offers its customers a wide range of different payment options driven by customer payment preferences and its ability to condition, limit and drive them,” says the report.

The demands placed on micropayments, both from the consumers and industry in finding a commercial solution is one that sits in the early stages of development. Value Partners expects considerable activity in the space over the next five years and believes this will lead to short-term fragmentation of micropayment offerings that will be tempered in the long-term by their economic viability and user preference. <

thegrowthofe-commerceandbroadbandinfrastructureWestern European broadband penetration has grown from 19% of households in 2004, to 56% at the end of 2009, in addition a further 9% of households have access to mobile broadband.

Building on this, widespread consumer adoption of online payments has fuelled considerable growth in global e-commerce.

This behavioural shift, supported by a thriving online payments industry has increased online spend from £150bn in 2004 to over £350bn in 2009.

Online shopping is so popular that even in the global recession of 2008-2009, as UK high street retailing revenues contracted by 2.5%, online sales rose 17.8%, compared year-on-year.

Moreover, a survey of UK consumers showed that more than two-thirds of the population aged 14 or above buy goods and services online at least once a month in 2010.

growthofsocialnetworks,onlinegamingandvirtualgoods-relatedbusinessesThe online gaming sector has rapidly gained popularity among internet users.

2007 – 2009 saw a proliferation of online games with built-in virtual currency systems and virtual goods stores, currently attracting over 400m monthly active users. The use of these online games has been driven by integration into social networks.

For example, FarmVille, a game designed by San Francisco-based Zynga, has more than 63 monthly million active users who each month spend an average of 15 minutes a day in the game.

Typically, virtual goods are bought for small sums of money within online games and are supported by a range of micropayment-style payment processes – for example, Facebook introduced their own virtual currency, called Facebook Credits, in mid-2010 which can be used to buy virtual gifts or spent within applications.

US sales of virtual goods are projected to reach $2.1bn in 2010.

emergenceofnewonlinepaymentsmodelsanduserinterfaces In the past decade, Value Partners has seen robust growth in the alternative online payment solutions space.

Companies like Google, PayPal and Amazon have leveraged their respected brand names and established trust-based customer relationships to enter the financial services market, while incumbent payment and banking infrastructures have increased their reach and new entrants are trying to establish themselves.

Consumers and merchants are driving the alternative payments market as they look for new ways to pay and get paid.

n micropaymentenablers

themicropaymentsevolutionhasbeenenabledbythree,mutuallyreinforcingtrends

Sources: Value Partners analysis; Screen Digest, Internet Retailing Magazine; eMarketer; AppData; Inside Virtual Goods

4

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senior movesBanking & Payments Asia people

n people

seniormovesinasia-pacific

country name movedfrom movedto oldposition newposition

Asia James R Hicks Global Payments n/a President, Central Europe President, Asia-Pacific

Asia Vanessa Wang Mercer Citi GTS Partner & Asia head, retirement, risk and finance

Head of pension services, Asia-Pacific – global transaction services

China Charles Li The Royal Bank of Scotland Plc

ANZ Country Executive and head of global banking, China

Chief executive – China

China Christine Yip ANZ United Overseas Bank Chief executive, China SVP, Greater China

Hong Kong Ronald Chan Pacific Eagle Asset Management

Manulife Asset Management

Deputy chief investment officer Senior managing director, head of equities, Asia

Hong Kong Roger de Basto – HSBC – Head of transaction management, equity capital markets of global banking, Asia-Pacific

Hong Kong Chris Bendl AIG Manulife Financial Chief executive Senior vice-president, head of regional wealth management, Asia

Hong Kong Li Cui Hong Kong Monetary Authority

The Royal Bank of Scotland Head of external division Chief China economist

Hong Kong Wyn James – JP Morgan Private Bank – Executive director

Hong Kong Steven Lo Citi Private Bank n/a – Global market manager, Hong Kong

Hong Kong & Singapore

Varun Minocha RBS Coutts n/a Investment advisory Head, Non-Resident Indian business, North-Asia

Hong Kong & Singapore

Lavin Mok Edmond de Rothschild Asset Management

BlackRock Head of Asia sales MD of Retail sales for Hong Kong & Singapore

Hong Kong Jimmy Pang AllianceBernstein Bank of Communications International – Asset Management

n/a CIO and head of asset management

Hong Kong Rajeev Sahney HSBC (London) HSBC Global head of retail, corporate sector group, global banking

Head of corporate sector group, global banking, Asia-Pacific

Hong Kong Richard Straus Citi Private Bank (Taiwan) Citi Private Bank – Head of global family office and institutional business, North-Asia

Hong Kong Ronald Tham – HSBC – Head of coverage and family office, Hong Kong, global banking

Hong Kong Paul Thurston HSBC (London) HSBC Hong Kong (to join March 2011)

Chief executive, consumer and commercial banking

Chief executive, retail banking and wealth management

Hong Kong Pying-Huan Wang Deutsche Bank Swiss-Asia financial services

Head of investment management Managing director, Hong Kong

India Sidharth Punshi Jefferies India JP Morgan – Managing director, investment banking

Singapore Jai Arya BNY Mellon n/a Head of client management, Asia-Pacific

Head of global business, sovereign institutions group

Singapore Tan Yeu Cheng DBS UBS – Executive director & cluster head

Singapore Gary Goh Credit Suisse UBS – Executive director & desk head

Singapore Barend Janssens ABN AMRO Royal Bank of Canada CEO, Asia private banking Head of emerging markets wealth management

Singapore Alexander Kwan Société Générale Private Banking

HSBC Private Bank Director of funds selection Senior director of funds selection

Singapore Yvonne Koh Credit Suisse UBS Vice-president, private banking Director & client adviser

Singapore Edmund Lin Bain & Company n/a Senior partner and head of Financial services practice, Asia-Pacific

Co-head of global financial services practice

Singapore Manish Singhai Arjava Capital Aviva Investors Principal portfolio manager for Asian ex-Japan equities

Chief investment officer, Asia equities

Singapore Loh Swee Sung Credit Suisse UBS Senior assistant relationship manager

Associate director and client adviser

Singapore Kevin Talbot ANZ Private Bank Aviva Investors – Chief investment officer, fixed income

Singapore Wendy Toh DBS Private Bank UBS Associate director Associate director & client adviser

South Korea Woong Park Woori Investment & Securities

Mirae Asset Global Investments

Head of equity and head of overseas business

CEO and international CMO, Asia-Pacific and EMEA regions

Taiwan John Wang Goldman Sachs Citi Private Bank – Head of Taiwan

Source: BPA

Page 28: Banking Digest

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iPad apps Banking & Payments Asiatechnology

For private banks, having a mobile device applica-tion has swiftly become a ‘when’ not ‘if’ question.

The dramatic take-up of mobile banking (m-banking) in Asia is driving this point home. Now increased interest in Apple’s iPad is springing the creation of bank-ing apps exclusive to ultra high net worth (UHNW) and high net worth (HNW) client sets.

JP Morgan, Citi Private Bank and Bank of America/Merrill Lynch (BofA/ML) have recently released new, free, private bank iPad-specific apps for client real-time asset management and access to bank research content. So should other banks follow suit?

The case for implementing apps is compelling when look-ing at the take-up of m-banking globally. A study from Juniper Research (see chart) forecasts that in 2011 more than 270 million people worldwide will use mobile devices to view their bank details. Another Juniper report forecasts that mobile banking usage will grow to reach 400 million people worldwide by 2013 (see chart on p27).

Howard Wilcox, author of Juniper’s mobile banking strategy report, says the iPad app trend is similar to that of mobile banking.

“It is all about providing customers with more flexibility and personalised service,” Wilcox says.

“In simple terms, an iPad is somewhere between a laptop and a smartphone in screen size. Apps for the iPad attract users who are perhaps not keen on the small screen form-factor of the phone, but who maybe do their banking by laptop already and want an alter-native in certain circumstances when they are out and about,” he adds.

Wilcox underlines apps as an additional channel banks are rolling out to increase mobile banking figures.

Finger-tipbankingWhat then do JP Morgan, Citi Private Bank and Bank of America/Merrill Lynch’s iPad apps offer? At the heart of the JP Morgan private banking app for US clients, users can view account balances, transaction history and keep watch on investment positions. Clients can transfer funds between accounts, make payments, send wire transfers and access gen-eral market data from JP Morgan.

The Citi private bank mobile app, available to the bank’s UHNWs, is a research appli-cation. It feeds private bank thought pieces, enabling free access to leadership publications and monthly global economic commentary. Banking advisory services and global, equity and fixed income research also underpin

the Citi offering. The BofA/ML research library app for institutional clients is similar, allowing access to the bank’s proprietary global research.

App banking is being adopted quickly by American and European private banks. However, Far-East Asia has shown the heaviest uptake of mobile banking and is expect-ed to remain the largest region to bank on-the-go by 2013. Interestingly, bank apps have not yet chosen to specifically harness this Asian market opportunity.

newwealth,newstrategyPart of banks’ technological push is aimed at the growing numbers of younger HNW individuals. In November 2010, Citi Private Bank unit head Jane Fraser announced Citigroup’s plans to remodel the bank, partly to tap the next generation of wealthy heirs who are expected to inherit $5 trillion in assets.

Private bank development around the next generation’s burgeoning wealth demo-graphic is an intelligent push,

says Nordea Bank spokesman Paul Malpas. “If you compare private bank clients in the

past decade to those around today and the shifting demographics, they are now younger, savvier and want selective information in an intelligent way,” says Malpas.

“iPad users do not want to be inundated with third party information. The content in our banking app is designed for the individual, it is bite-sized and easier to digest,” he says.

clientsandbankersdoubleuponappuseAt JP Morgan, bankers have been the test bed for the new app technology, says client adviso-ry experience specialist William Karczewski.

“We used their feedback for planning the development of the iPad and the mobile plat-

iPad app quick factsBank of America Merrill Lynch Research Library app• For institutional clients• Equity recommendations on 3,200 companies, credit recommendations on 860 corporate bond issuers• Risk assessment feature• Trade insight into 40 currencies and 60 economies

Citi Private Bank Mobile app• For UHNW clients • Global, equity and fixed income research• Monthly global economic commentary from

chief investment officer

JP Morgan• For US private bank clients• Account balances, investment positions, and

banking transaction history• E-newsletter from chief investment officer

App to the futurePrivate bank mobile applications are providing the world’s wealthiest clients with cutting-edge banking capabilities through their mobile devices. As several private banks launch iPad apps, emanel-shenawi asks whether this increased demand for client-portfolio transparency can be balanced with high-level security

Page 29: Banking Digest

February 2011 y 27www.vrl-financial-news.com

iPad appsBanking & Payments Asia technology

form in general. The bankers like the whole relationship view,” he says. “They can see their own accounts together and just because they are not in a face-to-face client meeting does not mean clients are not connecting with the brand, the bank and all our capabilities.”

Despite it being too early to analyse usage numbers since the its release, Karczewski anticipates that about 50 percent of JP Mor-gan’s online banking users will take advantage of the iPad push.

Citi Private Bank director of internet strat-egy Alison Szmulewicz explains that the Citi app’s use has also broadened beyond clients.

“We have seen a good number of client acti-vations across the Americas, Europe and Asia, but even more so we have seen a huge amount of internal activations.

“We want our bankers to embrace this tech-nology for them to be educated and informed about it,” she says.

transparencydrivestechnologySunGard, a manufacturer of mobile bank-ing programmes, has created several apps specifically for the private banking industry. Its Ambit Mobile Banking arm, Geneva-headquartered and launched in 2009, offers a solution suite for private banks connecting clients to their portfolios through the financial institution’s core banking application. These are accessed from mobile devices including the iPod touch, iPhone and iPad.

SunGard’s president of Ambit private bank-ing Daniel Bardini says the increased need for transparency in private banking has led to more technological answers.

“The financial crisis created the need for private banks to be more transparent than before. Pre-crisis, the client demand for their relationship managers to have a 360-degree

view of their assets was not at the same level as today,” says Bardini.

He explains that international HNW clients at SunGard-supported Swiss banks rarely used to travel to Switzerland to connect to their portfolios.

“Now we have moved from a situation where HNW individuals want to have access to their position in real time 24-hours-a-day. The needs of both HNW individuals and banks have evolved into new possibilities and we very rapidly add new functions into the mobile banking application to align to this,” he says.

Geneva-based private bank CIM Banque was the first customer to go live on the Ambit mobile banking solution in April 2010.

CIM Banque director and IT manager Nicolas Dilorio says the cost to implement the banking app stood at CHF45,000 ($48,117).

heightenedsecuritythreats?But how safe is confidential client data? Secu-rity is a joint effort between the mobile suite manufacturer and bank to ensure safety.

Bardini says SunGard’s data security chan-nels ensure that no confidential information from the service is stored on the application.

“When a client logs into the suite, the full content will be downloaded, then disappear when logging off – no data will be stored on the device itself,” he explains.

The recent Wikileaks-linked cyber attacks on financial organisations online have brought risk management to the fore, Bardini adds.

“Back at the bank, our customers have an architecture where they segregate confidential client information from operational informa-tion.”

theoutlookforappbankingThe key question for banks is whether iPad and similar tablet technology is a ‘must have’. Speculating on the future of mobile banking, analyst Howard Wilcox expects that banking by iPad will grow but does not see it dominat-ing just yet.

“Apps will not affect widespread take-up of mobile banking globally. They are designed and remain for a targeted user segment,” he says.

But tapping markets with keen users of mobile banking devices, like Asia, could be a key strategic move for banks, particularly as Asian emerging markets are the centre for industry expansion when targeting the surge of Asian UHNW wealth.

The development of app banking could see banks venturing further into app personalisa-tion to mould deeper into HNW lifestyles. Wilcox predicts an increase in tailored con-tent, such as travel and insurance products, possibly suited to clients that need to travel to manage offshore assets and business.

Citi and JP Morgan say the next chapter sees app capabilities branching out across Android and Blackberry technologies. JP Morgan has already received requests for a Blackberry-specific service.

The development of more tablet devices such as the new Samsung Galaxy tab, released at the end of 2010, raises the question of how private banking apps will adjust to the grow-ing number of formats.

“I don’t think it will be sustainable for the industry to manufacture a special app for every device released,” says JP Morgan’s Karc-zewski. “It will be interesting to see how the service may merge [across formats].” <

Source: Juniper Research

n mobilebankinggrowthtrendsglobalmobilebankinguserssettodoubleby2013

0

50

100

150

200

250

Millions

North America 12 %

Central & Eastern Europe 5%

Indian Sub Continent 4%

Latin America 3%

Western Europe 24%

Far East & China 38%

Rest of Asia- Pacific 6%

Africa & Middle East 8%

Source: Juniper Research

n geographicbreakdownoFmobilebankingusersin2011highdemandform-bankingservicesintheFareast&china

Page 30: Banking Digest

28 y February 2011 www.vrl-financial-news.com

survey Banking & Payments Asianews

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strategy

The road to retail excellenceAlthough the nature and impact of current industry trends vary by country and region, the majority of retail banks are still recovering from significant financial stress endured over the past three years.

Margin pressure, sharp rises in loan loss provisions, declines in asset volumes, rev-enues, and profits have taken a toll.

A report by consultants Boston Consulting Group (BCG), called Global Retail Banking 2010/2011: The Road to Excellence, argues that retail banks must take bold and forceful steps to achieve higher levels of both opera-tional and customer excellence in order to reverse these trends.

BCG benchmarked 12 of the top 30 retail banks across North America, Europe and Asia-Pacific. These 12 banks account for roughly 450 million customers, 51,000 branches and over $14.5 trillion in assets.

The benchmarking enabled BCG to iden-tify three key levers that banks must utilise in order to achieve operational excellence: streamline the organisation, develop efficient and effective processes and improve overall end-to-end performance.

The report said that although none of the top global retail banks has demonstrated the ability to excel in all of these areas and become a true “process and productivity lead-er,” the scope of the opportunity is leading many banks to embark on multiyear efforts to improve.

“We strongly believe that banks should continue this endeavour,” said Andy Maguire, a BCG senior partner and co-author of the report.

He continued: “Better still, they should accelerate their efforts and investments in order to reach a high level of operational excellence as quickly as possible. Those that do will not only reap vast benefits but also create the ability to sustain them.”

According to the survey, the most successful banks have a high number of customer-facing sales and service employees (see graph, right). These banks also have a high level of industri-alisation, characterised by simplified, stand-ardised processes that maximise the number of new accounts and loan decisions per opera-tions full-time equivalent.

Further, they possess a high level of proc-ess automation that features straight-through processing (STP), with up to 90 percent of new account openings and 70 percent of unsecured credit originations processed with STP.

Banks often hurt themselves, the report said, with poor customer service and expec-

tations they cannot consistently meet. Thus they must be more actively supportive of their customers – for example, by warning them of potential overdraft scenarios and helping them figure out whether they can afford the car or house.

The report noted that the primary check-ing or current account is the anchor of the customer relationship. Because of the cross-selling opportunities these accounts present, customers who hold them are up to 10 times more profitable than those who do not – and are up to 25 percent less likely to have over-draft or default difficulties.

Multichannel excellence goes beyond avoid-ing competition between channels and. It also means monitoring channel action and using that information to drive quality interactions with customers; it means shifting from a pas-sive approach – to proactive, sales and service-oriented, multichannel management.

“Many, if not all, retail banks are afraid of regulatory intervention. Yet, customer excel-lence may be the ultimate defence. Banks that capture and maintain their customers’ profiles – their demographics, risk attitude, product history, transaction and channel behaviour, etc – will be less troubled by regulation. They really do know their customers and act in their interests, which is what regulators care about most,” concluded Maguire. <

Note: Full time equivalents do not include corporate functions, such as risk, finance, HR and IT Source: BCG

n benchmarkingproductivity–full-timeemployeescustomerfacing

Page 31: Banking Digest

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New reports for the cards and payments sector

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Page 32: Banking Digest

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