The technological evolution unfolding before us is nothing short of extraordinary. Just on cognitive capabilities alone, what took living organisms more than two billion years of evolution to attain will only take advanced technology such as artificial intelligence (AI) mere decades.
The speed of technological evolution is making a huge impact on global economies, rapidly accelerating globalisation in an increasingly digital world. This, in turn, it is reshaping the way economic agents, including financial institutions, define, operate and adapt their business models as well as their social functions.
In this “global-digitisation” context, there are ample opportunities for financial institutions to harness these new technologies to improve efficiency and better service their clients. Fintech in particular represent a chance to promote collaboration within and outside of the industry. However, increasing interdependency and hyper-connectivity introduced by new technologies are also going to generate risk at multiple levels, which will require adapted response and control.
This article looks at blockchain as an example of one of the big benefits of new technologies. It also discusses the possible risks that come with embracing these technologies, and cites Singapore as a case study on how governments can help address these risks to create a more vibrant and competitive financial services landscape.
Big benefits: The case of blockchain
An example of a new technology within the Fintech space is distributed ledger technology (DLT), also known as blockchain. This technology is expected to progressively disintermediate transactional ecosystems like trade finance, securities trading and money transfer businesses by replacing the frictions embedded within the usual transaction processes such as reconciliation, confirmation and settlement with faster, cheaper and more integrated processes .
Traditionally, the transactional ecosystem is centralised and has one single trusted part. DLT decentralises the ecosystem with trust built upon and reinforced by a number of participants. The more blocks (transactions between the participants) there are, the longer and stronger the chain (trust between the participants). Eventually, there will be more stability within the ecosystem due to the very fact that collaboration is required for blockchain to work optimally, thereby de facto shifting the paradigm of competitive advantage based on information asymmetry towards more information transparency, process integration and partnership between the DLT participants.
From a Chief Risk Officer’s (CRO) perspective, private/permissioned DLT could be a fantastic opportunity to better identify, assess and manage the risks arising from the organisation’s activities. It could give access to volumes of important data and information insights that allow better anticipation and sensing of risks. Together with powerful analytics capabilities, this may drastically improve decision-making for the C-suites.
Additionally, based on the assumption that DLT will lead to more collaboration within the industry, the CRO should benefit from a more collaborative risk management ecosystem. Selected critical risk information would be shared and leveraged between institutions and some efforts would be mutualised through partnership, with a view to protect the community of interests formed by the DLT participants.
The mechanism of permissions attached to a DLT can also facilitate the audit and compliance processes and lead to significant cost reductions for financial institutions. Eventually, it should contribute to better management of the systemic risk, a priority for the regulator.
In the long term, DLT could very well pave the way for a more sustainable and inclusive economy, based on mutual trust, active collaboration and partnership of its participants for better protection of the global social ecosystem.
Consider the risk
DLT is just one example of many new Fintech that present vast opportunities to improve the business environment and make it more transparent and efficient in the long term. However, we are in very early stages of “global-digitisation” yet, and it is far too premature to know exactly what the future consequences and implications will be.
Furthermore, with every opportunity comes risks and these risks need to be addressed so that the primary purposes of deploying new technologies can be kept intact: to facilitate sound business relationships between organisations, enhance the identification and management of emerging risks, and eventually help protect the public’s interests and promote a sustainable and resilient economy.
Risk #1: at the company level
Financial institutions will need to address the high level of complexity that DLT and other Fintech are progressively introducing. Failure to address this will result in opaque black boxes that no one really understands or controls. Hence, the CRO needs to be engaged as early as possible and at the strategic level to put together a robust governance and control framework that considers the implications of new technology usage in the organisation. The implications, particularly in terms of operational risk, can be significant, with the multiple impacts of digital transformation and Fintech on anti-money laundering and countering the financing of terrorism (AML/CFT), data privacy, outsourcing and cyber-risk.
Risk #2: at the industry level
There is fierce competition within the financial services industry. Incumbent players such as banks and insurance companies are potentially in danger of losing their usual intermediary and fiduciary functions to emerging Fintech companies and the highly disruptive services such as peer-to-peer financing and public/permission-less DLT. In addition, the involvement of the bigtech such as GAFAM (Google, Amazon, Facebook, Apple and Microsoft) will also contribute to reshaping the financial services industry going forward. In this context of heightened competition, the financial services organisations that can offer the best experience and interface to clients and work out the best partnerships and alliances with both fintech and bigtech will thrive. In an era of perceived regulatory divergence within the financial industry, the role of regulators will be critical to harmonise requirements and expectations across industries.
Risk #3: at the society level
The social impact made by new technologies such as Internet of Things, Robot Automation Process and machine learning is especially significant in the areas of privacy and employment. There have been ethical questions raised around the number of jobs that could eventually be automated and handled by computers and algorithms in place of actual people. Bill Gates recently advocated for a tax on robots in order to compensate for the replacement of the workforce. South Korea is the first country to introduce a robot tax in 2017. So far, there is no clarity on what this might mean for societal evolution in the medium term, and studies tend to diverge on whether it will create or destroy jobs in the future. But, all agree that our dependence on machines will continue to increase dramatically.
Risk #4: at the humanity level
Artificial Intelligence (AI), and the anticipated exponential learning curve some observers believe will come with it in the future, may fundamentally reshape our existence. It may even threaten it if we do not define strict rules to maintain control of these technologies and prevent the reaching of the critical inflexion point where the relation between machines and humans shifts . Computer scientist Ray Kurzweil talks about “singularity”, referring to the phenomenon when machines will surpass and increasingly widen the gap between artificial and human intelligence. If we are not vigilant, there may come a time where machines will be able to use their own AI to create even more intelligent machines and supplant the human race .
How Singapore addresses these risks
In his opening remarks at the Singapore FinTech Festival last year, Monetary Authority of Singapore (MAS) Managing Director, Ravi Menon said, “Singapore is on the FinTech journey because we want to make pervasive a culture of innovation in our financial sector. […] But FinTech must safeguard trust and confidence.” This balance between innovation and confidence is indeed becoming increasingly fundamental in the light of the risks highlighted above. In this respect, Singapore is not only leading the way in terms of pure innovation potential but also when it comes to managing longer term implications. In particular, it relies on 3 fundamental pillars to do so.
1) Vision: Long term investment for the future
The Singapore government had announced, in its 2017 Budget, a S$2.4 billion investment over the next four years to support the future economy. This came on top of the S$4.5 billion invested the previous year into the Industry Transformation Programme, and S$1.5 billion into the National Research Fund and the National Productivity Fund. Each one of these investments constitutes a milestone in a clearly defined Smart Nation transformation roadmap. The recent 2018 Budget announcement complemented these investment efforts with enhancements by way of tax deductions for qualifying expenditure on qualifying R&D projects performed in Singapore, as well as for costs on protecting Intellectual Property (IP).
2) Education: Nurturing new talents into future leaders
The Future Economy Council (FEC) which drives Singapore’s future economy transformation, is also leading some important initiatives in the talent space, such as the SkillsFuture Leadership Development Initiative (LDI). As stated on its website, the LDI “aims to develop the next generation of business leaders by helping aspiring Singaporeans to acquire leadership competencies and critical experiences”. It offers specialised training programmes such as TechSkills Accelerator (TeSA) and SkillsFuture for Digital Workplace to help Singaporeans reskill and upskill to be prepared for the emerging technologies and the digital transformation of the economy. To emphasis the importance, the Finance Minister announced in this year’s Budget that an additional S$145 million will be set aside for TeSA for the next 3 years. By investing massively in education, Singapore is creating the path whereby its people can better understand and master these new technologies.
3) Innovation: Aligning research and industry practice
Singapore is increasingly promoting innovation and has become a major innovation hub, not only in Asia but worldwide. This is also due to a strong alignment between public and private sectors. In particular, the Agency for Science and Technology Research (A*STAR), with collaboration initiatives such as Tech Depot (centralised platform to facilitate access to technology and digital solutions for local enterprises) and Tech Access (access to equipment and expertise for SME), has been instrumental in bridging the gap between academic research and the development of solutions for the industry. To augment these efforts, it was announced in the 2018 Budget that the National Robotics Programme will be expanded to encourage greater use of robotics, especially in construction sector.
In the financial services industry, the MAS has set up a regulatory sandbox framework for the testing of Fintech innovations. This allows for more flexible rules for experimenting new products and services, while limiting the impact if something goes wrong.
As with any major breakthrough in human (scientific) history, the discovery, invention and use of new technologies bring about great opportunities. In the financial services industry, this could be a real game changer to the way services are provided and how the economy functions. By promoting and spreading more transparency, efficiency and collaboration among the participants, there can be better management of systemic risk, and an overall more stable, sustainable and inclusive socioeconomic environment.
That being said, in the current context of “global-digitization”, all stakeholders have to exercise caution and responsibility in the face of these new technologies. The process of innovation should not only focus on the quick wins and short-term benefits, but should also contemplate the longer term implications for the global community. In that respect, Singapore leads the way - it has defined a clear vision and plan for its future economy, is educating and nurturing today’s talents into leaders of tomorrow’s digital world, and is deploying significant investments for innovation while consciously aligning its public and private interests with its Smart Nation goal: “one where people are empowered by technology to lead meaningful and fulfilled lives.”
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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Frederic is an Executive Director within Deloitte Southeast Asia’s Financial Services Industry practice, leading risk management and Basel advisory services and covering more than 40 banks in Singapore and Southeast Asia. He has over 17 years of multi-disciplinary experience in risk management, regulatory compliance and internal/external audit in the banking and asset management industry, essentially within international audit and consulting firms, as well as in risk management for a large bank with assets under management of more than USD 100 billion.