Tongurai Limpiti: Innovation and growth - finding the right balance
Speech by Ms Tongurai Limpiti, Deputy Governor of the Bank of Thailand, at the
3rd Thailand Financial Services Summit 2014 "Driving Growth through Innovation", organized
by IDC Financial Insights, Bangkok, 9 October 2014.
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Good morning. It is a pleasure to be with you today and I would like to thank the IDC
Financial Insights for inviting me to deliver a keynote address today. The topic I cover today
is "Innovation and Growth: Finding the Right Balance", which is currently an interesting issue
that we have to carefully watch.
What do we see when we think about innovation and growth? We see that the financial
sector nowadays is highly competitive due to the number of players and the approach of
regional economic integration. We see that digital economy is becoming a reality; thus, IT
investment is one of the keys to success as it enables financial institutions to broaden
business market and strengthen their internal operation. As a central banker, we encourage
all financial institutions to improve their operational efficiency and capacity through innovation
and IT investments in order to be strong domestically and to be able to compete
internationally. Increasing operational efficiency has been a focus of Thailand's Financial
Sector Blueprint I and II and IT infrastructure development will play a crucial role in the next
phase of Financial Blueprint. Regulators will have to be prepared for such a change in order
to ensure sustainability and economic growth.
1. Balance between innovation & growth and security
Talking about balancing between innovation & growth and security, in the world of
digitization, it is a challenge to find the right balance between innovation & growth and
security which lie in our responsibilities. First of all, we have to understand the creation of the
matters as well as their main drivers.
Innovation and growth result from consumer's and business's demands for variety, speed
and lower cost that come with competitions to develop such technology facilitating financial
transactions and creating sophisticated banking products. Seeing that, their main drivers are
users' demand for financial facilities and technology together with a need for proper uses of
banking products and services, leading to security concerns, which have occurred in parallel
with the innovation and growth.
Security of IT system uses are prioritized as one of the most considerable issues, due to its
importance and interconnectedness, to accomplish our own goal of financial system stability
that is at the heart of effective supervision. So, it is our responsibility to prevent such fragility
before it is too late.
2. Regulatory schemes, bank business models and IT platform
In the world of highly competitive markets, in particular the banking sector, players have
continuously tried to create new banking products to serve the needs of consumers and to
move forward to penetrate market shares. As a result, sophisticated banking products along
with adaptive bank business models have emerged.
Unfortunately, once regulators respond to the changes steps after, financial crisis comes. At
the wake after 2008 global financial crisis, regulators actively strengthened regulatory
frameworks by reforming agenda such as strengthen market infrastructure, effective
supervision, resolution and addressing systemic important institutions.
From the banks' point of view, the implementation of the new stronger regulations at the time
of post-crisis has undoubtedly caused burdens to implementation. From the Centre for the
Study of Financial Innovation (CSFI) survey, it indicated that, "regulation" is the greatest
threat to the banking industry (from the survey, it climbed up from no. 6 in 2012 to no. 1 this
year). As banks have encountered the higher costs to run businesses, some may seek for
less regulated sectors and some seek for changes in their business models to deal with such
a situation. It might be implied here that regulation is the key influence to changes.
Therefore, it illustrates the need to find the right balance. As a consequence, regulators have
to respond to those changes, updating and revising their regulatory frameworks to be more
advance to keep up with the business models; hence, the regulatory schemes run
consistently with the shifts of bank business models.
3. The main drivers
i. Current innovation and growth of banking sector
What is the main driver? I would like to pinpoint here that current innovation and growth of
banking sector is one of the main drivers. Even though many countries including Thailand
have been affected by financial crises and regulatory reforms, we are currently in the stage
of revival with high potential growth among ASEAN countries.
According to the IDC Financial Insights' observation on key structural shifts, trends of
financial institution sector are: expansion of banking industry, particularly, in South Asia and
Southeast Asia due to an escalation of financial inclusion and new-entry of financial players;
technology refresh to serve with more sophisticated financial products and services; and
regional integration (AEC) and the growth of Asian insurance business. These are paths to
higher competition among banks, in which, IT innovation is a key to distinguish each brand.
Undoubtedly, banks and related parties invest more in IT projects to advance their services
responding to digital era.
To be more specific, we have to admit that we live in the world of digitization with an
escalation of Internet users and Y generation. Consequently, this group of people becomes a
new targeted customer group for banks. Interests in higher conveniences of services which
result from high integral digital environment and multi-task lifestyle of the people prompt
banks to respond with "Virtual Banking Concept" - any interaction with a bank happens
online instead of face-to-face meet up at a branch. To illustrate, the numbers of Internet and
mobile banking users have grown up recently as well as volume and value of transactions via
such systems. In Q2 this year, there are around 8.7 and 3.2 million agreements in Internet
and mobile banking, respectively, of which 43 and 24 million transactions in volume that cost
approximately 5,000 and 306 billion baths.
Some banks, therefore, strategically reduce the role of branches, intentionally pay attention
to Virtual Banking Concept, to efficiently reciprocate the target customers and to facilitate
international businesses that tend to grow due to trends of globalization and economic
integrations.
The growth of IT investments and sophisticated products as well as advanced services in
banking industry comes with a concern on "security ", which is the challenging key to propel
the sustainability of such a growth. In our role as central bank, we put "security" as our first
priority align with standard setting to promote advancement of banking services.
ii. The role of central bank (BOT)
What is our role? We have aimed at setting standards to create domestic and international
banking networks as well as to promote banking and payment system stabilities by
developing access to financial services including financial infrastructure for cross-border
payment and IT systems or other innovations aligned with security.
In terms of cross-border innovation, the Bank of Thailand in association with the ASEAN
central banks established the Working Committee on Payment and Settlement Systems:
WC-PSS in 2010 to study payment and settlement system environments in member
countries and to present regional strategic plans in order to serve economic integration in
2015. WC-PSS created cross-border payment innovations: international stock markets
network, electronic payment message standard, and ASEAN retail payment system network.
In addition, BOT in association with Hong Kong Monetary Authority (HKMA) launched a new
cross-border payment-versus-payment (PvP) link between Hong Kong's USD CHATS, Hong
Kong dollar Clearing House Automated Transfer System (CHATS) and Thai BAHTNET to
ensure the simultaneous delivery of US Dollars in Hong Kong and Thai Baht in Thailand in
order to eliminate or mitigate settlement and counterparty risks. The link operationally started
since 28 July this year.
Aligning with cross-border payment innovations, growth of IT investment is another matter
that the Bank of Thailand has promoted and monitored.
The widespread adoption of advanced technology in banks' key systems is to advance
efficient internal operations - Big Data Analytics for processing customers' information to
analyze customers' behavior and Cloud Computing for allocating IT resources, and to
provide products and services through online platform such as Mobile Electronic Data
Capture, Net Bank, Virtual Card, Near Field Communication Contactless, and etc. However,
many people, especially in the baby boom ages, have not experienced the online banking
services yet, partly because they have concerns about security. So it is our job to secure
them.
BOT has continuously promoted online banking systems and are aware of their risks and
impacts at the same time since we believe that no matter what we have in online mode, they
are all connected.
As digital banking products thrive, so do the competency of cyber threats. In Banking Banana
Survey this year indicated that technology risk rose from no. 18 in 2012 survey to no. 4 due
to a high increase in the frequency and sophistication of cyber-attacks. Financial institutions
have exposed to all risks of technology security: access risk, accuracy risk, availability risk,
and agility risk.
Concerning the systemic risks, the Bank of Thailand as a regulator established the IT
principle called "SIA", which stands for Security, Integrity and Availability that covers
infrastructure protection at the prevention stage of both physical and logical controls: CCTV /
access control; firewall, IDS / IPS, AntiVirus and password, respectively. In the arrangement
of contingency plan, all systems will be tested or reviewed regularly. Furthermore, key risk
indicators and risk tolerance will be closely monitored, and loss data collection will be
reported to the board of directors and the Bank of Thailand. Lastly, the Bank of Thailand has
to correct the IT contingency plan implementation. Additionally, market conduct will serve as
an alignment to each stage to determine customer protection by sharing correct information
and suggestions to customers; and by interacting with customers' complains.
As a central bank, we wish to support more on inter-operability for both wholesale and retail
which is a part of standard setting I mentioned earlier: for example, standardized codes for all
banks and real sector. In Thailand, we already have chip card and OTP token such as the
rabbit card and SmartPurse, but what we really wish to see in the very near future is
something more standardized and widely use like UK Oyster and Hong Kong Octopus.
Above all, incentive enhancement for people to use such new banking products, services
and systems is the most essential driver to extend the business advancement and that
security is the key challenging solution.
4. Conclusion
Today's IT innovations have influenced our ways of living in many fields including banking
industry and we all benefit from the new technologies; however, lessons learnt from past
crises have taught and reminded all of us not to ignore what adverse effects might be
afterward. As a consequence, maintaining the right balance between banking innovation
optimization and risk mitigation is the key in reciprocating the sustainability of growth. We
should be more aware and prepared of any challenging IT innovations in order to prevent
and mitigate such previous disasters we did encounter, and be more proactive in making
policies and designing new models.
Ladies and gentlemen, I do believe that the effective collaboration between supervisors
and financial institutions is necessary to encourage sustainable growth of Thai banking
system against evolving threats. With that, this summit is another move for financial
institutions and related organizations to share information and ideas; hence, I wish you all a
productive and fruitful discussion today. Thank you.