The electronification of Malaysia’s transaction banking industry
With the support and encouragement of Bank Negara Malaysia, financial institutions in the country are offering increasingly diverse financing options when it comes to processing their payments and receivables needs. Utilising such options is cost-efficient and helps reduce mistakes, but it is taking time to convince clients to shift to computer-based transaction banking. ASIAMONEY speaks to a panel of experts about what to expect in this fast-evolving sector.
Moderator: Richard Morrow,
John Wong, managing director, head of transaction banking, global wholesale banking, Maybank
Megat Mizan Nicholas Denney, senior director, K&N Kenanga Holdings
Peter Harustiak, chief financial officer, Mercedes-Benz Services Malaysia / Daimler Financial Services Group
Tham Kok-Yoke, head of finance, Manulife Insurance
Joseph Cherian, director, client coverage, global wholesale banking, Maybank
Asiamoney [AM]: Transaction banking has gained increasing importance in Asia, with trade flows rising. How is transaction banking evolving in Malaysia, especially in the electronification of these services?
John Wong, Maybank [JW]: Transaction banking in Malaysia and Asia has become a more important business in the global wholesale banking business. Leading banks here and in Singapore are all moving aggressively into the transaction banking arena.
While transaction banking might not be the sexiest business it creates the right revenue stream to help support global markets such as foreign exchange, as well as investment banking portfolios and balance sheet lending.
To a CFO [chief financial officer] or a treasurer today, each one would look at how they are able to maximise interest income and minimise income expense. Typical cash management systems in international banks and increasingly local banks look at how they can help CFOs do just that via their cash management services as one of the channels to automate payables and collection of receivables, ease of reconciliation and provide the ability to look at their entire portfolio holdings, particularly in the areas where exporters are active.
Megat Mizan Nicholas Denney, K&N Kenanga (MMD): I come from stock broking which is now considered a commodity, negotiable to a single digit basis point. We need our transaction costs to come down so we can make a decent margin. That’s why we rely on the financial institutions to do the work for us.
I’m also a supporter of micro clearing. In an electronic environment if you can baseline your clearing process to the absolute lowest level then anything on top is value-added. Unfortunately we have a tendency to build our own systems and there are incremental costs to maintaining them.
I’ve been involved in a movement towards the Malaysian government to bring down transaction costs, making them a repository to the trade transactions, so that the banks don’t have to reinvent the wheel and get what they need to support their customers.
The second thing I look at is what I’d call the reconciliation or closing of accounts, so that businesses know what their financial positions are at least at 5pm on a Friday. Right now there is no reconciling government account because everybody is servicing individual banks. I believe this is an opportunity for a bank to create an open platform that hooks into the wholesale bank. The government should create an environment powered by a bank creative enough to do that.
For example if the government created a labour exchange and had its own account, then a bank could come in and build an environment for the labour exchange based on the accounts of foreign workers, which is a critical step as every three years new workers come into the country. This is where an enterprise solution that moves towards the wholesale bank becomes a very tactical position. And you can roll this out in the region or the whole world.
Peter Harustiak, Mercedes-Benz Services Malaysia / Daimler Financial Services Group [PH]: As we launched our company in November 2012, we still need to ascertain how the customers accept electronic transactions. My first impression when talking to our bankers, dealers and customers in Malaysia is that there is still a significant reliance on non-electronic transactions such as cheques compared to other markets.
Cheque payments are a very manual and time consuming process; back in Europe you don’t see a single cheque from private transactions anymore. There are many other channels available to customers that are more convenient, from direct debiting, ATM payments, cash deposit machines to online channels and especially mobile devices. These channels are already being offered by banks, and they will become increasingly attractive for the customers. The benefit for a company like Mercedes-Benz Services Malaysia is the ability to directly collect the money from the customers, reconcile payments easily and have all related processes 100% automated, which in return will also benefit the customer as we keep our cost down.
Tham Kok-Yoke, Manulife [TKY]: The development in terms of electronic payments and settlement has improved a lot over the last five to 10 years. But as Peter mentioned there are still a lot of payments that rely on the traditional way of banking.
For a financial institution like Manulife having efficiency and responsiveness is very important to ensure that transactions get done speedily. Turnaround time and capability of handling large volumes are key performance measures to us as we have to deal with insurance, pensions and unit trusts simultaneously. All these businesses are time-sensitive services and cash flows are very important in managing them on a daily basis.
The central bank [Bank Negara Malaysia] has been encouraging e-payments, promoting through the banks, financial institutions and insurance companies to ensure certain things are done electronically. I agree that this is getting more important and more will come.
Joseph Cherian, Maybank [JC]: You have more sophisticated customers who are moving more into that direction, as they realise the benefits of the cash management platforms. But there are some conventional businesses which remain unconvinced of the benefits so it’s a question of providing more information to them and convincing them.
AM: How much of Malaysia’s transaction sphere is electronic versus physical?
JW: The last time we looked at the transaction volumes it was hovering at 25%-30%. The average per capita individual or company conducts 22 electronic transactions per annum in Malaysia, whereas a very high end country in the OECD (Organisation for Economic Co-operation and Development) will see average per capita transactions of 200-250. The central bank wants to grow Malaysia’s per capita transactions over the next three to five years to around 150 per annum.
We’ve already come far because the per capita number of transactions in Malaysia used to be less than 10. Yet corporations still widely use courier services to move cheques and work documents from one place to another.
AM: Peter, what are the key advantages of using electronic payments?
PH: There are two main aspects: efficiency and cost related to a transaction. For example, you can set up the identification of the customer for payments and begin automated payments and collections which are much simpler than somebody dropping off a cheque and perhaps failing to fill out their contract number. That can leave a financial services company like Mercedes-Benz Services Malaysia having to go through the database trying to figure out who the customer is. The customer runs into delinquency because his or her payment could not be reconciled.
AM: Mizan, where is the biggest advantage for you in electronic payments?
MMD: Many times I have had banks send back cheques with my signature to me, saying that it’s not what it’s supposed to be. That’s because I regularly sign thousands of cheques and my signature changes during this process.
But the accurate implementation of electronic systems is vital. I had a foreign bank provide me with a transaction banking solution and it was so buggy that I wondered whether they had actually tested the system in the first place. Files that were supposed to be published didn’t appear and if you did any form of application updating such as for Java it messed up everything. I ended up having to have a standalone payments PC [personal computer] and only my IT [information technology] department would update it.
Additionally, sometimes even if you have specific instructions to pay online you have to be very thorough about who you are paying to. I have questions about how they generated the payment instructions in the first place. I’ve had instances when we made a payment that had to be retracted. That’s embarrassing.
AM: Implementation is vital, as must be the banks’ ability to show customers how to use the systems.
JC: It’s a much easier process with more sophisticated clients. With every system and country there are quirks but we look at what the client wants. Typically it boils down to cost and efficiency, but there is also a hesitation to jump in that direction.
AM: You must be able to quantify how much quicker the systems are, how much less labour intensive it is, and how much they can save.
JW: Banks in Malaysia need to consider how much time they spend listening to their clients as opposed to just product pushing.
We began by asking ourselves whether any internal unit uses the system we want to deliver. If our payables arm or human capital department doesn’t use the system for its payroll how can we expect the customer to use it? We consider whether it’s good enough for us before we consider whether it’s good enough for the client.
Secondly, there are ways of coming up with solutions for the client. One is mobile access, which is one alternative that they may want to have. Two is security; some CFOs think that a typical click signature is far safer than a dongle token. There’s no right or wrong, it’s just a mindset today.
The third one is that quite a lot of Generation Y has moved into MNCs [multinational corporations] or conglomerates or banks. To them anything that’s electronic or has applications to a mobile device is cool. So we have to consider that too.
AM: Have you done studies to work out efficiency and cost savings pre- and post-implementation?
JW: It all depends on the clients and industry. A stock broking or insurance firm would benefit hugely because of the volume of transactions. A securities company needs to have a system that is fast and cost effective because on days when the stock market is particularly robust you can be conducting 10,000 transactions a day.
For the MNCs and conglomerates it’s all about consistency in how they run their finance operations. MNCs tend to have standard models for how they run their country cash operations, and the question becomes whether the bank can emulate that standard. Our challenge is to take the varying regulatory restrictions and deliver a platform that is ubiquitous with what it does elsewhere.
AM: Kok-Yoke, how advanced are the electronic services for Manulife in Malaysia versus other Asian countries or nations outside the region?
TKY: [Client] payments for Manulife Malaysia are very much transacted locally, so we don’t usually deal with many banks’ operations throughout the world.
As far as Malaysia’s concerned, we are moving very fast towards electronic payments relative to other countries. We’re pretty much on par with countries like Hong Kong and Singapore, whereas less developed countries like Vietnam and Cambodia are somewhat behind us.
PH: The way we set up our systems was a benchmark for Mercedes-Benz Services Malaysia. We fully utilised the expertise we have in other markets, from functional experts to treasury and transaction banking experts. The result is we have our payments process fully automated and standardised so no matter what the means of payment is we can instruct the bank the same way, no signatures physically.
Electronically we went live with two banks in Malaysia, one of which was Maybank, and we also implemented bank account reconciliation directly in our SAP system, which means we don’t have to go one by one through the statements daily or weekly. It’s automatic, and it’s done on a daily basis. We are now operational for four months and have not experienced any issues. We do the reconciliation every day to make sure there are no discrepancies in the system. The system had been tested thoroughly for bugs and potential failures.
AM: Is feedback from foreign companies helpful to improve Maybank’s services?
JW: We find there are two pockets of clients. First are the MNCs, whose approach is more about standardisation, having a streamlined process. MNCs have often headquartered their finance operations so they will not change with the environment but they expect the banks serving them to change.
On the other hand certain Asian conglomerates that operate in multiple parts of the region, and particularly in large countries like Indonesia, China and Hong Kong, want to have the best of a local bank in each country. And they have to reconcile transactions offered by multiple banks across these countries. To do so it’s important that the providing bank understands Swift transactions, and can set about reconciliation and making local payments.
Because there are various cultures across Asia and we don’t have a standardised model, a group CFO in an Asian conglomerate will not be able to gauge the financial position at any given time, which can be a challenge.
AM: From the client perspective how do you judge how efficient your banks are being?
TKY: We don’t really specify KPIs [key performance indicators] for the banks. Of course there are the key things that Mizan mentioned such as bugs being eliminated, customer services needs to be good, robust and easy-to-use transaction platform and network solutions for customers to utilise our products.
MMD: I’ll give you an example from my perspective. When you browse the various Malaysian banks you will see that a direct debt instruction cost can vary from MYR0.50 to MYR2. And nobody talks about batch charging.
I ultimately want to get to a position where I have direct access to how I want to deploy my money. As a stock broker I’d like to see Maybank come to me and say ‘we’ll offer you very good forex [foreign exchange] pricing on Thailand and Indonesia, because you are a good client but in return I want a higher number of your transactions so as to give you better pricing’.
The banks also have to make sure that the platform they give us operates well and that any other broker who wants to join the platform can do so. This may not be a product-driven platform, but instead a mutual platform. The banks can then offer us services as a clearing partner, seamlessly updating all data. I think that’s the part where the innovation will happen. Singapore is two steps ahead of us on this.
AM: Peter, how did you decide upon the partners you had in Malaysia?
PH: We had a tender for the cash management solutions and invited selected multinational banks, with whom we had existing relationships and also local banks as we think the local presence is very important. We have a globally standard selection process with various criteria such as efficiency and number of payment channels from the customer perspective.
There were some must-haves, such as automatic reconciliation of income payments and receivables, and a secured automated payments process. We were looking for local partners that could offer our customers the convenience of a big retail network, and numerous channels that the customer can use to decide how and when they want to pay. That’s where Maybank came in, the biggest retail bank in Malaysia, fulfilling all the criteria we were looking at.
We also use a multinational bank with whom we have already partnerships in other markets where Daimler Financial Services is present.
AM: Is it easy to get your balance sheet information from Maybank and to move that into Singapore central office?
PH: We consolidate it in Mercedes-Benz Services Malaysia locally, that’s the part where we were very demanding and challenged the banks, but in the end the back office of Maybank went the extra mile and we are very happy about it. It’s crucial for us given the number of transactions we expect in terms of auto financing for our dealers and customers to be able to both make and receive payments in an efficient manner.
AM: Kok-Yoke, how often do you review the cash management services you are being offered?
TKY: We work with quite a few banks and the services that we get from them can be quite different. For example we don’t write cheques but instead outsource them to another bank and when it comes to the collection side another different bank handles it.
We review them on a need basis and consider what new services or new systems that the banks can provide in order to help our efficiency. In the last three to five years, we have not made major changes in the services or systems used. One thing that’s key to us is the integration with our back office system.
AM: What are the internal indicators for Maybank in terms of how good a job you are doing offering electronic financial services?
JW: To gauge the effectiveness of how we engage clients, there are two methods that were developed over the last two years. One is an internal survey to see how well client coverage or transaction banking has worked with our internal stakeholders. This is an annual exercise.
Also on an annual basis, we have external surveys that we hold with our external clients where we ask “What do you think of our branch banking services, areas we can improve, what you think of our wealth management as well as transaction banking services, global markets and client coverage?” These surveys are undertaken by an independent department that reports back to the CEO [chief executive officer].
It’s important to ensure internally we are working together as a team and externally to ensure that our clients are satisfied with the level of services that we provide.
AM: What has been the most recent feedback?
JW: There have been various reports. You see different plus points but they vary, and we need to consider whether we are addressing the whole of the clients’ needs. The more we develop industry specific expertise the more we understand the clients. Each one has different needs, which helps us create solutions that are far more specific, and that’s a focus for us going forward.
AM: Has it been difficult to encapsulate the various documentation and language standards across several Asian countries into one operation?
JW: One of the biggest challenges of any solutions that we promote to our clients is documentation. So if one client has operations in Indonesia and wants to onboard there, and then asks if we can do something in Singapore, we’ll say ‘yes you can, but we need to check with our Singapore counterpart’.
At the end of the day an in-country treasurer may have full control of Singapore and Hong Kong, but the challenge is to promote a standardised arrangement across all of the countries in which their business operates. If we then talk to our operations in these other countries, one of them might not understand that particular client very well.
For example, in the collaboration with Mercedes-Benz Services Malaysia, we received quite a lot of requirements to ensure a full automation of processes as well as technology used. Mercedes-Benz Services clients must recognise the Mercedes-Benz Services’ ease of doing business across the whole network. And that is what we delivered, which proves it is possible.
MMD: I love that John is going towards the industry. In the oil and gas industry the modus operandi now is that if you are going to tender for any large contract [state oil and gas company] Petronas insists that you must have a supporting letter from the bank with the absolute number that represents the tender. I went to two local banks but both refused, saying that it wasn’t the way they conduct their business. I was astonished, and Petronas itself said to these banks ‘if other banks can do it why can’t you?’
I wondered if this was a way for those local banks to say ‘we want to do your business but we’re not going to go out of our comfort zone’. Most often it’s the non-GLC [government-linked company] banks and foreign banks that would do such an exercise because they understand that this is Petronas’ preference and it doesn’t limit the due processes they can still do internally.
This is an example that even industries are transforming. If a banker comes to me and says ‘I can get your customers on an omnibus account into Europe for the minimum cost and I manage everything, your forex [exposure], even your margin facilities and is willing to underwrite that account’, I will go with them. I will switch on a two millisecond update if I find something faster.
I feel banks have a comfort zone, the key to all this soul searching is that once you know your weakest part you will be able to bring that knowledge and offer it to the customers. Industries are changing, even in trade finance Islamic products are coming in. I do money lending in Kenanga, a lot of money on commodities settlement, and to be frank commodities is a real business because its prices move around. And I find that Malaysia is lacking commodities support.
AM: It’s interesting to hear that the banks could improve their capabilities in commodities, which is a market that Malaysia has close links to.
MMD: In theory we have failed big time in commodities because we do not have an understanding of the supply chain.
If you’re supplying coal from Indonesia to TNB (Tenaga Nasional Berhad, Malaysia’s largest electricity utility company) there’s a two week settlement period, in which I take and probably use the coal but don’t pay you until two weeks after I’ve received it. So there is already a financing gap. And there’s no solution, because the coal guy had no choice but to sell to the middle-man, so that he gets paid up straight away. But the end counterparty is TNB, there’s no need to be so paranoid about who is supplying the coal because the risk of non-payment has been taken off the table.
I financed some of these transactions at premium rates because they were one-off, and they [the coal middle men] were desperate and needed to settle. And that’s not our business; our cost of funding is far different from the banks. That’s just one example of how banks need to move into industries and listen to them.
AM: Peter, do you think that Maybank understands your business?
PH: Certainly, otherwise we wouldn’t have chosen them. The good thing is that given the competition and multiple players in the country I can look elsewhere if a bank doesn’t fulfill my needs. It’s good to have competition and also that learning effect for the bank and for us.
TKY: As John mentioned it’s the right way forward. Manulife is very much driven by the bank with the best products. So for the banks to have a wholesale commitment approach would benefit us a lot, in terms of integration and specific services.
AM: Are banks getting better at offering high quality services outside their home countries?
TKY: The quality of service can differ depending on the individual you are working with. We have had good experiences with Maybank and some bad ones before.
MMD: For me it varies. My counterpart in Thailand had to do a project in China and the number of layers of management they had to deal with in the [bank] group [they worked with] was amazing. I realised that they [the bank group] had a simple rule; the relationship with the customer sits off the bank. But they didn’t realise I was the one who introduced the customer. They had the view that ‘from now on they are our customer, take it or leave it’. They are very product-driven and silo-thinking; even among the bank group they didn’t want to share.
AM: How do you break down internal barriers to information flow and improve cooperation?
JW: Many companies today are aware that this is a problem; some hire a big four consulting company to advise them on how to get information across their own network because they can’t get it from their own people. One of the things we have is a consistent model on how we run our business and that mirrors the same organisation chart in each country as the group office.
Two or three years ago when we did a structural reorganisation we found that transaction banking was known under different names in different countries, it reported to different people and looked at revenues differently, so from the beginning the only thing that was consistent was the logo. So after two years of transformation and every single line of business in group office, the offices have been forced to change their structure to mirror ours. Subsequently we introduced matrix reporting, which was previously a foreign concept and had people wondering why they should report to two or three bosses, but the answer is simple: welcome to the real world.
Finally the most important of all is how do we measure success? In the past it’s usually revenue, or profit before tax or after tax. Today from a client perspective and product perspective we have to consider the impact of regulatory changes like Basel III, while we also consider economic profit and profits across the network.
AM: Transaction banking is, largely speaking, liked by the Basel Committee, but have you had to conduct a lot of change to meet their tightening criteria and preferences?
JW: From a regulatory perspective one of the largest challenges we face is internal buy-in. To recognise that transaction banking is the lowest of all the capital investments made and the least of all risk that the bank undertakes. The greatest impact is operational risk and the constant change of the regulatory framework in regards to payments and how we do trade finance.
Part of the team is working on compliance and the regulatory safeguards that we have to observe. Today in the typical transaction business a transaction banker has to understand how the central bank works, and in Maybank we are in constant contact with all the central banks in the countries that we operate in, to ensure we understand their regulatory perspectives while promoting a consistent business model.
There’s a delicate balance between the regulators and clients’ interests. We need to work out how to get all the stakeholders together, having ongoing conversations with the regulators and clients. We are telling the central banks that we have some clients that want to be involved in the conversation and they can be pilots too. So in the securities services radar for bond trading we have promoted a focus group with the central bank and our clients with regards to renminbi trade books, so the clients can voice their concern with regard to customs-related problems.
So we suggested that when we have a discussion with the PBoC [People’s Bank of China] that we should fly the clients too to have a productive conversation between the central banks, the clients and us. And that assists our drive for the clients to see us as a business partner rather than a services provider.
AM: Maybank has just launched a new electronic banking platform that integrates your existing ones. Does it have the upscaleability to meet the feedback to become a full nine country solution across Asia over the coming years?
JC: Definitely. We’re one of the first banks to offer something regional and have already rolled it out in Singapore, subsequently in Malaysia and then other countries. We think it will enable us to serve our customers well.
AM: Kok-Yoke, the next three years where would you like to see the development of transaction banking to make Manulife’s business easier to manage?
TKY: When the central bank emphasised the development of e-payments, our view was that the cost of doing transaction banking had to come down as a long-term incentive. The cost has to come down, and perhaps the higher the volume the lower the cost should be. We look forward to that.
At the same time we look forward to educating the public that e-payment is the right way to go. And thirdly we should progress on system integration with our back office. Sometimes these factors can deter companies from changing to a better system, as the need to improve the back office can be daunting.
PH: From my perspective we have the advantage of being a young company. We are implementing state-of-the-art processes and try to match to the latest benchmarks. I would be really happy if I could say after three years that we no longer receive cheque payments. We like to be an innovator in the Malaysian market and make doing business with Mercedes-Benz Services Malaysia as easy as possible in order to drive the automotive financing and leasing business with us.
One example would be to integrate payment functionalities into our website and “myMBFS-Malaysia” smartphone app to enhance the customer online-service experience. In short, we strive for electronic payments and collections and would like to see less cheque transactions in the future as electronic banking systems are more and more reliable and customers are increasingly mobile.
MMD: From what I hear I think there will definitely be changes. I like what John said earlier on regarding the issues of partnership. An enterprise solution from the wholesale bank will address the cost and integration issues but what’s important is that they see what the industry will be like and move towards that. I’ve got a global trading platform that is useless when it comes to settlement, and we wonder why we got involved in this investment if it’s not going to be useful five years down the road. We need to find likeminded partners who understand and can take care of our financial needs for settlements and payments now and in the future.
AM: Lastly John, what will you focus on?
JW: What we want is a more robust cash management platform across the region. Apart from that, what’s important is that we want to spend more time with the clients and for them to see us more as a business partner than simply a service provider. So we must be involved in industry-driven projects and initiatives. These are being triggered by central banks across the region and groups and industries. If we are involved as a major business player and partner we can see how the cash management platform that we’ve built today helps the client and industry.
There are three areas we will spend more time on to ensure our platform is abreast with the latest technology. The first will be increasing the number of languages available; we have six currently on the platform.
Number two will be to increase the mobile devices that our platform is available on, to stay updated with the current technology. We understand that Blackberries are preferred in Indonesia whereas you’ll see more iPhones and iPads in China and Singapore and elsewhere overseas some Windows accessibility may be necessary too.
And number three the platform must be Swift-compliant, so we’ll make more effort into developments for Swift-related file formats and standard payment applications.