Traditional Banks Struggling

Traditional banks are haunted by financial technology – fintech – firms. Challengers such as mobile-first banks Chime in the US, Monzo in the UK and Germany’s N26 have been around for a number of years now, but big global and regional banks are still struggling to deal with the competition. While fintechs experience a goldrush of investment – US$111 billion in 2018, up from US$51 billion in 2017 – banking CEOs find themselves under increasing pressure from shareholders alarmed at the slow rate of change taking place. 

In our conversations with senior managers of banks, we spot several blind spots which are often found among incumbents who get hit the hardest by disruption. Two stand out in particular: an over-reliance on existing competitive advantages and an inherent misunderstanding of what disruption really means for them.

Eroding advantages

Traditional banks have a few advantages that they believe will protect them from the fintech threat: branch coverage, the trust they enjoy from customers and government regulation. But these advantages are eroding rapidly.

In the past decade, the top 25 US banks managed to grow deposits while reducing their branch footprint by 15%. Clearly, having a physical branch in every neighbourhood is no longer necessary to drive customer deposits, as well as engagement.

Following the global financial crisis and bank bailouts, trust in the banking system was irrevocably shaken. Arguably, tech companies such as Amazon, Google, and Apple enjoy more trust from the global consumer than banks. With billions of devices and services from these companies already holding banking data and payment access in the form of apps and mobile wallet cards, customers seem to have already moved their financial transactions.

Regulation used to make it very difficult to set up and run a bank. But the new European Payment Services Directive PSD2 could soon bring down this barrier to entry. PSD2 is a set of policies that gives significant choice and protection to customers on how they want to fulfil their banking needs, as well as allowing them to put all their banking data in one place.

Meanwhile, regulation technology (“regtech”) tools are also maturing. These are making core compliance, risk management and transaction monitoring processes easier for new entrants. So it is only a matter of time before the regulation barrier protecting banks falls away completely across the globe.

Misunderstanding disruption

The other blind spot for legacy banks is their tendency to have a narrow and misguided understanding of disruptive business models. This usually begins with treating a new species of competitors as traditional ones. Bank of America’s CTO, commented on Apple’s announcement of a new credit card: “My reaction when I saw the announcement was, first competitively, all of the features that are in that card are offerings we have today.”

The propensity to see only the product or service and not the entire business model is common among incumbents across a range of industries. Kodak, Blockbuster and Nokia were only three of the hundreds of disrupted incumbents which were able to see only the product (and associated features) that threatened them and not how the business models of their competitors allowed the creation of entirely new ecosystems that they were poorly equipped to survive in. By stooping down to competing on a feature by feature basis, incumbents lose the chance to redefine an industry that they once dominated.

It is therefore not a surprise to us when we see banks closing down branches one by one, as a means of lowering costs, without attempting to find a position of power in their newly evolving ecosystem. This indicates a flawed understanding of the threat along the lines of: fintechs are winning because they offer similar services at a lower cost with better, digital-only customer experiences. Nothing could be further from the truth.

If there is anything to be learned from disruptions in other industries. it is that disruption is not a simple substitution at a lower cost. When customers adopted digital cameras they did so not because the quality of image and cost were now comparable to film, but because digitised images could be shared electronically. What photographs meant to people, who took them, when and of what, all changed in one fell swoop.

Fintechs are similarly changing what banking means to people, how they engage with it and what their expectations will be from their financial providers in the future. What killed Kodak in the end was not that they could not keep up with the technology, but their inability to appreciate the wider cultural and behavioral shift that ensued.

In the case of banks, the most important aspect of the shift is the move from product-focused to platform-based competition. Bankers feel good after making a profitable sale, or clinching a deal. Platforms are not about making profit from individual sales but how an expanding user base creates value for the entire network – a concept foreign to most banks. For platforms like Amazon or Facebook, customers are not just people who pay for products or services, they are the company’s most valuable asset – the reason why Facebook paid US$19 billion for WhatsApp.

It would be a mistake for banks to view the Apple Card as yet another card. The card, aimed at Apple’s 1.4 billion active devices and varied customer base, is just the tip of the iceberg. Facebook’s Libra, which has 2.4 billion users at its disposal, is not just a far-fetched dream which will take years to be accepted. It will bite incumbents sooner than they realise.

The quicker banks come to realise that they have a limited understanding of the fintech challenge, the more likely they will counter it successfully. Rather than trying to survive by closing down branches, launching mobile apps and hanging on to the promise of regulatory barriers, they should try to learn from the mistakes Kodak, Blockbuster, Nokia and others made.

India Curbing Misselling

In a strong effort to increase transparency and curb mis-selling of life insurance policies, IRDAI has directed insurers to: mandatorily issue benefit illustrations based on two different assumed rates of return as per a prescribed format; get these signed by the policy holder and agent/insurer; make these a part of the policy; write a warning-type advisory/alert about the non-guaranteed portion of the returns and ensure that all terms and conditions are displayed on main screen in case of of digital sales (instead of hidden behind hyerplinks).

Insurance companies must comply with the above by December 1, 2019. The Insurance Regulatory and Development Authority of India (IRDAI) had earlier too asked insurers to provide benefit illustrations but there was no deadline set for compliance. Consequently, most insurers were not following this rule.

A circular stating the above was issued on September 26, 2019 addressed to CEOs of all life insurers. According to the circular, life insurers must show the projected rate of return in their traditional insurance policy products (non-linked) as well as unit-linked insurance plan's benefit illustrations.

From December 1, 2019, IRDAI has made it mandatory for insurers to provide policyholders customised benefit illustrations that project their accumulated corpus at various stages assuming gross investment returns of 4 percent and 8 percent for each policy, i.e., there will be two investment growth scenarios projected for each policy.

The IRDAI circular states that the expected accumulated value on the date of vesting on the basis of gross investment returns as stipulated by the Authority from time to time, with the caveat, that the projected rates shall not reflect any guarantee. Currently the gross investment returns are 4% p.a. and 8% per annum.

The IRDAI circular directs as follows:

• Every insurer carrying on life insurance business have to provide customised benefit illustrations to proposers or policyholders at the point of sale for all products, except those issued under IRDAI (Micro Insurance) Regulations, 2015, Guidelines on Point of Sales (POS) - Life Insurance Products, 2016 and IRDAI (Insurance services by Common Service Centres) Regulations, 2019 as amended from time to time.

• Such benefit illustration shall be signed by the prospective policyholder as well as the insurance agent or authorized person of intermediary or the insurer involved in the sales process, as the case may be and should form part of the policy document.

• Further, the benefit illustrations have to be as per a specific format prescribed by the IRDAI. The circular contains annexures specifying formats for these illustrations for different types of policies.

The circular further states:

• The illustrations shall be clear and fair to enable a customer to make an informed decision. They shall clearly distinguish between guaranteed and non-guaranteed benefits and state that the quantum of benefits in respect of non-guaranteed category may vary

• The following phrase must appear on the front page of illustrations in the same font size as the rest of the text: Some benefits are guaranteed, and some benefits are variable with returns based on the future performance of your Insurer carrying on life insurance business. If your policy offers guaranteed benefits, then these will be clearly marked "guaranteed" in the illustration table on this page. If your policy offers variable benefits, then the illustrations on this page will show two different rates of assumed future investment returns. These assumed rates of return are not guaranteed, and they are not the upper or lower limits of what you might get back, as the value of your policy is dependent on a number of factors including actual future investment performance.

• The Appointed Actuary and the Chief Executive Officer / Principal Officer shall approve all illustrations. Further, the benefit illustrations shall also be placed before the Board of Directors for information. Any illustration which becomes misleading following any material change of circumstances shall be discontinued forthwith

• Inurers shall review the assumptions used in the benefit illustration during the annual actuarial valuation and revise the BI wherever required. The insurers shall file the revised the benefit illustration with the Authority within a period of fifteen days from the date of such revision

In case of online sale:

In case of online buying of policy, the insurer has to email the final customised benefit illustration to the registered email ID of the proposer immediately after the policyholder submits the proposal form online. "The illustration should be provided to the policyholder before the payment of proposal deposit," according to the IRDAI circular.

• The customized benefit illustration shall necessarily be generated in the prescribed format before the prospect is directed to fill up the application form and pay premium. It shall be ensured that all the terms and conditions, declarations, notes or disclosures are displayed on the main screen. No terms and conditions, declarations, notes or disclosures should be made available through an option of clicking a hyperlink. 
  
  
• Specific and separate confirmation for benefit illustration shall be obtained from the proposer about understanding the benefits illustrated. There shall be provision for saving and generating a printout of the final customised Benefit Illustration by the proposer. The final customised Benefit Illustration shall be emailed to the registered email ID of the proposer immediately after his or her online submission of the proposal form and before payment of proposal deposit.

IRDAI further underlines the reason for imposing these conditions by stating: " Considering that life insurance is essentially a long term financial instrument, a fair and transparent sales process with meaningful, timely and relevant disclosures, is very important to ensure good customer outcomes and protect the interests of insuring public."

What is a life insurance policy illustration?

A life insurance policy illustration is a set of projections, prepared by the actuaries (professional dealing with the measurement and management of risk and uncertainty involved in policy product) of the insurance company. The illustration basically shows how your (policyholders) insurance policy will perform over a period of time. It includes financial projections for every year until the maturity. However, you must know that these set of projections are based on certain assumptions and does not guarantee how much your policy will be worth in any given particular year, except where values are clearly stated as 'guaranteed.'

The customised benefit illustration includes insurance product's name, policy term, benefit amount (maturity proceeds), the premium to be paid, etc. The illustration also includes policy riders if opted any.

Assuring Your Family

Nothing excites us like the inevitability of death and taxes. At least taxes may come with a refund. During your working years, if you are married or have dependents, they expect you to bring in your salary, wages, 1099 income, etc. For many, that comes on an every-couple-of-weeks schedule. You probably don’t think much about it, especially if it just gets directly deposited in the bank.

Then there are those bills, such as the rent, car payment, parking fees, utilities, and the like. You may also have these paid directly out of your account.

What about the savings for the beach house, the kids’ college, and the travel you’re hoping to do in early retirement? Maybe you’ve started to save for some of those goals and plan to start on the others at a future date.

But what if that orderly process suddenly stopped—not because of unemployment or disability but due to a fatal car accident or an unexpected illness. How will the bills continue to get paid? Many people have had to turn to things like Go Fund Me pages to cover a partner’s burial before they can even think about coping with the missing income going forward. Where will the money come from to continue this orderly life? How will the income be replaced? Even if the person who is suddenly gone didn’t work outside the home, how will his or her household contribution be covered? 

Replacing your income - Let’s say you are 25 and make $50,000 a year. If you expect to work until age 65, then, not counting raises, your family expects that over the next 40 years, you will bring in $2 million (40 x $50,000) in pretax income. If you’re 45 and expect to work 20 years until 65, that reduces to $1 million (20 x $50,000). 

You may find these numbers shockingly high. But it’s not as much money as it seems to be. For one thing, along with reducing these figures for taxes, their purchasing power needs to be adjusted for inflation, as prices will certainly rise over the next 20 to 40 years. And this by no means accounts for all possible considerations that could stretch these dollar amounts to the breaking point, such as caring for a special needs child or losing your home during a natural disaster. 

But even if $1 or $2 million isn’t as much as it sounds, it would be a lot for your family to lose if you died suddenly. In that case, life insurance could help them weather the lost income, though it would do nothing to ease their emotional loss.

Vaping - CDC Suspects THC Kills

For the first time, the Centers for Disease Control and Prevention (CDC) said it suspects vaping THC - compound in marijuana—is tied to the hundreds of lung illnesses and at least 12 deaths that have been reported across the country.

During a press briefing on Friday, CDC officials said the latest findings of their investigation “suggest THC products play a role in the outbreak.” Previously, the CDC reported that many of the sick people reported using THC in their vape pens, but officials stopped short of tying the illnesses to the drug.

In data collected from more than 500 patients, 77% reported using THC products or using both THC and nicotine. About 36% reported using only products with THC. The CDC said 16% of patients said they only vaped nicotine and not THC.

This information is based on self-reports from patients.

Officials in Illinois and Wisconsin said that “Dank Vapes” was the most common used brand of THC-filled cartridges in their states. “Dank Vapes” is a very popular brand and easily obtainable, according to officials. The CDC interviewed 86 patients who had lung-related issues tied to e-cigarettes in the two states. Around 70% of those patients said they used “Dank Vapes,” according to the CDC.

The CDC also said “Dank Vapes” appears to be the leader in a large class of counterfeit brands of vape cartridges with THC that have similar packaging and are easy to buy online and in stores.

Others labels include TKO, Off White, Moon Rocks, Cookies, Chronic Carts, Mario Carts, Kingpen, California Confidential, Cereal Carts and Supreme G.

“We are in the midst of a complex investigation that spans nearly all states and involves serious life-threatening disease in young people,” Dr. Anne Schuchat, the Principal Deputy Director of the CDC said at the briefing.

There are 805 confirmed and probable cases of lung injury tied to vaping, according to the CDC. The CDC has also reported 12 deaths tied to vaping, but it expects that number to rise as state and local officials report these kind of deaths to the CDC. The Associated Press counted 13 vaping deaths so far.

“Sadly I do believe there are additional ones [deaths],” Schuchat said.

Though the CDC has found a pattern with THC, officials said they are still unable to say what exactly is making people sick.

“We can unfortunately not identify one product, brand, source or device that is common across all patients,” Dr. Jennifer Layden, Illinois’s Chief Medical Officer and State Epidemiologist said at the briefing.

The CDC continues to suggest that people consider not using e-cigarettes at all, especially ones that contain THC.

FWD - Vietcombank Cardif Life Insurance

FWD Group, the insurance arm of Hong Kong billionaire Richard Li’s investment group Pacific Century, is about to close a $400-million acquisition of Vietnam-based Vietcombank Cardif Life Insurance. 

Cardif Life Insurance is a 45:55 per cent joint venture between Vietcombank, Vietnam’s largest lender by market capitalisation, and BNP Paribas Cardif. 

FWD outbid other competitors including British insurer Prudential Plc and is set to announce the acquisition within weeks, the report added. The deal is part of a bancassurance transaction which could be worth up to $1 billion, with the $400-million amount as an initial payment from the insurer for exclusive rights to sell its products at the Vietnamese bank’s branches. 

FWD declined to comment for this story, while an email request sent to Vietcombank had not elicited a response at the time of publishing. Vietcombank Cardif posted total revenue of 485.2 billion dong ($20.8 million) in 2018, representing a 49.3 per cent year-on-year growth. However, its losses after tax grew threefold over 2017 to 37.96 billion dong last year. 

The company’s competitors in the country, which have inked similar bancassurance deals, include Manulife, Dai-ichi Life and Prudential, among others. 

FWD entered Vietnam in 2016 through the acquisition of Great Eastern’s Vietnam business for S$48.2 million ($35 million). In 2017, FWD Vietnam partnered with Nam A Bank as part of a 15-year bancassurance agreement. 

The Hong Kong insurance firm has stepped up its focus on Southeast Asia. This year, it announced a 92.7 billion baht ($3 billion) acquisition of Siam Commercial Bank’s arm SCB Life and bought a 49 per cent stake in HSBC Amanah Takaful (Malaysia). It had also announced the purchase of a majority stake in Indonesia’s PT Commonwealth Life last year.

Cash Is Not King

Several banks have come under fire for charging fees when customers make loan and credit card payments with cash or cheques over the counter or through deposit machines. At least two other banks have announced they would do the same from next month.

The Association of Banks in Malaysia (ABM) says the fees are imposed to “encourage customers to move from cash to electronic payments” but consumer groups argue that this practice is unfair to those who do not do their banking via digital channels.

The fee for making credit card and loan payments over the counter with cash or cheques is RM2 per transaction. A customer who pays his loan or credit card bill by using cash or cheque deposit machines is charged 50 sen each time.

We are shocked that Bank Negara is allowing this to happen. People are already suffering from the high cost of living and it is the role of the government to reduce the burden and not increase it, ” he told.

Paul noted that the poor and the disadvantaged will be the ones who will be burdened. National Union of Bank Employees (NUBE) secretary J. Solomon agreed that the fees would affect the lower-income group and people with special needs.

“We are not against introducing technology in the banking sector. We are only concerned that there is an imbalance now at the expense of consumers, people with special needs and bank workers, ” he said.

Solomon noted that banks have shifted from being a service-based industry to fee-based one. He pointed out that with these fees, people have to fork out extra to pay their loan instalments or credit card bills with cash or cheques. Solomon said banking services should be for everyone and not just those who are comfortable with online banking. He added that efforts to encourage the public to use online banking were perhaps a way for the banks to eventually reduce their workforce.

“In the last five years, the intake of recruits in the banking sector is minimal and that is one of the reasons for unemployment among the youth, ” he said.

Among the banks that are charging these fees are Affin Bank, CIMB Bank, Public Bank and Standard Chartered.

AmBank and Maybank have told customers that they will start charging these fees on Oct 1.

However, Maybank appears to have removed the announcement from its website.

When announcing the introduction of the fees, the banks have urged customers to make their loan and credit card payments through other channels such as Internet banking and automated teller machines (ATMs).

The banks have also said that they would waive the fees for over-the-counter transactions made by senior citizens and the disabled.

Muslim Consumers Association of Malaysia chief activist Datuk Nadzim Johan described the imposition of the fees as an “unethical way of squeezing money from consumers”.

“There is no reason for them to do this. If they instal a new machine to provide services, then they can go ahead and charge consumers. But there is nothing like that in this case, ” he said.

He called on Bank Negara and the Finance Ministry to look into the fees as the public is affected by the practice.

ABM posted a statement on its website yesterday to explain the reason for the fees.

However, it was taken down in the evening.

In the statement, the association said the shift to electronic payments improves the overall efficiency of the payment system and provides meaningful cost savings and efficiency to the Malaysian economy.

It added that electronic payments also increase financial inclusion by extending financial services to a larger segment of the population, enabling them to enjoy lower cost of financial services and better means of savings.

To encourage customers to move from cash to e-payments, ABM said some of its member banks currently impose fees for cheque and cash payments for credit card and financing payments performed over the counter (via teller at bank branch) and via cash deposit machines.

ABM said these fees may be debited from a customer’s credit card or financing account.

“We reiterate that senior citizens (aged 65 and above) and the disabled will not be charged the fees for over-the-counter transactions, ” it said.

On its website, CIMB Bank said it was charging these fees to encourage its customers to make payments via electronic platforms.

“Payments via digital channels are faster, easy and convenient for our customers as they can be made from anywhere without the need of having to visit a branch, ” it said.

Volkswagon Diesel Gate - CEO & Chairman Charged

Volkswagen CEO Herbert Diess and the company's chairman, Hans Dieter Pötsch, were charged by German prosecutors on Tuesday with stock market manipulation tied to the carmaker's diesel emissions scandal.

The two executives are accused of failing to disclose the huge financial risks of the diesel scandal to shareholders in a timely fashion.

New charges against Martin Winterkorn, the former CEO of Volkswagen (VLKAF) were also revealed in an indictment running to nearly 640 pages.

Under German law, top executives must inform shareholders of information that can affect stock prices — such as considerable financial risks — as soon as they become aware of them.

In a statement, prosecutors accused all three men of failing to carry out their duty to investors.

The indictments are the latest fallout from Volkswagen's bombshell admission in 2015 that it had rigged millions of diesel cars worldwide to cheat on emissions tests, a scandal that has cost the company over $30 billion.

Shareholders were also hit hard: The company's stock price plummeted by nearly 40% after allegations of cheating were finally made public in September 2015. 

Volkswagen said in a statement that the allegations are unfounded.

"The company has meticulously investigated this matter with the help of internal and external legal experts for almost four years," said Hiltrud Dorothea Werner, a senior executive responsible for legal affairs. "The result is clear: the allegations are groundless."

The company's supervisory board said it would hold an extraordinary meeting on Wednesday, and expressed its support for Diess and Pötsch.

The carmaker, a lynchpin of the German economy that employs roughly 650,000 workers, has sought for years to turn the page on the scandal. But investigations on both sides of the Atlantic have resulted in indictments against top executives, undermining claims by the company that senior managers were not aware of emissions cheating until late 2015.

Winterkorn, who stepped down as CEO after the scandal was revealed, was already facing charges in Germany and the United States.

US prosecutors alleged last year that he was informed of diesel emissions cheating as early as May 2014. He was charged with fraud, and accused of agreeing with other executives to continue the practice.

The timeline - German prosecutors said Tuesday that questions from American authorities about engine manipulation that began in 2014 and intensified in 2015 should have made the financial risks clear to Volkswagen executives.

Winterkorn, prosecutors said, had full knowledge of the situation by May 2015 at the latest. Pötsch and Diess were aware by June 29, 2015 and July 27, 2015, respectively.

Despite this, they failed to disclose the "explosive nature" of the issue to financial markets until September 18, 2015, in order to support the Volkswagen share price, prosecutors said.

The new charges are likely to increase pressure on Diess, who joined the world's largest carmaker as head of its Volkswagen brand only months before the diesel scandal burst into view.

Diess was made CEO of the group, which includes Audi, Porsche and Skoda, in 2018. He has sought to move beyond the diesel scandal with an aggressive and expensive push into electric cars. Earlier this year, Diess apologized for making a controversial reference to a notorious Nazi slogan while talking about the company's profits.