Panelists at DTCC’s annual Industry Forum in Kuala Lumpur, Malaysia, discuss the growing move toward embracing digital trends across the financial services industry.
Today, digital transformation is recognized as key to driving speed and agility in every industry. While capital markets have traditionally been cautious in adopting new technologies due to regulations and security requirements, change is afoot. The move towards embracing digital trends has been sweeping across the financial services industry in every corner of the world, including Malaysia.
Digitization vs. Digitalization
Since digital transformation involves leveraging digital technologies to revolutionize existing business models, buzzwords like digitization and digitalization often comes to mind.
So, what does digitization exactly mean for firms? What then is digitalization? And in the scheme of things, how does digitization and digitalization matter to digital transformation?
In the first of our two-part article, we bring you highlights of the panel discussion at DTCC’s annual Industry Forum in Kuala Lumpur, Malaysia, with Nigel Gnoh, Associate Director. Business Development for South East Asia at DTCC and moderator for the event, securing the definition of digitization and digitalization from the panelists.
While the two buzzwords are often used interchangeably, Rejina Rahim, Managing Director and Country Head, Nomura Asset Management Malaysia, pointed the difference, “digitization is about converting a firm’s assets into digital footprints while digitalization is viewed as a journey towards digital business.”
From the back-office perspective, Noor Aini Binte Shaik Awab, Chief Operating Officer, Hong Leong Asset Management, equated digitization to a binary number, 1 or 0 as represented in computer language which interprets to a “Yes” or “No” in human language.
Riding on the crest of the digital wave
Raymond Tang, Chief Executive Officer, Eastspring Investment Berhad, put forth his views on the subject. “The asset management industry is just catching up on digital initiatives,” Tang said. “Thanks to the internet, the concept of internet banking has been around for approximately 20 years. The ease of internet banking allows the man in the street to conduct various banking transactions from anywhere in the world without having to step foot in a branch bank.”
He continued, “That said, the asset management industry is in a sweet spot as there is no need to reinvent the wheel or even educate market participants on the benefits of going digital. The standard framework, protocol and processes have already been established – they just need to be customized according to the specific requirements of asset managers.”
Adding another dimension to digital transformation, Chan Boon-Hiong, Global Head of Market Advocacy Securities Services, Deutsche Bank, offered his views. “Digitization and digitalization are essentially pipes with built-in intelligence to connect two or more parties. By leveraging technologies like artificial intelligence, the built-in intelligence will augment our focus on strategic issues and exceptions that require human intervention.”
What is Holding the Digital Revolution?
According to Gnoh, a recent report revealed that about 90% of capital market firms in Malaysia are exploring digitalization while 40% are still at the exploratory stage.
Rejina explained the slow take up rate is due to the digital customer experience expected from retail banking is not on the same level as institutional clients. “Against this backdrop, asset managers are unwilling to embark on an enterprise-wide digital journey unless there is a demand for an improved, holistic client experience,” Rejina said. Within the industry, it is the front office first for digitization and digitalization to facilitate client development, acquisition and retention.”
She added, “In the absence of a paradigm shift that sees the middle and back offices as an enabler to business development and business growth, asset managers in Malaysia will not be able to compete with their global counterparts.”
Noor Aini offered a different perspective nothing that while searching for the alpha is invariably linked to the front office, support from the middle and back offices is crucial to facilitate a trade. “A failed trade could be detrimental to the entire firm, resulting in huge losses to be incurred for penalty and reputational damage,” Noor Aini said. “Automating the middle and back office – particularly in the post-trade process – is key to mitigating risk, improving operational efficiency and reducing trade fails.
“This explained why Hong Leong Asset Management decided to work with DTCC to automate its post-trade workflow more than five years ago – the project was initiated with blessings from the firm’s C-suite,” Noor Aini added.
Not a Drag on the Firm
“While not revenue generators, the whole ecosystem from top down must recognize the value that the middle and back offices bring to the firm as it will not be able to expand without support from the back-end,” Rejina concurred.
“Back office tends to gain unwanted attention when a problem that has direct implication to operational risk occurred,” Boon-Hiong said. “While it is easy to measure the performance of the front office based on client feedback, a smooth sailing event such as Malaysia’s transition to T+2 settlement cycle or consistently error-free operational performance at the back end is not easily noticed as super performance at the back end. It is as though that middle and back offices are only visible when issues happened.”
He suggested, “Forward looking firms could stipulate in the selection criteria for service providers to indicate the level of automation available at the back end. This will ensure that firms receive the necessary back end support from their service providers while doing business, particularly critical in times ofmarket volatility.”
Operational Evolution – Outsourcing vs. Insourcing
“Over the years, the back office has since evolved – shifting part of the processes to the middle office, which did not exist within the asset management space in the past. This evolution should continue to allow the back office to transit into a supervisory role – outsourcing the heavy-lifting tasks to specialist providers like custodians, transfer agents, etc.” Tang opined, adding that at the end of the day, it is about focusing on one’s core competency.
Aside from relying on DTCC’s CTMTM to accelerate the pre-settlement, post-trade process, Tang felt that outsourcing will also help to trim down resources to within manageable range.
Disagreeing with Raymond, Noor Aini stressed that outsourcing of back office could lead to losing control and visibility on business operations and furthermore; supervision review on the outsourced business are often performed manually by the outsourcer.
She continued, “There is also the risk of losing sensitive data or providing incorrect information in prospectus and regulatory reporting. And most importantly, the firm’s responsibility cannot be passed along with the deliverables that were outsourced. The firm is still answerable to the regulators or authorities on any mistakes undertaken by the outsourcer.”
Confident that her internal operations team has a solid grasp of the business, including the ability to obtain timely data from all sources – external vendors, front, middle and back offices, brokers, Noor Aini indicated that having the right expertise inhouse will ensure that timely actions and decisions are made to ensure the smooth functioning of the back office and hence the firm’s business.
“Given that we have reliable talents inhouse, there is really no impetus to look beyond the firm for support,” Noor Aini said. “However, outsourcing may be considered in instances where service providers are able to provide status update online for tracking and monitoring, reducing the need for manual oversight.”
Speaking on behalf of custody services, Boon-Hiong joined the debate by highlighting that there are experts within custodian firms to assist their clients on every area of business need, including furnishing information to meet regulatory requirements.
“There could be an option to consider a common platform where all involved has an open view of common data that everyone has needs of – to support parallel processing for greater efficiencies,” Boon-Hiong said. “This will also address quality assurance requirements.”
Rejina agreed that outsourcing is a viable option if transparency is present among business partners and service providers to enable mistakes to be detected in real-time.
“It is almost impossible to operate in an error-free environment – trade mismatch will happen,” Rejina said. “By leveraging automation and the latest digital technologies, greater operational efficiency can be achieved – with the front, middle and back offices all working towards a common goal of improving business performance for the firm.”