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Developing the finance-banking sector in the context of the Fourth Industry Revolution
15/7/2019 10:31' Send Print
Illustration photo. Source: AFP/VNA

International experience in finance-banking development in the context of Industry 4.0

Countries around the world have different approaches to Industry 4.0 in general and the finance-banking 4.0 in particular. Responses of countries can be divided into two types: active and passive. Those which choose the active approach often interact closely with creators to capture new developments in financial technology (Fintech), legal obstacles to innovation and start-up support to address the challenges. They work to develop overall policies, such as experimental legal framework, signing of multinational cooperation agreements and building innovation centers These countries often have had developed markets and very high innovation technology.

In countries which choose the passive response, policymakers have played an active role in trying to make Fintech successful, but their responses are often not active and ready to adjust legal regulations when necessary. This approach is mainly applied in countries where Industry 4.0 has not yet caused big impact on their market. These countries often have many restrictions in terms of IT infrastructure, human resources and institutions. All theses constitute obstacles to innovation, making it difficult to apply Industry 4.0 technology. Therefore, managers often face less pressure in adjusting the legal framework, while technology has changed much quicker to the legal framework adjustment.

In order to prepare for legal framework development, some countries have built general legal "sandboxes" (an important security software) as well as industry sandboxes. The general legal sandboxes provide an environment for testing new products and services that developers seek to put to market. In this process, Fintech companies are exempted from certain legal or regulatory requirements that may hinder the development of technology. Industry sandboxes are led and funded by related industry stakeholders and provided with opportunities for product testing in a simulated market environment without customers. In addition, some countries choose the approach of "testing and learning," such as Indonesia, the Philippines, Kenya, among others; or "wait and see" attitude like China.

In preparation for human resources, some countries have paid special attention to this issuer in the context of Industry 4.0. Of which, the prominent trend is to transform education ecosystems with key solutions, such as early education of children, development of the “ready for the future" program "; training of professional teaching staff and digitally skillful human resources; promote technical and vocational education; continue lifelong learning. Some countries are very successful with their investment strategies on human resources, such as Singapore's comprehensive adult training; Finland's strategy for basic education for future; India’s framework and standards for expanding private sector education; comprehensive approach for vocational systems of Germany and Switzerland.

For infrastructure, preparations do not only carried out by countries but also by large enterprises and financial groups. Countries have focused on developing infrastructure for Fintech's strategic goals, such as instant payment systems and distributed ledgers in the US; connected payment infrastructure of banks and telecommunications in China and Thailand; investment in improving the quality of clearing and settlement systems in Europe; connected platforms for businesses in Singapore. Major financial corporations around the world have paid more attention to infrastructure in international payment, for example, the six largest banks in the world established the "Blockchain Utility Settlement Coin" project, allowing stock transactions without money transfers, or inter-national payment provider (PSP) network, such as Earthport allowing quick payments to all bank accounts in more than 65 countries around the world.

In general, responses to Industry 4.0 differ across countries, however, all countries recognize Industry 4.0 as a great opportunity for socio-economic development, so governments have directed study and close monitoring of the developments of Industry 4.0. Vietnam can study and consider the proactive approach and application of sandbox in developing policies and encouraging technology development in finance-banking sector, focusing on completing information technology infrastructure, lifting high quality of human resources and institutional reforms to remove barriers to technological development.

Industry 4.0 in the field of finance-banking in Vietnam

The finance-banking sector is the most dynamic area in Vietnam in implementing Industry 4.0 research and application. A survey conducted by the Banking Strategy Institute in May 2016 showed that 92% of survey respondents answered that they were preparing for investment in technological innovation and developing digital-based sales channels to receive and adapt to the advancement of Industry 4.0; 76% were prepared to attract workers in the field of high technology and information technology; 96% of banks have currently developed strategies for high technology and typical technologies of Industry 4.0 to 2025. Among them, the Vietnam Prosperity Bank (VP Bank); Tien Phong Bank (TP Bank), Hong Kong and Shanghai Banking Corporation (HSBC) have developed advanced and automatic robot development strategies. Prominent trends in Industry 4.0 application in Vietnam include the development of digital banking, big data, artificial intelligence (AI) in service of customers in digital banking, application of cloud computing and research, application of Robotic Process Automation (RPA).

Fintech has brought about profound changes in the financial industry in Vietnam. According to the ASEAN Fintech Census 2018 undertaken by Ernst & Young (one of the four leading auditing companies in the world today), Vietnam currently has about 78 Fintech companies with total investment capital of up to US$129 million. In particular, 90% of payments are in cash and 47% of 78 Vietnamese Fintech companies have largely focused on payment. This is a highest rate in ASEAN region. Major products of Fintech in the banking sector include e-wallets, peer-to-peer money transfers, financial information provision, peer lending, community capital raising, bitcoin cryptography. Industry 4.0 in Vietnam's stock market has increased the quality of goods, increased utility for investors and improved operating modes through impacting on the quality of listed companies, intermediaries and investors in the stock market.

In general, the impact of Industry 4.0 on the banking sector in Vietnam is quite obvious. It can be said that the banking sector in Vietnam has made the fastest response as compared to other sectors in terms of research and application of science and technology of Industry 4.0 to innovate banking management, relations with customers; modernize banking transactions, product supply and distribution channels; apply big data, artificial intelligence, cloud computing, and Fintech technology in payment. The reason to this breakthrough in the finance-banking sector is the reduced costs help widely diffuse technology in the finance-banking sector; the combination of different digital technologies, and digital technology convergence help improve operational efficiency, simplify operation and improve accuracy. The current finance-banking system in Vietnam has caught up with the world technology trend. However, compared to the overall scale of the finance-banking system in Vietnam, it is clear that the research and proactive application of Industry 4.0 technology are still very fragmented and mainly in large finance-banking organizations which are scientific and technological potential, and already aware of the importance of Industry 4.0. There are still many finance-banking organizations which are in the research stage or have not made any moves. This group is mainly small-scale with limited science-technology foundation, has not caught up with the changing trend of Industry 4.0 in the country and the world, their operation is still traditional. This puts pressure on them to restructure and operate on the basis of technology of Industry 4.0 to survive.

Opportunities and challenges for Vietnam's finance- banking sector development

Industry 4.0 brings many new development opportunities to the finance-banking sector of Vietnam, of which the outstanding ones are:

1- Technology gap is reduced. The demand for high technology application and development in banking operations in Vietnam is rising. A State Bank's survey showed that some banks are expected to invest from 8% to 10% of the total annual operating costs in information technology. Advances from the digital revolution and subsequent Industry 4.0 will create favorable conditions for Vietnamese banks to attract investment capital and access to international markets; update modern management, execution and business skills; apply smart digital banking models; innovate technology through application or transfer of high technology, development of modern banking products and services, promote great potential in the banking sector and make timely changes to keep abreast with new technology trends when Vietnam joined the World Trade Organization (WTO) and signed a series of free trade agreements (FTAs), especially Vietnam-Eurasian Economic Union FTA, or Vietnam-Korea, Vietnam-Japan FTAs.

2- Increased access to international markets: Vietnam currently has established diplomatic and trade relations with most countries and territories around the world, participating in most large-scale FTAs in the world. The presence of Industry 4.0 will be an opportunity not only for large finance-banking organizations but also the whole system to reach out of the territory, expand the scope of activities and build international brands in global, highly professional and equal business playing field. This will open a great opportunity for the finance-banking sector to keep up with the world level, expand markets, and contribute to Vietnam's economic growth.

3- The quality of finance-banking products and services is improved towards modernity, effectiveness in terms of time, space, cost and profit increase: Industry 4.0 based on digital technology and integration of smart technologies has created great opportunities to reduce costs of transaction, transport, management, and optimally meet customers' needs. It also challenges and puts pressure on existing traditional models to modernize their activities if they do not want to be excluded from the market, create a positive competition in the finance-banking sector which is needed in Vietnam’s finance-banking sector in the context of international integration and smart technology.

In addition to the above-mentioned opportunities, the development of Industry 4.0 in the finance-banking sector in Vietnam also faces a numerous challenges, notably:

1- Policy gap requires the building of legal regulations to meet the needs of technology reform in the finance-banking sector. Technologies in Industry 4.0 have developed so rapidly that many countries, including Vietnam, have met with difficulties in designing the legal framework. The Government is required to design new policies to manage and monitor new elements of the finance-banking sector, such as crypto currency, e-money, Fintech companies. In addition, discrepancies in regulations and procedures have caused big obstacles to the development of new legal regulations to meet the demand for technology reform in finance-banking sector.

2- The payment infrastructure has been developed unevenly and not really completed. Currently, Vietnam's payment system still has many limitations in technology, standards for domestic chip cards, messaging standards, system integrity. This situation hinders the integration, connection with regional and international payment systems.

3- Human resources have not been prepared to respond to Industry 4.0: this revolution will change the way of recruitment, treatment, and use of human resources in order to attract long-term talents to serve the finance-banking sector. Requirements on quality of human resources will change, demanding digital technology operation skills, compliance with operating procedures of finance-banking product and service supply, new issues in training resources for finance-banking 4.0 in training institutions.

4. The State Bank’s regulation and control of currency at a time when electronic money is increasingly being used and widely accepted. The emergence of electronic money poses a big challenge for the State Bank of Vietnam in measuring, controlling and forecasting money supply in circulation. In addition, the trend of Fintech technology companies’ penetration in finance-banking field is challenging traditional banking operation, such as payment, money transfer.

5. Risks of information technology, security and technology crimes. The Internet of Things (IoT) and big data likely increase risks in information technology, especially on cyber security and information security. With the growing sophistication of digital technology and the tendency to shift to cloud computing, security gaps may increase, leading to high risk of hacking. These risks can cause huge losses to the finance-banking system, thereby affecting financial security, reducing the reputation of the Government.

Comparing what Vietnam has to Industry 4.0, it is possible to see that Vietnam boasts a number of favorable conditions as a good foundation for developing Industry 4.0 in industries and trades in general and finance-banking sector in particular, including: First, abundant labor force which is intelligent, studious and easily absorb scientific and technological advances; In addition, the young generation of Vietnam craves for technology; the use of mobile phones and the internet is a standard of daily life; Second, relatively complete telecommunications network infrastructure and development with many different forms. Third, the will of the political system. In Industry 4.0, the Government identifies that this is a good opportunity for Vietnam to quickly complete the goal of industrialization and modernization, catch up with modern countries in the region and the world.

Solutions for development of finance-banking sector 4.0 in Vietnam

In order to grasp development opportunities, and at the same time limit the above-mentioned challenges to the finance-banking sector in the context of Industry 4.0, it is necessary to implement synchronously and effectively the following groups of solutions:

First, institutions and policies. Institutions and policies play an important role in creating the fundamental framework for the development of the finance-banking sector. Completing institutions and policies should focus on the following issues:

- Reaching consensus on the concept and understanding of finance-banking 4.0 products based on international practices and current legal system. This is important for reviewing relevant legal documents, as well as assigning management responsibilities to ministries and agencies concerned.

- Reviewing and revising current legal documents to facilitate the application, transaction and development of finance-banking 4.0 products. In Vietnam, many legal documents were promulgated when products and activities of finance-banking 4.0 had not yet come about and therefore these legal documents are no longer suitable.

- Issuing a controlled experimental legal framework. Sandboxes must ensure criteria before and after a product or an activity is put into the sandboxes. A selected product or activity to be put to sandboxes must be a new product or activity of finance-banking 4.0, create positive added value for the society. It will overcome the legal barriers and current inspection and control mechanisms. Therefore, it is necessary to set criteria to prevent the misuse of sandboxes for negative purposes, such as taking advantage of sandboxes to perform illegal activities, or deliberately putting a product with average technology into the sandbox to evade taxes. After a period of operation, it is necessary to have a specialized committee to monitor and evaluate so that after a period of testing, relevant circulars and rules can be quickly issued. This will avoid monopoly in the market and asking-giving mechanisms.

In addition to the above-mentioned solutions, this group of solutions must be completed to be similar or closer to technological standards, institutions, and international law. Regulations on responsibilities and authority of state management agencies, especially the inspection and supervision department must be promulgated in accordance with finance-banking sector 4.0. At the same time, solutions and policies must be made to encourage financial technology companies to expand in both Vietnam and international markets.

Second, the role of public service provision to realize the State's orientation towards promoting finance-banking 4.0 in Vietnam. The state should actively apply finance-banking 4.0 in supply and payment of public services. Currently, cash payment of public services in Vietnam is still much higher than that of other regional countries and countries with similar or less development levels in the world. This can be quickly changed if the State adopts new payment technologies for public services. In the long term, this can also help reduce staffing and save cost. In addition, the State should direct businesses, state corporations, especially businesses and corporations which are public service providers to facilitate and establish mechanisms to encourage people to use new means of payment.

The State should actively apply finance-banking 4.0 in inspection and monitoring of the finance-banking system (reg-tech) through automation and/or artificial intelligence use. This helps improve transparency and efficiency in the operation of the finance-banking sector. Currently, artificial intelligence has been applied in some advanced countries to detect stock pricing activities.

Third, infrastructure and information as technological platforms for application and development of achievements of Industry 4.0.

- Upgrading broadband download. Compared to other countries in the region, Vietnam's wifi coverage is quite high. However, download speed is much lower, and the download cost is still high. This must be quickly improved to create good infrastructure for Industry 4.0 in general and finance-banking 4.0 in particular.

- Establishing an Innovation Center to test new products and new activities of finance-banking 4.0. Regulatory sandboxes can also be placed here. For finance-banking 4.0, this center must be located in the center of Hanoi Capital for easy connection with businesses, banks, financial companies, and related ministries, departments and agencies. This center is responsible for testing technology products and services, outlining the legal corridors to quickly bring these products and services into mass application. Legal corridors (proposed amendments, new construction) must be developed after a period of sandboxes’ testing products and services. Subsequently, relevant ministries and agencies must issue detailed legal documents. In addition, in order to upgrade and improve infrastructure for finance-banking 4.0 development, the State must early establish national electronic identity infrastructure in accordance with international practices which can be accepted in international transaction; state management agencies must actively digitize supply services and management processes when possible; improve the capacity of the National Cyber Security Center.

Fourth, human resources must not only be able to apply the achievements of the world but also have the capacity to innovate new applications based on Industry 4.0 technology.

- Universalizing training of programming and database at university level to turn out IT human resources for application and innovation in the context of Industry 4.0 in general and finance-banking 4.0 in particular. Developing multi-disciplinary universities/trades/fields instead of the current in-depth training of human resources in the context of Industry 4.0 in general and finance-banking 4.0 in particular who must possess generalization thinking and knowledge of information technology and finance-banking. In the immediate future, the Government should consider focusing investment in information technology faculties at economic and finance-banking universities.

- Developing a strategy to train relevant state management officials for finance-banking 4.0. Industry 4.0 poses many issues for management, such as newly promulgated laws and policies, diversity of new forms in finance-banking activities, which requires state managers to constantly improve their professional level. It is necessary to have a strategy to train managers in the finance-banking sector, especially senior management officials who are professionally qualified and regularly update professional knowledge and skills on a par with international standards.

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This article was published in the Communist Review No 919 (May 2019)

Assoc. Prof. Dao Van Hung, PhDPresident of the Academy of Policy and Development, Ministry of Planning and Investment