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Digital transformation has emerged as a key focus for corporations across the Asia Paciﬁc region, particularly as a result of the COVID-19 pandemic, which has accelerated the trend. And many of the technologies that have gained prominence in the past two years are likely here to stay.

But digital transformation can be a complex undertaking. Baker McKenzie’s recently released Digital Transformation and Cloud Survey 2021/2022 revealed several key challenges that organisations face in achieving this transformation, including how to balance value creation through digital transformation and how to mitigate associated risks; how governance structures can evolve to address and manage new technology environments; and how to best navigate continually evolving legal and regulatory landscapes.

It is very evident from the survey that the global trend of digital transformation which was accelerated during 2020 as businesses sought to mitigate the signiﬁcant impact of the COVID-19 pandemic is now a permanent part of the enterprise.

- Anne-Marie Allgrove, partner, Baker McKenzie (Sydney)

“It is very evident from the survey that the global trend of digital transformation which was accelerated during 2020 as businesses sought to mitigate the signiﬁcant impact of the COVID-19 pandemic is now a permanent part of the enterprise,” says Anne-Marie Allgrove, partner in the Sydney ofﬁce of Baker McKenzie.

She believes digital transformation will continue to create exciting opportunities for organisations across all sectors and is likely to remain as a key focus going forward.

THE FUTURE BELONGS TO THE BOLD

Baker McKenzie’s research suggests that there are clear opportunities for companies that choose to be strategic and proactive – as opposed to reactive – in their digital transformation journey.

“There are competitive advantages from both an internal organisational efﬁciency and cost reduction perspective, and in terms of the external market in terms of product offerings and reputation,” says Allgrove, who is also the global chair of the ﬁrm’s Intellectual Property (IP), Data and Technology Practice.

Over 50 percent of the organisations surveyed through the Digital Transformation and Cloud Survey said that faster identiﬁcation and reaction to issues and better management of unexpected third-party costs would have resulted in better outcomes, highlighting the importance of clear and effective governance structures.

Another key lesson from the survey was the need to involve subject matter teams earlier to help manage complex legal and regulatory landscapes.

In a digitally transforming world, another key theme from those surveyed was the importance of people in the development and delivery of products and services.

Allgrove points out that cloud computing and cybersecurity are key elements of the digital transformation focus for large companies driving efﬁciencies and ensuring security of data and systems.

“This is fuelling concerns for migration of legacy systems and for over a third of the respondents was one of the top three current concerns,” she notes.

“The focus for start-ups is on new technologies and innovative opportunities such as Artiﬁcial Intelligence (AI). AI has huge potential and the start-ups are focused on harnessing that potential in developing their offerings,” Allgrove adds.

Large companies, for the most part, need to work with smaller companies to access newer technologies. But this often causes issues with procurement, particularly when procurement processes make it difﬁcult to bring smaller providers onboard quickly and efﬁciently.

“Consideration needs to be given by large organisations to ways of mitigating the risks and ensuring compliance especially with security requirements without slowing down the transformation process unduly. This need is in part fuelling an increase in M&A activity to enable large companies to build internal skills and provide access to new technologies,” says Allgrove.

Other Baker McKenzie Partners have discussed digital transformation pain points at a number of key events, such as Hong Kong Fintech Week and the Singapore Fintech Festival (SFF).

“During 2021, the ﬁnancial industry as a whole saw a mix of pain points and opportunities. The most important was a focus by regulators on increasing the pace of digital transformation. This took several forms including the Hong Kong Monetary Authority and the Securities and Futures Commission taking steps to enable greater ﬂexibility in remote onboarding processes,” says Karen Man, a partner in Baker McKenzie’s financial services practice in Hong Kong.

This means that regulators globally have increased their existing long-term focus on cybersecurity and anti-money laundering. Ensuring more robust security can be very time consuming and costly for ﬁnancial institutions, so the regulators have been encouraging the use of regtech solutions whilst also exploring suptech solutions to enable them to conduct oversight more efﬁciently.

- Karen Man, partner and financial regulatory practice global chair, Baker McKenzie

She notes that ﬁntech ﬁrms and market disruptors have beneﬁted from these moves and been able to increase market penetration as part of the signiﬁcant consumer shift to digital-based banking and other investment services. The pandemic has also resulted in a great increase in cybercrime.

“This means that regulators globally have increased their existing long-term focus on cybersecurity and anti-money laundering. Ensuring more robust security can be very time consuming and costly for ﬁnancial institutions, so the regulators have been encouraging the use of regtech solutions whilst also exploring suptech solutions to enable them to conduct oversight more efﬁciently,” says Man, who is also the ﬁrm’s global chair of financial services regulatory practice.

“All ﬁnancial institutions have been required to ensure that they have appropriate resilience in their networks to facilitate increased client/customer demands for digital services at the same time as teams have been working on a split basis or entirely off-site,” Man adds.

“This has resulted in heavy investment in user experience and a focus on reducing friction for consumers within digital offerings whether built in-house or through partnering with start-ups. However, risk management and regulatory over-sight within ﬁnancial institutions means that there are greater challenges for traditional ﬁnancial institutions developing and partnering with ﬁntechs,”

- Paolo Sbuttoni, partner, Baker McKenzie (Hong Kong)

This has not only required ﬁnancial investments into digital networks but also the implementation of remote monitoring solutions to guard against employee misconduct and ensure that regulatory requirements to capture and store data are complied with.

Additionally, technology from sectors outside of ﬁnancial services is changing user expectations about what the ﬁnancial services experience should be like.

“This has resulted in heavy investment in user experience and a focus on reducing friction for consumers within digital offerings whether built in-house or through partnering with start-ups. However, risk management and regulatory oversight within ﬁnancial institutions means that there are greater challenges for traditional ﬁnancial institutions developing and partnering with ﬁntechs,” says Paolo Sbuttoni, a partner in the intellectual property, data and technology practice at Baker McKenzie in Hong Kong.

He sees there are many obstacles from a risk and compliance perspective to bring in new innovations at the proof-of-concept stage in particular, which means that some ﬁnancial institutions are slower to move to market than the pure ﬁntech or tech providers.

On the ﬂip side, the rise of regtech shows that increased risk and compliance requirements have encouraged innovation to meet growing compliance burdens. This can lead to a challenge of updating legacy systems and a war for talent.

CHANGING REGULATORY LANDSCAPE

The regulatory landscape across Asia Paciﬁc is also adapting to this region-wide digital transformation.

The Monetary Authority of Singapore (MAS), for example, launched several initiatives at the SFF. Stephanie Magnus, principal and Asia Paciﬁc co-head of the financial institutions group at Baker McKenzie sees them as a herald of things to come.

Within the ﬁnancial sector, the SFF brought up interesting conversations about the future of money, especially with a rise of crypto tokens and stablecoins, and whether there was a compelling case for central bank digital currencies.

- Stephanie Magnus, principal and Asia Paciﬁc co-head of the Financial Institutions Group, Baker McKenzie

“Within the ﬁnancial sector, the SFF brought up interesting conversations about the future of money, especially with a rise of crypto tokens and stablecoins, and whether there was a compelling case for central bank digital currencies,” says Magnus, who is also the practice leader for the ﬁnancial services regulatory team in Baker McKenzie Wong & Leow, the Singapore member ﬁrm of Baker McKenzie. “There were also forward-thinking discussions on digital ﬁnance and having the right infrastructure and network to both facilitate and support but also to combat increased risk areas such as cybersecurity and money laundering, as well as Web 3.0 and how that will play into the future of ﬁnancial services.”

“One key takeaway from these discussions is the need to have sufﬁcient infrastructure to ensure that technology and innovation can be developed in a sustainable way - with a need to balance the usage of new and nascent uses of technology with regulation,” she adds.

The MAS-launched initiatives at the SFF seek to provide that infrastructure and balance.

This includes Sandbox Plus which came into effect on 1 Jan 2022; COSMIC, co-created with MAS and six major banks in Singapore to enable seamless data exchange; and the connectivity of Singapore’s real-time payment system, PayNow, with the payment systems of other countries for easy cross-border payments transfers (refer to the feature box article).

Over in Mainland China, the digital transformation of ﬁnancial institutions is making waves, particularly their cooperation with third parties and outsourcing service institutions.

Kevin Yuan, senior counsel at FenXun Partners, Baker McKenzie’s Joint Operation platform Partner in China, thinks it will make the compliance of ﬁnancial institutions become the focus of regulatory governance.

“On one hand, the regulators encourage ﬁnancial institutions to conduct digital transformation at the strategic, organisational and ﬁnancial product levels and apply the cutting-edge technologies including big data, cloud computing, AI, blockchain, etc. For example, a series of policies were released to support the development of supply chain ﬁnancial platforms in recent years,” says Yuan.

“On the other hand, they also put forward strict regulatory requirements for the cooperation between ﬁnancial institutions and third-party technological companies in speciﬁc business segments by constantly issuing new regulations and increasing regulatory measures which will have a signiﬁcant impact on the compliance framework of ﬁnancial institutions,” he adds.

A SMART SOLUTION

Aware of the numerous challenges that accompany digital transformation, Baker McKenzie has tailored its SMART Framework and emphasizes expertise across the entire Asia Paciﬁc platform as solutions to those issues. The SMART Framework is focused on the following key elements: S (Smart Technologies), M (Mobility), A (Aggregated Data), R (Regulation and Regulators), and T (Transactions).

“Baker McKenzie has taken a holistic approach to our digital transformation services, across the Asia-Paciﬁc region and indeed across the globe. Our deep coverage of the Asia-Paciﬁc region allows us to address digital transformation needs across all areas of law, with experts focused on how (it) is shaping each and every industry sector,” says Adrian Lawrence, a partner in Baker McKenzie’s Sydney ofﬁce who heads the Asia Paciﬁc technology, media and telecommunications (TMT) group. “At Baker McKenzie, we have created the SMART Framework as a structure for industries and ﬁrms to consider and tailor their approach to digital transformation and, in particular, to the legal challenges that they are likely to encounter.”

PAYMENT PALS

Several key trends have shaped Asia’s future payments landscape, with COVID-19 having fuelled an 80/20 rise in digital payments: A 20 percent increase in the digital user base, with 80 percent of the gains that occurred during the height of COVID-19’s impact expected to remain for the long term.

Yet, progress throughout the region is not uniform. Mainland China is already an established leader in this field, while emerging countries like Vietnam have some 30-odd payment services.

“In a feasibility study KPMG published in 2018 on Cross-Border Payments Interoperability Networks in ASEAN, eight out of the 10 ASEAN countries are expected to be prepared to implement a cross-border payments interoperability in the next three years. Singapore, Thailand and Malaysia were predicted to drive the initial wave of adoption,” says Ken Chia, a principal at Baker McKenzie Wong & Leow’s intellectual property (IP), data and technology practice.

The Monetary Authority of Singapore (MAS) launched several initiatives at the Singapore Fintech Festival (SFF), one of which connects Singapore’s PayNow service to several of its neighbours.

Kullarat Phongsathaporn, a partner in the financial services practice group at Baker McKenzie Thailand, sees that matters have played out as predicted in the KPMG report with Singapore and Thailand establishing the first linkage with PromptPay-PayNow.

“Further linkages by Singapore’s PayNow to Malaysia and India have already been announced, and Singapore is further exploring linkages with The Philippines. Other jurisdictions have also hopped on the bandwagon with Indonesia and Thailand announcing the launch of a cross-border QR payment linkage in 2021, and Indonesia and Malaysia launching a similar QR payment linkage in January 2022,” says Kullarat.

Readiness to create similar cross-border linkages for the remaining ASEAN countries hinges on the state of a country’s domestic payments infrastructure.

“The COVID-19 pandemic has accelerated a rise in the adoption of digital payments to a region that had traditionally been one of the most cash-reliant regions. The broader adoption of digital payment methods will provide greater incentive to accelerate the development of domestic and cross-border payment networks as the region, hopefully, begins to open up from 2022 onwards,” says Chia.

Kullarat feels there are a lot of learnings to be had from having worked on the first ASEAN payments linkage in PromptPay-PayNow.

First, she feels having an experienced team that is familiar both with payments and cross-border work is important to speed the process up.

“Industry engagement and participation is another important factor in generating the momentum to pull off such a project. Having the regulator’s encouragement and support is one thing, but getting key industry players together to drive the project is arguably even more important to get the project past the finish line,” says Kullarat.

“To this effect, the involvement and buy-in from both the banking associations and participating banks on either side were crucial to gathering the right forces to make things happen.”

Chia said that interested firms and countries should be prepared to “get into the weeds.”

“There tend to be differences between how domestic payments systems operate. Accounting for and bridging these differences will be necessary to achieve success in creating cross-border payments linkages,” he says. “Participants may need to take a hands-on approach to find common ground to resolve these differences in a real-time cross-border payments system.”

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