Financial Operations Magazine Spring 2016 by Lloydmedia Inc

Q1 Spring 2016 â&#x20AC;˘ Canadaâ&#x20AC;&#x2122;s Independent Magazine

The Role of Analytics in Risk Management

Accounts Payable: Building a reservoir of trust

Trend Report: Adoption of FinTech could double within 12 months

Business Matters: Comparing three recurring revenue models PM40050803

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Contents

Q1 Spring 2016

Volume 3 Number 1

8 Features The Role of Analytics in Risk Management 8 Do you understand risk?

Why organizations need a horizontal view of risk in its totality

10 What a difference a day makes

A proactive approach can safeguard profit and working capital

16 Recurring revenue models

How to choose the model that works for your business

17 Building a reservoir of trust 18 Setting a new standard for secure digital payments in Canada

22 Trend Report:

Adoption of FinTech could double within 12 months

Also Publishers of

Canadian Equipment Finance

Advertising Sales Mark Henry mark@financialoperations.ca Publisher and Editor-in-Chief Steve Lloyd steve@financialoperations.ca Managing Editor Sarah O’Connor sarah@financialoperations.ca Creative Direction / Production Jennifer O’Neill jennifer@financialoperations.ca Photographer Gary Tannyan

For subscription, circulation and change of address information, contact subscriptions@financialoperations.ca Subscriptions available for $40.00 year or $60.00 two years. ©2016 Lloydmedia Inc. All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher. Printed in Canada. Reprint permission requests to use materials published in Financial Operations should be directed to the publisher.

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NEWS Extended vacancy: on average, CFOs take four weeks to fill finance positions Imagine being without a valuable employee for a month. That’s the situation accounting and finance departments typically find themselves in when a member of the team moves on. According to a new survey from Robert Half Finance & Accounting, Canadian CFOs said it takes four weeks, on average, to fill an open staff-level accounting or finance position and six weeks to hire for a management-level role. “Considering the talent shortage in today’s hiring market for finance and accounting professionals, a drawn-out hiring process can prove detrimental for companies hoping to lock in the most skilled candidates,” said Greg Scileppi, president of Robert Half, International Staffing Operations. “Properly vetting potential employees remains essential, but hiring managers should be prepared to accelerate the hiring process in order to ensure talented candidates aren’t lost to more decisive and competitive offers elsewhere.” Scileppi added, “Professionals with specialized finance and accounting designations are in particularly high demand, and companies must be especially diligent in extending job offers to these candidates.” CFOs were asked, “On average, how many weeks does it typically take to hire for an open staff-level accounting or finance position?” The mean response was four weeks. CFOs were also asked, “On average, how many weeks does it typically take to hire for an open management-level accounting or finance position?” The mean response was six weeks. Robert Half Finance & Accounting offers five tips to help managers accelerate their hiring process: • Move quickly. Develop an action plan that begins with creating a short list of potential hires and benchmarks for each step of the hiring process. The goal should be to carefully assess candidates, yet move swiftly toward extending an offer. • Update your finance job description. Provide a clear summary of the skill sets you need, including technical and interpersonal abilities. A good description gives candidates a solid statement of your performance expectations. • Solicit input. Enlist your top team members in updating the list of responsibilities, duties and requirements of the job and with evaluating finalists. While the final decision is yours to make, key staff members can help prevent making the wrong choice and wasting valuable time and resources. • Help your company stand out. Get creative in promoting your organization’s unique corporate culture, growth opportunities and benefits. Ensure the compensation you’re offering is in line with competing employers by comparing it against data in the Robert Half Salary Guide for Accounting and Finance. • Work with a recruiting firm. Staffing professionals interact with hiring managers and job seekers every day and understand current employment trends. By tapping their extensive network, you may meet in-demand candidates you couldn’t find on your own.

Financial Operations | Spring 2016 | www.financialoperations.ca

More than half of Canadians have been identity theft, financial fraud victims More than half of Canadians (53 per cent) say they have been a victim of financial fraud according to an Equifax Canada survey. Additionally, new data suggests that millennials (Generation Y) are increasingly the ideal target for fraudsters and organized crime syndicates. Throughout Fraud Prevention Month in March, Equifax Canada will work with the Canadian Anti-Fraud Centre (CAFC) to educate consumers, especially millennials about the impact of fraud and how to protect themselves. The CAFC estimates that mass marketing fraud losses to businesses and citizens has grown to greater than $10 billion annually, and it’s believed that almost 80 per cent of all fraud is committed by organized crime groups.

Fraud volume and Generation Y “Across the different age groups in the country, it seems that Generation Y is singled out largely due to a significantly higher reported fraud volume than any other generation across all provinces,” said John Russo, Equifax Canada’s chief privacy officer. “The data also indicates that approximately half of all fraud is being perpetrated against this group—20 points higher than the next age group— Generation X.” “Millennials rely heavily on technology for most of their day-to-day activities, which exposes them to more risk,” explains Russo. “Whether it’s online banking at home or tapping into a wi-fi hot-spot via a mobile device, millennials must recognize that they are now the biggest target for fraudsters.” A false sense of security when interacting online as well as the falsehood that they don’t earn enough money to be a target for fraudsters, may be to blame for the quandary millennials find themselves in today. “When it comes to online behavior, compared to the national average, millennials are less likely to double check their credit card statements, change their passwords, and limit their online purchases,” adds Russo. “Additionally, our survey found that 21 per cent think that identity theft is something that happens to other individuals, not them.”

What Equifax is telling consumers about safety: • Be less ‘social’ within your networks—don’t over share. Tech-savvy thieves can quickly gather what you share on social networks (your home or email address; children’s names; birth date and so on) to use for scams, phishing, and account theft. • Fight ‘phishing’—don’t take the bait. Never give out Continued on page 6

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personal information over the phone, through the mail, or over the Internet unless you have initiated the contact. • Check your credit report and report problems immediately. Check your credit report once or twice per year. Consider signing up for

ongoing monitoring of your credit file to safeguard against potentially fraudulent activity. • Click with caution. When shopping online, check out a website before entering your credit card number or other personal information. Only enter personal information on secure web pages with “https” in the

address bar and a padlock symbol at the bottom of the browser window. • Use strong passwords online—easy passwords open the doors to your personal information. Make passwords more complicated by combining letters, numbers, mixing in special characters and changing them regularly.

Investment in FinTech is the future of Canadian banking According to PwC’s Canadian Banks 2016: Embracing the FinTech Movement report, Canadian banks are laser-focused on responding to the threats—and opportunities—posed to the banking industry by a group of new companies building financial technology (FinTech) solutions. FinTech offerings range from competing financial services such as alternative lending, to additive solutions atop existing banking services, to enabling technologies for the banks themselves. Capitalizing on the latest mobile, cloud and digital technologies, Canada is now home to many FinTech firms who are trying to shake up and be accretive to the banking value chain. According to the report, banks have a great deal to gain from FinTechs’ innovation which may become essential in propelling the sector forward by reimagining operating models, streamlining costs, increasing reach in underserved markets, innovating through new product development, and opening new revenue streams. The increasing momentum of FinTechs and their success is challenging banks to devise a spectrum of strategic responses; however, not all FinTechs pose the same threats or opportunities. In some cases, FinTechs will be viewed as enablers to traditional innovation and continuous improvement. In others, it presents a series of disruptions and threats as they continue to make inroads into banks’ traditional territory by offering a competitive service or products. Canadian banks will ultimately employ parallel strategies that comprise collaborating with and leveraging some FinTechs while innovating to compete with others.

“Canadian banks must stay the course with a long term view and continue, as they have, to respond to the needs of an evolving market to create a stronger ecosystem that will position them to be even more competitive on a global level. This must encompass business model innovation, technology and architecture enablement, as well as cultural evolution to align with the new realities imposed by the tremendous uptick in the FinTech space,” says Diane Kazarian, national financial services leader, PwC Canada. Canadian banks are not only including responses to FinTechs as part of their growth strategy; they are investing in ecosystems which will position them to better compete in the market. Building an environment that produces innovative offerings is essential to be competitive in the years to come. For Canadian banks, embracing FinTech isn’t a short-term play. Here are six considerations that the financial services sector must consider when integrating FinTech in their strategy: Act now, but think long term. It’s time for the financial services sector to establish a clear, long-term FinTech strategy that not only allows for disruption, but embraces it. Think from the customer’s perspective. Gen X and Gen Y will assume more significant roles in the global economy over the next decade and millennials are bringing radical shifts to consumer behaviour and expectations. It’s vital that banks look at their own products and services from a customer’s perspective to better understand the points of friction. Adopt new thinking around getting concepts to market. The financial services

Financial Operations | Spring 2016 | www.financialoperations.ca

sector should strive to emulate the start-up model and culture to attract talent and rapidly develop products and bring them to market. Invest in the future by investing in technology. Banks must continue to assess new technologies and invest in those that fit with their business strategy and help them become innovation leaders. Collaborate. Technology and customer expectations are changing quickly and banks must respond with according speed. It’s about understanding what customers want and assessing whether banks have the skills and technology to deliver. Stay the course—and don’t slow down. The financial services sector must stay focused on the larger goal and increase their investments in FinTech. They are essential to meeting the needs of not only today’s customers, but also tomorrow’s. Given quarterly financial pressure, the temptation to slow down will be considerable but not strategic. The report also indicates that Canadian banks continued to see strong performance in 2015, achieving positive revenue growth and posting solid returns. In addition, they improved their 2016 first quarter results over last year despite a slowing economy, slumping commodity prices and low economic growth. The Big Six banks’ average consolidated revenues were $21.4 billion in 2015, up 4.3 per cent from $20.5 billion in 2014. From a productivity perspective, the banks continued their efforts to increase efficiency and streamline their cost base, however despite these efforts, the overall efficiency was 58.4 per cent in 2015, up slightly from 57.9 per cent in 2014.

NEWS 10th annual Paying Taxes report ranks Canada in global top 10 for ease of paying taxes

According to the latest Paying Taxes report, released by PwC and the World Bank Group, Canada continues to lead when it comes to the ease of paying taxes compared to its global counterparts. The report measures the overall ease of paying taxes for small to medium-sized domestic businesses based on the number of tax payments per year, the time required to compile returns and submit tax payments, as well as companies’ total tax liability as a percentage of pre-tax profits. The report found that on average, Canadian companies had a Total Tax Rate of 21.1 per cent of commercial profits compared to a global average of 40.8 per cent. Canada’s Total Tax Rate also falls below the North American average. Mexico’s Total Tax Rate is 51.7 per cent while the United States comes in at 43.9 per cent. In 2014, 46 economies exhibited an increase in their Total Tax Rate, while the Tax Rate decreased in 41 economies. “The Canadian government is committed to creating a tax-competitive and business-friendly environment for small-medium sized domestic companies,” says Peter Van Dijk, PwC Canadian Tax Policy leader, PwC Canada. “The implementation of various tax programs help to support and encourage the creation of more such businesses.” On average, Canadian companies make eight tax payments per year and take 131 hours to comply with their tax requirements. These numbers fall below the global average of 25.6 payments and 261 hours respectively. Electronic filing continues to have a significant impact in easing the burden of tax administration. Paying taxes became easier for medium sized companies globally, but the focus has moved from reducing tax rates for companies to embracing technology and relieving their compliance burden.

KEEP UP TO DATE AND INFORMED BY VISITING OUR WEBSITE DAILY. Financial Operations magazine posts news, insights, updates and breaking stories as they happen.

Paying Taxes 2014 rankings: G7 nations Country

Overall Paying Taxes Ranking

Total Tax Payments

Time to Comply (# of hours)

Total Tax Rate ( per cent)

Canada

131

21.1

France

137

62.7

Germany

218

48.8

Italy

137

269

64.8

Japan

121

330

51.3

110

32.0

175

43.9

FOR INFORMATION CONTACT:

MARK HENRY Corporate Sales Manager 905-201-6600 x 223 mark@financialoperations.ca

Canada’s ninth place ranking makes it the easiest country to pay taxes amongst the G7 nations based on the number of tax payments, the time it takes to comply and its Total Tax Rate (TTR).

For breaking news and in-depth features, visit our website at

www.financialoperations.ca

SARAH O’CONNOR Managing Editor 905-201-6600 x 227 sarah@financialoperations.ca

Visit us online at www.financialoperations.ca

Financial Operations | Spring 2016 | www.financialoperations.ca

Analytics & Risk

Do you understand risk? Why organizations need a horizontal view of risk in its totality

By Sajiv Talwar and Tom Kimner

Tom Kimner, head of Americas risk practice at SAS, and Sanjiv Talwar, PhD, head of risk capital and stress testing at the Bank of Montreal, discuss the evolution of capital management and the organizational and process implications of new regulatory capital requirements.

ver the preceding decade, capital management has evolved from both economic and regulatory perspectives. As an outcome of the financial downturn in more recent years, regulators have taken a stronger stand on capital management as they more closely monitor banks’ capital and associated processes to guard against systemic risk on both a regional and global basis. There is a shift in focus toward regulatory capital management—for example, increased capital buffers as part of Basel III, quantitative/qualitative measurement and management as part of CCAR and the inclusion of liquidity measures. As a result, more banks are asking how they might capitalize on the investments they’re making for regulatory compliance to meet their ongoing day-to-day management and

decision-making practices. To do this, institutions need to fully develop the construct of riskbased capital and use a risk-reward framework more effectively. This requires a holistic view of capital—from the perspective of capital demand to capital distribution, including a view on how to build this programmatically through a more robust performance management process. Many banks have made significant investments in technology, but proactive risk management and capital optimization also require investments in people—training, development of analytic and modeling skills and critical thinking. Some would argue that the lack of investments in these areas was contributing to the Great Recession. Tom Kimner: Given some of the major enhancements to regulations like CCAR, Basel III and Dodd-Frank, what are some of the organizational and process implications of meeting these strengthened regulatory capital requirements? Sanjiv Talwar: Coming out of the financial crisis, regulators expressed concern “that many financial companies simply failed to adequately identify the potential exposures

Financial Operations | Spring 2016 | www.financialoperations.ca

and risks stemming from their firmwide activities.” CCAR, Basel III and Dodd-Frank are riskbased compliance regimes. Each demands a comprehensive understanding of risk, which is not always easy to achieve given the complexity of many financial institutions. Organizational complexity—structures, processes and systems—has been shaped by size and the drive for efficiency. This has led to functional silos housing pockets of deep knowledge and technical expertise. The larger the institution, the more specialized and vertical the functions are. With compartmentalization, the horizontal view of how the separate organizational entities fit together can be obscured. This is further compounded as workloads hamper efforts to engage in horizontal work. With the exception of senior management, few may understand how a large financial institution really functions. All of these factors contribute to a lack of understanding of material risk across the organization. In other words, a horizontal view of risk in its totality is needed, as individual pockets may not appear material.

Analytics & Risk Kimner: What are some of the more difficult hurdles to address with the new regulations? Talwar: First and foremost, let me say that the sheer volume and velocity of regulation is daunting. One of the challenges when you are responding quickly to supervisory demands is that you have to keep moving forward—even if you don’t have a complete picture of the problem you’re solving, let alone the “end game.” This poses a real challenge for any institution that’s significantly investing in a rapidly evolving requirement. Senior executive and board support is essential to mitigating funding and execution risk. Compounding this is a very small talent pool for which institutions are competing. The supply shortage is a serious issue, and the ripple effect of delayed work and resulting consequences is very concerning. Second, don’t underestimate the importance of clearly articulated end-to-end processes. Much of how we do things is based on tacit knowledge. Codifying knowledge is a disciplined, cross-organizational strategic exercise and is something everyone needs to improve on. Job rotations through business and risk functions can help cut through complexity by increasing awareness and building knowledge. Responsiveness and timeliness are critical and shouldn’t be overlooked. Achieving this requires process alignment and agile systems. The quantitative components of capital management can be delivered programmatically. By that I mean that much activity can be automated provided it is underpinned with sound models. Certainly model risk management is a key consideration and must be supported with overarching governance spanning validation, controls and transparency of model assumptions and weaknesses. Kimner: Has technology enabled any of this work? Talwar: There are many moving parts that have to be synchronized for effective capital management. Risk and finance systems with appropriate data integration are essential. A few years ago, vended technology was not well equipped to provide a solution, but that is changing. An integrated risk, finance and treasury systems architecture—with appropriate data integration—is needed to support capital management, including

the ability to aggregate data from multiple loss-estimation models. This will expedite processing and enable transparency and repeatability—and shift the effort from production to value-added analysis. Kimner: Can technology ever take the place of skilled analysts? And how do human judgment, critical thinking, evaluation and overrides fit into the picture? Talwar: Technology is not a panacea; yet all too often there is a view that it can supplant critical thinking. This is dangerous thinking because it can lead to blind acceptance of model output and lull users into a false sense of security. Models are calibrated on history and do not predict how the world might change, or how human behavior could change under a certain set of circumstances. Therefore, judgment and analysis are crucial, as is a deep understanding of model assumptions and parameters. The future is unpredictable and model results must be interpreted with great caution and augmented with qualitative assessments. Kimner: How are organizations evolving their riskbased capital frameworks to more fully incorporate the risk-reward trade-offs that need to be made beyond regulatory compliance? Talwar: Strategy, risk appetite and business model shape an organization’s capital needs and balance sheet. Given the changing regulatory landscape, more and more institutions are evaluating risk-based capital through multiple measures: regulatory capital, economic capital and stress capital. Regulatory capital is the minimum amount of capital required by regulators. Economic capital is an internal assessment of risk capital based on statistical modeling of a tail event. Stress capital is the level of capital required to withstand the impact of severely adverse conditions. Each framework imposes constraints in terms of capital allocation choices. While it would not be realistic to manage strategy based on a severe tail event, these measures help an institution determine the appropriate level of capital to hold to maintain market and regulatory confidence and absorb losses in the event of adverse economic conditions. Kimner: Are organizations well positioned in terms of staffing skills to meet more stringent regulatory

requirements? Are there specific skills required, and are there market gaps in those skill sets? Talwar: Let’s be clear. There is a war for talent. Increasingly banks need to view themselves as knowledge-based industries and recruit and reward based on that premise. The work we do is changing. While we’ll continue to need quantitative experts, we need to complement that skill set with critical thinking, problem-solving, reasoning and analysis. And we need to place a higher value on cross-functional, collaborative teams if we’re to break down the functional silos I referred to earlier. Kimner: Many institutions have openly criticized the growing cost of regulatory compliance. Are there ways to apply risk management technology and human resource investments to improve business decision management? Talwar: One of my current accountabilities is stress testing. The Bank of Montreal is investing heavily in building stress testing capability. This spans people, processes and systems. We view it as much more than a compliance exercise. We see stress testing as a strategic, value adding input to assessing, anticipating and preparing for uncertainty. I like to think of stress testing, or scenario testing, as a forward-looking simulation, similar to a flight simulator. For those managers with limited exposure to tail events, it is a useful tool to contemplate and rehearse—without recourse—a playbook of strategic moves. This practice should improve forward-looking thinking and timely recognition of adverse, or opportune, events as they unfold and foster more rapid adaptation to market conditions. As Head of Risk Capital and Stress Testing at the Bank of Montreal, Sanjiv Talwar, PhD oversees the determination of capital demand—including economic capital, regulatory capital and stress capital—for the enterprise. In addition, he is accountable for risk analytics. Talwar also has leadership responsibilities for CCAR, DFAST and ICAAP, and maintaining relationships with regulators in multiple jurisdictions. As Head of Americas Risk Practice and Global Risk Products at SAS, Thomas Kimner is currently responsible for executing the vision for SAS risk solutions and sales support activities. He also serves as chairman of the Risk Governance Board—a global committee that sets overall strategic direction for risk. Kimner has testified before the Financial Services Committee of the United States House of Representatives and regularly speaks at risk conferences and other SAS-hosted events.

Financial Operations | Spring 2016 | www.financialoperations.ca

Analytics & Risk

What a

difference a day makes

A proactive approach can safeguard profit and working capital

10â&#x20AC;&#x192;

Financial Operations | Spring 2016 | www.financialoperations.ca

Analytics & Risk

By Phil Beane

hen a house is on fire, firefighters spring into action. Why? Because the time sensitivity of the threat is evident and real. A home can burn to the ground in minutes, making every second count. The threat a company faces from fraud, duplicate payments and lack of consistent and high-quality continuous monitoring systems isn’t as obvious as a burning house, but it doesn’t mean consequences are any less dire. Just as lives can change forever in a matter of mere moments, so too can a company’s risk and exposure to fraud and overpayment increase exponentially in the course of a single day. Whether due to a system conversion, major accounting system upgrade, a new workflow process, a merger or acquisition or staff turnover, nearly any disruption in daily business guarantees an influx of exceptions in the AP process. Consider: when a company goes through a system upgrade or conversion to a different back-office accounting system, there are typically huge spikes (due to overlapping systems and processes) in duplicate payments. In one example, a metal manufacturer my company worked with showed a one-month spike during a major system change of almost $700 thousand in duplicates that were mistakenly overpaid with their ERP system, but caught thanks to specialized monitoring software. Supplier fraud during times of transition is another concern. Asset misappropriation in the form of fraudulent disbursements (billing and payroll schemes, check tampering, register disbursements) is the most common type of occupational fraud. And as the most recent ACFE Report to the Nations notes, “The longer the frauds were able to go undetected, the more costly they became.” As someone working in treasury, you are a steward of your company’s financial assets. As such, understanding and analyzing the AP process to understand how everything from invoice-approval processes to payment schedules influence cash scenarios and cash-flow forecasts should be a focus for your department. Whenever there is disruption, the increased risk for fraud and cash

mismanagement is real. Putting early controls in place, however, can minimize and prevent one-time and on-going financial losses. Outlined below are strategies to ensure that, in times of change, your company isn’t hit with financial Armageddon.

Partner with accounts payable for greater cash management strategy Although the day-to-day functions of treasury and AP differ, companies are best served by these functions collaborating. As noted in the September 9, 2015 LinkedIn article “Why Treasury May Soon Take Over Accounts Payable”— “AP is fundamentally a cash distribution function.” The author, a senior payables researcher at Ardent Partners, points out, “There is significant capital involved in paying an enterprise’s suppliers—hundreds of millions of dollars in some cases—which means that treasury must, out of necessity, be closely involved in managing payments in order to ensure that doing so is aligned to the enterprise’s greater cash optimization strategy.” Similarly, in the process of treasury taking on a larger role in mergers and acquisitions and managing capital in global markets by managing payment terms, there are consequences for the disbursements function. Let’s say your company decides to spin off a division. Once those ledgers are separated, invoices continue to roll in. Who’s paying them? Without controls in place, chances are strong duplicate payments are being sent. An internal review may eventually identify the error but the danger there is that it may take so long to find the overpayment that 1) the error has already fallen out of the financial period of either you or the supplier and 2) at some point the overpayment becomes uncollectable because you are no longer buying from that supplier or they have gone out of business. Such situations occur every day to the tune of millions of dollars. As you can see in the

chart below, a Fortune 50 company APEX Analytix worked with found an average of $3.5 million per month that would have been lost in duplicate payments, while one of the largest consumer packaged goods companies in the world saw $28 million per month of duplicates prevented.

When you consider the volume of trade of these companies—tens of billions of dollars—the representative proportion of errors occurring in the normal course of business may seem small by comparison. But look at it this way: the $28 million per month in duplicates found by the consumer packaged goods company is equal to almost a million dollars a day—the equivalent of ten basis points on a billion dollars in spend —if they hadn’t had continuous monitoring in place. That’s the difference a day makes.

Institute high-quality continuous monitoring technologies How do you identify overpayment errors like the ones above, as well as leakage due to fraud? Departments like AP, treasury and internal audit may already perform continuous monitoring and/or sample audits, but we know from experience that these departments operate with an overestimation of how strong their controls are. Even among Global 1000 companies, we fail to see consistent and high-quality continuous monitoring technology and processes in place. Here’s an example of a situation that is not uncommon. An internal audit department performs an annual sample check for fraud. Continued on page 14

Financial Operations | Spring 2016 | www.financialoperations.ca

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Simplified payments If you’re looking for an efficient way to send payments, this service is the perfect solution for your business. Whether you’re managing payroll for temporary staff, or regularly refunding customer overpayments, Bulk Interac e-Transfer service can simplify your payments process. Insurance companies can also streamline administrative procedures when refunding customer premiums or when sending small claims pay-outs. Manufacturers can easily fulfill their after-purchase rebate programs. And it’s a game-changer for universities, too – simplifying reimbursements to students.

Easy to use First, you generate a payment file, which includes the recipient’s email address and the payment amount, as well as a security question and answer. Then the file is uploaded to Scotiabank for onward submission to Interac. The recipient will receive an email notification with instructions on how to deposit the funds.

With the Bulk Interac e-Transfer service, recipients can securely deposit their funds into an account at a Canadian financial institution. Each payment is password-protected with a security question that the recipient must correctly answer in order to receive the funds. With a cap of 100,000 payments in a single file, there’s no minimum payment value and the expiration dates can be set for up to 364 days in advance. Businesses will also receive status reports, including a listing of completed and cancelled transactions. Basically, any infrequent or non-recurring payment can be sent using this innovative new service.

A university could write as many as 500 cheques per month to students, with most of these refund cheques being written during peak periods. Bulk Interac e-Transfer payments can save time and remove issues such as lost or stale-dated cheques, or even locating a student’s current address to mail the refund—now all you need is their email address. With this innovative service, cash-strapped students can have their refund within one day, not weeks.

What it means for your business You will find this service to be fast, safe, cost-effective and convenient. Plus, you can save time and money by eliminating the need to mail, process, and track costly cheques.

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Analytics & Risk Continued from page 11

They may even compare vendor TINs against employee social security numbers to check for commonalities. If this audit is done on January 1 of each year, the company may catch some discrepancies. However, the door remains wide open to fraud and overpayments for the remainder of the year. As the months go by, the amount of the fraud can exponentially increase. To repeat, as business is being transacted and funds exchanged between suppliers and buyer, there are rampant opportunities for leakage. One amusing story we heard had a

company hiring a host of interns who went in and cleaned up the company’s vendor data. Which means, for that one day, the vendor data was probably in pretty good shape. The next day, however, with no monitoring controls in place, the vendor data became outdated. Here’s the difference: you want a continuous monitoring system that pulls data from all of your systems, every night and provides you with a workbench that gives you easy dispositioning and reporting on overpayments. The right continuous monitoring system will issue reports on duplicate payment prevention, vendor risk analysis, missed cash discounts, paid credit memos and tax analysis before payments are posted. The best-case scenario in vendor master monitoring is a push technology that dynamically vets vendors in your database against global tax identification databases, address databases, industry classifications and prohibited entity lists then pushes the changes for you to review and update in your ERP. The only sure way to identify errors as they occur is by having a daily feed of all

the net change data. For example, let’s say you have 100 vendors in your vendor master database and you know the records are clean. Tomorrow, one of those vendors ends up on the OFAC list. The system you’re using should send you an alert that reports a change has occurred in this field and ask if you want to take action. That’s the value of continuous monitoring.

Adopt a proactive stance to fighting fraud While overpayments in the form of duplicates, pricing errors or other transactional issues that may be detected through an audit or continuous monitoring are straightforward and clear-cut, vendor fraud is a more insidious and sometimes larger issue to which treasury must remain alert. According to the ACFE Report to Nations, the losses to undetected fraud increase over time. If a fraud lasts more than a year, it doubles in losses to the company. If it lasts more than two years, it doubles again. Asset misappropriation schemes are the most common frauds as well. In our business, we often joke about “Sutton’s Law,” based on a rumored exchange between “Slick Willie” Sutton, the infamous bank robber, and reporter Mitch Ohnstad. Sutton was asked by the reporter why he robbed banks. According to Ohnstad, he replied, “Because that’s where the money is.” Likewise, the volume of asset misappropriation cases that target AP could be due to the fact that it’s where the money is… or, at least, where it’s spent. Among asset misappropriation schemes, as seen in the ACFE chart below, billing fraud is

Financial Operations | Spring 2016 | www.financialoperations.ca

the highest risk category, accounting for 22.3 percent of asset misappropriations. And it’s something that can be detected early with the right monitoring software. And yet, many Global 1000 and even Fortune 500 companies do a poor job at monitoring for fraud. Per the ACFE Report to the Nations, “…tips are consistently the most common detection method for cases of occupational fraud by a significant margin.” Until there is broader adoption of continuous monitoring, it’s difficult to say how many of the losses to fraud could have been stemmed earlier and kept profits from leaking out of the company. How initial detection occurs matters because frauds that were discovered by accident last approximately three times longer—and at almost six times the cost— than those caught through monitoring. That’s a breakdown that will directly affect any company’s bottom line. What can be done? Daily monitoring in the form of risk scoring for all vendors goes a long way toward protecting your financial resources. Each day, AP adds vendors, vendor records are updated and changes occur with vendors that are not known to the company who is paying them—all of which potentially place your company at risk. A supplier portal with continuous monitoring checks for things such as prison or residential addresses, employee-supplier matches (collusion), prohibited suppliers, CPI (global Corruption Perception Index) scores, consecutive invoice numbering, small first payments and even dollar amounts. Similar to how a continuous monitoring system may notify you of changes in vendor status or duplicate payments, a continuous monitoring system for vendor fraud will likewise provide you with an accessible workbench for reviewing, confirming, denying and reporting on potential risk of fraud. The best systems are the ones that create a composite score, rather than run individual comparison tests one by one. Compiling a score for every supplier in your database, comparing supplier records against employee records, and doing so continuously during and after onboarding is one of the

Analytics & Risk best practices of leading companies. Unlike duplicate and overpayments that noticeably spike when changes (mergers, system upgrades, etc.) occur, supplier fraud can hit at any time. That doesn’t mean that a day still can’t make a huge difference. In fact, companies operating on a “business as usual” platform are often more susceptible to fraud. For example, if AP doesn’t have a good segregation of duties between invoice receipt and approval, a highly trusted individual may be manipulating the process. As for internal sample audits, they are just that—samples— and are often “check the box” procedures versus thorough reviews. An objective third party review for audit and process control is essential.

Why your ERP system isn’t enough If you’re relying on your Enterprise Resource Planning (ERP) payment platform to protect against duplicate payments and fraud, it’s time for a reality check. Yes, ERP systems have levels of controls built in them. But even leading systems like SAP and Oracle lack the sophisticated, multi-level controls required to prevent and detect duplicate payments and fraud. The primary problem with ERP systems is human error. Anything from a typo to a keyer adding a “1” in front of an invoice number to placate an irate vendor threatening to pull his inventory because he hasn’t been paid leads to an ERP’s inherent controls being circumvented. In addition, multiple ERPs compound problems. Unless your systems are integrated, there is no way for one system to see into another to catch a duplicate payment. It’s not unusual for businesses to operate with multiple ERPs. One large financial services company found that more than 25 per cent of the duplicate payments uncovered during a recovery audit were the result of the same invoice being paid on multiple systems. ERP controls can also slow your operations. Often the controls that are on the front end of a payment process are either too tied down (every entry results in an alert leading to frustrated data entry teams overriding them) or too opened up (too few parameters to scan). Either way, thousands of potential duplicate payments may escape detection. The bottom line is that both treasury and AP need to ask hard questions about what their control environment is really like. Don’t

accept a casual response as evidence of strong controls. IT or your ERP vendor may tell you there are controls in place but dig past the surface and you’ll most often find the level of control is only superficial. While ERPs have revolutionized today’s business world, best-in-class continuous monitoring applications are required to shore up your ERP controls, eliminate duplicate payments, root out fraud and protect your bottom line. Above all, insist on the ability of your monitoring system to extract daily data feeds from your ERP for analysis without slowing down your operations. Ideally, you should be able to walk into the office each morning and review a single, concise report that ranks potential issues and provides all the information you need to intervene before disbursements are made.

Supply chain finance and dynamic discounting Beyond what’s been discussed here, treasury and AP both have many additional opportunities to maximize the use of funds. Treasury, AP and procurement are a threelegged stool in this effort; without active involvement by all three teams, the effort will fail. For example, more effective than typical static discount terms (2/10 net 30) are supply chain finance (SCF) programs, approved payables finance (APF) and dynamic discounting. Buyer benefits vary by program. With APF, the buyer typically has a financial institution fund the early payment to vendors and gains extended use of funds. With dynamic discounting, the buyer uses their funds to pay vendors early and reduces the amount paid by the discount, keeping the cash. Treasury’s involvement in the management of these programs can help maximize the benefit obtained and alignment with cash management objectives. Within all of these, treasury, AP and procurement each have roles to play. Typically, treasury arranges liquidity from financial institutions at competitive rates to fund APF programs and provides guidance regarding the acceptable rate of return for dynamic discounting programs. Procurement identifies which program is a fit for which vendors. AP typically manages the portal to suppliers to allow them the ability to check the status of their invoices and payments. State-of-the art portals provide not only

daily calculation of discounts, but also can proactively market discounts to target suppliers. Therefore, a portal is enabling daily collaboration that provides working capital management strategies and benefits to both buyers and suppliers. From the perspective of the supplier, they don’t have the problem of “frozen capital” as they wait the 30, 60, 90 or even more days to be paid. Every day, via Approved Payables Finance (APF) or dynamic discounting, they can see the discounted payment amount for that day and clear the receivable. What can that cash-inhand represent for your cash environment— especially if you’re getting preferred interest rates? That’s where the time value of money comes into play. By partnering with teams like AP and procurement, treasury can target suppliers or commodity areas where extension of payment terms is possible. And configuring optimal payment terms is just the beginning. Are invoices arriving on time? Are payments being made too early against terms? Are discounts being taken where available? One day can make a big difference in a standard 2/10 net 30 payment term. If the invoice arrives late or “Dead on Arrival,” the company loses two per cent of the invoice amount. For a Fortune 500 company, where a single invoice can easily be $100,000 or more, that’s $2,000 out of the treasury coffers. It adds up. Treasury has an opportunity, and potentially an obligation, to collaborate closely with AP to get a more holistic view of the cash management picture in their company. While treasury has typically left AP and procurement alone to manage payment terms, for example, there are benefits to a more collaborative effort. By participating more actively with financial supply chain partners in procurement and AP, treasury achieves more control over cash flow and return. And once you take the steps to close the gaps where money is leaking, you can turn your attention to the more exciting and valuable daily recoveries and benefits offered by dynamic discounting and supply chain financing. As senior vice president, global field operations at APEX Analytix, Phil Beane leads the commercial and retail audit teams and our international operations. His focus is on ensuring the highest level of customer satisfaction and value creation, which has helped to fuel a period of double-digit growth. He was previously responsible for leading Apix Analytix’ audit and software implementation support teams in the Americas.

Financial Operations | Spring 2016 | www.financialoperations.ca

Business Matters

Recurring revenue models How to choose which of the three flavours works for your business By Sean Rollings

wenty-first century buyers are a new breed and offer an extraordinarily disruptive dynamic that favours the “fast” over the “slow” in virtually every sector of the economy. Recurring revenue management helps you take advantage of the on-demand, Internetfueled revolution. Recurring revenue may be the largest opportunity to disrupt markets and drive new revenue growth in and across industries since the birth of the Internet. The three most widely adopted recurring revenue models today are subscription, usage and combinations of the two. All are ways to convert or monetize a product, service or asset into recurring revenue. Each makes sense in different situations by delivering distinctive advantages for sellers and buyers. Each may be more or less appropriate for a given product or service. The following compares these models to help you choose the best fit for your business.

The subscription revenue model The subscription revenue model, also called flat-rate recurring, comprises a fixed payment for a service for a specific period of time (a day, a month, a year). Magazines offer a common type of subscription in which the subscriber pays to receive every issue for a year. For some sellers, new subscription models may imply higher support and customer care costs because of the ongoing relationship as opposed to just touching customers at point of sale. For other businesses, these ongoing support costs are already part of their cost structure. In all cases, automating customer touch points and offering self-service options are key to delivering higher customer satisfaction while realizing lower costs for supporting a large subscriber base. To determine whether recurring subscription revenue is the right model for your business, answer the following three questions: • Does your service offer value over a period of time, not just once? • Do you have additional services and

customer data to cross-sell to that customer effectively? • Is there a strategic imperative or opportunity, such as competitive pressure or the desire to inflict it, which dictates a more predictable recurring revenue stream or new way of monetizing assets? If you answered yes to any of these questions, you may want to explore recurring subscription revenue more deeply. Consider the following: • Recurring revenue generally requires specialized accounting treatment. For pre-paid subscriptions, sellers receive payment before delivering all the products or services, a cash flow advantage as revenues are typically recognized in an ongoing fashion as part of service delivery. • Customers may prefer to stretch out payments instead of paying up front, helping their own cash flow. To encourage up front payments, some sellers offer discounts on prepaid subscriptions. If a recurring subscription revenue model doesn’t fit well, you can still examine other recurring revenue models.

The usage revenue model The usage revenue model, also known as consumption, variable-rate recurring, metered usage, pay-per-use, pay-per-view, bandwidth billing, among others, charges peruse or per-unit of service. Your home water service is commonly usage-based billing: the more water used, the larger the bill. Overall, the usage model nicely matches the seller’s costs to the benefit derived by the customer, but it carries some downsides. The usage model requires that the service can be measured and the price must align with how customers perceive value. You could charge for a book by the word, but would the customer interpret reading 50 percent of the words as getting 50 percent of the value of the book, for instance?

Financial Operations | Spring 2016 | www.financialoperations.ca

Usage-based offerings are often characterized by high per unit costs such that providing an additional unit without compensation puts profits at risk. The exact opposite can also occur, where customers perceive high value in an additional unit but it costs the business little to provide. In both cases, businesses must either boost the number of users or the usage of existing customers to increase volume. This is often done through a volume-discount pricing strategy where the price per unit goes down as the total unit consumption goes up. Texting through your cellphone remains a contentious example of a service offered via subscription, usage-based and combination billing. Usage-based offerings can evolve quickly so you need a system that can handle the pace of change. Offering unlimited texting for one monthly price is an effective offer to someone paying five cents per text. If you’re first to market, you can set the terms and take the lion’s share of the profits. If you’re serious about charging for usage, ask yourself these questions: • Do your customers use your offering more and more over time (usage billing can turn increased use into higher revenue)? • Do your customers use alternatives in addition to your service? Would you be better off if they consolidated their usage with you and could you offer them a better price to do so? • Could a usage-based offering change the competitive landscape in an important market? • How would you track usage metrics?

Combinations: The subscription plus usage revenue model In their simplest form, combination plans (subscription plus usage) charge a subscription fee for basic service with any overage billed as extra charges. More broadly, a combination plan can be any combination of a flat-recurring charge coupled with usage services. For example, the standard cellphone

BUSINESS MATTERS bill generally has a base subscription and a variety of usage based services (texts, data, minutes, and so on) included as “free,” plus overage charges for usage beyond levels included in the base subscription. Combination revenue models most often result from subscription-based businesses seeking to extract more value from their heaviest users while providing lower entry price points to attract new subscribers. Sometimes usage-based plans add a subscription option (or base user fee) to drive more revenue from infrequent users to cover fixed costs. Companies in digital media, software and gaming add usage charges on top of subscriptions using various metrics: concurrent or named users, emails received, files scanned (or saved or printed), installations, storage space and so on. Many gaming companies also complement recurring subscriptions with a different type of usage (in-app purchases). If you’re considering subscriptions plus usage, ask yourself these questions: • Do you like the stability of the subscription revenue stream with less risk from heavy users hurting profitability? • Would your customers value ad hoc access to advanced features that you could measure usage of ? • Could you obtain competitive advantage from a lower initial price and higher usage fees, or would the opposite be better? Enter the importance of recurring relationships, which commonly involve a mix of one-time and recurring transactions that can occur at any time. In order to manage these relationships, you need a state-of-the-art recurring revenue management system that can take advantage of each customer touch point and every revenue moment. Managing recurring revenue includes a complete set of practices that directly or indirectly impact a company’s ability to generate and protect revenue. Hop aboard. The journey may be windy, but it is worth its weight in gold. Sean Rollings serves as vice president of product marketing at Aria Systems. He is a seasoned product and corporate marketing executive in the high technology, software, and consumer products industries. His areas of expertise include: cloud computing, new product introductions, and cross-functional leadership. Prior to Aria, Rollings worked with NetSuite, Oracle, E2open, and Deloitte Consulting. Rollings earned his Bachelors of Engineering from Vanderbilt University and his MBA from Kellogg Graduate School of Management.

Building a reservoir of trust By Ken Young

aking a decision solely on financial disclosure is like looking at a Rembrandt with only a couple of primary colours on the canvas. There is much more to the decision than financial disclosure alone. Developing healthy business relationships built on trust and mutual respect is an important aspect of credit management. I recall meeting with a customer in Chicago who had just created a start-up entity. The owner had been CFO with a firm that had gone out of business recently. After dialoguing with the customer for a while, he provided access to their opening balance sheet and spent a considerable length of time sharing their business plan. The value achieved in this meeting was the fact that we were the first major supplier to extend credit, which the customer never forgot. Another significant aspect was the fact that we took the time to meet him personally and tour the facilities. A genuine and trusting business partnership was forever established. Visualization of the operation in so many lines of business adds a unique and invaluable dimension. The credit line and terms that were initially established were adequate to get the firm purchasing their requirements of our product line from us. However these credit aspects (credit availability and terms) would still need to be reviewed in a matter of months, once a historical payment pattern and actual business results were established. This allowed us to keep a close watch on the company as it was progressing, keep the credit reins tight initially, and secure significant business volume in a geographical marketplace that we did not have high volumes from previously. Over many years it was very pleasing to see the client grow to have a very significant presence in the geographical marketplace as well as the industry overall. We don’t always bat 100% in credit granting, but it is rewarding when you can look back and see the impact that was made due in large part to trusting business relationships. These partnerships, once established, can produce

very substantial volume growth, profitability and shareholder value for both parties. There is a story told of Jerry Rice—one of the best wide receivers in the history of the NFL. When he was asked why he attended Mississippi State University when a very wellknown college (UCLA) had been recruiting him, his answer was they were the only college to come to his house and pay a personal visit. They showed in a personal way that they cared. It is the same with customers, as so many of them are proud of their business and appreciate the time suppliers take to come to their premises and meet them. Face-to-face meetings offer significant and intangible interactions that go way beyond words. These meetings are more likely to result in agreement and collaboration. Customer visits for some companies are a road less travelled; however, depending on the volume, profitability and growth potential, it is a road that cannot be ignored if a complete picture of the risk elements versus reward is to be painted. If customer visits are not possible, it is still very worthwhile to cultivate customer relationships—although they are not as effective as in a face to face setting—in order to more fully understand and to capture the upside of risk. Mark Cuban once said, “The NBA (National Basketball Association) is never just a business. It’s always business. It’s always personal. All good businesses are personal. The best businesses are very personal.” Developing and maintaining customer relationships that are built on trust are of prime importance in significantly impacting your firm’s revenue growth, profitability, and shareholder value in achieving corporate and personal success. Ken Young has been a credit management professional for over twenty-five years and has global experience in a broad range of industries including the food (aquaculture & beverage), chemical, manufacture, and transportation sectors. Most recently he was the Credit & Collection Manager at PepsiCo Beverages Canada and is now an international consultant, trainer and speaker. He has been awarded the highly esteemed CCP Emeritus award from the Credit Institute of Canada for distinguished and meritorious service for the advancement of credit education and the credit profession. He can be contacted at young.ken@hotmail. com or www.trpaulsen.com/credit.

Financial Operations | Spring 2016 | www.financialoperations.ca

Technology Report

Setting a new standard for secure digital payments in Canada

By Frank Attaie

obile technology has completely permeated the lives of Canadians, particularly for those under 55 years of age. In fact, in 2015, there were 24 million mobile device users in Canada. Suffice it to say, smartphones and tablets are a key part of everyday life. They are now being used to do everything from watch a movie to shop. With Apple and Interac’s recent Canadian

launch of Apple Pay for consumers with Interac debit cards issued by several Canadian banks, the further permeation of mobile technology is set to exponentially increase. Since May, consumers have been able to add their Interac debit cards to their Apple Wallet and pay with their iPhones at the hundreds of thousands of merchants who accept contactless payments. What’s driving this paradigm shift in

Financial Operations | Spring 2016 | www.financialoperations.ca

the digital payments landscape? What is neutralizing what has, from a security point of view, been viewed as a weak spot, particularly with authentication between a retailer and the customer’s bank? In a word: tokenization. In fact, we believe tokenization will become the new standard in digital payments, due to the security benefits for not just banks and retailers but all parties, including the consumer.

Technology Report minimizing fraud. Security and privacy is at the core of Apple Pay, so when used with a payment card the actual card numbers are not stored on the device nor on Apple servers. Instead, a unique Device Account Number is assigned, encrypted and securely stored in the Secure Element of the device. Apple Pay replies on Interac’s Token Service Provider (TSP), to validate each transaction with a one-time unique token. The Interac TSP was developed in collaboration with IBM, Bell ID, a global provider of tokenization software for mobile payments, and Everlink, a provider of integrated payment solutions and services. Tokenization is not a new idea, but interest has certainly strengthened as the consumer’s desire for a seamless multi-channel retail experience has grown. As well, recent highly publicized data breaches where millions of credit card numbers have been stolen and the broadening adoption of services like Apple Pay have accelerated the need for a secure tokenization service.

Benefits of tokenization include:

Tokenization is the process of substituting a consumer’s financial information, like a credit card number, with an alias or secure token that consists of a unique, randomly generated sequence of numbers. This token, which is meaningless to unauthorized parties, enables secure digital transactions on the consumer’s mobile device or wallet. Even if hacked, there is no sensitive data exposed. Tokens are also account, device and wallet specific—further

• It incorporates unique security features that align with global mobile industry standards. Tokenization substitutes consumer’s financial information with a secure token that consists of a unique, randomly generated sequence of numbers. This token, which is meaningless to unauthorized parties, can only be used on the consumer’s mobile device. • It gives consumers the freedom to make purchases whenever and however they want with deviceagnostic technology. The Interac TSP represents an ‘open’ mobile debit payment solution with device-agnostic technology that can be implemented on any mobile device that supports it. • It provides seamless integration with payment partners on a scalable platform. Financial institutions, mobile technology providers and merchants can use the Interac TSP to innovate, build and manage secure digital payment experiences. The platform is built to scale and allows for continued innovation. • It offers a trusted payment choice for all stakeholders within the

payment chain—and all at a low cost. Transactions through the Interac TSP use the existing functionality and security of Interac Flash contactless debit technology. It offers strong consumer protections such as protective passcode verification and zero customer liability. Merchants benefit from realtime transactions: payment is received immediately and charge backs never occur. It is also one of the lowestcost payment acceptance options for merchants. The concept of substituting consumers’ financial information with a “token” has been integral to the security of several Interac products. For example, Interac debit cards feature an identifier (not an account number) on the front of the cards, Interac Online uses a one-time identifier to complete a transaction and the Interac e-Transfer service requires only an email or a mobile phone number to send money—no account information is shared between senders and recipients. The new Interac proprietary token generation and management service—among the first for a domestic debit network globally—is particularly welcome news in Canada, where consumers are already very actively using Interac Debit cards. Canadians use the Interac network more than 16 million times per day to pay and exchange money. And Canadian consumers use Interac more than any other payment brand as acceptance is nearly ubiquitous at merchants from coast to coast. However, in the future, tokenization holds the potential for a number of other applications, beyond digital payments. Essentially any scenario where data sensitivity is critical could adopt tokenization. For example, we see promise in the health care space, where tokenized patient data could be used by physicians, pharmacists or insurers, and in transportation, where tokenized accounts could provide real-time fare payment options. Because Canadians embrace new technologies quickly, demands for the value, security and convenience tokenization offers will undoubtedly accelerate the rate of change happening in the digital landscape. Frank Attaie is director, financial services sector for IBM Canada.

Financial Operations | Spring 2016 | www.financialoperations.ca

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Visit us online www.financialoperations.ca/events.html Financial Operations | Spring 2016 | www.financialoperations.ca

Trend Report

Adoption of FinTech could double among digitally active consumers within next 12 months

he levels of financial technology (FinTech) adoption among consumers are set to grow significantly in the next year, a change that will require traditional financial services companies to revisit their customer service strategies to compete effectively with new market entrants, according to EY’s first FinTech Adoption Index. According to a survey of 10,131 digitally active consumers in Australia, Canada, Hong Kong, Singapore, the UK and the U.S., 15.5 per cent have used at least two FinTech services—financial services products developed by non-bank, non-insurance, online companies—in the past six months. Survey responses also suggest that adoption rates among digitally active consumers could potentially double within the next 12 months if respondents follow up on their intentions to use FinTech. The index evaluates the use of 10 FinTech services in four categories: savings and investments; money transfer and payments; borrowing; and insurance. The 10 services include: peer-to-peer platforms for investments; equity or rewards crowd funding; online investment advice and investments; online financial planning; online stock broking or spread betting; online foreign exchange; overseas remittances; non-bank money transfers; borrowing using peer-to-peer platforms; and health insurance premium aggregators or car insurance using telematics. Imran Gulamhuseinwala, EY global FinTech leader, says: “The adoption of FinTech products is relatively high for such a new sector, so the risk of disruption is real. As FinTech continues to catch on among consumers, traditional financial services companies will have to reassess their view of which customers are most at risk from the new competition and step up their efforts to serve them effectively.”

Payments, savings products prove the most popular Payment services have the highest adoption rate among FinTech products in the markets surveyed (17.6 per cent). Services in this category include the use of non-bank providers to make online payments, online foreign exchange, and overseas remittances. Savings and investments is the second most-used category (16.7 per cent). Online stock broking and spread betting is the most common activity within this category, followed by online budgeting and planning; online investments; equity and rewards crowd funding; and peer-to-peer or marketplace lending. Insurance services, including health premium aggregators and car insurance using telematics (7.7 per cent), and online borrowing through peer-to-peer websites (5.6 per cent) are among the less commonly used services by respondents.

Use of FinTech is greatest among younger, wealthier customers Early FinTech adopters tend to be younger, higher-income customers. Respondents between the ages of 25 and 34 years old used at least two FinTech products in the past six months the most (25.2 per cent), followed by those aged 35 to 44 (21.3 per cent), and those aged 18 to 24 (17.7 per cent). FinTech use is highest among consumers with incomes greater than USD$150,000 (44.1 per cent). Usage declines to 24 per cent among consumers with incomes between USD$70,001 and USD$150,000, and 14.7 per cent for consumers with incomes between USD$30,001 to USD$70,000. Steven Lewis, global lead banking analyst at EY, says: “Higher-income individuals are some of the most economically valuable customers for banks and insurers. These organizations will have to review how their offerings, such as their own multi-channel

Financial Operations | Spring 2016 | www.financialoperations.ca

strategies or partnerships with FinTech providers, meet their customers’ needs. Otherwise, they may have difficulty stemming the flight to FinTech.”

Adoption higher in urban areas Urban consumers tend to use FinTech at rates greater than the 15.5 per cent average for all six regions surveyed. Online users in New York are more likely than users in the United States as a whole to use at least two FinTech services (33.3 per cent in New York City compared to 16.5 per cent for the U.S. as a whole). Hong Kong has the highest rate of FinTech use of all markets surveyed (29.1 per cent). The U.S. has the second-highest adoption rate (16.5 per cent), followed by Singapore (14.7 per cent), the UK (14.3 per cent), Australia (13 per cent) and Canada (8.2 per cent).

Awareness is the big obstacle For digitally active respondents who have not used two or more FinTech products in the past six months, 53.2 per cent say they were unaware the products existed, followed by 32.3 per cent who say that they do not have a need to use the products, and 27.7 per cent who prefer to use a traditional financial services provider, while 21.3 per cent say they do not understand how the products work. Trust has not been a major obstacle to FinTech use, with only 11.2 per cent of respondents saying they do not trust FinTech products. Matt Hatch, EY Americas FinTech leader, says: “This index shows that the innovations and changes of FinTech are here to stay. A coexistence and collaboration between the new and old market players will be inevitable. There is much that traditional financial services firms can learn from how FinTechs think about the customer proposition and harness technology to deliver a compelling service.”

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WHERE THERE’S FINANCIAL SERVICES THERE’S EPSON

WHERE THERE’S BUSINESS THERE’S EPSON Every day, financial enterprises around the world rely on Epson® Business Solutions to make transactions more efficient by combining multiple processes to save space and minimize errors. Offering a full suite of innovative products including cheque scanning, ID verification and receipt printing, Epson Business Solutions are designed to ensure maximum productivity and mitigate risk. For more information on how Epson Business Solutions are helping financial institutions exceed their vision, visit epson.ca/forfinancialservices

EPSON is a registered trademark and EPSON Exceed Your Vision is a registered logomark of Seiko Epson Corporation. All other product and brand names are trademarks and/or registered trademarks of their respective companies. Epson disclaims any and all rights in these marks. Copyright 2015 Epson America, Inc.