Global Banking & Finance Review Issue 4 - Business & Finance Magazine by Global Banking & Finance Review®

Issue 4

Investing in Latin America Emilio Ilac, CEO of Puente Redefining the Ease of Banking Zenith Bank Ghana Wealth Management in Taiwan

Sheila Chen, Senior Vice President and Head of Wealth Management at King’s Town Bank discusses the opportunities and challenges facing wealth management in Taiwan

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I am pleased to present Issue 4 of Global Banking & Finance Review. For those of you that are reading us for the first time, welcome.

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In this edition you will find engaging interviews with leaders from the financial community and insightful commentary from industry experts. Featured on the front cover is Emilio Ilac, CEO of Puente who met early this year in London with Global Banking & Finance Reviews Phil Fothergill to discuss the investment landscape in Latin America. Located in the magnificent city of Buenos Aires, Puente is a leading capital markets company in the Southern Cone with a strong presence in Latin America. I hope you enjoy this interview and the other interviews and articles as much as I did. For over 5 years, we have enjoyed bringing the latest activity from within the global financial community to our online and now offline readership. We strive to capture the breaking news about the world’s economy, financial events, and banking game changers from prominent leaders in the industry and public viewpoints with an intention to serve a holistic outlook. We have gone that extra mile to ensure we give you the best from the world of finance. Send us your thoughts on how we can continue to improve and what you’d like to see in the future. Happy reading!

Wanda Rich Editor

Stay caught up on the latest news and trends taking place. Read us online

www.globalbankingandfinance.com

CONTENTS

INVESTING IN LATIN AMERICA

BANKING IN VIETNAM

WEALTH MANAGEMENT IN TAIWAN

interviews... WEALTH MANAGEMENT IN TAIWAN 8

INVESTING IN LATIN AMERICA 54

Sheila Chen, Senior Vice President and Head of

Emilio Ilac, CEO of Puente

Wealth Management, King’s Town Bank

Located in the magnificent city of Buenos Aires, Puente is a leading capital markets company in the Southern Cone with a strong presence in Latin America. The firm provides integrated investment solutions guaranteeing the best market conditions for the private and public sector. Puente also identifies investment opportunities and develops the best strategies to help its clients achieve their financial goals, and the company uses high-level technology and platforms to allow its clients to trade in all markets.

Established in 1975, King’s Town Bank (KTB) is a local and small bank in Taiwan with 66 branches, mostly located in southern part of Taiwan. Being a long established bank, KTB has built up long and deep relationships with its clients. The relationship between the bank and clients are more of family than of business.

BANKING IN VIETNAM 28 Mr. Le Duc Tho, General Director, VietinBank

Global Banking & Finance Review spoke with Mr. Le Duc Tho, General Director at VietinBank to find out about the challenges and opportunities facing the Vietnam banking sector and VietinBank.

A 93-YEAR TRADITION OF EXCELLENCE

A 93-YEAR TRADITION OF EXCELLENCE 62

An Interview with MUFG Union Bank Global Trust Services’ Jeff Boyle and David Ursa

Founded in 1864, MUFG Union Bank, N.A. is a federally chartered national bank with Global Trust Services Assets Under Administration of $265 billion, as of March 31, 2016. A member of Mitsubishi UFJ Financial Group (MUFG), one of the world’s largest financial organizations, with offices in nearly 50 countries.

Issue 4 | 5

CONTENTS

116

Staying One Step Ahead

How Corporates Meet Today’s FX Market Challenges

inside... BANKING

A Secure Mobile Banking Experience IS Possible

Robert Capps, Vice President of Business Development, NuData Security

FINTECH IS THE NEW BUSINESS MODEL FOR BANKS

103

BUSINESS

90 109

How Banks are Understanding their Customers as Individuals Again James Blake, Founder and CEO, Hello Soda

Biometric banking: the revolution is here

Hans Zandbelt, senior technical architect, Ping Identity

121

Achieving the Happiness Halo in Banking

Simon Glynn, Director of EMEA, Strategy, Lippincott

130

Who Should Collect Your Cash? Lucie Luangrath Senior Manager at The Hackett Group

HIDDEN BARRIERS TO INTERNATIONAL ECOMMERCE SUCCESS

FINANCE

144

Working with the Senior Managers Regime

Nigel Farmer, Solutions and Industry Director of Capital Markets, Software AG

128

6 | Issue 4

Data & Information Coherence – the future of the financial sector depends on it

Saloni Ramakrishna, Author *; Senior Director, Financial Services Analytics, Oracle Financial Services

112

Transforming the World of Corporate Lending

Financing projects: increased focus on human rights and greenhouse gas emissions in export credit agency due diligence Alex Blomfield, Counsel, King & Spalding Llp, London and Jessica Trevellick, King & Spalding Llp

Mia Drennan, CEO and Co-founder at GLAS

125

The GDPR – new obligations on financial services businesses

Robert Lands, Partner and Head of Intellectual Property, Howard Kennedy LLP

Banking on Trade Stores

Adrian Carr, Senior Vice President, MarkLogic

Trade fraudsters love paper but are locked out by digitization Ian Kerr, CEO, Bolero Investment

Guillaume Pousaz, founder of Checkout. com, a global international payments provider for small and multi-national eCommerce merchants.

Jouk Pleiter, CEO of Backbase

Clever banking with artificial intelligence

140

Going Paperless

Andrew Crowson, Managing Director of Cummins Allison in the UK

Redefining the ease of banking

CONTENTS

Banking the unbanked with mobile money

The Rise of Corporate Venturing

INVESTMENT

Why Social Impact Bonds will be Big

TECHNOLOGY

Ean Mikale, J.D., Chief Innovation Officer, Infinite 8 Institute, L3C

Collaboration in the Fund Administration Industry is Not a Weakness but an Opportunity

Africa Bright Spots Defy Doubters with Resilience to Lower Oil and Commodity Prices

Where is the Financial Services industry gaining a return on Big Data? Ed Wrazen, VP Product Management, Big Data at Trillium Software

FX blind spots: the impact of fixedrates on treasury operations

Dieter Stynen, Global Transaction Banking FX, Deutsche Bank

Guy Warren, CEO, ITRS Group

Mark Hedderman, CEO of Custom House Global Fund Services

Data lakes vs data streams: which is better?

TRADING

How active fund managers can combat the ETF threat and beat their benchmarks Rocco Pellegrinelli, CEO of momentum analytics firm, Trendrating

Latin America - Increasing Mobile Adoption Fred Mazo | Project Director & Conference Organizer, Open Mobile Media

Edward George, Head of Research at EBI (Groupe Ecobank)

Biometrics and Bots

Adam Oldfield, the EMEA Financial Services Director at Unisys

Issue 4 | 7

Asia 8 Issue 4

ASIA INTERVIEW

Wealth

Management

in Taiwan

King’s Town Bank (KTB) is a local and small bank in Taiwan with 66 branches, mostly located in southern part of Taiwan. It was established in 1948 and turned into a commercial bank in 1975, known as Tainan Business Bank, and acquired the name of King’s Town Bank in 2006 as a result of shareholder structure change. Being a long established bank, KTB has built up long and deep relationships with its clients. The relationship between the bank and clients are more of family than of business. In some of the small towns, KTB is very often the only commercial bank operates locally. The bank has therefore always been positioning itself as a community bank. Global Banking & Finance Review spoke with Sheila Chen, Senior Vice President and Head of Wealth Management of KTB about wealth management in Taiwan. What are the biggest challenges and opportunities facing wealth management in Taiwan? Overbanking has been a major challenge for the banking industry in Taiwan for the last decades. There are 39 banks with over 2000 branches serving around 23 million people- not to mention those offshore banking service providing clients with overseas financial facilities. Fierce competition in the banking industry has tightened loan spreads and drawn the banks attention from interest to fee income, mainly from wealth management business. Most banks set increasingly higher targets for fee income, which accounts for very high percentage of the total annual turnover. Due to the strong sale from all the banking officers, clients’ awareness of the financial products is getting higher, despite

that the awareness very often coming from miss-selling or investment loss. As a result, the regulation supervision is becoming more stringent. “knowing your clients “(KYC) and “knowing your products” (KYP) have become the prerequisites of financial advisory of wealth management in the bank and all the regulations follow suit. The regulations surrounding KYP and KYC have been challenges to the Wealth Management business in Taiwan. They are challenges to others, but maybe not so much to KTB. I actually fully embrace the two principles of KYC and KYP when providing financial advisory to clients, as I always request our financial advisors to follow a golden rule, that is,” never advise, unless you know better than the clients themselves.” It may sound too optimistic in real wealth management practice in banking industry. However, for a local and grass-rooted community bank as KTB, it is indeed the way we do our daily business, as the client-bank relationship in this type of bank was deep, comprehensive and was built from generation to generation. With a solid client base in southern Taiwan, where people are more conservative and care more about capital protection, we play the role as a goal keep by screening products very cautiously, especially those products with high complexity, such as derivatives and structured products. As a result, the trust among our clients, our financial advisors, and the bank are even stronger. Despite of that, the high market volatility and global uncertainty of economic situation ahead does mean a tough challenge to us, in terms of AUM growth, market exploration, product selection, investment strategy, and so on. Issue 4 | 9

ASIA INTERVIEW

Sheila Chen Senior Vice President and Head of Wealth Management Kingâ&#x20AC;&#x2122;s Town Bank

Sheila Chen has had been working in the diplomatic service of Taiwan government for a long time before switching her career path to the banking industry. Her experience of working in the Economic Division of Taipei Representative Office in the UK, the de-fecto Taiwanese Embassy and being in charge of Taiwan-Europe Bilateral Trade relationship in the Board of Foreign Trade, Ministry of Economic Affairs has greatly improved her exposure to the international financial service industry and in turn, inspired her taking a totally different approach in leading the Wealth Management Business of KTB.

10 | Issue 4

ASIA INTERVIEW

How have individual investors attitudes towards wealth management changed over the past few years?

How does KTB help clients manage their daily finances and achieve their long-term financial goals?

After the financial crisis in 2008, individual investors especially those who manage their wealth through banks have turned very conservative. They care more about capital protection than the return on capital. As a result, fixed income products have dominating the market since then. Those insurance policies with pension scheme are also very popular in the market.

I always encourage our financial advisors to play the role as architectures to client’s dream house of financial safety. To play the role well, they have to understand what kind of house clients want to build and then provide them with a feasible and achievable plan. Aiming at the same and agreed goal, the banks and the client could then allocate the risk portfolios for financial management as risk is always the main concern of any investment. Based on the risk tolerance of individual client, products will then be brought into the picture. Talking about products, I take the view that a product itself is neutral in nature, and it is the strategy that makes things different. There are no evil products, but only wrong strategies of applying products and bad advice. Therefore, good understanding of the purpose and right strategy to apply right product are the keys to good wealth management. Teamwork among financial advisors and product research team is the key to our success.

How do you approach wealth management? King’s Town Bank has always positioned itself as a community bank. Our service is provided locally with high professionalism. We built up strong linkage with local clients with trustworthy service. Wealth management is one of our business lines providing service locally with the same ethics. My intention of making KTB’s wealth management different and my commitment to do the right thing, in conjunction with the bank’s deep and family-oriented bankclient relationship have made KTB’s wealth management business a quite unique one. My vision of running this business is to provide localized service and best practice to every client, no matter what asset level he/ she is. With full understanding that KTB might not be the bank of his/her first choice，we strive to climb on the priority list in client’s mind by gradually proving what we care and what we can do. We aim to help our clients to increase and accumulate asset by applying suitable financial concept and right strategy toward different financial product, with the product risk always in mind. We care more on absolute return than relative return on clients’ portfolios. To provide proper financial advisory to the client, I built a concept of teamwork in doing this business, as I don’t believe that any person/financial advisor can be so gifted to fully understand all aspects of financial products while having the capacity of building strong personal networking of clients. Therefore, a strong product research team under my direct jurisdiction is providing all the professional research report and product strategy to all the financial advisors posted in our branches to suit the client of different needs and all the financial advisors mainly focus on identifying clients’ real financial needs. All the solutions are tailor-made.

What role does technology play? To be honest, technology does not really play an important role in respect of our wealth management business. Technology applied in all wealth management related IT systems has helped us setting investment strategy such as Regular Saving Plan or investment profit/loss alerting, capital return reporting of individual investment portfolio, as so on. Except for that, all the products researches were all done by bottom-up fundamental approach from hard and labor intensive work of the product team. Do you have any new products or services you will be launching this year? We have been focused our product line on mutual funds and insurance policies for the past few years. Recently, we add ETF and straight bonds into our products. With ETF, our clients could participate in various markets in a more direct way, while straight bond could benefit clients with fixed income from credit market. We will also put much effort on family trust and pension scheme facing the aging population in Taiwan.

Issue 4 | 11

ASIA FINANCE

Trade fraudsters

love paper but are locked out by digitisation Fraud in trade finance remains a major problem â&#x20AC;&#x201C; particularly in the deceptive shape of counterfeiting. Unfortunately, paper documents for any trade finance transaction can easily be forged, using information about normal operations to produce an instrument such as a bill of lading that looks convincing, but is entirely bogus. Criminals know enough about the processes of international trade to be able to sneak into the system on the backs of genuine transactions. Fraudulent documents They can obtain access to trade finance by using phoney shipping documents such as bills of lading, or rename cargoes. In one case, dangerous medical waste was renamed and sent to South America from Europe in order to avoid the costs of handling it legitimately.

12 | Issue 4

When a shipowner is discovered with such a cargo, it will incur a fine and the costs of dealing with the aftermath. Indeed, the consequences of fraud in trade finance are always serious and in some cases, catastrophic, destroying companies in the shipping or trade chain. It is not always easy to detect. Importers and exporters, for example, can join forces to create false turnover for the purposes of obtaining credit, or engage in rigging invoices or falsifying of cargo volumes. Digital detection We are never going to eliminate fraud, but we can severely reduce it if we shift to digital documents and processes. Digitisation makes it much harder to surreptitiously alter documents, as each amendment is fully tracked and logged and all instruments and changes are fully traceable and remain visible to all the parties who need to see them. Automation makes the detection of anomalies quicker and more reliable. It has been known for misspelled names of carriers to go undetected on paper documents.

ASIA FINANCE

When there are thousands of transactions to check, many different languages and organisations in different jurisdictions, even the most experienced human eye will miss the indications of fraud and forgery in the paper trail. Switching to a single, multi-party trade finance platform for the exchange of documents brings very obvious advantages over paper processes, where documents disappear from view and alterations or forgeries are hard to spot. Authentication The use of the Bolero digital platform, for example, means it is easy for companies in the trade chain to locate not just the documents in complex transactions, but also the goods. This visibility and reduction in the risk of fraud is part and parcel of the huge gains in efficiency that the electronic presentation of documents brings to all parties legitimately involved in trade.

The fact that the platform is underpinned by a secure mechanism to control the legal holding rights to the documents, known as the title registry, automatically ensures documents are delivered to the right party at the right time. Both sender and receiver of these documents are able to rely on the authenticity of the electronic document. Wider uptake What will really defeat the criminals who present forged paper bills of lading or letters of credit, is the adoption of the digital platform approach by everyone involved in world trade â&#x20AC;&#x201C; from banks to port authorities and small and mediumsized businesses. It is very much in their interest to do so, because, alongside the reduction in fraud and risk that accompanies the use of digital documents, they will all reap the benefits of reduced costs from the requirement for less man-hours in their handling and far fewer errors that result in expensive corrections.

Ian Kerr CEO, Bolero

Issue 4 | 15

ASIA BANKING

16 | Issue 4

ASIA BANKING

Banking the unbanked with mobile money According to a 2015 report by PricewaterhouseCoopers, more than 233 million Indians have never set foot inside a bank. And, even though India has the world’s second-largest population, there are only around 23 million credit cards in the country. India is now trying to bring its cash-based economy into the 21st century with the goal of bringing banking and financial services to millions of citizens, many of them poor and disadvantaged. Some of the population find it difficult to get a bank account because of ‘Know Your Customer’ and identity verification processes in India, but still need a simple payment solution. Quartz magazine recently reported that there has been an uptake of mobile banking in India with the value of transactions made from mobile phones more than quadrupling between December 2014 and December 2015. The growth potential for mobile banking in the country is enormous, particularly given that India has the world’s fastest growing smartphone market – which is projected to double in a few years from the approximated 220 million users currently. Enabling users to bank through mobile phones is at the heart of its aim to bring banking services to the country’s poorest people.

The digital revolution According to a recently published report, India has a cash intensive economy with a cash to GDP ratio of 12%. This dependence on cash transactions is affecting the e-commerce sector, particularly with the country’s preferred cash on delivery method for around 50% of transactions. Cash on delivery can be very expensive for a retailer, especially if the product is returned as the seller ends up paying much more than the original amount spent shipping the product. That said, India has moved a step closer towards becoming a cashless economy with the launch of the United Payments Interface (UPI) – the Indian government has made the migration from cash to electronic payments a key focus of its strategy to boost financial inclusion in the country, and which is also expected to make e-commerce transactions easier. With over 250 million internet users in the country, the mobile and e-payments industry is booming and could one day rival the popular Mpesa cash transfer system in place in Kenya.

Issue 4 | 17

ASIA BANKING

Retailer adoption A recent MasterCard study of micromerchants found that business merchants aged 35-45 were more likely to adopt these digital payments. For retailers, these solutions revolutionise the payment process and help solve the country’s shortage of small denomination notes by accepting payments as low as one Rupee – a merchant typically buys 100 Rupees (Rs,) of loose changed for Rs. 110-15, at a staggering 15% cost. These digital payments benefit retailers, reducing the amount of cash a business must keep on its premises, making it safer for the retailer. So, in a country largely driven by cash, mobile wallets and digital payments solutions look set to revolutionise how retailers and consumers can make and receive payments, regardless of the amount. There is a real vision to bring financial inclusion to the country using solutions including contactless Near Field Communications (NFC) systems in the form of tap and pay prepaid wallets using apps or tags.

Money is loaded into a customer’s digital wallet and can then be used for over the counter payments, recharges, bills and online payments, converting what were cash payments into digital ones. The addition of NFC tags eliminates the need for the user to have an internet connection or smartphone; it’s a low cost and truly inclusive system. India may not yet have high credit card penetration but the introduction of digital payments is a big opportunity and a positive trend encouraging many users to sign up. With the ever increasing number of mobile users in the country, and the collaboration of banks worldwide, the next wave of digital will provide better access for the ‘unbanked’ population, with a truly innovative payment ecosystem.

Vivek Chandok Head - Consumer Business Tech Mahindra Ltd

Issue 4 | 19

ASIA TECHNOLOGY

Data lakes vs data streams:

which is better?

Data lakes and data streams: two of the hottest data buzzwords du jour and as likely as any pair to spark an argument between data scientists backing one or the other. But which really is better?

A data lake is still a fairly new concept that refers to the storage of a large amount of unstructured and semi structured data. It addresses the need to store data in a more agile method compared to traditional databases and data warehouses, where a rigid data structure and data definition is required. The data is usually indexed so that it is searchable, either as text or by a tag which forms part of the schema. The flexibilityfactor is that each new stream of data can come with no schema, or its own schema, but either way can still be added to the data lake for future processing.

way that people can dive into the data lake and pull out what they need there and then, without having to define the data dictionary and relational structure of data in advance. This increases the speed at which data can be captured and analysed, and gives much more flexibility for adding new sources to the lake. This makes lakes much more flexible than traditional storage for data scientists or business analysts, who are constantly looking for ways to capture and analyse their data, and even pour it back into the lake to create new data sources from their results. Perhaps someone has run an analysis to find anomalies within a subset of the data and has then contributed this analysis back to the data lake as a new source. However, to get the best out of a complex data lake, a data curator is still recommended to create consistency and allow joins across data from different sources.

Why is this useful? Because businesses are producing increasing amounts of useful data, in various formats, speeds and sizes. To realise the full value of this data, it must be stored in a such

A data stream on the other hand, is an even newer concept in the general data science world (except for people who use Complex Event Processing engines which work on streaming data). In contrast to

Firstly, what are these lakes and streams?

Issue 4 | 21

ASIA TECHNOLOGY

deep storage, it’s a result of the increasing requirement to process and perform realtime analysis on streaming data. Highly scalable real-time analysis is a challenge that very few technologies out there can truly deliver on...yet. The value of the data stream (versus the lake) is the speed and continuous nature of the analysis, without having to store the data first. Data is analysed ‘in motion’. The data stream can then also be stored. This gives the ability to add further context or compare the real-time data against your historical data to provide a view of what has changed – and perhaps even why (which depending on your solution, may impact responsiveness). For example, by comparing real-time data on trades per counterparty against historical data, it could show that a counterparty, who usually submits a given number of trades a day, has not submitted as many trades as expected. A business can then investigate why this is the case and act in real-time, rather than retroactively or at the end of day. Is it a connection problem with the counterparty, is the problem on the business’ side or the client’s? Is it a problem with the relationship? Perhaps they’ve got a better price elsewhere?

22 | Issue 4

All useful insight when it comes to shaping trading strategy and managing counterparty relationships. The availability of these new ways of storing and managing data has created a need for smarter, faster data storage and analytics tools to keep up with the scale and speed of the data. There is also a much broader set of users out there who want to be able to ask questions of their data themselves, perhaps to aid their decision making and drive their trading strategy in real-time rather than weekly or quarterly. And they don’t want to rely on or wait for someone else such as a dedicated business analyst or other limited resource to do the analysis for them. This increased ability and accessibility is creating whole new sets of users and completely new use cases, as well as transforming old ones. Look at IT capacity management, for example; hitherto limited to looking at sample historical data in a tool like a spreadsheet and trying to identify issues and opportunities in the IT estate. Now, it is possible to compare real-time historical server data with trading data, i.e. what volume of trades generated what load on the applications processing the trades.

ASIA TECHNOLOGY

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ASIA TECHNOLOGY

It is also possible to spot unusual IT loads before they cause an issue. Imagine an upgrade to a key application: the modern capacity management tools can detect that the servers are showing unusually high load given the volume of trades going through the application, catching a degradation in application performance before a high trading load causes an outage. In the future, by feeding in more varied and richer sources of data (particularly combining IT and business data) and implementing machine learning algorithms, it will be possible to accurately predict server outages or market moves that could trigger significant losses if not caught quickly. So: which is better, a data lake or a data stream? The answer is both. Businesses need to be able to process and analyse data at increasingly large volumes and speed, and from across a growing number of sources as the data arrives in a stream, along with the ability to both access and analyse the data easily and quickly from a data lake. Historically, the problem has been that standard tooling doesnâ&#x20AC;&#x2122;t easily allow for mixing these two paradigms â&#x20AC;&#x201C; but the world is changing!

Guy Warren CEO, ITRS Group

Issue 4 | 25

ASIA TRADING

FX Blind Spots: The Impact of Fixed-Rates on Treasury Operations

Dieter Stynen, Global Transaction Banking FX, Deutsche Bank, examines how fixed FX rates are clouding transparency throughout the payment process, and offers strategies to mitigate FX risk – allowing treasurers to regain control of corporate operations A key priority for corporate treasurers is lowering operational costs – yet the true costs of foreign exchange (FX) payments are not clear, creating treasury blind spots. As a result, treasurers could be subjecting themselves to unnecessary FX exposure which – in a globalised marketplace with increasing volumes of capital flows – ought to be avoided. However, with more sophisticated FX tools available, treasurers can improve operational visibility and supply chain relationships as well as create cost savings.

A volatile treasury environment Today’s treasurers function in an increasingly complex business landscape. Indeed, the globalised marketplace has created a web of trade and supply chain relationships – growing volumes of crosscurrency payments between buyers and suppliers – which has made the treasurer’s role more difficult and more important. Coupled with pressures to make cost savings and rationalise operations in the post-crisis environment, the treasurer has shifted from a processheavy role to that of a corporate strategist. In this respect, corporates are demanding greater assistance with FX volatility and risk. In fact, a transparency shortfall still exists throughout the cross-currency transaction process. While making such payments, corporates are typically in the dark when it comes to the FX rates and spreads applied by their bank – receiving no disclosure of the rates applied or amounts debited. Of course, the potential FX cost will seem minimal per transaction but, when aggregated across an entire corporate (and any subsidiaries), the net value of cross-currency payments may be far greater than expected. And certainly, the treasurer cannot mitigate costs that are not visible.

26 10 | Issue Issue 44

ASIA TRADING

The financial and operational impact of fixed-rate FX payments Not only are treasurers subject to a transparency black hole, but some counter-solutions adopted to mitigate FX risk are just as costly, on both financial and operational levels. On the financial side, a bank using fixed-rates for payments will typically set the rate two-to-three times per day. With this in mind, these banks will use a wide spread in order to protect against sudden FX market volatility – acting as a buffer that moves the charged rate further from real-time currency rates. What’s more, even using a corporate’s base currency to make payments is a source of uncertainty. To illustrate, consider a Eurozone corporate paying an Asian supplier, who, to accommodate the corporate, issues an invoice in euros. In this instance, the corporate makes the payment, which is then converted into the supplier’s base currency by the supplier’s bank – exposing the supplier to an FX risk. As a result, suppliers may opt to pass this volatility risk back to the corporate via its pricing. In fact, Deutsche Bank has found that this can increase invoice totals from overseas suppliers by as much as 3-5% in the form of transaction charges.

solutions such as Deutsche Bank’s FX4Cash™. By avoiding cumbersome banking practices, treasurers can address two operational problems: pools of trapped cash appearing across the balance sheet and the potential for transactional errors caused by an unnecessarily complex system. Also, moving to real-time FX rates can lead to tangible cost and efficiency savings. Revisiting the earlier example, an Asian supplier invoicing in euros can be paid, through a consolidated FX payment account, using the supplier’s base currency. Removing the FX risk on the supplier’s side creates an opportunity for price negotiation as the transaction costs are more certain to both parties – leading to improved trade and supply chain relationships. Certainly, using real-time rates creates benefits which align with the modern treasurer’s broader objectives – driving efficiency, rationalising their set-up and achieving cost savings. Yet, as many banking sector innovations derive from customer-led demand, it is not surprising that widespread adoption of real-time FX and data reporting has been slow – given that its implications are shielded from the treasurer’s view. However, by using realtime rates for cross-currency payments, treasurers could gain full control of their operations.

However, attempts to mitigate FX exposure can lead to cumbersome and partial solutions being adopted. Although global FX banks may offer competitive FX rates, this does not prevent other costly idiosyncrasies. For example, treasury departments may open a myriad of infrequently-used foreign currency accounts in order to pay invoices more easily. Not only is this time-consuming, but may lead to trapped and idle cash appearing across a balance sheet – and, not least, loosen the treasurer’s grip on the corporate’s operations.

Addressing treasurer blind spots: a move to real-time payments Despite the drawbacks, such methods remain widespread because domestic and cross-currency payments are treated in silos. Instead, treasurers ought to be demanding transaction transparency as a payment prerequisite – rather than a privilege. By becoming savvy to such blind spots, treasurers can eliminate the FX risk caused by fixed-rates in order to streamline processes and even negotiate better price points with suppliers. On the process level, receiving rich data from the bank at every stage of a transaction will enable corporates to make more accurate cost calculations. Real-time FX rates reduces the need for banks to protect against market volatility, which gives greater reassurance to the treasurer that a fair exchange rate has been applied.

Dieter Stynen Global Transaction Banking FX Deutsche Bank

In light of their increasingly strategic function, treasurers can leverage real-time FX rates to achieve further rationalisation by consolidating multiple foreign currency accounts by using

Issue 27 Issue 44 || 11

ASIA INTERVIEW

Mr. Le Duc Tho General Director VietinBank

28 | Issue 4

ASIA INTERVIEW

Banking in Vietnam Global Banking & Finance Review spoke with Mr. Le Duc Tho, General Director at VietinBank to find out about the challenges and opportunities facing the Vietnam banking sector and VietinBank. What are the challenges and opportunities you see banks facing in Vietnam?

Mr. Le Duc Tho: Vietnam is a developing

country and has very high potential for strong development in the future, this is the basis for the evolution of the banking and financial sector. In-depth global integration has led to strong growth of international financial markets; the increasing demand on financial products and services encourages financial institutions to improve their capacity to meet diverse financial demands and support economic development. Moreover, domestic banks have access to advanced management technology, investment capital and exploitation of potential markets. However, our deeply-integrated economy witnesses the penetration of foreign banks that are known for their superior financial strength, diverse and modern product portfolio. This situation places significant pressure on Vietnam’s commercial banks in general and VietinBank in particular. In addition, regulatory changes are certainly to be made in order to meet integration requirements and commitment; therefore, a more drastic restructuring of the financial institution is critical in this context. The rise of retail banking services has become an inevitable trend in the world and Vietnam not excluded from this drift. Vietnam currently ranks 28th in the list of the world’s most attractive retail markets and top 5 Asia’s most developed retail markets (according to data published by A.T.Kearey – Global Management Consulting firm). Despite of being a potential market, in the context of integration with globall economy, local banks in Vietnam are not

only required to compete with each other but also have to compete with foreign financial institutions with financial strength and experience in retail banking business. According to statistics, the foreign retailers account for only 5% market share in Vietnam, but possess fastest growth rate. Set against this backdrop, commercial banks in Vietnam in general and VietinBank in particular need to further improve to enhance their competitiveness in the provision of retail services. Pressure from this competition is heavily placed on domestic banks but is viewed as an encouragement for them to strive to do better, improve competitiveness and business efficiency not only in the local market but also expand further to the regional and global markets.

VietinBank continues to upgrade and invest in technology infrastructure. What advantage does this provide shareholders and customers with?

Mr. Le Duc Tho: At VietinBank,

technology as one of key factors in the success of our business strategy. Heavy investment has been placed on developing and upgrading our IT infrastructure because we understand how modern technology benefits our customers and shareholders: Modern technology helps diversifying products and services, enhancing product flexibility, so that our customers of every segment are able to access the most professional and modern products/services. Service quality through modern and automatic distribution channels is enhanced so that our customers can access services everywhere and every time.

Analysis of customer data in multiple dimensions helps us to understand our customers better. Data analysis provides us with comprehensive view of our customers and therefore, customer information is better managed. The application of professional tools in risk management and corporate governance helps our shareholders to monitor the Bank’s activities more efficiently. Modern technology also helps us to improve our productivity, reduce operating costs and create more superior values to our shareholders and employees.

What has VietinBank been doing to reach the international standards in banking and finance sector?

Mr. Le Duc Tho: As a result of

integration, domestic banks will participate in a common playground with foreign financial institutions, therefore strict compliance with international standards is critical for a sustainable development. VietinBank has been implementing numerous projects to meet international standard requirements including perfecting our organizational structure, ensuring that its functions are in line with the international best practice; investing in staff training ; completing corporate governance mechanisms and risk management; completing our short-term, medium-term and long-term development strategies; developing more diversified and tailored banking products and services. Especially, our risk management project has been actively developed and prepared all necessary conditions for a full implementation of Basel II.

Issue 4 | 29

ASIA INTERVIEW

IT modernization has also been promoted to establish a solid technology infrastructure in order to provide invaluable support to business operations, improving governance capacity in line with international practices. Not only we developed various IT applications to support the bank operation and risk management but also in-corporated IT into internal governance, increasing staff productivity and work efficiency. Aiming at becoming no.1 retail bank in Vietnam, VietinBank has focused on fundamental solutions, in line with modern governance practices, asserting its position locally and in the region including: Organizational structure and strategic management of modern retail Banking reforms: Improve core competence and strategic retail structure from the Head Office to the branches and and transactional offices. Strengthening retail bank staff ‘competency; Improving transactional offices’ efficiency as well as optimizing business processes (shortening processing time…); Improving service quality; enhancing sales and cross-sales culture and promoting business strategies according to each region’ characteristics. Emphasizing on the application of modern technology and the creation of userfriendly service within every business unit, especially retail banking segment. Diversifying sales channel (through partners, agencies, E-Banking channel to facilitate different customer segments) Continuous and transparent information management is emphasized for planning activities and accurate decision making. These resolution are fundamental for VietinBank’s access to modern governance practices and once again, reaffirmed VietinBank’s reputation at home and in South East Asia. You currently operate with 149 branches in Vietnam. Do you have any plans for further expansion?

30 | Issue 4

Mr. Le Duc Tho: VietinBank has grown

to build an extensive network of 149 local branches, across 63 provinces and cities nationwide. The Bank is the first among the local financial institutions in the country to have presence in Germany and Laos through its two branches in Frankfurt, Berlin and a subsidiary in Laos. In future, we have plans to strengthen and expand our network to enhance the Bank’s operational scale and improve efficiency. In 2016, VietinBank is going to inaugurate 05 new retail branches in Hanoi, Ho Chi Minh City, Da Nang, 1 mixed branch in Phu Quoc Island and 1 branch under our Laos subsidiary. Going forward, VietinBank will continue to expand its network in the country to gain higher market shares and serve the needs of socio-economic development. Our banking activities will be further expanded to the region and the world through appropriate commercial presence, especially in markets that have high potential for economic cooperation in terms of trade and investment with Vietnam. VietinBank will take the lead in connecting the Vietnamese business community with the global business communities. New distribution channels, including investment banking services will also be developed to meet rising demands of our customers and development trend of global financial markets.

Q2 profit for 2016 showed an increase of 10,2% reaching VND 4273 billion. What do you attribute to this success and what are your expectations for the rest of the year?

Mr. Le Duc Tho: Earlier this year,

under the guidance of the State Bank of Vietnam, the medium-term and long-term business plans were passed by the Board of Directors. Accordingly, VietinBank has deployed numerous comprehensive solutions to promote business activities in every region in the country, focusing on safety, effectiveness, business growth built on the foundation of strong risk management.

At VietinBank, we aim for a growth rate that is higher than industry average on the basis of strong development in retail, SMEs, FDI customer segments in addition to maintain the leading position in the segment of large corporate clients. We also emphasize on relationship between various business sectors, affiliated companies, creating breakthrough in cross-selling. A roadmap has been established to improve our income structure towards increasing the proportion of fee-based incomes. Besides, we continue to be the industry pioneer in modernizing IT systems and payment services, developing high-quality, differentiated products and services to meet the diverse needs of our customers. With tremendous effort, In the first six months of this year, we reported consolidated pre-tax profit of 4.273 billion, increased by 10,2% compared to the same period last year. Strong growth in both operational scale and efficiency were achieved which significantly contributed to sector growth and socio-economic development. Taking advantage of our strengths, we will continue to explore the opportunities available and overcome challenges. We strongly believe in a spectacular growth while maintaining our position as the most profitable bank in the country. In 2016, VietinBank aims to promote continuous business growth, higher than sector average, in which targeted total assets are expected to reach VND 889,550 billion, gross loans to increase to VND 798,492, total funding is target at VND 811,445. In parallel with growth in terms of scale, VietinBank also plans to top the local banking sector with targeted profits of VND 7,900 billion, up by 8% compared to that of 2015, profitability ratios shall be well-maintained at high levels and benefits to our shareholders will also be ensured. With the expected merger with PG Bank, the Bank’s total equity will reach VND 64,455 billion in 2016 which emphasizes on a further improvement of the Bank’s financial capability to meet various capital requirements under Basel II standards and empowers VietinBank’s competitiveness on regional and international markets.

ASIA INTERVIEW

With available strengths coming from the high-quality workforce, advanced technology infrastructure and effective governance strategies, especially strict compliance with professional standards, VietinBank is well-positioned to achieve set targets and the overall 2016 business plan.

Looking forward, we believe the merger is a strategic move and will bring long-term and superior values to our shareholders. The merger which was passed at the two institutions’ 2016 General Meeting of Shareholders has been submitted to the State Bank of Vietnam for final approval.

VietinBank is currently conducting studies for possible M&A transactions in the future in order to realize our development strategy and promote the role of the leading financial institutions in Vietnam.

Can you tell us more about the recent M&A transaction with PG Bank?

Mr. Le Duc Tho: In recent years,

restructuring and enhancing operational capacity of the Vietnamese financial system is a critical mission of the Government and the State bank of Vietnam. As the leading commercial bank with significant role in the local financial system, VietinBank plays a pivotal role in sector reform and is committed to investing and supporting local banks in terms of human resources, experience, technology and governance so as to improve their financial health and governance capabilities and contribute to the sector reform’s success story. The merger between VietinBank and Petrolimex Group Commercial Joint Stock Bank (PG Bank) is part of our contribution to the sector reform. The merger is based on a voluntary basis and in compliance with the provisions of law. The transaction complies with the policy of the Government and the State Bank of Vietnam as it not only improves the competitiveness of the local financial institutions but also creates a stronger financial institution of larger scale and financial capabilities in every aspects including total assets, capital position, network and customer base. The synergy of scale shall enhance the Bank’s competitiveness and reaffirm VietinBank as the leading financial institutions in Vietnam. The merger also aims towards the strategic partnership between VietinBank and Petrolimex (the strategic shareholders of PG Bank). Petrolimex Group is the largest entity operating in oil and gas industry in the country with extensive operational network, strong financial strength and business efficiency. Through the merger, VietinBank aims to be the ultimate provider of comprehensive financial solutions to Petrolimex’s affiliates, partners and customers depending on their specific needs.

Issue 4 | 31

Middle East

Issue 4

MIDDLE EAST FINANCE

The Rise of Corporate Venturing Investment Tips for Brands Corporate Venturing isn’t new and established brands have been investing in smaller companies and start-ups since the 1960s. The big difference is that, today, with increased pressure on corporates to be innovative, the sector has come of age and there are more opportunities for brand/start-up partnerships than ever before. It is fair to say that, historically, CVC (corporate venture capital) has been boom and bust following equity prices collapsing in the 1970s, the crashing of the stock market in ‘87 and the dot com bubble bursting in the 2000s. Today however, CVC has established a firm foothold in the corporate world as companies look to emerging companies to gain early access to potentially disruptive business models and generate financial returns. This increase in confidence is matched by the statistics. According to CB Insights in 2015 venture capital funding hit its highest level since 2000, with more than a quarter of the money coming from companies with venture arms. It’s also evident that CVC has moved beyond being dominated by a handful of industries and is present across many sectors; financial firms (Visa), carmakers (BMW), chemists (Boots), CPG (Unilever), telecommunications

(Telefonica), sportswear (Nike), retail (John Lewis) and tech giants (Microsoft). But while there is no question that investing in entrepreneurs and start-ups opens up a huge number of opportunities for brands, it’s also worth reflecting on the potential pitfalls. When CVC works it can be amazing, but when it doesn’t work it’s not just a question of losing your investment, but it can have a detrimental impact on the entrepreneur/startup themselves. Over the past decade we have managed tens of millions of pounds worth of investments and these are our top tips for brands looking to invest in start-ups.

Know why Ensure that both sides are 100% clear about why they’re getting into a partnership. It’s essential the big corporate needs to know this - how else will they know if it’s been successful or not. But it is also their job to ensure the start-up is clear on why they are doing it and to ensure that their interests are aligned otherwise they run the risk of pulling in different directions. I would also say that both sides should be clear on ‘what success looks like’ and what they both expect to tangibly get out of the partnership.

Issue 4 33

MIDDLE EAST FINANCE

34 | Issue 4

MIDDLE EAST FINANCE

Get out of the way

Be a great partner

Assuming that the big corporate is interested in the start-up because they believe they have skills, competencies, expertise etc that they do not - which should be the case as why else would they be entertaining the idea - then ensure you get out of the way and let them be good at those things. Often, big corporates get involved because they see magic in the start-up work and then, once the deal is done, they meddle or ask the start-up to work their way etc. Often they don’t do this on purpose - it’s almost like they can’t help themselves!

rather than the hard-bargaining negotiation that might be more prevalent in your organisation. Even if long-term equity gain is not your principal reason for forming the partnership, we’ve seen many times how putting some money on the table to become a shareholder can lead to better outcomes than paying for services or only trying to leverage non-monetary value added. Once you’re a shareholder, you’re much less likely to bargain hard for a deal which might satisfy your short term interests at the expense of the start-up’s long term future.

Look for the real mutual value

Keeping the organisation engaged

Creating mutual value seems like such an obvious point but we have learnt that the real value sometimes isn’t in the places where you think it is. Getting this right is vital in ensuring your strategy is not just a success in the long term but builds sufficient support across your organisation for it to even get off the ground in the first place. There are a broad set of areas in which you can look for a return:

One of the areas where corporates might hope to get an immediate return is the cultural change and introduction to new agile business process and product development cycles that working with start-ups can offer. However, there’s a real fine balance to be struck here, as one of the biggest things that can kill a start-up venture programme is the perception that too many people are spending too much time in it and it’s becoming a distraction to the required focus on immediate business objectives. Establishing the expectations of senior stakeholders about how much of their team’s attention can sensibly be devoted to the start-ups is crucial – and there’s a balance to be struck between securing as much time and assistance for the start-up as is needed to make a difference (and deliver long term return) while ensuring that this is not at a level that makes no economic sense for the corporate, no matter the monetary value you put on corporate change.

1. Access to technologies or expertise that could transform your business 2. Leveraging under-utilised assets 3. Accelerating internal cultural change 4. Getting a pipeline of future acquisitions 5. Hedging against big disruptions to your core market 6. Simply going for a straight financial return. Do the deal in the right way Before you start on the deal, you need to look at your organisation and honestly assess whether key stakeholders have a true picture of the length of time before they can expect a return, the risks, the likely additional capital needs the business will have, and who in the business will take the P&L hit from any writedowns (and inevitably there will be some writedowns). Once you’ve got that alignment internally, framing the deal well requires you to adopt a win-win style of integrative negotiation

To be a great partner for the start-ups you’re involved in, you need to get very realistic about what the start-up needs and also about your responsibilities back at the ranch. Being a great partner also requires sensitivity. It’s incredibly difficult to create a great working relationship with a group of people working flat out on a new product when you’re dropping in and out in the midst of doing all the things your day job requires. Doing so requires sensitivity to what they’re going through, a flexibility about operating on their timescale and not yours, and a real knack for spotting the opportunities where you can help build their capabilities as well as the moments when you can just take a whole task off their plate. Being a good partner means acting in ways that respect and promote the “special sauce” of the start-up rather than in ways that dilute or kill it. Be in or Get Out No one likes to start a relationship by contemplating its end, but smart entrepreneurs will want to interrogate the downsides as well as the upsides, and thinking through this will make it much more likely you form a good, honest relationship from the start.

Shilen Patel Founder of Leading Innovation, Business Accelerator, and Corporate Venturing Agency Independents United

Issue 4 | 35

EUROPE BANKING

24 | Issue 4

MIDDLE EAST TECHNOLOGY

Where is the Financial Services industry gaining a return on Big Data? Big Data has been talked about

extensively for many years but actual use cases for Big Data deployments in financial services remain relatively rare. However, there are some examples of early deployment use cases where the new technologies and approaches involved in Big Data are beginning to make an impact today. For data and IT professionals seeking to understand where Big Data can make an impact for their organisation these early examples are a good place to start. Before we move on to discuss the specific examples it is worth just restating what we mean by ‘Big Data’. Big Data can be viewed as a collection of social media data, machine data, and other sources characterised by inclusion of both structured and unstructured data. The availability of such broad data sets already affects organisations operating across multiple sectors and lines of business. For instance, for in areas such as IT, sales, marketing, manufacturing and customer support Big Data provides previously unseen insights, which can help organisations better understand how to optimise efficiency, improve marketing and customer relations and drive innovation. The financial sector has been quick to realise the huge potential of Big Data, with significant inroads being made in extracting data insight to fight fraud, reduce business risk and improve marketing initiatives.

Using Big Data to fight fraud By integrating evermore data relating to customers, and importantly the interrelationships between customers, financial services firms are identifying fraud more effectively. For example, by screening all transactions made between potentially suspicious accounts and supplementing that data with relationships uncovered through external links, e.g. social media, Big Data deployments can help financial services firms better spot fraud rings. Anti Money Laundering (AML) is a great example of where more data, and more context, can help to spot fraudulent activity. When combined with powerful matching and identity resolution capabilities such additional ‘Big’ data can have a material impact on both compliance and the bottom line. However, customer account data and transactional data used by different AML and fraud management systems are collected from various sources, which often creates errors, duplications and results in inaccurate data insights. To address this challenge, financial providers need to adopt robust data quality solutions, which enable the screening and cleaning of the data and help reduce the number of false positives during fraud investigations and AML checks.

Such data quality improvements can go a long way in improving fraud prevention and allowing financial services providers to streamline their customer due diligence practices by improving their Know Your Customer (KYC) process to drive compliance.

Harnessing new data sources for personalised marketing One of the major promises of Big Data is being able to better understand customers so the business can more effectively meet their needs. This is certainly true in the financial services industry where gaining a greater insight can result in new customer acquisition, retention, and cross selling. By supplementing the data a financial services firm already holds on its customers with new, external, ‘Big’ data sources such as social media and external data providers players within the industry are seeking to deliver more personalised interactions. For example, GPS data can help financial services firms to understand where customers are spending money. As the use of mobile grows and evermore data becomes available financial services firms will be able to point customers to their nearest cash point or bank branch. Similarly every time a customer visited a bank’s website wouldn’t it be preferable to show content that relates to their likely purchase intent?

Issue 4 | 37

A trustworthy partner helps in exploring new frontiers confidently.

In today’s unpredictable global financial scenario, it makes sense to focus on your core financial operations, trusting your support services with AFS. Having a proud track record and expertise in electronicpayments and consumer-finance outsourcing solutions, we have been trusted as a strategic partner by leading financial institutions since 1984. Our state of the art technologies, committed staff and worldwide partnerships, enable us in providing integrated, flexible and secure services from card issuance to fraud monitoring and consumer finance processing to loyalty programmes. Speak to us to know how we can offer you bespoke outsourcing solutions to lower operating costs and to increase the bottom line.

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MIDDLE EAST TECHNOLOGY

This is exactly the type of project that is beginning to get off the ground as banks manage to integrate data from weblogs, contact centre scripts, emails and social media to build a far clearer picture of what their customers actually want. However, to be able to achieve such degree of personalisation, financial organisations need to have a single view of the customer across all channels and lines of business. Having the ability to check and clean data from multiple sources is essential to building a more comprehensive view of the customer and driving service personalisation.

More accurately evaluating risk One of the core competencies of any lender is evaluating a customer’s risk profile prior to lending and pricing risk. Big Data is beginning to help here by helping organisations to gain greater insights into risk. For instance, constructing a more complex picture of an applicant’s personal circumstances by drawing on wider datasets is helping lenders make more accurate judgements. Similarly, cross-analysis of data captured from a customer in relation to that customer’s domestic and corporate dealings with the bank may reveal significant insight about the true risk of doing business with that person.

Ensuring Big Data delivers ROI What’s common to each of the above use cases is the need for a high degree of confidence in the underlying quality of the data. As the industry increasingly looks to integrate external, ‘Big’, data sources into business processes it becomes important to consider how those data sources can be validated.

However, the complexity of data and the siloed nature of how it is stored, means that business users within financial organisations often struggle to locate data sources across the business quickly enough to generate data insight when it is needed. This, coupled with the cumbersome processes that most data analysts need to go through to ensure all required data is in the same format and is verified, creates significant delays and errors when analysing data. To address this challenges many organisations are adopting selfservice analytics to enable business users to generate more accurate data insights faster and easier than ever before. Solutions that enable organisations to locate, prepare and verify data for analysis from multiple data silos and data sources will be key to helping financial organisations to accelerate access to Big Data insight and drive innovation. Another common method for data preparation is pooling data into a ‘data lake’, often running on the popular Hadoop database technology. In such circumstances we advise clients that having a plan in place for how they will understand, integrate, standardise and match such data is essential to gaining ROI. As Hadoop-based systems begin to be connected to traditional data warehouses and used for businesscritical applications such as regulatory compliance, the ability to ensure the quality of data becomes fundamental. As with any data-driven initiative business value will only be achieved from analysing Big Data if that data is trustworthy and assured.

Ed Wrazen VP Product Management, Big Data Trillium Software

Issue 4 | 39

MIDDLE EAST FINANCE

Data

& Information

Coherence

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MIDDLE EAST FINANCE

Financial services companies serve multiple masters. A look at the top three of those brings to fore the exponential complexity that they have to deal with. The first of those are the regulators. With regulations becoming stricter, complex and rigorous by the day on the one hand and information reach explosion through various forms of media on the other, financial services are under floodlights. Financial companies can hit the headlines for all the wrong reasons. Negative news about miss-selling or unhealthy business practices, intentional or otherwise, cause institutions in question and the sector in general, reputational and monetary damage.

offering a wide range of services from old favourites to innovative new launches are all crucial; all this while remaining efficient, profitable and competitive. There is a third audience financial institutions need to serve, their shareholders. Investors who look for a good return and a thriving organization, a group that needs to be considered as carefully as the other two in everything a financial company does. Satisfying all of these stakeholders at the same time is extremely challenging if not downright impossible. Sometimes their interests might seem to conflict, and individually the time and resources required to keep these groups content may seem overwhelming. One of the most powerful but underutilized resource of the financial institutions that can prove exceptionally helpful in building a harmonious approach to meet the apparent cross purposes of these masters is data at their disposal.

Set against this intense scrutiny, financial institutions have to carry on business as usual - outward looking, client-facing business that needs to understand and serve their customers well, their second and most important masters. They need to earn customer’s confidence, retain existing customers while winning new ones. Understanding customers’ requirements and providing multiple routes of contact using the latest technologies as well as

Financial institutions collect, manage, interpret and act on vast quantities of data. It is perhaps the most potent asset they

have. Bringing in Data and Information together into a single analytical construct by breaking the data silos and unifying it intelligently, overlaying it with sophisticated analytics, such that it lends itself to multiple uses is what I call “Data and Information Coherence”. This asset can be made to work smart in servicing regulators, customers and shareholders. It can help identify profitable customers, create more personalized products and services for the customer, indicate new markets it can expand into, and support better, more informed decision-making across the organization. At a very fundamental level, the classes of data that financial services firms have are finite. A unified Data management architecture with a common platform and a data construct that understands the nuances of financial services can be great start point for evolving a harmonious solution to multiple demands by different stakeholders. A simplistic representation of the data classes (structured) that are available within the systems of financial services firms are shown in Fig 1 below

Customer Details with (Both On and Off Balance Sheet) required Attributes

Customers

Transactions

Transaction Details (Both On and Off Balance Sheet) with required Attributes Figure 1

Contract Details (Both On and Off Balance Sheet) with required Attributes

Contracts

Balance Sheet, Proﬁt & Loss Statements, Products, Collerals Market Data

General Ledger and Other relevant Data

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MIDDLE EAST FINANCE

Let us focus on the customer. Customers today have a wide choice with financial services firms wooing them with multiple products and services. It is an out and out buyers market, especially for the “desired customer segment”. This brings to fore the analytical aspect where customers need to be segmented and desirable profiles be identified. The next steps will be to determine what products and services this identified segments will require; what and when will they buy; how and through what channels do the financial services firms reach them and make the products / services available. Financial services firms have huge amount of information about customers, their accounts and the underlying transactions. Understanding a customer’s behaviour by unifying this data onto a single platform and applying predictive analytics lets the organization decide how best to serve them. This is vital for customer retention. The ‘personal touch’ and “tailored” products

and services will become increasingly important as banking and financial management gets more and more commoditized. This enhances customer experience. Once customer experience is enhanced both the bottom line and top line are impacted positively which make the shareholders happy. Predictive analytics also plays a vital part in identifying potential or actual fraud. Mapping transactions in real time is regularly used to capture credit card fraud, for example. Unstructured data such as that from online browsing behaviour can be used to predict fraudulent activity too, and preventative measures can then be taken. Keeping on top of fraud not only saves the organisation money, it helps with reputation and is an important regulatory matter. A unified data approach makes this possible. Figure 2 below illustrates how the same set of data classes with appropriate analytics can deliver intelligence required by different stake holders.

Custer Segmentation Pricing

Decision support Intelligence to the Management & Staff of the ﬁrm

Enhancing Customer Experience Fraud Analysis Customers

Transactions

Regulatory Returns Market Disclosures

Contracts

Balance Sheet, Proﬁt & Loss Statements, Products, Collerals Market Data

Proﬁtability and Performance Analytics Risk Analytics

Figure 2

42 | Issue 4

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“ONE OF THE BEST PLACES IN THE WORLD TO WORK” - GALLUP

2014

2015

2016

Winner of the Gallup ‘Great Workplace’ Award, for the 3rd year in a row. The Gallup ‘Great Workplace’ Award is the benchmark in ‘Employee Engagement’ around the world. And by winning it three years in a row, Mashreq has proved that it has successfully maintained excellence in creating a great work culture. A feat no other bank in the region has ever achieved. At Mashreq, we strongly believe that only the highest level of employee engagement can deliver what our customers truly deserve – the best customer service in the world. That’s because at Mashreq – We Make Possible.

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MIDDLE EAST FINANCE

When a financial institution has decided to gain better insight from its mountains of data by unifying it and applying rigorous analytics, it becomes accessible to a wider audience. It is ready to be democratized through the organization, such that business decision makers can query it and use the results to inform their work. There is a virtuous circle at play here. The more decision-makers have access to sophisticated analytics, the more embedded this becomes in the fabric of the organization, and the more it contributes to better informed decision making.

A data and information architecture that is transparent, flexible, lends itself elegantly to analytics and has an effective data governance layer around it is the core of data coherence. This is still an emerging concept in the financial sector, but with the increasing demand for disclosures, expansion of regulation and changing demands of customers, itâ&#x20AC;&#x2122;s only a matter of time before it becomes a top priority industry-wide.

Implementing a unified data approach, with democratized access to resources and the use of predictive analytics is a sure way to keep the three top stakeholderâ&#x20AC;&#x2122;s viz. Customers, regulators and shareholder happy. This may, in some cases, be easier said than done. The way to make it happen is to accept the coherence philosophy and start the journey in that direction.

Saloni Ramakrishna Author, Senior Director, Financial Services Analytics Oracle Financial Services

Issue 4 | 45

MIDDLE EAST BANKING

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MIDDLE EAST BANKING

C l e ver b an k i ng w it h ar t i f i c i a l i ntel li ge nce Why A I c ou l d hol d t he ke y to st anding out in b an k ing and f inanci a l s e r v ice s As banking organisations, financial services providers and brands predict and plan for the way consumers will manage their money in the future, artificial intelligence (AI) is high on the business development strategy for 2016 and beyond. Gideon Hyde co-founder of Market Gravity, proposition design consultancy, shares his thoughts on this emerging technology and explains how businesses can embrace AI to enhance their offerings, meet consumer demand for speed, personalisation and convenience, and launch new products and services to stand out in the competitive marketplace. AI is already around us and used everyday within payments, money management and for roboadvice, particularly in the area of intelligent digital assistants that handle regular customer service enquiries and tasks. It can process ‘big data’ far more efficiently than humans and can recognise speech, images, text, patterns of online behaviour, for example to detect fraud as well as appropriate advertisements for upselling. Smart machines and technology can turn data into customer insights and enhance service provisions, bringing the digital experience closer to the human interaction for consumers. Santander announced it is to provide secure transactions using voice recognition via its banking app, while Royal Bank of Scotland has trialled ‘Luvo’ AI customer service assistance to interact with staff and potentially serve customers in the future. In Sweden, Swedbank’s Nina Web assistant achieved an average of 30K conversations per month and first-contact resolution of 78% in its first three months. Nina can handle over 350 different customer questions

and answers*. Several other banks in the UK and internationally have similar systems in place or are trialling them. These organisations, alongside new challenger banks and payment providers, are leading the way in intelligent banking, with other traditional banks and financial institutions expected to follow suit. Machine learning Machine learning technology has advanced rapidly over the last ten years, and there are now more flexible and cost-effective solutions that banks can implement, even with their often legacy-burdened IT systems. The computer analyses new information and compares it with existing data to look for patterns, similarities and differences. By repeating the activity, the machine improves its ability to predict and classify information making it easier to make data-driven decisions. Banks and fintech companies already use machine learning to detect fraud by flagging unusual transactions, as well as for other purposes. It’s far more efficient than human manual monitoring and is expected to become the norm in banking and finance. Consumers, particularly millennials, increasingly prefer digital servicing channels over going into a branch or calling in and have experienced AI in other areas of their lives – for example Siri on iPhones. From an economic standpoint, AI applied to customer servicing is also a big opportunity for retail banks to increase automation and reduce the cost of serving customers – which will be attractive as banks across the sector seek to reduce their cost bases.

Issue 4 | 47

MIDDLE EAST BANKING

Where to next?

Customer benefits Personalisation is a major talking point for banks and many are experimenting with innovative ways to match products and services to the consumer. For the customer the technology can simplify the money management process and offer suggestions and recommendations for upgrades and new services by matching algorithms. There are also great examples of companies embracing personal financial management (PFM) such as San Francisco start-up Wallet.AI, a new app which helps consumers make smarter purchase decisions, manage their finances and make cost savings while they are out and about spending money. The robots are coming Google’s Rat Kurzweil predicts robots will reach human levels of intelligence by 2029 if they can overcome current limitations. Pepper the Robot is the world’s first humanoid robot with human emotions, developed by Softbank, one of Japan’s biggest telecommunications companies, in collaboration with Paris-based robotics experts, Aldebaran.

48 | Issue 4

Pepper is already being used in customer services industries as a replacement to an informational booth or welcome desk. Now, a partnership with IBM means the Watson-powered version offers a service that developers can build into their apps or devices to make them smarter by doing things such as analysing data, making personal recommendations and even understanding human language and emotion. The Watson-powered Pepper will be able to tap into data such as social media, video, images and text with more types of jobs in development. Mizuho Financial Group Inc bank in Japan introduced Pepper to its flagship branch in Tokyo in summer 2015 to deal with customer enquiries, while Mitsubishi UFJ Financial Group trialled ‘Nao’, humanoid robot to interact with customers, also designed and developed by Aldebaran. Robotics are already being used for back office tasks, but Pepper and Nao are pushing the boundaries of what an autonomous, artificially intelligent robot can do within a banking setting, and we envisage a time when robots will work sideby-side with humans.

While AI can improve customer experiences, machines will not simply replace human customer service staff – many consumers will still want to speak with a person for more complex queries and so the key for banks will be delivering a service that gets the balance right between machine and human, ensuring human intervention at the necessary points. Banking and financial services organisations need to pay attention to technological developments such as AI and plan ahead for what is coming and how they will address the changes. The way businesses discover and implement innovation is shifting, with the launch of venture teams and accelerator panels or internal ‘incubators’ to bring a start-up mentality to corporate organisations. The growth of automated services, AI and robotics has heightened the need for traditional banks, financial services and payment providers to work closely with proposition designers, coders, developers and marketers to ensure new concepts are identified, developed and commercialised professionally and effectively.

MIDDLE EAST BANKING

Giden Hyde Co-Founder/CEO Market Gravity

Gideon Hyde is co-founder and CEO of Market Gravity, which has offices in London, Edinburgh and New York. It works with big businesses, including Boots, Barclaycard, HSBC, Aegon, Standard Life, RWE npower and The AA, to help them realise their innovation capabilities and release the start up within. For further information on Market Gravity please visit the website http:// marketgravity.com/ *Source: Nuance Communications (technology provider for ‘Nina’)

Issue 4 | 49

2016 Award Winners

Mr. Bui Trung Kien Deputy General Director ABBANK

1 2

Sylvain ThĂŠriault President Desjardins Private Wealth Management

Angela Gruzdova Head of Affiliate Network, FBS

Julia Ivanova Chief Operating Officer FBS

(left to right)

Melvin Tan Chief Executive Officer Tradesto Corporation (left to right)

Samuel Law Executive Director Global Head of Risk Management Tradesto Corporation

4 3

2016 Award Winners Continued 5

Ms. Kristine Umali Commercial Attache and Director, Embassy of the Philippines Ambassador Evan P. Garcia of the Republic of the Philippines in the United Kingdom

Gilda E. Pico President and CEO Landbank of Philippines

Ms. Catherine Rowena B. Villanueva First Vice President, Corporate Affairs Dept Landbank of Philippines Jocelyn Cabreza Executive Vice President Landbank of Philippines Phil Fothergill Journalist and Video Producer

(left to right)

Dr. Lance Mambondiani CEO Steward Bank

Mr. B Chandrasekhar CEO AFS Arab Financial Services

Mr. Hassan Abdalla CEO and Vice Chairman Arab African International Bank

Americas 54 Issue 4

AMERICAS INTERVIEW

Investing in

Latin America Located in the magnificent city of Buenos Aires, Puente is a leading capital markets company in the Southern Cone with a strong presence in Latin America. The firm provides integrated investment solutions guaranteeing the best market conditions for the private and public sector. Puente also identifies investment opportunities and develops the best strategies to help its clients achieve their financial goals, and the company uses high-level technology and platforms to allow its clients to trade in all markets. Global Banking & Finance Reviewâ&#x20AC;&#x2122;s Phil Fothergill met in London with Mr. Emilio Ilac, CEO of Puente, to discuss the investment landscape in Latin America. Phil: Letâ&#x20AC;&#x2122;s, if we may start by looking at Latin America and the investment opportunities there. What kind of challenges and opportunities are there? Emilio: Well, something we spoke with our investors for the last, I would like to say 100 years, but it is much less than that of course, is that it is hard to find a strategic partner that truly knows a region and has the ability to bring to the table the level of professionalism that they need. Something that you have to understand about capital markets, specifically in the Latin American region, is that a large part of the market agenda is shaped by economic and political events, so you have to have the ability to understand them really fast and be able to act on them right away.

Phil: This is an interesting time in Argentina. What can we expect in Argentina now that Mauricio Macri has been elected President? Is that good news for investors and business people across Argentina? Emilio: We think it is being very good news. Argentina is the second biggest economy in Latin America and in the past it used to be one of the main markets in the region for investors worldwide. What we are seeing at the moment is a huge interest from both international and local investors for Argentine sovereign, sub-sovereign and corporate debt. So something we are expecting in 2016 is a large number of new issuances, we even see some Equity Capital Markets (ECN) coming to the table. This is why we think Argentina is probably going to be the star market among emerging markets in the next three to five years. Phil: And given the changes in Argentina, how significant is Argentina when it comes to the effect of the rest of Latin America? Emilio: We know that Argentina is the second biggest economy in Latin America regarding its GDP, but the potential that Argentina has is humongous, itâ&#x20AC;&#x2122;s huge. I think we are very much behind in infrastructure, and we are also very behind in capital markets. If you see how much trading there is today in local markets in Argentina, we have a huge potentiality to grow. Issue 4 55

AMERICAS INTERVIEW

Emilio Ilac CEO of Puente

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AMERICAS INTERVIEW

Something similar happens in Uruguay and Paraguay, where Puente is also located. If you compare Argentina’s capital market to Brazil’s, we’re very tiny in size; I’m talking about onetenth or one-fifteenth of theirs, and we should be trading at least 80% of what they are trading.

that we don’t simply provide products for our clients, what we do is listen to what our clients need, and then we provide them with the best solution available. That’s why “solutions” is a big word inside Puente because this is the only way we can orientate our relationship managers to find the appropriate solution for our clients.

Phil: Puente offers a large range of investment solutions for your customers and clients. What about your managers, how do they ensure that your clients get the best possible opportunities and investments?

Phil: I understand that you, of course, at the time of recording, are the new CEO for Puente, congratulations. So, what do you see now as the challenges that lie ahead for you?

Emilio: That’s a great question, and in the question you said a key word for us that we remark inside Puente, from the first day that you come to work for us and during our induction process, which is the word “solutions”. Something we understand clearly is that, to succeed in this market, specifically, in capital markets, you have to earn the trust of the client. That is essential, and you do this by being transparent, professional, with respect, and of course other values which are all part of our strategic goals. Something our managers understand is

Emilio: Well, it’s a big challenge for sure; we’re the leading capital markets company in the Southern Cone, our main hub, comprising Argentina, Uruguay, and Paraguay. We have offices in other locations of course, in London, Panama, etc., but our main focus has been Argentina, Uruguay, and Paraguay. Something we love to say in Puente is that Puente is a 100-year-old company with 12 years of history. Why, because, our true change, the transformation of Puente as a leading capital markets company, started to take place after Federico Tomasevich, who is currently the chairman of the board

of directors the moment, started leading the company. He truly transformed Puente in a revolutionary way, aggressive commercially, with a very ambitious plan in mind to make Puente what it is today. So, if you ask me what my main goal is today, I would have to say it is the consolidation of our four core business units which are Capital Markets, Asset Management, Wealth Management and Sales & Trading, across the region but with specific focus on our Southern Cone hub. Phil: What plans do you have to ensure your clients continue to benefit from the growth of Puente? Emilio: We’ve been consolidating our growth for the last 12 years, across our different locations. The way we can consolidate this growth is by providing solutions for our clients, in every one of our core business units, and to do this we have to make sure that all of your employees have the highest values of respect, professionalism, and transparency with your clients, inside and outside of the company of course.

Issue 4 | 57

AMERICAS BANKING

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AMERICAS BANKING

A Secure

Mobile Banking Experience

IS Possible Banks work hard to acquire and retain their customers. It’s a relationship that is nurtured over time and built on trust. To maintain that trust, banks must implement the strongest security measures possible. As mobility has become a fact of modern life, consumers expect a fast mobile experience that meets their needs while keeping their identities and their data safe. This is particularly true for the financial industry, as evidenced by the explosion of mobile banking. In response, financial institutions are turning to passive biometrics and behavioral analytics. Customers’ preference for banking-on-the-go is driving the transition. Mobile logins are outpacing desktop logins at financial websites across the globe. Mobile banking customers are more engaged, logging in on average 14-15 times per month versus 4-5 times for traditional online banking customers using a desktop computer. Focusing on customer engagement in the mobile space can further cement brand loyalty, making your mobile app an indispensable resource your customers rely on and use every day. Failing to deliver experiences consumers demand means losing customers to more agile competitors, all while making new customer acquisition extremely difficult and costly. There is a cost associated with offering mobile banking access. As banks deploy easier-to-use and more friendly online services, they become

more attractive to online criminals, resulting in higher-risk transactions and less data to adjudicate between good users and bad. Compounding this risk is the fact that banking customers have a very low tolerance for incidents of fraud – but how they found out about it also has a huge trust impact. In a recent study on consumer behavior, if banks alerted customers to fraud, only 2.5 percent of customers would leave that bank; but if customers discovered fraud on their own, there was a four-fold increase in customer churn observed, with one in five customers defecting to another institution. Unlike a retailer that has a breach, if a customer’s accounts at a bank are compromised, they will not likely be won back over time. Banks spend years developing that deep well of trust, so why risk it? Breaking that trust comes at too high a price. Risk aversion is a reasonable reaction to the current online environment. Since 2010, incidences of card-related data breaches have increased over 340 percent. Theft of login and password data has increased over 300 percent in the same period. Consumers who have had their account information stolen are 10 times more likely to be the victim of financial fraud, with a subset of those consumers experiencing true identity theft – a crime with lifetime ramifications. Another real concern is malware, once confined to desktop computers and now exploding in the mobile space. Issue 4 | 59

AMERICAS BANKING

The threat is real, but so is customer expectation for a frictionless, convenient experience, so a balance must be maintained. The need for this balance is driving nearly 80 percent of financial institutions to invest in technology solutions that boost customer engagement and bolster security. Often, these investments are diametrically opposed, either increasing the risk profile of an institution by making consumer access more convenient or increasing account security at the expense of decreasing consumer engagement. Solutions must be found that don’t compromise the ideal state – both easy to use and secure. To create solutions of this type, financial institutions must transcend typical methods of consumer identification that use single points of static data to predict risk (single data points that can be spoofed and mimicked). We’ve relied too long solely on device identification, data element matching and static usernames and passwords to define legitimate access. Having all these elements match up in an account application, login or transaction does not mean that interaction is safe and, inversely, having anything fail to match up should not remove all faith that an interaction is valid. Attempts to add dynamic elements, like one-time passwords and SMS text messages, to the authentication equation have traditionally met with consumer confusion, backlash and rejection. It simply adds too much friction. Our brave new mobile world presents many challenges to user authentication. Usernames tend to be basic and easy to guess. Passwords are almost literally a dime a dozen on the dark Web. Device ID becomes increasingly suspect in a mobile world. But there’s no need to despair when it comes to security. Behavioral analytics and passive biometrics can be layered with existing methods of authentication to create a behind-the-scenes security strategy that still delivers a real-time and responsive customer experience.

Finally, a security model that benefits both banks and their customers, increasing the likelihood of a continued trust relationship.

Robert Capps Vice President of Business Development NuData Security

Robert Capps is the vice president of business development for NuData Security. He is responsible for developing and nurturing strategic alliances, partnerships and channels. Robert is a recognized technologist, thought leader and advisor with over twenty years of experience in the design, management and protection of complex information systems – leveraging people, process and technology to counter cyber risks. In his previous role at RedSeal as a senior director, Robert was responsible for technical, security and customer operations. Prior to RedSeal, Robert was senior manager, global trust and safety at StubHub. Robert can be reached online at Twitter @rwcapps or via www.nudatasecurity.com.

Issue 4 | 61

AMERICAS INTERVIEW

A 93-YEAR TRADITION OF EXCELLENCE An Interview with MUFG Union Bank Global Trust Services’ Jeff Boyle and David Ursa Corporate Trust services are essential in helping institutions raise capital, support debt financing structures, and to provide safekeeping of assets – each of which are generally quite complex. Tell us about the Global Trust Services group at the bank and what Corporate Trust professionals may not know about your team.

Jeff: Our Global Trust Services (GTS) group, which is within the Bank’s Transaction Banking of the Americas Division, has been providing Corporate Trust agency, trustee, and escrow services to corporations, public agencies, municipalities, and other institutional investors since 1923. We offer

Jeffrey Boyle serves as Managing

Director and Global Trust Services Head of Sales at MUFG Union Bank, N.A., where he oversees new business development and client marketing efforts. He has more than 30 years of experience in the Institutional Trust & Asset Management industry. Mr. Boyle joined MUFG Union Bank in 1989. He has been designated a Certified Retirement Services Professional and is a regular speaker at industry events. He also serves as a member of the Bank’s Global Trust senior administration committee and an ad-hoc member of the management team of Highmark Capital Management, Inc. (HighMark), an SEC-registered investment adviser, and wholly owned subsidiary of MUFG Union Bank, N.A.

Jeffrey Boyle Managing Director and Global Trust Services Head of Sales MUFG Union Bank, N.A.

62 | Issue 4

a full range of products and solutions that can be tailored to the needs of our client organizations and their complex debt, escrow, and project finance transactions. I really like the size of our organization. We have the strength and global reach of one of the largest banks in the world, yet the regional and local focus on the clients and communities we serve. We work closely with the Bank’s Wholesale and Investment Banking teams in the U.S. and throughout the world to provide Corporate Trust, Global Custody, and Liquidity Agency products and solutions. While most of our clients are U.S.-based organizations, many of them have significant overseas operations through their non-U.S. affiliates and/or subsidiaries and we are able to service these non-U.S. entities as well. In fact, we currently have clients on six continents— we’re still looking for a deal in Antarctica. We also partner with our colleagues throughout the MUFG global network to provide services for project finance transactions and hold back escrows for merger & acquisition transactions worldwide.

MUFG Union Bank, N.A. (the “Bank”) is a federally chartered national bank. Founded in 1864. Global Trust Services Assets Under Administration of $265 billion, as of March 31, 2016. A member of Mitsubishi UFJ Financial Group (MUFG), one of the world’s largest financial organizations, with offices in nearly 50 countries.

AMERICAS INTERVIEW

Global Banking & Finance Review recently named MUFG Union Bank “Best Corporate Trust Bank in the United States of America for 2016” for the fourth time in five years. How do you account for your ongoing success and what sets GTS apart in its approach to clients?

Jeff: Our team is very proud to receive, once

again, the Global Banking & Finance Review award. I think it really validates our approach to serving our clients’ needs. We truly believe that our clients’ success is the best way to measure our own success. We’ve built one of the most experienced teams of Corporate Trust professionals in the industry which is led by a group of dedicated client relationship managers who average more than 15 years of industry experience. Each of them is committed to building long-lasting relationships with our clients, which enables us to provide valuable insight and expertise to help our clients achieve their business goals.

David: In addition to our relationship

managers, our clients are supported by experienced client account administration, cash processing, and corporate trust operations specialty teams, which are comprised of many Certified Corporate Trust Specialists. This level of expertise is crucial as the Corporate Trust business becomes more complex with increased regulatory, compliance, and reporting requirements. Our team of specialists is easily accessible and ready to assist with all the details and requirements of our clients’ transactions.

Jeff: We’re also committed to growing

our product capabilities to enhance our collaboration with our colleagues across the MUFG network. For example, we recently expanded our team’s reach to London and Australia, which enables GTS to work with U.S.-based multinational clients with overseas operations for our Corporate Trust, Global Custody, and Liquidity Agency products.

Both of you have more than 30 years of experience in the Institutional Securities Services and Corporate Trust industry. How has this segment changed over the years, and how is GTS addressing those changes?

Jeff: Without even realizing it, technology

has taken over so many elements of what we all do and rely upon. Clients and our client service teams have so many more tools and a core platform providing online, real time account access with greater transparency into all aspects of account information. In addition, the ability for asset and transaction monitoring at all levels, deal related data metrics, and various reporting capabilities are essential for continuing success.

project finance transactions. That is the greatest value that our client receives.

David: The unprecedented level of

government regulation is the other big change affecting the Corporate Trust industry. As a result, our business is far more complex than it was 30 years ago. In fact, it is far more complex than it was just five years ago. It’s more important than ever for organizations to work with an experienced Corporate Trust team that not only understands the needs of the business, but has a solid grasp on the everchanging regulatory environment and the reporting and compliance requirements of its clients.

However, technology can’t anticipate the needs of a client like an experienced Corporate Trust professional or assist with deal structuring to be certain all parties acknowledge their duties and responsibilities. Our long-tenured team members understand the nuances of the business and can anticipate client needs and provide tailored solutions. We believe it is essential that the team a client selects must have a depth of experience and a breadth of expertise in Corporate Trust debt, escrow, or David Ursa serves as Managing Director and Head of Corporate Trust Services at MUFG Union Bank, N.A. He is responsible for all aspects of business activity including account administration services, client experience, revenue, and expense management, and he guides the team’s operational, product, and technology strategies. Mr. Ursa has nearly 30 years of asset servicing and trust experience, primarily in the Corporate Trust industry segment. He is a designated Certified Corporate Trust Specialist and a member of the American Bankers Association (ABA) Corporate Trust Committee. Mr. Ursa served two terms as chairman of the ABA’s Capital Market Forum for Corporate Trust Professionals. He joined the Bank in 2013.

David Ursa Managing Director and Head of Corporate Trust Services MUFG Union Bank, N.A.

Issue 4 | 63

AMERICAS TECHNOLOGY AMERICAS TECHNOLOGY

Latin America Increasing Mobile Adoption The countries of Latin America offer unique and compelling opportunities for mobile payments given the proliferation of mobile devices but there are significant cultural and technological hurdles to clear before uptake is widespread.

There are several subjects that need to be addressed when analyzing the mobile financial opportunities in Latin America. One key area is the unbanked or the financial inclusion people without access to banking services.

Emerging economies in countries such as Brazil, Mexico, and Colombia have populations keen to adopt new technologies and to rethink the way people participate in everyday economic activities.

Most of the unbanked population in the region lives in rural areas; areas where the smartphone penetration is considerably lower than in urban sectors. 55 percent of the mobile users in Latin America use feature phones that can access the Internet but lack “smartphone” functionality, so clearly there’s a large population of unbanked people using this type of mobile device.

Latin America is also a region where, on the one hand, there is mobile penetration surpassing 100 percent. That means that there are more mobile phones (lines) than the area’s population. But it’s also a region where only 51 percent of its adult population has access to banking services, according to the World Bank. This contrast shows the great opportunity in the region to increase local consumers’ economic participation via mobile technologies, in particular, mobile payments.

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Ana Aguilera Bañón, LATAM Mobile Money manager for Telefónica, says in order to reach these feature phone users, a short message service (SMS) must be considered as part of any financial strategy. That’s because the feature offers a massive non-exclusive service, whether the strategy is offering mobile

AMERICAS TECHNOLOGY

banking services or simpler inclusion services such as mobile wallets or mobile payments. But beyond technology, Bañón says financial, and tech firms must win the hearts and minds of the unbanked. “There are two key points regarding cultural trust in mobile payments. The first one is the challenge to build trust with the unbanked. You must be able to deliver the message where they see value in changing the way they use money. So you must be able to deliver trust and value to encourage them to use mobile money. “The second point is that the unbanked trust more in a telco than in a bank. Telco’s offer a transactional service, time selling, which resembles money transfers. So that is why Telco’s being the key players in mobile money, they have the infrastructure, the technology, the knowhow and the closeness to the consumer.” According to Aguilera, the telco is the key

player, but it’s not the only one. She says the mobile operator should lead the ecosystem into mobile money, but local businesses, banks, government and the telecommunications companies are all part of this ecosystem. She says everyone must invest, and be vested, in making mobile payments a reality. It is not a matter of competition; it is a matter of cooperation. The ultimate objective is to find out how to transform a top-up customer into a financial customer. Banks in Latin America know they need to take a step forward to offer stateof-the-art services to consumers. The technology is already there, available to implement innovative products such as a complete digital banking service including mobile payments, however, other variables must be taken into consideration in order to succeed.

Fred Mazo Project Director & Conference Organizer Open Mobile Media

Issue 4 | 65 71

AMERICAS TECHNOLOGY Miguel Valero Cañas, Digital Banking Director for Grupo Financiero Banorte, states: “We have been innovating in digital banking for many years, but there is still some mistrust in the digital channels from the market. So it is not just about the technology, it is also a matter of culture and adoption”. Valero points to a key trend in Latin America: “People are already using their mobile phone to buy stuff, but not to pay for it”. He explains that users are looking for products and services in their phones all the time, comparing prices and availability, getting quotes and calculating budgets. But users are still afraid of taking the last step to complete the process, which is actually paying for the product or the service. They still prefer to pay physically. So the Banorte digital banking director says there must be a strong evangelization effort towards consumers.

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Valero says one key milestone for mobile payments to become a part of everyday life in the region is that “we need to reach a point where the customer can pay for the service or the product independently of the bank, retailer or channel he is using.” He adds there must be a standardization and unification process between banks in terms of what technology to use, or what transactions to accept and how to treat them regarding mobile payments in physical businesses and stores. This is an important part to reach the milestone mentioned. Another important market player in Latin America is the so-called millennial population, the young professionals and their peers between the ages of 18 and 30 years old. In Latin America this demographic represents 25percent of the population and they are not unlike their cohort in the US or Europe.

This segment of the population may be the most demanding as they expect state of- the-art services tailored to meet their individual needs. When offering them a service, the word personalization must always be used, which means knowing the customer. The experience needs to be seamless, continuous and integrated between the customer and the provider (ATM, in-store, mobile, web, call center, etc.). This way, the customer engagement is always the same and personalized independently of the channel of interaction. Since many millennials live in a mobile world, they not only expect a mobile payment feature but a broader and more complete mobile experience with features such as gamification and loyalty services to reward them for being customers, social network integration, individually tailored promotions based on

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AMERICAS AMERICAS BANKING TECHNOLOGY

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AMERICAS TECHNOLOGY

their consumption habits and their profile. The experience is not limited to the variety of features or their quality; it needs to consider the user experience with the application as well. The young professionals are extremely demanding when talking about user experience within their apps. If the app is not user-friendly from the beginning, or if it crashes, the user will not hesitate to delete it and find another one. That is why the user’s navigation and interface must be efficiently modelled and designed. Take Uber’s interface as an example, where less is more and where simplicity keeps the user constantly engaged with the service, allowing them to quickly get the service they need at the moment it’s needed. There should be no difference with a mobile payment service; the user should be able to spend the least amount of time possible in the application while still being able to get the desired service. With more than 350 thousand mobile users in his platform, Sergio Chalbaud, entrepreneur and founder of Fintonic, knows a little about mobile. He asserts that a complete user experience is needed in order to accelerate usage of mobile payments. “Mobile is the entry point to the banking world. It is important to incentivize the consumer to use the service and to enable the whole financial experience in mobile: financing on the phone, paying on the phone, all in the same place.”

In terms of infrastructure and software solutions to back up a mobile payment strategy, many customers are betting on using cloud solutions for several reasons. First of all, they can forget about the costs of maintaining their own data centres and the costs of the hardware, which is reduced to zero. Another important reason they are choosing cloud solutions is because of the flexibility they offer to adapt quickly to the changes demanded by the evolving market. These days, companies need to be open, agile and flexible in order to keep the pace with the exponentially changing trends, market demands and technologies. A system application might seem like a suitable solution for the market needs today, but that may not hold true tomorrow. This is why the system should let the service provider quickly adapts and evolve without disrupting daily operations. Mary Gramaglia, Cloud and Mobile Manager for SAP LATAM, says that the biggest use case in Latin America for mobile payments is person-to-person money transfers and service payments. “The success of these uses depends critically on the availability and reliability of the correspondent network.”

Gramaglia states that the biggest obstacle for mobile payments is acceptance in stores, and in order to overcome this, the customer must be encouraged to use the service with a reward or loyalty program. “There are two key technological barriers in Latin America that must be met: The first one is regarding the feature phones because mobile payments need to be enabled via text, so there is an SMS cost for the user. Of course, USSD is also an option, but the technology is not available in all Latin American countries. The second barrier is that there has not been a massive POS machine update. Owners are not seeing the value in renewing their mobile-unfriendly POS.” For these reasons, Mary Gramaglia considers Latin America a very distinctive market, with demographics different from every other region and, because of that, one with business opportunities that cannot be found elsewhere in terms of mobile payments. And because it is such a distinct area with unique consumers and processes, this makes it a region rich with possibilities and challenges to boost adoption of mobile payments because the industry must innovate in ways that haven’t been used elsewhere.

Chalbaud says Fintonic plays a key role by providing users with financial self-managing capabilities as well as offering a credit-scoring model based on customer consumption that eases the loan approval processes. These services complete the financial mobile experience for the user. Chalbaud says, “Between the Telco’s, banks and the government, there must be the right mix of incentives for the consumers. They must understand the users and let them see you are close to them.”

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FINTECH IS THE NEW BUSINESS

MODEL FOR BANKS With the advent of the challenger bank and a recent acceleration of financial technology, banks need to think about how they can adapt their business models to develop equally compelling services in order to stay relevant to their customers. In the face of PSD2 and the XS2A provision within it, this need is greater than ever. Fortunately, though, XS2A also gives banks a fantastic opportunity to build great new services that really appeal to customers by offering them something theyâ&#x20AC;&#x2122;ve never had access to before. Imagine a smartphone app that shows you activities in all of your bank accounts - current, savings, mortgages and so on - and presents this alongside budgeting and forecasting tools, all in one place. If banks can figure out how to take these capabilities and blend them into a service with higher value then they stand a great chance of delighting their existing customers and attracting new ones.

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Finding a new formula for your bank could be the difference between being a big winner or a big loser when PSD2 comes along. Think about one of the most talked about services of recent years, Uber for example, and how its success has stemmed from the culmination of several services (a mapping system similar to Google and a payment platform similar to Stripe) combined with its own proprietary technology to handle the bookings and job allocations. The result: a revolutionary customer-centric service. Now take a look back into recent history and youâ&#x20AC;&#x2122;ll see established companies that were once dominant in their fields (the likes of Nokia, Blackberry and Kodak) all fail to accept the changes in their markets, adoption of new technology, and all of whom consequently crumbled to their competitors.

AMERICAS BANKING

The same can and will happen to the big banks that have dominated the high streets for as long as anyone can remember; if they want to survive the technological revolution they had better be ready to learn from those paving the way fintech startups. Letâ&#x20AC;&#x2122;s take Transferwise for example. A startup which has put itself directly in competition with banks by offering lower foreign transfer fees and fairer exchange rates - not to mention much better customer service. Although this is only one source of income for the big banks, if this level of disruption and innovation continues to take place outside of their immediate domain they could find their bottom lines quickly shrink, customer bases diminish, and prestige tarnish. To combat disruption banks must first shift strategic focus to the customer - this is one of the main reasons challenger banks have

been able to startup and gain a sizable following. For too long the big banks have taken their customers for granted and their technology satisfactory; now theyâ&#x20AC;&#x2122;re finding themselves on the backfoot of technological innovation and playing catchup to deliver the customer experience expected of them. They must challenge the old legacybased business model that plagues their systems and upheave infrastructure to source new players from the fintech startup world who have a background in innovation. Perhaps banks could even go as far as acquiring startups that could soon become major competitors. However, this will not be enough for banks to ensure market control. An increasingly potent asset for many fintech startups is their omni-channel offering, and acrossthe-board customer service.

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This has been a recent trend in many sectors, with the gradual adoption of various platforms and devices, companies and businesses are now expected to provide a continuous level of service across all points of contact - think of the fluid viewing feature that Sky has recently released, whereby you can watch and pause a show on one device, move to another and pick up right where you left off. Now itâ&#x20AC;&#x2122;s the banksâ&#x20AC;&#x2122; turn to shift into this innovative and nimble infrastructure. This is by no means a simple act, but meeting consumersâ&#x20AC;&#x2122; increasingly high expectations of what a good experience entails is vital. If customers can perform an action such as making a balance transfer in-branch, then they need to be able to do this on the phone, online and on their mobile device too. Although most high street banks have introduced a simple smartphone app it is in many cases very basic - however this is arguably the most important facet of an effective omni-channel service with many consumers relying on their personal mobiles on a day to day basis for a multitude of purposes. The necessity of perfecting this component cannot be understated, and despite the complications of using legacybased IT systems to accomplish this it should be considered a top priority. Therefore, banks need to adopt a proactive mindset. Even if this involves a re-evaluation of their business model, the success of fintech startups cannot be ignored. In order for banks to retain their established customer-bases, they must start integrating this technology.

Jouk Pleiter CEO Backbase

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AMERICAS TRADING

How Active Fund Managers can Combat the ETF threat & Beat Their Benchmarks

When active fund managers make the right call, they can see significant returns. However, these managers must also be accountable for their less-profitable decisions. Earlier this year, S&P released data showing that 86 percent of active European equity funds underperformed their benchmark over the past decade. With this in mind, it is unsurprising that exchange-traded funds (ETFs), which track indexes, are on the rise. By following the benchmark, investors pay less in fees, less in taxes, and trade with a higher degree of liquidity. The popularity of these funds is such that, by the end of last month they’ve grown to a collective value of $3.1 trillion, while sales of actively managed funds in Europe have seen a 15 percent downturn, according to Lipper. While active management is unlikely to become completely outmoded, it’s also clear that fund managers can’t afford to be complacent in the face of such competition.

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AMERICAS TRADING

Cultural shift: experts to models

Why does active management underperform? Mutual fund managers claim substantial fees for outperformance. The apparent justification for this is that they’re well-equipped in terms of staff, resources, and technology to design and implement winning investment strategies: they conduct research, they mitigate risk, they analyse data, and they constantly test. And yet, even with all these advantages, they still fall short of their benchmark. Why? Because even a winning strategy can be undone by the person implementing it. Human error is often the root cause of the failure of an investment strategy such as value or momentum. Investors are prone to letting their losses run, convinced that their position is a “dead cert” even as the stock continues to trend downwards. Other investors cash out too early despite evidence of positive momentum, losing out on strong uptrends. The lesson here is that theoretical value is not the same as the real price action. Active managers who rely on their intuition – or indeed their caution – can fall victim to the “disposition effect”: they hold when they should sell, and they sell when they should hold. Either way, their biases, emotions, and behaviours limit the profitability of their portfolios.

Models outperform experts on average: a recent experiment demonstrated that investors who chose to follow an algorithm saw returns of 84 percent compared to 63 percent for those who chose stocks on a discretionary basis. This isn’t to say that active portfolio managers are always erratic, or that they need to abandon their favoured approach entirely – but they need to add a level of discipline and intelligence to their methodology if they are to improve performance and justify their fees. The aim should be to balance bias, emotion, market knowledge, and subjectivity with objective insight gained from rigorous investment models. Fortunately, an analytical, data-driven approach is perfectly compatible with any investment strategy, and some investors have already begun to incorporate systematic models into their decision-making process.

time, winning assets will usually keep winning, and losing assets will usually keep losing. A simple principle, but one that means momentum historically outperforms other factors – and makes it complementary to a more systematic approach to investment. Don’t get left behind With underperformance widespread, it’s not enough for fund managers to simply back the right factor in their investment strategy – they also have to execute that strategy with intelligence and discipline. By approaching a factor such as momentum with the added rigor of a momentum model, fund managers can ensure they are acting on and profiting from the real price action, rather than theoretical value. Fund managers should aim to support their existing strategies with objective, systematic portfolio analytics and investment models. Fail, and they risk having their lunch eaten by ETFs.

For example, fund managers can benefit from systematically exploiting price momentum in the markets. Using a model to track momentum provides investors with objective cues on when to buy, sell, or hold (if the stock is on a good trend), helping fund managers improve their performance with one simple, historically verifiable fact: over

Rocco Pellegrinelli CEO Trendrating A Momentum Analytics Firm

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AMERICAS BANKING

How Banks are Understanding their Customers as Individuals Again Banking used to be personal; customers were treated as individuals, and their local bank teller would understand what was going on in their life and what time they would likely pop into the branch. Since then, consumers have been whittled down to a series of impersonal numbers based on inadequate data provided by the credit bureau and whatever information they provide the bank with (e.g. transaction history.) Banks know how much you earn and how you spend your money but they donâ&#x20AC;&#x2122;t know about that promotion you were recently offered, that you are expecting a pay raise, Â that you plan to travel a lot more and are trying for a baby- all of which are factors predictive of future financial status. Now, with the increase of available data, and new and innovative software products available, banks can get personal again.

The internet has changed the way people communicate. There are over 1.65 billion Facebook users (a number which increases daily) and every 60 seconds the platform sees 510 new comments written, 293 000 statuses published, and 136 000 photos posted. With more and more data being created exponentially, it is only logical to utilise it in order to better understand consumer behaviour.While social data is

increasing, traditional credit data is not. More Millennials use Facebook daily than own a credit card. Although this is partly due to a desire to avoid further debt, 6.5% of Millennials say that the reason that they do not have a credit card is because their application was denied. Millennials have the lowest average credit score of any generation, and the shortest credit history, making it difficult to be approved using traditional methods. Based on the previously mentioned statistic (that more Millennials use Facebook daily than have a credit card), exploiting social data as an alternative to (or as well as) traditional data could enable individuals with little-to-no credit history to establish risk and identity profiles. During our recent study with Visa, we derived that a higher propensity for unbanked individuals, including Millennials or those new to country, to engage with formal financial institutions could be achieved through replacing tiresome application processes with social data driven processes.

Social data analytics can verify identity, detect fraud, verify location and whether they travel a lot (e.g. that annual ski trip to the Alps), identify relevant life events such as getting engaged (an upcoming

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expensive ceremony?), a promotion, or moving house and more. This capability not only enables banks to determine risk and generate alternative credit scores, in turn opening up potentially life-changing opportunities for those traditionally deemed undesirable applicants, it can also be used to tailor offerings and communication techniques to better engage with consumers. Big Data and text analytics tools, such as PROFILE, can ensure that bank customers feel valued again by personalising automated processes. For example, an ‘unexpected’ transaction made abroad won’t be so unexpected when you have already been notified that that consumer has been planning a trip to Australia with their friends, eliminating the embarrassment and inconvenience of a blocked bank card. Likewise, a simple “congratulations” at the top of a marketing email when they have just received a promotion or got married could personalise the bank-to-consumer relationship in a way that promotes customer loyalty. Banks can use this data to not only for acquiring customers, but for customer retention also. A key challenge for banks in the digital age when it comes to retaining customers is personalisation; 15% of customers say that they would switch branch because the customer experience was not tailored to their individual needs. The integration of data and analytics technology could enable this personalisation by presenting each customer with a bespoke customer experience, facilitated by determining a customer’s wants, needs, and lifestyle, and delivering information, products, and services that they are likely to consider relevant and interesting. A loyalty incentive, a tactic most banks use to attract and retain customers, could be much more effective if that incentive is something that that individual actually wants rather than a ‘one size fits all’ approach.

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Personalising the user journey with analytics software like PROFILE can increase customer loyalty while simultaneously offering the capability to empower consumers to gain access to products and services they may not otherwise get approved for when relying on traditional data. Moving into the digital age doesn’t just mean creating an app and introducing internet banking, it also requires banks to utilise the digital footprints of their consumers. After all, social media is now a primary channel for people to communicate with each other, announce life events, congratulate and commiserate friends and acquaintances, engage with brands, RSVP to events, plan holidays, and so much more. If you don’t know what your consumer is interested in, or that they have a big trip with their friends planned next week, then you mustn’t be looking. The data is out there, and it’s time to start using it. Make banking personal again.

James Blake Founder and CEO Hello Soda

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AMERICAS INVESTMENT

Social Impact Bonds Why

will be BIG

Social Impact Bonds (SIBs), also known as Pay for Success Contracts, have become a buzzword as a potential solution for testing new and existing products, services, and technologies. With the instability of the global financial markets there is a strong desire by governments, the private sector, and philanthropy to reduce costs, increase return on investments, while maintaining robust research and development initiatives. As more governments and wealth holdersâ&#x20AC;&#x2122; continue to pool together capital and resources, in an effort to fund innovations that have a high value and probability of profitability, SIBs will continue to become an increasingly attractive option. Traditional SIBs are created when upfront investors, usually banking institutions, loan a non-profit service provider working capital to implement new or proven social initiatives. Under the traditional model, the government is willing to pay investors back their initial investment plus interest, but only if the service providers intervention proves to be successful. A newer alternative, the Micro-SIB, is designed to include more untraditional social finance investors (i.e., angels and venture capital), untraditional service provides (i.e., for-profits, tech start-ups, and social enterprises), while also allowing philanthropy to replace government as the final entity paying back investors for successful outcomes. SIBs have been used to fund everything from early childhood education to preventative healthcare and affordable housing. Over 40 SIBs have been commissioned globally since 2012, ranging in capital

requirements from $250,000 to $30 million. In 2016, the Obama Administration designated over $600 million in capital to finance such initiatives in the United States. Primarily financed by banking institutions and philanthropy, other potential funding sources have hardly been explored. There is also a call for synergy between industries and more cross-sector collaboration. For example, many U.S. government-backed sources of financing for R & D are increasingly requiring private sector matches prior to the awarding of funds. Yet, such collaborative efforts by government are not always effective enough at articulating why the private sector and wealth holdersâ&#x20AC;&#x2122; should get involved. This is where much of the potential for growth in the SIB sector exists, through the leveraging of collective interests within the financial community, such as those of venture capital, angel investors, institutional investors, insurance companies, and philanthropy to increase capital flow, deal flow, and raise investor sentiment. In the low-growth environment of the short to mid-term market, high risk vehicles such as hedge funds and early-stage start-ups will become less attractive. High yield government bonds while more stable, due to lowinterest rates, still provide little incentive for investment. However, the SIB fills this gap well as a financial vehicle with midrange risk, along with average interest rates ranging between 5-15 percent.

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The SIB also provides investors increased flexibility, with the ability to be structured to provide interest payments to investors at a flat rate as well as compounded annually or bi-annually. The SIB can also be structured to make the transaction entirely private, by partnering with philanthropic entities or insurance companies to pay for successful outcomes they deem important, rather than having government foot the bill. More importantly, through the determination of an independent third party evaluator, the investors gain unbiased insight concerning their actual return on investment (RIO).

Also, increasingly fewer unicorn start-ups are choosing IPOâ&#x20AC;&#x2122;s over private investment, offering less opportunities for investors to acquire undervalued stock with large potential for future growth. The SIB even offers the venture capital market valuable incentives many entrepreneurs find attractive, such as zero equity, zero loan deals that stipulate a definitive rather than perpetual timeline for the formal business relationship. And most importantly, the provision of an evaluator of outcomes provides investors with priceless data to enhance future investment strategies.

SIBs also offer advantages over similar investments. SIBs offer higher interest rates than U.S. Treasury Bonds. SIBs offer less default risk than Corporate Bonds, being structured to put the capital offered as collateral for the project in escrow, to be paid out to investors at a date contractually agreed upon. SIBs offer more security than stocks, with SIBs having their profitability tied to factors involving local human outcomes, rather than being tied strongly to global investor sentiment and international current events.

In the foreseeable future, SIBs will become a mainstream vehicle for funding outcome-based initiatives using prototypical or applied technologies and methodologies. As the world demands innovative ideas and strategies for solving new and existing problems, there will also be a need for a financial vehicle that is lean and dynamic enough to facilitate such sophisticated transactions. And with the state of the current global financial ecosystem, the timeliness of SIBs couldnâ&#x20AC;&#x2122;t be better.

Social Impact Bonds

OďŹ&#x20AC;er More Security

Provide Investerors Increased Flexibility Ean Mikale, J.D. Cheif Innovation Officer Infinate 8 Institute, L3C

Less Default Risk Than Corporate Bonds

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Advantages Over Similar Investments

AMERICAS INVESTMENT

84 | Issue 4

AMERICAS INVESTMENT

Collaboration in the Fund Administration Industry is Not a Weakness but an Opportunity Robert Kennedy once said that “Progress is a nice word. But change is its motivator. And change has its enemies.” While the Kennedys, or even politicians, might not be everyone’s cup of tea, they dreamed big. ‘Moonshots’ is a term that is now used to encapsulate the desire to achieve the unachievable, a reference to Jack’s famous ‘we chose to go to the moon’ speech. What does this have to do with hedge fund administration? It is not an obvious parallel. Every firm sets out to be a leader in their industry, to beat the competition, to be more successful than the next. In business, out-performing the market is the main goal, if you don’t count offering the best services to clients, which should be a given. You have to be better and, at times, accomplish this goal at the expense of the others. There is little room for sentiment. ‘Nice guys finish last’, we are told. It may be worth considering a more strategic way to achieve better outcomes for all players. Typically, when firms align, it is in the context of some form of merger or acquisition. As we recently became an independent fund administrator, we have first-hand experience of being part of this corporate activity and we have seen the advantages and pitfalls. What has remained through this experience is how the needs of the ultimate beneficiary of our

efforts, the investor and the manager, are not considered in these changes. So what does that mean? For us, it’s an opportunity to take a fresh approach to how we constitute our industry. All around us there are examples of how our world has advanced as a result of preconceived ideas that were turned upside down. What makes us think that providing support to the alternative investment community should be any different? There is a real sense of turmoil in the administration world today as the ‘return to core values’ that is under way across the financial markets creates a new service provider landscape. In many cases, service provision models that investors have chosen have been dramatically altered. This leads to concern about future stability and priority. They have to reconsider the lens through which they view this industry through because of all these changes. It is our belief that the provision of administration to hedge funds is best done via an independent administrator who is not affiliated with any other aspect of the investment process. This allows a strategic collaboration that is designed to purely deliver a quality, independent service to both the manager and investor. One of the biggest challenges all

administrators currently have is how to meet the increasing demands of clients. There has been a massive increase in regulatory requirements, advanced technical complexities and a general expansion of the expectations of the client. Of course, all of this must be delivered in a cost effective manner, as the pressure on margins in every area of the business increases. There are many ways for firms to address these demands, but maybe there is one solution that has not been considered. This is where the ‘moonshot’ comes in. If we were to design our industry’s model from the investor backwards, instead of the service provider, we might come up with a very different model. It is an interesting exercise to undertake and something that has resonance in other areas of business. Reverse engineering of our operational models is something that we are all familiar with, but done from the point of view of the client, can throw up some interesting results. I have heard a number of times recently from both managers and investors that there are features of our business that they admire and would love to avail of, but at the same time, not lose what they have with another trusted provider who offers something complimentary. What is the barrier to this?

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The question worth considering is whether we are brave enough to find ways to collaborate with other players in our industry to offer our clients something better, but at the same time, preserving our own identity and purpose? Is there room for an affiliation between service providers that puts the interest of the client first? Preserving the integrity of our firms is something that is to the forefront of every CEO and it is often the case that collaboration with another firm is not possible as they simply do not align. However, maybe this alignment doesn’t have to be in totality? If it makes sense to work together to provide something that outperforms what is currently being offered in the market, then why not explore it? The reasons not to collaborate would appear to be more human than technical. Ego, ambition, self-preservation and mistrust are all factors that exist when firms from a similar background come together. The natural and initial reaction is to advocate the strengths of your own firm and denigrate your competitors. What if it were possible to put these factors aside for one moment and see if there is an alignment that could be converted into an offering that goes beyond what is available in the marketplace, but still allows both firms to continue on their own path? There is no easy answer to this question and it is a challenge to find an audience that is willing to discuss it. Traditionally, such a conversation between service providers would have to indicate a position of relative weakness on behalf of one of them.

The evolution of firms is often a result of the combination of their own strategy and the needs of their clients. One example can be opening offices due to a desire to have a regional presence and the demands of clients. There are many firms that have had these evolutions that may have led to different outcomes, such as a specialization in a particular asset class or even advancement in a specific technology. Not every story is the same however, what is constant is the increasing sophistication and demands of the client and the globalization of the investment industry. One way of meeting the challenges of this next phase could be the collaboration concept. Two firms coming together to pool their strengths could provide the combination of a specific technical expertise and a particular regional presence to use the example above. The benefit to the manager and the investor is that there is an immediate acceleration to a preferred service model that could also be cost effective as there is not the capital outlay required to build the missing component. Enhanced service at no extra cost to the Investor; isn’t that what the goal should be? It is a topic that is not openly discussed and a question that is not asked enough, which makes us want to consider it some more. Maybe this is one ‘moonshot’ for the hedge fund administration world, and if so, shouldn’t we at least explore it?

However, what if this was not the case? As a newly independent administrator, we find ourselves looking at all options that could further enhance our services to clients, but allow us to preserve this new identity that we have worked hard to regain. One of the obvious ones is communicating with colleagues in other areas of the industry that have complementary strengths to ours, but at the same time, value their independence, like we do.

Mark Hedderman 86 | Issue 4

CEO Custom House Global Fund Services

AMERICAS INVESTMENT

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Biometric Banking: The Revolution is Here Hans Zandbelt, senior technical architect, Ping Identity discusses why the retail banking sector is poised to benefit from the biometrics revolution. The biometrics industry has certainly gathered apace and recognition over the last six months. Retina scanning, voice recognition and fingerprint technology have the capability to transform the security architecture of many organisations, across many sectors, today. The retail banking sector is already benefiting from this new era of identity-defined authentication with well-known banks such as Nationwide and HSBC taking notable steps to place their customers’ identity firmly at the centre of new security policies. This new approach, coupled with the latest in technological innovations, is what will and should be implemented across a variety of different industries in our digital economy.

A sector leading the way The payments and banking services industry is facing a new era of compliance, growth and innovation. Many banks across the EU are now required to deal with the Payment Services Directive (PSD2). This new initiative sets out to improve and standardise the efficiency of payments across the EU, and in doing so, will open up a new standard of robust authentication measures for the industry. The online banking experience is one that is inherently tied to a user’s identity. Banks are a treasure trove of credit card details, telephone numbers and addresses. And it’s not just a matter of financial fraud at play here- but potentially damaging and widespread identity fraud. The future of authentication must be one where identity is placed firmly at the heart of renewed security policies.

By introducing systems that centre on a customers’ identity- whether that be facial recognition, retina scanning or fingerprint scanning, banks can offer loyal customers a convenient and fast service, mitigating losses and retaining customer trust. This point is imperative when we consider comments made a couple of months ago by Sir Bernard Hogan-Howe, chief of the Metropolitan Police. He suggested that victims of online fraud and cybercrime should not be refunded by banks if they fail to take the necessary precautions to safeguard themselves online. Hogan-Howe’s statement may be extreme, but is informed in part by the spike in inadequate and poor password protection measures adopted by many consumers across the UK. The issue at hand here isn’t just in clumsy password management or in using passwords such as ‘Password’ across various different accounts. Rather, it is passwords themselves which are a dated method of authentication. It is therefore extremely positive to see so many high street banks take measurable steps to create a secure, revamped access management framework for their customers. It is just as much the responsibility of the service provider, as it is the customer to adopt secure authentication methods.

staff to work more securely with multifactor authentication. This is but one component of a broader programme where $19 billion has been proposed for tighter cyber security measures across public sector departments. Consumer-facing brands such as Google are protecting users with two factor authentication technology. A twofactor authentication process typically needs customers to authenticate using their phone- something they “own” in conjunction with an existing passwordsomething they “know”, which will result in a unique code being sent to the phone number when a login is required. This ultimately creates a more secure, faster way of accessing an account. The ‘post-password’ era is truly being realised by many retail banks today. However, more can and should be done to secure a customer’s identity, today. Identity-defined security should not be an afterthought or ‘optional extra’ but should rather be the lifeblood of how customer trust is retained, financial fraud is prevented and reputations maintained.

Lessons to be learned With the retail banking sector leading the charge in rolling out alternatives to passwords, the question is what can other industries learn moving forward? Are other sectors doing enough to adopt new methods of authentication fast enough in today’s digitised economy? The US public sector is one strong example here, with President Obama recently revealing plans for US federal government

Hans Zandbelt Senior Technical Architect Ping Identity

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AMERICAS BUSINESS

Who should collect your cash? How to develop an effective cash collection process Companies undertaking working capital initiatives often assign sales managers and sales representatives to collect the receivables, believing that doing so will resolve their working capital issues and decrease days sales outstanding (DSO). But are those people the right ones for the job? The question of who should collect the cash has long been problematic within organizations. Frequently, management underestimates the efficiencies to be gained by having a dedicated collections team. Instead, they simply urge their sales team to collect customer debts. This article explains, step-by-step, how to maximize the effectiveness of the cash collections process.

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Why sales people are the wrong persons to collect cash Salespeople are the experts on what they’re selling. Their goal is to sell and prospect customers in the pursuit of sales commissions based upon revenue and/or gross margin, and to build and maintain a quality relationship with customers. Hence, talking with customers about recovering unpaid bills is usually perceived as a taboo conversation among the sales force – no matter the industry. Moreover, their client contact is not usually the direct payer – that is, not the accounts payable clerk. So even if the salesperson makes a request for payment, the request is often not passed on to the direct payer in a timely manner, if ever. Having a third person communicate to the accounts payable department is not the best way to optimize the cash collections process. Companies that assign collections responsibilities to their salespeople usually have a reactive internal collections process focused exclusively on overdue debt. Some of them have an average percentage of overdue debt of 40 percent or higher against total trade receivables. To proactively introduce procedures into this environment is not unworkable, but it is extremely challenging in terms of acceptance and change management. Below are some proven methods for improving the cash collection process:

Establish responsibilities and accountabilities

Management should look at the entire quote-to-cash or order-tocash cycle and identify gaps and bottlenecks within the different sub-processes, then define policies and procedures that clearly establish responsibilities and accountabilities for the various stakeholders. This exercise will help management to draw a clear matrix of roles and responsibilities, and to see that cash collection is clearly a process step that needs to be handled separately by an individual or a dedicated group of persons within the organization. Just as sales management is responsible for contracting, selling products or services, and maintaining client relationships; whereas credit management is responsible for checking customer creditworthiness of existing and new accounts and setting the right level of credit limits to protect company financial interests; a dedicated collections team is responsible for collecting outstanding debts and identifying disputes before the invoice is due and resolving them to prevent customers from non-payment. The accounting team is responsible for allocating the cash to the right accounts and invoices, and managing daily company bank account balances.

And the legal department is responsible for following accounts that are on hold and under the legal process because of bad debts. In each case, there is clear accountability and responsibility. It is very important to note that customer-to-cash is a crossfunctional process with roles and responsibilities spread across the organization. Credit and risk management, collections management, and accounts receivable management are usually under CFO and treasurer responsibilities. Sales and quote management, order processing, and invoicing are under sales and marketing directors’ supervision. Dispute management requires the mobilization of the whole company’s stakeholders to resolve the disputes. And additional key stakeholders are equally pivotal in the process, such as IT, other divisional or corporate management, operations, and the internal consulting group. Which department should the collection team be attached to? Obviously, a collections team is more aligned with and often attached to accounting or credit management within the finance team. However, some companies have proven that letting a collections team be managed by another department, such as the customer service department, can also be effective. Determining where the collection team should reside within the organization is based on the characteristics of the company’s business and culture. The first consideration is to analyze any conflict of interests in the tasks and process and monitor how well the team “fits” within the department selected.

Establish a clear and detailed collections procedure and strategies A fundamental aspect of good cash collections management is to have comprehensive and thoughtful collections strategies that have been designed and agreed-upon by company stakeholders in workshop sessions and signed-off on by the company board and management team. The procedure should include a detailed description of who is contacting the client, what method is applied to prioritize accounts, how customers are contacted (emails, phone calls, collection agencies, or other means), and when and how often customers are contacted (for example, before the account is due, or one week overdue). The collections strategies should always be prioritized and segmented by size and risk of the customer. In addition to defining the collections strategies, a clear escalation process needs to be defined to help collectors escalate accounts in the case of non-payment. Part of this process should also include communicating the actions of the collections team to the salesforce and general reporting.

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Work to leverage the relationship between sales and the collections team One of the biggest issues within most organizations is the lack of commitment from the different stakeholders to implementing internal processes that require cross-functional teamwork. While the organizationâ&#x20AC;&#x2122;s goal is to act and work efficiently in order to run the business and generate profits, departments often operate in silos. As a result, people tend to forget that in order to achieve a common goal and make the business run harmoniously and smoothly, they need to communicate and develop solid working relationships between departments. A cross-functional process that is clearly defined and sponsored by the leadership team is, therefore, fundamental for interdepartmental cooperation and effectiveness. Very often, in organizations with a dedicated collections team, the sales managers are not involved in the collections process at all. That is a critical mistake. A fundamental key to achieving overdue debt reduction is to develop and nurture the relationship between sales, customer service, credit risk, and the collections team. Collectors should regularly update the sales and customer service departments on the largest top 10 open accounts receivable clients and largest top 10 open disputes. Sales and customer service should also support the collections teams as part of the escalation process. When the collections team has followed all the collections procedures with no success of client payment, sales and/or customer service should take over the collection tasks from the collection team and address the issue directly with the client (for example, meeting with the client -- such as a purchasing vice president, to discuss the outstanding debts and future sales orders).

Establish clear targets and objectives Most of the companies that have been interviewed about their cash collections process recognize that letting the commercial team handle the process is not advisable unless significant bonus schemes are tied to their individual monthly DSO results. Indeed, a good

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incentive plan is essential to create the desire to achieve the objectives, but itâ&#x20AC;&#x2122;s not the only success factor to decrease DSO. Setting up the right monthly cash target helps significantly in reducing DSO. For each stakeholder, clear objectives need to be established, as well as individual achievable monthly targets along with sufficient support from the management team. Of course, setting targets and objectives does not guarantee that the work will be done. A good monitoring process should also be set up to track daily cash receipts and performance against target. Explanations of the shortfalls need to be provided after month-end to analyze why the cash target has not been achieved, and to set appropriate corrective actions.

Conclusion Companies should take the time to consider the advantages of having a dedicated collection team and avoid giving the responsibility of collecting cash to their sales management team, regardless of the size of the company. Obviously, for small and medium companies, the team should be structured accordingly (for example, designating a half full-time employee for cash collections). Larger companies can afford to set up fully dedicated collectors. The number of people required for the cash collections task should be based on the total volume of customer portfolio and the overall customer credit risk. Having a dedicated team with clear collections strategies and procedures, along with achievable targets and clear objectives, generates quicker cash to companies. It also enables better control over cash management and better cash in-flow forecast.

AMERICAS BUSINESS

Lucie Luangrath Senior Manager The Hackett Group

The Hackett Group has completed more than 11,000 benchmarking studies with major corporations and government agencies, including 93 percent of the Dow Jones Industrials, 86 percent of the Fortune 100, 87 percent of the DAX 30 and 52 percent of the FTSE 100. These studies drive its Best Practice Intelligence Center™, which includes the firm’s benchmarking metrics, best practices repository, and best practice configuration guides and process flows. It is this intellectual capital that enables The Hackett Group’s clients and partners to achieve world-class performance.

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Africa 94

Issue 4

AFRICA INVESTMENT

Africa Bright Spots Defy Doubters with Lower Oil

Resilience

& Commodity Prices

Despite a difficult few months for African markets, the continent has pockets of resilience and dynamism which informed, long-term investors are returning to exploit. The start of 2016 was tough for both developed and emerging markets. China’s stock market fell by 20%, the S&P by 10.5% and oil prices by a further 20% from 2015 levels. Many emerging markets were hit by uncertainty, volatility and slowing demand. Growth sagged in global powerhouse China and other emerging market ‘flagships’ – Brazil, India and Russia, also had a poor first quarter. But the BRICs no longer accurately represent the whole asset class. For active investors not reliant on the rise of emerging markets indices too often dominated by a few countries, sectors or stocks, it has been a useful period of consolidation and renewal. Africa’s major oil producers like Nigeria and Angola suffered in Q1 and the continent’s major commodity exporters felt the effect of the strengthening UD dollar and the slowdown in China.

However, other markets have defied the short period of weakness. In 2016, the International Monetary Fund (IMF) expects the region to recover from the global commodity price slump, with real GDP set to grow by around 4-5%. That ranks Africa alongside developing Asia as the fastest growing region in the world. The total size of African GDP remains low at an estimated $2.3 trillion in 2015, similar to India’s GDP, and about 3% of global GDP. But Sub-Saharan African countries are likely to maintain positive growth trajectories in the short term. The latest World Bank ‘Pulse Africa’ report singles out Kenya, Côte d’Ivoire, Tanzania and Rwanda as engines of growth. Major LNG projects are planned for Tanzania and Ethiopia, which is considered a rising star, as the government boosts its garments and food processing sectors. Planned infrastructure development includes hydropower dams, railroads and ports as well as a 3G roll-out over the next three years. Real GDP growth in Ethiopia exceeded 10% a year in the decade to 2015. This year it is forecast at 7.6%. Issue 4

AFRICA INVESTMENT

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AFRICA INVESTMENT Kenya has become one of the most attractive destinations in Africa for FDI inflows into a wide range of sectors, including infrastructure, energy, real estate and tourism. The Kenyan economy grew at over 5% per year in the decade to 2015, while neighbouring Tanzania delivered 7% over the period, a rate expected to continue in 2016. Niche industries and commodity producers in Africa have stepped in where other emerging market supply chains have failed. Drought and other negative factors in Brazil have boosted demand for Kenyan and Ethiopian coffee, while financial services, telecoms and alternative energy providers have enjoyed renewed growth. In sectors like brewing, where stock prices have fallen in the last few months, value is drawing investors back. Non-oil dependent economies such as Ethiopia, Mozambique and Côte d’Ivoire are continuing to build infrastructure to support more diversified economic activity which is set to deliver real GDP growth of between 7% and 8%. The global slump in oil prices has actually prompted many African countries to speed up the reform of their tax and subsidy regimes, which will support growth going forward.

Provisional data for the year show a budget deficit equal to 7.1% of GDP, against 10.2% of GDP in 2014. This suggests an easing of sovereign risk. Overall, Sub-Saharan Africa is faring much better than the BRICs, the previous darlings of the emerging markets community, all of which are undergoing crises of confidence. GDP growth in many African markets is running at double the rate of most developed markets, with far more supportive long-term factors, such as favourable demographics, plentiful resources and growing domestic affluence. Furthermore, Africa’s markets are less dependent on foreign investment since their domestic and intra-regional investor base has grown. Passive investors tied to indexed products, or those struggling with price volatility, or quarterly target returns will clearly feel the pain of short-term dips. Yet there has already been a strong rebound. The Institute of International Finance estimates that foreign investors poured US$37 billion into emerging market stocks in March, the highest level of inflows for two years.

Although exchange rate pressures remain, volatility in most African currencies has reduced. This is particularly the case for the Angolan Kwanza, Kenyan Shilling and Ghana Cedi, reflecting falling external risks and efforts by African central banks to strengthen their monetary environments. Ghana was a prime focus of investor concern in 2015, but as the government has engaged with the IMF on a financial stabilisation plan, confidence has returned and real GDP growth is set to rise. More needs to be done to strengthen the fiscal position, but efforts to consolidate spending have seen a cash deficit of 5.6% of GDP (better than the target of 6.8%) for the first 11 months of 2015.

Edward George Head of Research EBI - (Group Ecobank)

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AFRICA BANKING

Redefin the ease of Bank Banking as a functional part of the daily human routine, is underpinned by strong technology deployment and constant innovation. This reality did not just dawn on the financial industry â&#x20AC;&#x201C; in fact like in most endeavours, there were pacesetters that predicted rightly the role of technology and thus embraced it from the onset. Zenith Bank Ghana clearly is in the bracket of those Banks that invested in the appropriate technology and thus were able to churn out relevant innovations which defined and continue to define the banking experience for their customers.

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Over the years, in line with Ghana governmentâ&#x20AC;&#x2122;s agenda to create a cashlite economy using technology as the backbone, the Bank has introduced an array of products and services which are responsible for the seamless way its customers transact their businesses. Zenith Bank, which was awarded the Best e-Commerce Bank in Ghana during the

2015 Global Banking and Finance Review Awards, recently launched GlobalPAY, an e-Commerce service, to enable companies and individuals (merchants) sell their products safely online in order to boost sales in an increasingly competitive and global marketplace. Recognizing the vast opportunity for local companies to expand their businesses online, supported by a digital-savvy bank with a robust and state of the art technology, GlobalPAY has been designed as a secure web-based collection gateway that enables merchants to accept real-time card payments from customers worldwide. The GlobalPAY platform serves as a link between Zenith Bank, merchants and card holders as well as payment networks such as MasterCard and Visa and very soon the E-zwich card, a localcard which was created by an offshoot of the Bank of Ghana.

AFRICA BANKING

ing ing The product works in two ways; the first is the “Website Integration” where the Bank integrates its payment Application Programme Interface (API) into the merchant’s website. Customers of the merchant can therefore make direct payments with their cards from the merchant’s website. The second, known as the “Storefront” is tailored to merchants who wish to utilize the product but do not have websites and the technical capability to use the API. The Bank supports these merchants by creating an online store for them to list their products on the GlobalPAY platform where customers can make purchases with their cards. Merchants - which may include supermarkets, shopping malls, stores, large and small corporates, airlines, internet companies and virtually any entity seeking to do business or receive payments online—stand to benefit from using GlobalPAY as it increases the global

reach of their businesses, grants 24/7 access to their products and services, provides real-time card authentication and payment authorization, and ensures multiple card acceptance and secure transactions via Verified by Visa (VbV) and MasterCard SecureCode (MSC). Corporate Institutions and individuals who sign up for this product can be assured of secure transactions, real time payments, global reach, increased business channels amongst others. Managing Director and Chief Executive Officer of the Zenith Bank, Henry Oroh, whilst speaking at the launch of the platform said, “With GlobalPAY, we are poised as a Bank to break boundaries in the e-commerce market place and live up to our reputation of being the Best E-Commerce Bank, awarded us at the 2015 Global Banking and Finance Awards and Winner, Most Cashless Bank at the 14th Ghana Banking Awards organised by Corporate Initiative Ghana.” Issue 4 | 99

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Zenith GlobalPAY

Automated Direct Payment System (ADPS)

Other Innovations Some of the innovative products that culminated in the Bank becoming the pacesetter in technology and innovation include its pioneering partnership with mobile telephony service operators, Airtel and MTN, to offer mobile money services to the large unbanked population. Last year the Bank of Ghana passed a set of regulations for the mobile money operators which amongst other things called for partnerships between the operators and the Banks. A year after the passage of the regulations, the value of transactions recorded on the mobile money platform reached nearly US$10 billion representing more than a 216 percent increment over the previous year. With Zenith Bank’s partnership with Airtel and MTN Mobile Money, customers are

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Zenith Visa Cards

able to link their mobile wallets to their Bank accounts. For instance customers are able to pay for goods and services using their connected mobile wallets. E-ticketing and Travel Solutions The Bank’s unmatched payment services efficiency has drawn more airlines, both local and international, onto its E-Ticketing and Travel Solutions platform, bringing the benefits of the Bank’s highly convenient pay options to more travellers. Currently, the Bank collects payments for nine international airlines and all domestic carriers. The list of international airlines include KLM, Tap Portugal, Gambia Bird, Kenya Airways, Arik Air Dana Air and Med View Airline. These airlines fly directly or connect to most cities in the world. The domestic carriers are Africa World

Airlines and Starbow which cover the main Accra-Kumasi, Accra-Takoradi and AccraTamale routes. The convenience which Zenith Bank offers is that customers of these airlines can book their flights online and pay at any of the Bank’s 32 business locations across Ghana. The airlines receive instant notification of the payments and quickly dispatch customers’ flight tickets (e-tickets) to them through the e-mail address they provided when booking. The service thus eases the booking process for flights to various destinations and the general travel experience, saving customers the time they would otherwise have spent looking for an airline’s specific office location to book and pay for their flights.

Mobile

AFRICA BANKING Wide Range of Card Solutions In addition to its technology-driven products and services, the Bank currently offers four different types of cards for people with diverse needs. These include the Zenith Eazypay card, Visa Classic Debit Card, Visa Classic Credit Card and Visa Classic Prepaid Card. The Eazypay cards are issued to account holders to carry out cash withdrawal services from any Zenith ATM or ATM of an eTranzact member bank or ATM’s of other switches connected to Zenith Bank Ghana. The cardholders can also transact on any Zenith Bank or eTranzact enabled Point of Sale terminal.

Banking

Zenith Bank’s Visa cards allow cardholders to access their funds for withdrawals or payments worldwide. The Debit Card, which appears to be the most popular, is used to make withdrawals on all Visa branded ATMs and also used to make payments locally and internationally on Point of Sale terminals and online. Funds are deducted directly from the customer’s account.

According to the magazine, “Zenith Bank Ghana has spurred innovation within the Ghanaian banking industry and has helped to provide an international standard of financial services to the market.” The Bank was also adjudged The Banker’s Bank of the Year Ghana 2015 and 2014 and won the Best Bank in Customer Care at the Ghana Banking Awards held in 2014. According to Henry Oroh, the Bank’s MD/CEO,

“

Over the years, Zenith Bank has acquired the reputation of providing innovative banking products and services that cater to the needs of our numerous customers. Never resting on its oars, the Bank continues to develop and enhance these products and services to satisfy the ever changing and growing needs of today’s customer bearing in mind the technologically driven world we live in now. Zenith Bank, in your best interest!

”

Unlike the debit card, the Zenith Visa Classic Credit Card – grants access to a monthly line of credit based on a particular credit score. The last of the cards is the Zenith Visa Classic Prepaid Card. This is a reloadable card loaded with the user’s own funds for purchases or withdrawals. Cardholders get instant value on the cards and have the option of loading their cards at any Zenith Bank branch or via Internet Banking. Recognition Currently in its tenth year of operation in Ghana, Zenith Bank has fast become the czar of innovation in the Ghanaian banking industry, and continues to distinguish itself through its ability to serve an unrivalled customer experience. Its dedicated service resulted in the Bank being adjudged the Best Banking Group in Ghana for 2016 and 2015 by World Finance, the influential UK-based financial magazine.

Henry Oroh CEO/Managing Director Zenith Bank Ghana Ltd

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Growing businesses stitch by stitch We offer tailor-made and innovative financial solutions to help grow businesses. Partner with us and witness our commitment of making you a success. Everyday Banking for Everyday People.

Ecocash Banking Services

Ownai

MUZINDA Hub

VISA Debit Card

Crowd Funding

SB Smart Money

Incubation Pod

AFRICA TRADING

How Corporates Meet Today's FX Market Challenges Cost effective solutions for measuring and managing corporate FX risk exposures Corporate treasurers and CFOs everywhere are confronted with the seemingly endless volatility and uncertainty that afflicts the global foreign exchange market. The weakness of the commodity sector, the general collapse of equity markets and the lack of clarity about the timing and scope of the next moves of influential international authorities such as the Federal Reserve Bank and the European Central Bank add to the confusion and promise no early respite. Treasurers and CFOs are tasked with protecting the value of their companies’ foreign profits, earnings, and investments – and this task has never been more demanding than it is today.

professionals whose market expertise enables them to plan and perform the required market interventions at the best available rates, in compliance with the organisation’s financial risk management policy.

Companies and corporations which are engaged in global commercial operations are naturally exposed to FX market fluctuations, impacting export-based revenues, import costs, and the value of overseas business and financial investments.

This article outlines some of today’s corporate treasury tools which provide practical help to meet these objectives.

Measuring these exposures can be a demanding technical exercise, perhaps involving the management of large and complex arrays of foreign currency bank accounts, committed future payable and receivable flows, and the most uncertain projected flows based on future sales, investments, and expenditures. Analysing these exposures requires sophisticated data management tools, to produce dependable reporting, and the identification of viable and effective hedging strategies to mitigate the underlying risk. Finally, the hedging program should be executed by

These complex requirements need a combination of several differ kinds of expertise, plus robust and effective technology support to produce dependable consistent best practice results. For many cost-conscious finance organisations, the continuing challenge is to fulfil foreign revenue and investment value protection within overall budgetary constraints.

FX Risk Management – Technology Overview Technology underpins effective FX risk management through the provision of effective communications, process management, and analytical tools which can liberate financial professionals from the need to struggle with data processing operations, and from working with inaccurate data. Today’s treasury technology can take care of complex issues such as managing the reporting of accounts from a network of diverse international banks, dealing accurately with different message formats and security and communications protocols.

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In contrast, spreadsheets lack the robustness and dependability demanded by contemporary audit standards to manage high-value financial functions such as treasury. Treasury Management Systems (‘TMSs’) provide the core functionality for defining and managing controlled and transparent treasury management operations, and for providing FX risk management decision support. Modern TMSs take advantage of technical advances such as Software as a Service (‘SaaS’) and web-based technology outsourcing to deliver cost-competitive solutions which take advantage of the economies of scale based on technical resource sharing and centralised service provision. Treasuries can enjoy cost effective technology services for daily processing, reporting, and risk analysis without the burdens of managing hardware, software and communications.

FX Exposure Measurement – the Cash Position The automated cash position is derived by collecting the up-to-date balances from a global network of multi-currency bank accounts. This information is consolidated into an accurate real-time cash position, with all natural offsets applied. In addition to providing treasury with the basis for effective cash mobilisation, it reveals the core FX exposure situation across the organisation. Also, integration with the company’s ERP and accounting system enables the reported FX exposure position to be adjusted to reflect all committed foreign currency payable and receivable flows, broadening the analysis.

FX Exposure Management – Forecasting More and more companies are now achieving high-quality medium-term FX exposure forecasting to extend risk visibility into the future. This involves using technology to gather commercial forecasts from a global network of operating subsidiaries and joint venture entities. The forecasts are automatically consolidated into future FX risk reports, using a time horizon dependent on the underlying nature of the business. Forecasting operates best in an environment in which performance objectives are set, and in which the central finance function feeds back actual data to the participating subsidiaries to support forecast quality improvement. Technology plays an essential role in operating a truly effective forecasting environment, to handle the necessarily complex data management requirements.

Hedging Policy Designing, implementing and operating a formal Treasury policy is an important corporate treasury management function, and it is one which is regularly mandated in treasury and finance department audit reports. The policy should feature some items relating to FX risk. These include rules about hedging procedure, indicating the levels of net exposure that must be mitigated by executing hedging transactions in the market. The policy should define what proportion (up to 100%) of exposures must be hedged, what level (if any) levels of mismatch are permitted, and which instruments may be used. Typically corporate hedging uses forward contracts and non-deliverable forwards, and some more sophisticated treasuries take advantage of lower cost option strategies to cover some or all of the risk.

Hedge effectiveness may be monitored by IFRS testing protocols. TMS technology is used to analyse exposures and propose specific hedging structures, to administer the hedge transactions, and to support the requirements of hedge accounting where implemented.

Hedging Strategy Effective FX hedging depends primarily on planning a program to achieve the required level of risk elimination cost effectively, and in compliance with policy. Corporates increasingly work with expert third parties, to construct an optimal action plan to eliminate the true exposures revealed by effective cash positioning and forecasting. The process must reflect the cyclical characteristics of the corporate’s business, and the expected behaviour of the market based on the relevant fundamental conditions, for example, global economic indicators such as GDP and inflationary expectations, combined with the impact of potential policy shifts. So achieving best practice hedging strategy design depends on the quality of business and FX market expertise available for the exercise.

Hedge Execution - Dealing Market operations, of course, require a specific technical expertise, needing experience and understanding of the key tactical factors which enable dealers to judge the timing of interventions to achieve the best available price performance over time. Corporate dealing is a distinct discipline from proprietary and speculative FX trading, where the primary objective is to generate profits; the vast majority of corporate treasuries simply deal to mitigate the risks of naked FX exposures, and hence to protect the value of the company’s foreign assets and income.

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Dealing is another area in which corporates often partner with trusted third parties to execute FX transactions effectively. Alternatively, many corporates use electronic dealing platforms to achieve automated FX order execution with authorised bank counterparties, in line with policy and current dealing limit utilisation.

In-house Banking Many large multinationals have centralised many of their treasury operations into global or regional in-house banks, usually based on the group treasury function. In-house banks are centres of excellence which assume some of the traditional functions of commercial banks, such as operating virtual bank accounts, and centralising cash management, funding and investment actions to enhance cash and risk visibility, minimise external borrowings and optimise interest income/expense performance. In-house banks can provide central FX dealing functions, enabling corporate subsidiaries to secure superior risk management services and dealing rates, and eliminating the costs and risks of running multiple dealing operations in the group. Typically, cover requests and deal details are inter-communicated between subsidiaries and the in-house bank via secure web connections, on a 24x7 basis. The details of permitted operations for a specific in-house bank depend on the regulatory and legal environments relating to them and their clients – the corporate subsidiaries. Traditionally the cost/benefit equation for in-house banking has worked best for large institutions, but today’s highly

efficient treasury services operations and web-based, scalable service delivery have brought the facilities and benefits of in-house banking into the budget range of many medium-sized organisations. In addition to enhanced FX hedging operations, many corporates benefit from in-house banking activities such as cash concentration, which streamlines FX exposure reporting by consolidating balances, and multilateral invoice netting, which streamlines the settlement of multicurrency inter-company invoices, cutting external FX dealing requirements to the minimum, and settling each subsidiary’s net position by single debits or credits (translated to their functional currency) to their in-house bank account.

Synthesis So, where does a specific corporate treasury or finance department fit into this analysis of corporate FX risk management? Size is not in fact the primary determinant: the key issue is each organisation’s Board level perception of the importance of FX risk to their bottom line performance. Finance history is littered with the corpses of companies who got it wrong, assuming that recent patterns of market behaviour would continue into the future, or that ‘natural’ offsets would be indefinitely sustainable. Today’s market volatility emphasises the immediacy of the issue. We have seen that large multinationals usually have the necessary resources to support the substantial in-house operations for running in-house banks, with the required professional teams and technology departments.

But what of smaller enterprises, which are painfully aware of the FX risks threatening their profitability and even viability, but which must operate under significant budget constraints? The prospect today is more positive than ever before, because of the possibilities which are now available through contemporary web-based treasury technology, and through partnerships with treasury services companies which can provide affordable and complementary resources to deliver a complete and fully effective FX risk management solution. The details of such a solution will vary in every case. For example, one company might need expert services in designing and executing an effective FX risk management strategy. Another might need back office resources to handle the technicalities of hedge administration, settlement, regulatory compliance and reporting. A third might need access to a powerful and flexible TMS to provide best practice technical support for securing, controlling and reporting its treasury operations. The challenges of setting up and operating a full internal treasury function to manage all aspects of FX risk as outlined here might seem daunting. In practice fully cost effective solutions can now be realised by working with a properly qualified professional partner. The modest cost should be seen as an insurance premium providing real protection against the seemingly endless turbulence of the FX market. The clear benefit is the effective protection of the value of the organisation’s foreign revenues and investments.

Hennie de Klerk CEO TreasuryOne

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AFRICA TRADING

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BEST CORPORATE BANK GHANA 2016

BEST E-COMMERCE BANK GHANA 2016

BEST CUSTOMER SERVICE BANK GHANA 2016

AFRICA BUSINESS

HIDDEN BARRIERS TO INTERNATIONAL ECOMMERCE SUCCESS By Guillaume Pousaz, founder of Checkout.com, a global international payments provider for small and multi-national eCommerce merchants. Following a 25 percent increase in worldwide online sales in 2015[1], it may seem that there is no stopping the momentum of global eCommerce growth. Many ambitious online retailers who have experienced success in their home market look to grow by taking their offering into other countries. However, it’s often not as simple as replicating their business model and offering international shipping options. From the payments perspective, there are a number of minefields that are hindering merchants from realising their growth potential and tapping into this opportunity.

alternative payment methods is exploding, especially in developing markets such as China, Brazil and parts of Africa, and these vary wildly from country to country. For example, any merchant looking to sell in the Netherlands needs to accept iDEAL as a payment method. iDEAL now dominates the Dutch e-commerce market, accounting for 60 percent of all online transactions and approximately 18 million payments each month. This means that Payment Service Providers (PSP) need to be versatile and fast off the mark in offering the right payment methods to support international growth.

When targeting specific countries, one vital piece of information is to know how locals prefer to pay. Surprising for many merchants, it’s not just the ability to accept Visa, MasterCard or Amex; in fact, alternative payments now represent approximately 50 percent of all online transactions. The number of local and

PSP Restrictions.

Know how local customers pay.

PSPs are pivotal to international success, however many fail to keep up with global trends, are built on older technology that doesn’t allow them to adapt quickly and don’t offer a wide range of local and alternative payment methods to match shopper’s preferences. Merchants should

be weary of signing a contract with a PSP unless they are certain the PSP is dedicated to continuous innovation. Despite the myths, switching PSPs to meet international requirements is a relatively simple process that should be painless for merchants and seamless for customers. Merchants can easily move their customer data over from one PSP to another without customers needing to re-enter their card data, regardless of what some PSPs claim.

Hidden Fees. Unfortunately, not everything is transparent in the payment market, which can be riddled with hidden fees. Many PSPs initially propose a low transaction fee, but will then add hidden fees such as monthly fees, PCI compliance fees, and 3D Secure fees on top – adding significant costs to each and every transaction. These added fees cut into already tight margins. Issue 4 | 109

AFRICA BUSINESS

Maximising the Approval Ratio. With the value of an online customer estimated to be $106 USD in the first 30 days[2], each and every buyer is fundamental to success. Achieving the highest possible approval ratio (the proportion of transactions approved by issuing banks) is critical in order to maximise revenues. Many merchants, as they expand internationally, will notice that their approval ratio decreases. The approval ratio varies greatly from one PSP to another and is based on a number of factors. Therefore it is important for merchants to assess which PSP can best service their international customer base. A key question is ask a potential PSP is whether they are a principal member and a direct acquirer of all major card brands (i.e. VISA/ Mastercard/ Diners-Discover/ AMEX/ UnionPay). Unfortunately low approval ratios can be the demise of otherwise successful online retailers. Innovate or Die. The online global retail market is changing rapidly. Technology developments and early adopting shoppers result in

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swiftly changing customer expectations. Successful eCommerce merchants need to match this pace and be aware of the inevitable redundancy of technology that is unable to adapt to the rapidly developing sector. Whilst merchants have to constantly innovate in order to stay competitive and retain their customer base, unfortunately in the payment market, this isn’t necessarily always the case. However, the right PSP built using the latest technology can play a key role here by ensuring that merchants are able to remain nimble, adapt quickly and stay ahead of the competition. Conclusion. In order to successfully navigate the barriers of international eCommerce payments, there are a few factors that should be carefully considered. And having the support of a Payment Service Provider that enables merchants to focus on what they do best is key. Successful merchants in their home territory often feel that it is just a matter of replicating their business model internationally. However as outlined in this article, there are many barriers to successful expansion, all within a merchant’s control, but often buried amongst the fine print.

Guillaume Pousaz Founder of Checkout.com A global international payments provider for small & multinational eCommerce merchants

https://www.internetretailer. com/2015/07/29/global-e-commerce-setgrow-25-2015 https://rjmetrics.com/resources/reports/ ecommerce-buyer-behavior

AFRICA FINANCE

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Financing Projects:

Increased Focus on Human Rights and Greenhouse Gas Emissions in Export Credit Agency due Diligence Project developers, export credit agencies and other stakeholders in energy and infrastructure projects which benefit from export credit finance will need to be aware of, and factor into their project planning, assessment and development, as applicable, recent changes to the Organisation for Economic Co-operation and Developmentâ&#x20AC;&#x2122;s Recommendation of the Council on Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence (OECD Common Approaches), which were adopted on 6 April 2016. The latest version of the OECD Common Approaches increase and expand the requirements for environmental and social due diligence for export credit agency (ECA) financed projects. While these changes affect all goods and services financed by ECAs, they are especially pertinent for project financings. The OECD Common Approaches aim to harmonise environmental and social assessment procedures so that the same competitive conditions apply for all ECAs.

Due diligence typically includes reviewing any environmental and social impact studies or reports produced by the project developer, site inspections, internet-based research, interviews with employees, and consultation with other stakeholders. The OECD Common Approaches apply to all projects with an officially supported export credit with a payment period of more than two years.

New human rights screening requirement Under the latest version of the OECD Common Approaches, ECAs will be bound to screen all applications to identify whether there may be a high likelihood of severe project-related human rights impacts occurring and, where such impacts are identified, to carry out further assessments. Previously, no further action was required beyond screening for applications for projects for which the share of the Adherent (an OECD member or non-OECD member which elects to adhere to the OECD Common Approaches) is below SDR 10 million (SDR =

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special drawing rights, a currency equivalent unit created by the International Monetary Fund) and which are not in or near sensitive areas, or for existing operations for which an Adherent’s share is below SDR 10 million. Now, where screening determines that there may be a high likelihood of severe project-related human rights impacts occurring, applications should be assessed irrespective of the Adherent’s share and, where appropriate, that subsequent review should be complemented by specific human rights due diligence. This is arguably the most significant change in the latest revised version and the greatest impact is likely to be on smaller companies applying for officially supported export credit. Larger companies may not need to make any changes to their existing processes as a result of the latest revised OECD Common Approaches. Under the 2012 version of the OECD Common Approaches, consideration of human rights impacts did not factor until the classification stage (and, at this stage, it was considered within the wider umbrella of ‘social impacts’ rather than as a standalone item) and classification was only required for projects for which the share of the Adherent was over SDR 10 million Larger companies are likely to have applied for export credit support in excess of this SDR 10 million threshold and, as such, been mindful of human rights impacts when making their applications. Further, the majority of such larger businesses have made public sustainability commitments and many, recognising that they are subject to public and investor scrutiny on social and environmental issues, publish sustainability reports. As such, their existing internal due diligence processes generally already place significant weight on

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human rights. By the time that the company applies to an ECA for export credit, it should have already considered the probability and scale of any potential impact on human rights of a project. Indeed, where there is a high likelihood of severe human rights impacts, the company will often seek to avoid the considerable financial and reputational risk that the project would carry and throw it out prior to making an application for export credit. Specific human rights due diligence is nothing new for most of these companies. Where a project applies to more than one ECA, the ECAs will often collaborate on due diligence, sometimes with one ECA taking the lead if that project falls within an area of particular expertise. In such joint due diligence efforts, ECAs which have already been applying a human rights impact criterion to all applications should impart their best practice. Whereas the primary aim of the OECD Common Approaches is to harmonise environmental and social due diligence processes for the purposes of ‘levelling the playing field’ between ECAs from a competition perspective, their secondary purpose of is to encourage knowledge-sharing with a view to enhancing the pool of collective international experience and expertise.

New greenhouse gas reporting requirements Adherents must report to the OECD Export Credit Group on the estimated annual greenhouse gas emissions from all fossil fuel power plants, and for all other projects where such emissions are projected to exceed 25 000 tonnes CO2-equivalent annually and such information has been provided as part of the due diligence exercise. Adherents should try

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to obtain and report the estimated annual in CO2-equivalent and/or the estimated annual direct greenhouse gas emissions by carbon intensity (e.g. in g/kWh) for the six greenhouse gases generated during the operations phase of the project. Adherents should also consider international standards and guidance relating to support for thermal power plants and nuclear power plants, such as the use of technology to reduce carbon emissions and sharing experience gained with respect to handling the potential impacts of nuclear power plants with other exporting countries.

Conclusion The OECD Common Approaches are, in themselves, part of a wider initiative to raise the bar in the international community with respect to guardianship of human rights and the environment. Subscription is voluntary so it can be presumed that Adherents to it seek to comply with this spirit of continuous improvement. This is the fourth revision to the original OECD Common Approaches, which were agreed in 2003, so staying ahead of the curve is not an easy task. Nonetheless, to the extent possible, companies looking to make applications for officially support export credit should, rather than adopting a formalistic compliance approach to achieve minimal observance of the conditions of the standards cited in the OECD Common Approaches, endeavour to meet the current most stringent relevant international standards.

Alex Blomfield Counsel King & Spalding Llp, London

Jessica Trevellick King & Spalding Llp

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Staying

One Step Ahead When the European Commission recently confirmed a one year delay in the implementation of MiFID II, the trading community of banks, brokers, financial institutions and independent advisors gave a collective sigh of relief. But is this delay really a blessing for banks? Markets in Financial Instruments Directive (MiFID) was first introduced on 1 November 2007 with MiFID II coming into play on 2 July 2014. However, the story doesnâ&#x20AC;&#x2122;t stop there. Since this point, the implementation of the proposed legislature amendments have been pushed back twice and has been subject to numerous changes. More than a third of firms spend at least one whole day every week tracing and analysing regulatory change, confirming one thing â&#x20AC;&#x201C; a traditionally conservative and slow to change sector is now likely to change often and rapidly as a result of regular reviewing procedures. So, although the delay in MiFID II provides breathing space for banks to prepare for the proposed amendments, such as increased transaction reporting and pre and post-trade transparency, the real lesson here is that banks should be utilising this time to action IT operational changes that will ensure they are ready for regulatory change at the point of announcement. This proactive attitude will provide banks with a competitive advantage as they can stay live in the market with minimal disruption.

Toeing the line of compliance The technology needed to fulfil transaction recording and reporting does not come cheap. For banks, implementing a back end IT transformation on this scale should go beyond meeting regulation and show a clear return on investment long before compliance officers come knocking on the door. The piece of mind in knowing that your bank meets all compliance criteria and is unlikely to face million dollar fines should be enough for banks to make these changes sooner rather than later and with regulatory matters consuming disproportionate amounts of board time this has never been more important.

Fraudster or false positive? With compliance regulation stepping up a gear, banks are feeling the pressure to put surveillance measures in place to reduce the risk of receiving hefty fines. With fines reaching the millions mark itâ&#x20AC;&#x2122;s a worthwhile task to try and uncover the fraudsters. Here lies the biggest hurdle. Most fraudulent behaviour happens on the phone but often banks and trading firms are blind when it comes to surveillance of voice. Banks currently spend huge amounts of money to outsource the manual monitoring of traders calls. Money aside, this method of surveillance is inefficient because it identifies a large number of false positives. Issue 4

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For surveillance of traders behaviour to be truly effective there needs to be an overarching holistic view of all communications including voice, text, email, chat and social media for the front, middle and back office. This way all communications can be put into context in order to get a better understanding of the trade from the first initial conversation to the close. Then a decision can be made on whether or not it warrants an alert. The amount wasted in terms of money, time and effort so that false positives can be manually sorted from the real alerts is undisclosed but in May 2015, the Financial Times reported that a large US investment bank had used unskilled people to screen emails at a rate of 200 messages a day. With phone surveillance, all investigators have to go on is the date of the call and the name of the trader who is assigned to that phone. If there is no adequate technology in place then investigations will be conducted manually and with regulators requiring information within set timeframes this could be costly. If biometric technology is in place the surveillance of all traders’ communications will be conducted under the radar until required for investigation but the best solution will be one that takes a proactive approach and alerts the compliance department when it picks up on suspected fraudulent communications.

What’s next? MiFID II regulations should not be treated as a one off with banks falling back into the habit of letting things look after themselves. The MiFID II revisions make clear that the regulations will face review on a regular basis and are likely to be modified often and rapidly. Banks, brokers, financial institutions and independent advisors need to develop the ability to adapt on a long term basis as new amendments are announced and implemented. The industry needs to develop a proactive strategic approach and move away from short term tactics. Companies need to be able to manoeuvre and adapt to changes in order to stay live in the market and a wise firm will begin planning and budgeting for a strategic solution that enables them to keep pace with changing regulations. Look for one that reduces the stress of managing risk and has development capability so will stand the test-of-time and you won’t go wrong.

The best tech solution will be one that has a richness of functionality and analytics, including context of voice content capability and, to be really first class, it should be able to detect and report true anomalies early – the benchmark is within 15 minutes.

Simon Richards CEO USA Fonetic

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Achieving the Happiness Halo in Banking Happiness is elusive in the world of banking. The problem is not acute. People aren’t leaving through unhappiness. In fact, they are resiliently stable. But there is a chronic problem, because people are generally not engaged. This makes it harder than it should be for banks to deepen their relationships with customers. Banks would love to see higher levels of product holding, yet struggle to achieve it. And it leaves banks vulnerable to disruptive digital business models, to the banking industry being ‘Ubered’. What banks are missing is more than just a quantitatively higher level of customer satisfaction or Net Promoter Score. It’s not just a matter of reducing the ‘hassles’ and smoothing the customer experience touchpoint by touchpoint. Happiness is as much about how we look forward to and look back on an event as it is about the event itself, so creating happiness is about managing the anticipation and the afterglow as much as the interaction. That’s the key to unlocking what we call the ‘happiness halo’. For decades, companies have taken for granted the notion that focusing relentlessly on improving customer interactions will lead to greater loyalty from the people who buy their products and services. The relevant metrics usually pertain to familiar questions: How well am I delivering in the moment? How are customers experiencing my brand across a range of touchpoints — call centres, websites, mobile apps, in-branch? This focus on improving interactions has not worked. In a Forrester survey, more than 80% of leaders say their companies are focused on boosting customer experience through incremental or radical improvements. Yet in 2013, only 8% of the companies in the Forrester Index achieved excellent customer experience scores. To resolve this dissonance, we at Lippincott conducted an in-depth study of customer happiness. We learned a lot, most importantly that we’ve been thinking far too narrowly about the ‘customer experience’.

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Happiness researchers find that upwards of half of someone’s happiness is built in moments of anticipation and remembering. Which means companies are missing moments when engagement might be more exciting and compelling for customers: before and after the interaction. To truly glow in the hearts of customers, radiant brands must exude the joy of anticipation and the warmth of remembering. When making decisions, we use our memories. It’s a simple fact pointed out by Nobel Prize-winning psychologist Daniel Kahneman, who coined the term “Remembering Self.” If we’re deciding whether to return to a hotel, repurchase a shampoo or revisit a store, it’s not the actual interaction we had that guides us — it’s the memory of that interaction. Furthermore, what makes for a great interaction might not necessarily lead to a great memory. Brands need to recognise the power of memories and take distinct actions to earn their favour. Researchers at University College London have developed a corollary of sorts to Kahneman’s “Remembering Self.” They’ve demonstrated that positive expectations influence a person’s overall happiness as much as actual experiences do. The interaction exists in between the “before” of the anticipation and the “after” of the memory. All three phases have distinct but interconnected influences.

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Box One illustrates nine scientifically grounded strategies for true customer happiness using this newly broadened conception of the customer experience: anticipation, interaction and afterglow. But can they work in the world of banking? Can you create a sense of anticipation about opening a bank account? It’s not obvious. Even Metrobank, which sets out to do things differently, offers two whole pages of tabulated information describing ‘What you need to open an account.’ Far from tempting and even further from being a treat. Our research into consumer perceptions of brands across industries suggests that it is both doable and necessary, in order to stay competitive. In multiple surveys across multiple countries, we consistently find that: 1. There are low-engagement categories, of which banking is one, where the leading brands score dramatically lower than the digital disruptors. Telecoms, utilities and insurance are others. 2. Even within these categories, individual brands manage to break out. First Direct in the UK, TD in the U.S. and Frank in Singapore are examples in banking. Orange and O2 have each done so in their categories for substantial periods.

EUROPE BANKING

3. When brands do break out in these categories, they do so simply by doing what leading brands in other categories do. They focus on helping customers do what they’re trying to do in life – and let their relationship with the customer follow naturally from that. They create a value surplus through their business model and then re-invest some of it in a trusted relationship, which continues to bring returns for both parties even when the original surplus has eroded. First Direct introduced 24-hour phone banking funded by the saving of not having branches, which continues to yield a distinctive relationship even now that its functional offer has become the norm. Lastly, they innovate an experience that goes beyond functionality, creating a world and way of doing things that people want to be a part of. There is no reason we couldn’t make people happy when they open a bank account or use other services. Give them something to look forward to and make sure they leave with an afterglow. Have a conversation that’s more about them and less about the bank. Surprise them with something you can do for them that they weren’t expecting. Put a pound of the bank’s money in the account to start them off (a minimal investment in the context of the customer acquisition cost). At the very least, ask yourself the question and set yourself the challenge, versus focusing only on the functional interaction and simply smoothing out hassles.

Simon Glynn Director of EMEA, Strategy Lippincott

Nine scientifically grounded strategies for true customer happiness: Anticipation Tease - What can your brand hide to build excitement during anticipation? Tempt - What can your brand expose to give customers something to look forward to?

Make it a treat - What

moments of your brand experience might be a limitedtime treat for customers, and how can you frame them that way?

Interaction

Afterglow

Immerse - How can your brand encourage customers to immerse themselves in your experience?

End strong - What’s your “last impression” and how can you make it a happy memory?

Direct - How can you focus

Surprise - What surprises

choice in a way that feels helpful rather than limiting, easing decision-making stress and post-interaction regret?

Elevate - How can you make

customers feel superior, even to other customers?

can your brand deliever to bring unexpected joy to the afterglow

Reinforce and rewire -

What can your brand do to reinforce your positives and rewrite your negatives?

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The GDPR

– New Obligations on Financial Services Businesses

Robert Lands, head of intellectual property at law firm Howard Kennedy, explains how the new General Data Protection Regulation (GDPR) will change the way financial services businesses manage data. Let’s start with the good news. The current obligation to register with the Information Commissioners Office (ICO) will be abolished, along with the criminal offence of failing to do so. In its place, the GDPR introduces a raft of “data governance” obligations which put the emphasis on organisations carrying out self-assessment exercises and documenting their data processing. The idea is to move away from box-ticking registration, to a culture where the use of personal data is scrutinised and justified. In some cases, such as when core activities require “regular and systematic monitoring of data subjects on a large scale” businesses will be required to appoint Data Protection Officers. Data Protection Officers must have a direct reporting line to the highest level of management and have a protected employment status - they cannot be dismissed for performing their functions. Businesses are encouraged to adopt “data protection by design”, meaning that they should think about the data protection consequences of all their activities. They should regularly audit the data they hold and document the reasons for doing so. They should train staff in data protection and adopt good practice techniques such as “pseudonymisation” to make it harder to identify individuals, for example, by using employee numbers instead of names in statistical analysis.

Where an activity might impact on privacy more seriously, such as monitoring people, or processing sensitive personal data, organisations will be required to carry out formal “Privacy Impact Assessments” to document the risks and the safeguards to be put in place. In certain cases, they will also have to notify the ICO of the Privacy Impact Assessment and seek permission before undertaking the proposed activity. Organisations also have transparency obligations, meaning that it will be obligatory to say more about what they are doing. These requirements go beyond the typical privacy policy we see today. In addition to setting out the purposes for processing and the identity of the data controller, they include explaining the legal basis for the processing, the period(s) for which the data will be retained and people’s legal rights - including that they have a right to complain to the ICO. Businesses will therefore need to update their privacy policies and look at whether additional statements and disclosures need to be given, including at the point of data collection. This is especially true if a business is relying on the individual’s consent. Under the GDPR consent must be “unambiguous” and separate consents are required for each processing activity. Individuals must be presented with a sufficiently granular and genuine choice.

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The obligations in the current Data Protection Act 1998 apply only to “data controllers” (organisations which exercise control over the processing of personal data), but the new GDPR also applies to “data processors” (those who process data on behalf of others). This means that many businesses which are not subject to the current regime, will now be liable. Worse, data processors will now have an obligation to inform the data controller if the processing they are asked to undertake is unlawful. Meaning in effect that suppliers will have to police their customers’ activities. Data processors will also have an obligation to notify data controllers if there is any unauthorised loss or damage to personal data. And the data controllers themselves will have an obligation to notify the ICO within 72 hours of such an event. Unless an exemption applies, they will also have to inform the individuals whose data has been compromised. At the moment, only communication service providers (think Talk Talk) have to do this, but soon it will apply to all data controllers.

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Individuals have greatly enhanced rights under the GDPR and ensuring that they can exercise those rights will place an additional burden on business. The existing “subject access” right, broadly the right to see the information processed about you, will be extended. In addition, individuals will have new rights, such as the right to erasure (the “right to be forgotten”), a new right to require organisations to “restrict” processing while complaints are investigated and a right to “data portability”. Portability is similar to subject access, but data has to be provided in a machine readable format and an organisation can be required to send the data directly to a new data controller. In other words, customers can ask a business to port their data to a new provider. This may help some businesses in lowering barriers to entry to certain markets, but it also means that businesses must develop systems to cope with portability requests.

EUROPE FINANCE

Robert Lands The GDPR will make some things easier for businesses, especially those who trade across Europe, as the law will be harmonised to a greater extent. However, for a great many it will make life that bit harder, especially in transitioning to the new regime. Further, the potential fines for getting it wrong are to increase massively. Currently, the ICO can fine up to ÂŁ500,000. This will rise to the greater of 20 million Euros or 4% of the worldwide turnover of a business. Given this, businesses may want to examine their insurance cover and should in all cases ensure the data protection is moved higher up the boardroom agenda.

Partner and Head of Intellectual Property Howard Kennedy LLP

Robert Lands is a Partner and Head of Intellectual Property at Howard Kennedy LLP. He can be reached by email: Robert.lands@howardkennedy.com. Visit www.howardkennedy.com or follow @howardkennedy_

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Transforming the World of Corporate Lending Post-crash banking regulation is transforming the world of corporate lending – for the better

When discussing the impact of financial regulation – particularly big, sweeping changes that encompass multiple jurisdictions and authorities – we often talk of ‘unintended consequences’, and rightly so. We also tend to assume that any unintended consequences will be negative. But it is quite possible for an unintended consequence to be positive. Happy accidents do happen. The ongoing impact of post-crash banking regulation on corporate lending is a case in point. Thanks to reforms such as Basel III, banks must now hold a far greater portion of their capital in reserve. Some banks may face even stricter requirements in future; only this month Sir John Vickers called for UK banks to be forced to shore up their financial buffers further in the face of renewed market volatility. These measures are primarily motivated by a desire to make the overall system more stable, to ensure adequate reserves and liquidity in the case of another major shock. But part and parcel of this is the fact that it is now far harder and less profitable for banks to lend to a range of businesses. As a result, banks have been steadily withdrawing from large areas of corporate lending as they look to reorient their focus to key relationships and diversifying risk. This has left a gap in the market: many corporates are finding it near impossible to get the level of financing from banks that they previously relied upon.

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The administration of loans (and other aspects of corporate lending such as debt restructuring) is a good example. Historically this was usually done in-house by one of the banks providing the finance. As well as creating potential conflicts of interest, the low margins at play meant that it was treated as an afterthought – very much a back office matter. Its low priority status meant that there was no real focus on service or cost-efficiency. Processes were cumbersome and dogged by long turnaround periods. And the new regulatory environment banks find themselves in would only make this worse. But banks are withdrawing from these services just as they are from lending itself. And into their place are stepping new, smaller, independent providers. Unencumbered by banking regulations and focused entirely on loan administration – and using highly specialised built-for-purpose technology – they are able to provide a far more efficient, cost-effective, and client-focused service. This has had the effect of dramatically reducing average turnaround times for new or complex arrangements. This sounds bad, but it isn’t. For elsewhere in the economy there are plenty of institutional investors sitting on cash, struggling to find decent, reliable returns in a low interest rate environment. Corporates that are now struggling to get bank finance represent ideal investments. Many institutions are more than happy to trade the liquidity of bonds for the higher returns these investments promise. And hedge funds – along with other alternative providers – are stepping into the gap to provide direct lending, linking these two segments of the economy together.

With these changes, we are unlikely to see a return to the old status quo. When considered alongside the rise of crowdfunding platforms and other new, disruptive elements from the fintech space, it is clear that we are at an exciting juncture regarding the evolution of the corporate lending ecosystem.

In Europe alone, fund managers have approximately $41 billion ready to deploy in direct lending deals, twice as much as in 2012 – 61 direct loans were made in the region in Q3 of last year alone, up 14 per cent from the previous year. Globally, the appetite is clear, and fundraising no problem at all; the world’s top ten private debt funds now hold $244 billion in cash, a 37 per cent increase on 2014’s figure of $179 billion. This seismic shift in the corporate lending ecosystem is to be welcomed, as it is creating new opportunities and mutually beneficial relationships while at the same time diversifying risk. More than that however, the move away from banks is catalysing a shakeup in how things are done, leading participants to rethink and reinvent moribund and outdated processes that were historically ‘good enough’, but never optimal.

Mia Drennan CEO & Co-Founder GLAS

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Banking on Trade Stores Standfirst: Minimising Risk & Maintaining Compliance

Falling foul of the regulators is an expensive business. The FCA levied eye-watering fines just shy of £1 billion on banks in 2015 - not to mention the costs pertaining to possible litigation or the time spent addressing the problem or salvaging a bank’s reputation. And if there’s one thing you can bank on, it’s that more fines are on the cards as regulatory requirements – like MiFID II and BCBS29 – demand even tighter controls and more granular levels of reporting. But the pressure arising from compliance and the changing regulatory framework can be reduced. By getting their data in order now, banks can be fully prepared. There is a growing realisation in the financial services industry that one answer to this lies

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in the deployment of a Trade Store (or Data Hub) – a virtual filing cabinet that holds a single source of truth for all trade events within a bank. With this Trade Store approach – effectively a trade lifecycle management system – every single ‘event’ that happens to a trade or asset is recorded, allowing a full audit trail for auditors and regulators. Over the last few years, I have been involved in many Trade Store discussions and deployments. The common denominator for these has been the constraints imposed by technologies conceived in a different era. Technologies which have become cumbersome, expensive and slow to maintain. For valid historic reasons, banks frequently have a multitude of individual product lines and trading systems that feed into specific information

EUROPE BANKING

silos which keeps data separate and hinders organisations from achieving that single source of truth. The flurry of M&As hasn’t helped, creating even more trading system fiefdoms and silos. New regulatory pressures dictate that these now have to be cobbled together somehow to provide an integrated, consolidated view for reporting purposes. Some banks have tried - and failed - to use their legacy relational databases to build a Trade Store. The changing nature, variety and complexity of trading data does not lend itself to the rigidity of a schema-based relational model. With each separate Trading system comes a new schema requiring complex interfaces to reconcile the disparate fields. If anything changes, which of course it does, at a minimum everything needs to tested or, more frequently, re-designed. An additional constraint with relational databases is the need to know what queries you will run in the future whilst still in the decision stage. Our customers find that relational databases are simply not agile enough to integrate mission critical data across many silos in a timely and cost-effective manner. Some of the world’s largest investment banks have solved the conundrum by building a Trade Store on an Enterprise NoSQL database platform.

A NoSQL database is flexible, schema-agnostic and specifically designed for rapidly changing, multi-structured, complex data applications – like a Trade Store. Choosing the right NoSQL database is important though: Open source variants do not have all the enterprise-grade features required. These features include support for ACID transactions, government-grade security, high availability, elasticity or scalability and disaster recovery. An Enterprise NoSQL database marries the two so financial institutions can benefit from a flexible, agile and scalable platform while knowing its data will be secure, never lost and always available. In addition to finding a database with both enterprise and NoSQL traits, it’s good to find one that embodies innovations that are ahead of the market. Combining technical innovation and banking insights, one leading investment bank already working with the MarkLogic database to deploy a Trade Store recognised the future importance of determining what was known at any particular point in time. As a result of these discussions, a new and increasingly important feature called Bitemporal data management was developed. MarkLogic’s Bitemporal capability allows banks to minimize risk through “tech time travel”—time stamping and rewinding documents to identify changes by looking at data as it was over the course of time without having to reload data backups. This is critical to maintain and demonstrate compliance with, for example, Dodd-Frank data analysis processes. By adopting a ‘Regulatory Book Of Record’ approach, not only are banks able to avoid the prospect of hefty fines, but they can also reduce costs because there is no longer a need to

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develop and maintain multiple different systems. In the new Enterprise NoSQL world, the system is built on a commodity scale-out architecture. The result is a lower cost per trade. To cut costs and introduce efficiencies, a leading investment bank - booking an average of 100,000 derivatives trades a day, resulting in about 32 million live deals - reengineered its disparate legacy derivatives trading architecture. The bank deployed MarkLogic’s Enterprise NoSQL database, giving it a single unified view of derivatives trades. It replaced 20 Sybase databases with a single database, making trade information retrievable as well as actionable in real-time. As well as enhancing compliance reporting, it has dramatically reduced maintenance costs and the bank can now develop and deploy new software – and therefore launch new products in response to the market – much more quickly. Another global investment bank built a Trade Store on the MarkLogic database in just six months. This acts as a single source of truth for all trade events and related data, and ensures data consistency. More than 30 Trading systems were connected to bring vast amounts of unstructured and structured data into one central repository and make it accessible by tens of line of business’s downstream systems. This allows the bank to handle various reporting requirements, including regulatory reporting, and helps to protect against regulatory fines.

currently holds information on over a billion trades and ingests, in near real-time, up to 2 million trade events and reference data records per day from upstream production systems, including validity and duplication checks and version management. Importantly, the system can also be quickly adapted, extended and enhanced to meet changing business and regulatory requirements without redesigning schemas or ETL (Extract, Transform and Load). Looking ahead, the idea of a Trade Store on steroids used to evaluate aggregated risks – for example for BCBS 239 - is being mooted by some banks. If they know where they stand with regard to a risk-adjusted position at any one time, they can work out how much capital they have available to trade with as well. As BIS highlighted in its recent report on the adoption progress of the BCBS 239 risk data governance principles, ‘Banks should critically examine their data architecture and data adaptability capabilities’. It will be interesting to observe which banks take a strategic approach to regulatory reporting and align to the European Banking Authority’s public ambition to have a daily electronic regulatory submissions pipeline by 2020. The countdown has begun. Banks need to act now to get their digital filing in order to avoid falling victim to massive – and wholly avoidable regulatory fines.

Today, the same Trade Store takes inputs from between 20 and 30 trade sources and three reference data sources, and unifies and stores more than 25 TB of unstructured and structured data in one single searchable repository. It

Adrian Carr Senior Vice President MarkLogic

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Biometrics

Bots

Increasing levels of sophistication in the tech used by hackers and fraudsters is making it harder for financial institutions to defend themselves. Malware and phishing scams are targeting the industry, with a particular focus on online lending and mobile banking. Not every attack is being thwarted. Banks, lenders and funds are losing money to fraud and it seems only a matter of time before a substantial attack becomes prime time news. When it does, the institution in question may find themselves offline for days, suffering costs that reach into the millions and reputational damage that could last a generation. The risk for financial services companies is twofold. On the one hand, there is the threat of attack itself – on the other, public awareness. Customers know that the wrong people want their data and money. So, they are unlikely to want to bank with any institution that isn’t putting the best security technologies on the frontline. Financial services bodies must provide high security that doesn’t compromise on the customer experience. People want to bank with ease, but also securely. The need to remember complex passwords and cross a number of security checks can turn convenience into frustration. Which is perhaps why we are seeing financial institutions experimenting with letting customers choose a PIN code made up of emoji’s. The argument is that millennial users will find these more intuitive and easy to remember than traditional passcodes. While the emoji example may seem frivolous, it is an example of the ways that institutions are increasingly looking at more seamless and innovative technologies to facilitate account security. It is a frontier that might start with emojis, but also includes bots and biometric technology.

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Biometrics in 2016… While once seen as a future-gazing technology, biometrics is readily used as a security tool today. Fingerprint recognition went mainstream with the launch of the iPhone 5S, and voice, facial and eye recognition measures are becoming increasingly common methods of security. To use a recent example, Unisys partnered with BehavioSec to produce a prototype for Nationwide’s mobile banking app that recognises how users hold, type or swipe into their phone – and uses that as an authentication method. These forms of biometric data are all unique to the individual and difficult for fraudsters to replicate. When used as part of a multifactor authentication process, these biometric measures add a layer of security on top of existing methods to ensure that only the customer in question can gain access to his or her account. However, the problem for financial services companies is that the risk factor of introducing biometrics can be much higher. The regulatory landscape is quickly catching up with these innovations and ensuring these authentication methods are compliant will become more complex. The revised Directive on Payment Services (PSD2) and the General Data Protection Regulation (GDPR) both introduce measures to govern the biometric data institutions store on their customers – and the harsh penalties involved if this data is misused. Institutions must also consider that biometric data, such as fingerprints, are possible to replicate – if the hacker in question has the right technology and determination. Thus the biometric and bot tech financial bodies use not only has to be sophisticated, it has to be sufficiently more sophisticated than whatever the fraudsters are using at the same time.

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It will not be enough to think that fingerprints will do the job, then to allow the end user to get on with it. Instead, banks must look at emerging tech and consider how it can contribute to the security solutions they are duty-bound to provide.

The key for RBS will be to get Luvo working alongside its security measures, arriving at a sweet spot of better service and better encryption.

â&#x20AC;Śand biometrics in 2026

The journey into future technology for financial services doesnâ&#x20AC;&#x2122;t have a firm stop. Instead, it is a constantly evolving and moving thing, with new products and ideas redefining it all the time. And customers know that.

The next generation of authentication methods will be driven by biometric pioneers, who are currently looking to make retinal and iris identification standard, and are moving forward with heartbeat, voice, gait and even typing rhythm recognition. All are so personalised to the user that they all but guarantee safety and encryption. These can be augmented with behavioural data such as user location data. So if a login attempt is made outside the regular location of the customer (for example, not at home or the office) then institutions can flag this as suspect. Or if an access attempt is made at a time when the customer is not normally active (say, at three in the morning on a weekday), then banks can have the confidence to intercept and challenge it.

Service and reward

As such, the onus is on banks and lenders to offer their consumers tech that improves service and gives them peace of mind. The challenge for every institution is to begin the push towards biometrics and bots today, becoming financial market leaders, rather than followers.

But what about the impact of these technologies on the services users receive? Future financial technology cannot be all about fraud prevention. It will also have to give users a better experience and save money in real-term cost efficiencies. Taking that lead, RBS are currently in the process of introducing an AI solution called Luvo to answer customer calls. Luvo is programmed to mimic human empathy and is very much the first step on a path towards more automation and AI in the sector. Naturally, there is the risk of a disconnect between the bank and its customers, but the cost saving rewards are too pronounced to be ignored.

Adam Oldfield EMEA Finanical Servicers Director Unisys

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Going Paperless

Is the Industry Ready for Polymer Cash? By Andrew Crowson, Managing Director of Cummins Allison in the UK

With the UK’s bank notes on the brink of the biggest change since the withdrawal of the £1 note in 1988, many financial institutions are already asking themselves how they will be affected when the new polymer £5 notes are rolled out this September. If all goes according to plan, businesses and consumers will soon be reaping the benefits of the new currency, such as increased fraud prevention and durability. Yet alongside these benefits, the industry needs to be certain that it is 100 percent ready for the new notes and the technical challenges they may introduce. The benefits promised by the new polymer notes are clear. For one, security and fraud prevention will help minimise losses and counterfeit; potentially saving vast quantities of money. The Bank of England removed almost £5 million worth of fake notes last year alone. On top of this, the new notes are more durable – the Bank of England claims they will last 2.5 times as long as the current paper versions, meaning less damaged notes to cause issues. However, financial institutions need to be ready for the change to polymer in order for the transition to go smoothly.

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Change in progress As changes to bank notes since 1988 have involved only size changes or cosmetic changes to the design, putting the processes in place to deal with such a major change will be new to the vast majority of organisations. The move to polymer is much bigger than a change in size: every part of the new notes, from design to dimensions to fraud prevention technology, will be radically different. As a result, the industry will need to examine the technology it uses; the processes it puts into place for dealing with cash; and the education it gives its workers and customers, in order to make the transition as smooth as possible; especially as for a period organisations will have to deal with both new and old £5 notes at the same time until the old paper currency is phased out. Keep everyone informed Training will be an essential ingredient to a smooth transition, especially since employers are unlikely to have pre-existing processes in place to deal with the issues. With employees being the front line between the organisation and consumers, this training will become even more important. Essentially it will allow bank employees to become experts who can assist banking customers and instil confidence. In particular, training will need to cover how polymer currency differs from the paper notes that workers are familiar with, as well as making them aware of any changes in equipment. This will help eliminate many of the issues that might arise as polymer notes enter circulation. Technical challenges shouldn’t slowing down your bank With the deadline being so close, banks need to update note counting equipment as a matter of urgency. The changes in texture and size alone, together with the new anti-fraud measures, mean that a bank’s cash

EUROPE FINANCE

counting equipment will need to be updated to cope with the new notes. The material itself adds new challenges: polymer notes have a tendency to cling together – especially when new – making manual counting more difficult and potentially increasing reliance on cash counting machines. It is therefore very important that cash counting equipment has adequate anti-static capabilities. The last thing that financial organisations need is cash counting equipment miscounting or failing entirely as a result of the introduction. Cutting corners isn’t the answer Although there will be support available from the government and the Bank of England to help with the transition, it’d be unwise to leave things to the last minute and risk not being ready. While there might be a temptation to put in place temporary solutions to deal with the new polymer notes, this is unlikely to pay off in the long term. Given that new £10 and £20 notes, as well as the new £1 coins, will follow in quick succession, short term fixes will fall short; especially as any confusion felt by banks will be amplified 10 fold for customers. Being prepared and putting everything into place now will mean that there will be far less disruption as currency continues to evolve, ensuring ‘business as usual’ for financial institutions. It’s understandable that some in the finance industry might view the introduction of the new £5 polymer note with some trepidation. However, it is important not to delay putting in place the right processes and equipment to deal with the challenges that the new currency brings. By acting now, financial organisations can ensure they are ready for the changes polymer brings and can ease the transition from cotton paper bank notes. There are clear business benefits that come with polymer notes. However, these can only be taken advantage of if there’s the right equipment and processes in place before they are introduced.

Adam Oldfield EMEA Finanical Servicers Director Unisys

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How could IFRS9 affect your collections and recoveries strategy? Debt sale: a knock-on effect?

Collections can influence severity of loss

Right now, most businesses are well on their way to coming up with a compliant solution for the new accounting standard IFRS9, which becomes mandatory on 1 January 2018. Management teams are also starting to understand the direct impact of IFRS9 to their profit and loss (P&L) and as a result, thought naturally leans towards the secondary impacts of the implementation of this regulation.

Traditionally, the relationship between collections and impairment is one way under IAS39. Collections activity can influence the severity of the loss and in the best case, can return accounts to order. This impacts the impairment line in two ways, the amount recovered and the direct cost of collecting it.

There are of course many secondary impacts to consider, both operational and financial, such as the opportunities for improved pricing or collections strategies and the use of forbearance, the implications of debt sales, the requirements for monitoring and validation of more sophisticated models and the impact on capital. One of the most difficult impacts for a business to predict is the impact on collections strategy and performance and the knock-on effect that this could have on debt sale across the industry. There are two main areas we should be thinking about here; the relationship between collections activity and impairment and the value of existing portfolios when measured at Lifetime Expected Loss (LEL).

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The reason for this very one directional relationship is the way in which impairment is calculated currently under IAS39. It is estimated based on incurred loss, so a binary trigger event has to occur before a loss is recognised in the P&L, these binary events typically occur as a result of financial difficulty and manifest themselves as missed payments (delinquency) or help with payment schedules. Often, once these states are no longer applicable and the customer is back to paying their regular schedule, and are up to date, these assets are treated as performing and only a small amount of provision is held. This has no ongoing impact on the provision of that asset. Under IFRS9, these binary measures are only used as back stops, either for entry to Stage 2 or entry to Stage 3 but critically a â&#x20AC;&#x2DC;cureâ&#x20AC;&#x2122; period is expected, similar to that used in IRB (Internal Ratings Based-approach) to indicate when an asset has not only got back up to date but is also not likely to re-default in the near future.

EUROPE FINANCE How this is assessed is still up for debate but it does extend the period for being treated as Stage 3, even if the account is up to date; for example if interest has been reduced or frozen on a credit card.

Treatment of early and pre-arrears customers – will this change? In addition to this, IFRS9 is an Expected Loss (EL) approach and places emphasis on monitoring the change in risk of default over the lifetime of the asset. If the change in risk of default is ‘significant’ you are required to move an account to Stage 2 and recognise lifetime losses, this can have a significant impact to your P&L. Most organisations are using their underlying scorecards as a base to this assessment, and most scorecards will factor previous defaults in the overall risk of default, so by applying forbearance, you not only commit to recognising assets in Stage 3 for longer but also increase the likelihood of remaining in Stage 2 for a period long after they have cured, recognising lifetime losses all through that period. This raises the question, ‘will this change the way an organisation treats early and prearrears customers?’ It might if they believe that the majority of customers will cure without intervention and by applying early forbearance they disadvantage themselves by recognising lifetime losses unnecessarily early. This may have implications for customers that do rely on the help and support lenders provide, even if they do so reluctantly which is unlikely to be the intent of the standard and may not be viewed favourably by other regulators.

Debt sale and valuation Another interesting consideration is the affect on valuation and pricing. Under IAS39 you only consider lifetime losses when the impairment event has already happened so you only hold a small amount of provision for your entire up to date book. When you have to hold lifetime losses for a significant portion of this up to date book under IFRS9, organisations may find that some of these portfolios are no longer profitable, despite being regular payers. This situation is also exacerbated by the interplay between capital and impairment. Without going into too much detail, as a general rule, more capital resources will be required under IFRS9, which could lead to an increase in the cost of capital overall and certainly per pound lent.

Pushing more performing debt out to the market This could lead to organisations wanting to push more performing debt out to the market. If this happens there will likely be lower returns for organisations, despite the debt purchasers buying better quality debt. There is a significant competitive advantage to being first to market with this and it will be interesting to see how organisations approach this. Whilst none of this is certain, it is definitely food for thought and IFRS9 won’t be the only consideration for the lenders. Customer impact will definitely play a part and it is more than likely that the FCA (Financial Conduct Authority) will be interested in the results.

Damien Burke Head of Regulatory Practice 4most Europe 4most Europe Ltd is a specialist credit risk analytics consultancy with offices in London and Edinburgh. The company provides a range of products and services across credit risk, fraud and pricing, working with blue chip clients predominantly in the retail banking and mobile sectors. The company offers a flexible, competitive model, either working with clients to manage regulatory change or delivering and implementing business critical solutions.

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Working with the Senior Managers Regime As of March, the new Senior Managers Regime (SMR), designed to improve individual accountability in the banking and finance sector, is in full effect within the UK. According to the Bank of England’s Prudential Reporting Authority, the SMR “is aimed at supporting a change in culture at all levels in firms through a clear identification and allocation of responsibilities to individuals responsible for running them”. Under this new regime, banks and other regulated financial institutions are now required to identify all individuals who hold a Senior Management Function (SMF), so that those individuals can be held accountable for any misconduct that falls within their areas of responsibilities. It’s clear that the regulators are serious about improving accountability in the financial sector. If responsible individuals are to avoid criminal sanctions potentially being imposed upon them for noncompliance, they will need to be absolutely certain that their firms have all the necessary policies, procedures and processes in place to allow them to do their jobs and remain within the law.

The first step is for firms to clearly define the responsible roles (i.e. the Senior Manager Functions), so they can inform the regulator who is performing those roles, and which areas they’re responsible for. However, it’s worth emphasising that this is not just a one-off action; firms can’t just register their senior managers with the FCA and leave it there. It’s an ongoing process, where senior managers and the roles they perform must be reviewed on a regular basis to ensure those individuals are still fit, proper and performing their functions correctly. It is important to note that these new regulations do not just apply to the individuals who perform Senior Management Functions. Every firm must also now implement a Certification Regime, to certify that employees carrying out “significant harm” functions – who are not Senior Managers – are also fit and proper to perform the functions that are considered to carry risk. These employees also need to be regularly assessed. Under the new regime, firms are now expected to put processes in place for certifying every individual who

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falls into one of the above two categories. Of course, this needs to address ongoing issues, such as when people change roles or get promoted, people leaving the firm and others coming in, temporary cover for things like maternity leave or compassionate leave and so on.

which can be tied back to what’s actually going on within the organisation right now. This includes automatically flagging and highlighting elements that could potentially be breaching specific Conduct Rules, so that appropriate action can be taken and, where necessary, reported to the regulator.

Another aspect of the SMR is that every firm needs to identify and implement a set of Conduct Rules, which then need to be monitored on an ongoing basis to ensure that they are being adhered to. All relevant individuals must be made aware of the Conduct Rules that apply to them and trained appropriately. Firms also need to inform the regulators when those rules are potentially being breached and by whom.

It is important to note that the implementation and ongoing management of the SMR is not an isolated function that happens on a stand-alone basis. One of the key benefits of Intelligent GRC and integrated BPA technology is that it allows SMR compliance to be fully integrated with a firm’s ongoing business, so the entire process becomes much more meaningful. This additional clarity means there is less scope for error and misinterpretation of rules and regulations, as it becomes much easier for the organisation to actually track, monitor and manage the whole process. As a result, compliance becomes much more manageable with fewer unwanted surprises.

As it is the Senior Managers’ heads that will roll in the event of serious failings within their part of the organisation, they will want and need the ability to actively monitor for breaches of compliance and conduct by their staff, which means closer collaboration between their lines of business, HR and Compliance departments – even bringing more compliance monitoring into the front office. While none of this is simple or straightforward, it can all be made more transparent, more controlled, more manageable and more agile through the use of appropriate Business Process Analysis (BPA) technology and Intelligent Governance, Risk Management and Compliance (iGRC) solutions. This type of technology allows firms to not only document the roles and functions of their named Senior Managers, but also to track the workflow around those functions and run automated real-time control testing,

In conclusion, the firms that are able to rapidly and clearly design a set of processes around these new policies, and implement those processes in an integrated way, will be in a much stronger position in terms of compliance, enabling their Senior Managers to sleep a little easier at night.

Nigel Farmer Solutions and Industry Director of Capital Markets Software AG

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