Global Banking & Finance Review Issue 2 - Business & Finance Magazine by Global Banking & Finance Review®

Issue 2

HUSSAIN AL QEMZI,

CEO NOOR BANK UK £9.95 NL €14.00 USA $15.50 CAN $20.00 SGD 21.00 AED 57.00

Af ri c a | Am er ic a s | Mi ddle Eas t | Europe | As ia

www.globalbankingandfinance.com

WELCOME CEO and Publisher Varun Sash Editor Wanda Rich email: wrich@gbafmag.com Editorial Coordinator & Analyst Sandy James Web Development and Maintenance Anand Giri Client Service Manager Michelle Farrell

FROM THE

editor

Head of Distribution Subban Bellie Project Managers Megan Sash, Peter Barron, Manuel Carmona, David Dineen, Oisin Kavanagh Business Consultants John Davis, Ronita Gosh, Neil Harris Allan Mendes, June Smith

We are excited to present to you the second print edition of Global Banking & Finance Review. For those of you that are reading us for the first time, welcome.

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Issue 2

This past year I was given the opportunity to meet with several industry leaders. In this edition you will find engaging interviews with leaders from the financial community in every section and insightful commentary from industry experts. Featured on the front cover is Noor Bank CEO Hussain Al Qemzi. In September of 2015, I traveled to Noor Bank’s offices in Dubai to speak with Hussain Al Qemzi, CEO, and Waleed Barhaji, Business Head of Consumer Finance, about the bank and its consumer finance business. I hope you enjoy this interview and the other interviews 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

Be sure to check out our online publication at

www.globalbankingandfinance.com Connect with us on Twitter: @GBAFReview, Google+ and Facebook: globalbankingandfinancereview

CONTENTS Banking in Ghana

6 PPP Financing in Latin America

Hussain Al Qemzi, CEO Noor Bank

Moving fprward in Vietnam with SCB

118

inside... BANKING 34 Innovate, Adapt and Scale

BUSINESS 22 Watch the sales come in

FINANCE 21 It's more than leasing

41 The importance of operational

50 Bitcoin XT, The next generation

Juan Manuel Matheu,CEO, Banco Falabella

Success in modern banking

John M. Collard, Chairman, Strategic Management Partners, Inc

Neil Sholay, Head of Digital, Oracle

Challenging The Status Quo â&#x20AC;&#x201C; Innovative Banking Solutions In Chile

With our specialization we go beyond banking services

Dr. Gerardo Salazar Viezca, Chief Executive Officer, Banco Interacciones

77 Regulation and Compliance

Manish Chopra, SVP, Global Risk Services, Genpact

58 Brazil The land of opportunities

for merchants

Ralf Ohlhausen, Chief Strategy Officer, The PPRO Group

in Saudi Arabia

104 Managing transformation in the

Abdulrahman H. Al-Sughayer, Secretary General, Chief Governance,Compliance & Control Officer, Banque Saudi Frans

Using small data to catch big fraud

Nadeem Shaikh, Founder and CEO, Anthemis Group SA

change in driving risk management improvements

Issue 2

utilities sector

James Stirton, Senior Solutions Consultant, EMEA, Allegro Development

108 Avoid Contract Pitfalls during Mergers and Acquisitions

Toby Hannon, Vice President EMEA, Seal Software

Samuel Akinniyi Ajiboyede, Group Managing Director, FleetPartners Leasing Ltd

or the end of the line?

Judith Rinearson, Partner, Bryan Cave LLP

55 Dodd-Frank: what happens next? Karen Winter, Sales and Marketing Manager, Fonetic

92 Despite all the attention, SME finances is still fundamentally Broken

James Sherwin-Smith, CEO , Growth Street

134 Defining Digital Differences amid financial disruption

Christopher Evans, Director, Collinson Group

142 Consumer Finance in Vietnam Pham Minh Hang, StoxPlus

CONTENTS The Chronicles of Currency Wars - China

60 Trading In Europe why, how, and why now?

U.S. Investor Immigration Program

126

Private banking in Qatar

TECHNOLOGY 10 The role of identity federation

INVESTMENT 44 IMAP’s view on how M&A is

INSURANCE 94 Deregulation Sets Businesses

Thierry Bettini, Director of International Strategy, Ilex International

Dr. Christoph Bieri and Michel Le Bars, Kurmann, Partners AG (IMAP Switzerland)

Mark Armstrong, MD EMEA, Progress Software

80 Storage in financial service

70 Wealth Management in

131 Trade credit insurance companies

Chirag Dekate, Sr. Manager Vertical

Eng. Tarek Al-Rikhaimi,CEO, Saudi Kuwait Finance House

in keeping up with digital change

Moving above and beyond the parallel Markets, DDN

96 Banking meets the cognitive era: back to the future on personalised service

Paul Moores, Director, Banking & Financial Markets, IBM UK & Ireland

113 The Future Rests On a

Programmable Economy

Dr David Andrieux, Market Intelligence Manager, Sopra Banking Software

reshaping the Pharma industry

Saudi Arabia

98 The evolving role of pension scheme trustees Roger Buttery, Independent Trustee for several UK pension schemes

123 Double dividend - Will the end

of one-child policy spur Chinese economic growth? Ilario Attasi, Chief Investment Officer, Luxembourg, KBL European Private Bankers

1 38 Adding Commodities to a Portfolio Sal Gilbertie, President, Chief Investment Officer and co-founder of Teucrium

Free in the World of Insurance

still unable to see the wood for the trees

Carlo d’Amore, Global Head of Financial Institutions and Partners Management Bolero International

TRADING 30 Is exchange system monitoring

the answer to systemic risk? Guy Warren, CEO, ITRS

124 Regulatory interference weakens the link between IPO activity and market conditions

Dr Ufuk GÜÇbilmez: University of Edinburgh, Business School

Issue 2

Africa 6

Issue 2

AFRICA INTERVIEW

Ghana BANKING IN

Founded in 1953, GCB was started with the specific aim to serve and support Ghanaian workers, traders, farmers, and business people, to empower them to achieve success with locally sourced funding. Since then, GCB has gone on to become Ghanaâ&#x20AC;&#x2122;s biggest independent bank, with the financial strength and capability to support those who contribute to the growth of the country. Global Banking & Finance Review Editor, Wanda Rich interviewed Mr. Simon Dornoo, Managing Director of GCB Bank Ltd. about the current banking landscape in Ghana.

GCB Bank Limited Head Office, Accra

What is your assessment of the banking industry in Ghana? What are the biggest challenges and opportunities?Â Evidently, the weakening macroeconomic condition amplified by the high currency volatility is beginning to impact banking sector liquidity and capital. Liquidity conditions are expected to remain tight as the Central Bank seeks to anchor monetary policy in line with its inflation targeting framework while bank capital buffers erode under stressed scenarios. We expect earnings growth to slow down which will exert further pressure on capital ratios. As a result of these developments, we see opportunities for consolidation through Mergers and Acquisitions or private equity investment in the banking sector.

How are regulations and legislation shaping the industry? The Central Bank is far advanced in the process of introducing a new Banking Act and a Deposit Insurance Act which seek to strengthen its regulatory and supervisory authority in areas of Holding Companies or Group Companies, Recovery and Resolution procedures for weak or distressed banks, bank capitalisation, cross-border supervision and protection of depositors. The Bank of Ghana has also recently introduced regulation and guidelines that allow Telecommunication companies and Mobile money operators to provide some financial services. It is inevitable that these changes together with the IMF-backed reforms will reshape the banking industry. How have competition in the market and customer demand impacted product and service creation? The banking industry is fragmented with many niche players chipping away market share from the commercial banks. Non-Bank Financial Institutions (NBFIs) are flourishing thanks to regulatory arbitrage opportunities. These NBFIs, set up with relatively low capital, offer to a large extent full-scale banking services without having to meet the stringent regulatory and compliance requirements Issue 2

AFRICA INTERVIEW

Ghana, Elmina - market and fishing boats

for commercial banks. With 28 commercial banks and competition from non-resident banks offering trade finance, cash management and long-term financing products the banking landscape has become very competitive. Customers now have a choice and loyalty is hard to maintain as a result of commoditized technology. Banks, therefore, have to adapt to market demands and competitive pressure by enhancing their product and service offerings or restructure to stay competitive. What role is technology playing? Electronic transactions among banks and customers are on the rise thanks to the Central Bank’s policy on interoperability that has led to significant investments in a clearing and payment infrastructure. Investments in technology have also improved customer service experience judging by the adoption rates of digital and card-based banking or payment service channels. Technology has made it possible for banks to pursue operating and cost efficiency projects which are both imperatives to remain competitive. In GCB, technology

Mr. Simon Dornoo, Managing Director, GCB Bank Limited

has helped to improve team collaboration, the speed with decision-making and better control of the business in addition to the introduction of new products and services. What are the financing opportunities available to customers? Customers have access to a wide range of financing options both direct funding and credit enhancements, however, relatively limited opportunities for long-term funding. This is due to the persistently high level of interest rates and the lack of an active primary and secondary market for bond and capital market instruments. We expect a slowdown in lending growth due to elevated risks from the difficult operating environment and tighter liquidity conditions. The prospects for the economy are however positive over the medium term which bodes well for an upturn in lending growth. How is GCB Bank Ltd supporting the social, economic development in Ghana? GCB continues to play a key role in the country’s socio-economic development through its wide network of branches well represented in all regions of the country. Apart from its support for large corporates and local entrepreneurs some of whom now own major businesses and employ

many people, the Bank is the biggest lender to the consumer market with average unsecured loans of $1,200 which are helping families stay together. Our analysis shows that these small loans are used to pay school fees, start small businesses and pay rent and medical bills.

GCB has provided direct intervention in Health, Education, Environment and Sports and funded other community-based projects under its social responsibility program. What are your future plans for development? GCB is going through a vital phase of its development. From a state-owned bank, it has evolved into a private sector publicly owned business with aspirations of becoming one of the leading banks in Africa. Our ambition is anchored on the Bank’s strong heritage and local franchise which provide the platform for its future growth and profitability. Our performance over the past few years underpins our optimism of a bright future. Issue 2

AFRICA TECHNOLOGY

Issue 2

AFRICA TECHNOLOGY

The role of identity federation in keeping up with digital change In the digital age, people expect to be able to gain access to applications and services quickly and easily. This quest for performance and instant access to information has inevitably led to a significant increase in cyber risk. Indeed, 2015 saw a steep rise in large, targeted cyber attacks, breaches in personal data protection, identity theft and social network hacking. Users, who are familiar with new technologies, are often unaware of the security issues resulting from their actions. Now more than ever, IT departments need to facilitate the demands of users and at the same time ensuring security is maintained. With the streamlining of information systems, the key is to implement a secure, modern infrastructure which is capable of supporting and anticipating these changes. Technologies such as identity federation can support the growing need for financial institutions to provide access quickly and securely, helping IT to keep up with the speed of digital change.

What is Identity Federation?

Identity Federation is a secure way for two organisations to share information about a user. The goal is to enable the user to easily navigate across various services, following a single authentication to a trusted thirdparty acting as guarantor of their identity. Identity federation manages user access based on existing trusted relationships, the validity of the identity presented and authentication to the trusted partner. It can also transmit user information (such as application rights) which is then certified by the partner that provided the identity. This Single Sign-On (SSO) functionality means end users can access applications and services seamlessly, without having to re-authenticate themselves.

Identity federation in practice

In the context of business growth including reorganisation, joint ventures, merger and acquisitions, IT directors face a number of issues when trying to enable access for a significant number of users, often within Issue 2

VISA & Mastercard Accepted for Cash Withdrawals on GTBank ATMs and for transactions on POS Terminals

Website:www.gtbankgambia.com, Email:corpaffgm@gtbank.com Phone:00220 4376371 - 4

GTBank Proudly African and Truly International

AFRICA TECHNOLOGY tight time constraints. Identity federation helps organisations set up an identity management infrastructure for each operational entity and facilitates access to corporate or shared applications and services for all types of user profiles within complex organisations. Allowing authorised user access to applications provided and hosted by the corporation, without having to support multiple authentications, is a significant advantage. Users’ identities are transmitted to applications by federation protocols (SAML v2 for the most part), in a secure, standardised way.

USER

OPEN ID PROVIDER

Identity federation also helps standardise access to the company’s ecosystem for partners and providers. A good example is Société Générale group’s SAFE initiative, an enterprise federation authentication programme. The objective was to safely open the bank’s information systems to partners and simplify the authentication procedure. SAFE works by first providing an identity federation service, via single authentication, to a group of applications dedicated to the management of electronic banking. This helps streamline the management of a large number of identifiers and existing authentication devices for key user groups and a diverse application base. Thus, the bank maintains open access to its information systems while strengthening security by offering a consistent, easy to use identity and access management service for employees. Another example of identity federation in action is the growing use of solutions delivered via a Software-as-as-Service (SaaS) model. IT Departments must find solutions to industrialise and standardise access policies for this type of application. Many customers want to adopt third-party messaging systems – for instance, to switch to Office365 or Google Apps – using as little internal resource as possible and in a secure and standardised way. Identity federation for cloud applications helps solve this issue and secure access to these applications. ’Social’ federation is the most significant example of identity federation used today. Practically, it consists in linking sites to social networks such as Facebook, Google and Twitter.

OPEN ID RELYING PARTY OPEN ID PROVIDER & RELYING PARTY

This interface and use of third party digital identities is a real breakthrough, both on a technical and business level. The principle is that once a user is authenticated to a social network, they can directly access multiple sites and content, without having to create a new user account.

Benefits

Technology has resulted in consumers expecting more. They want quicker responses to customised and modern services. They want to be able to use their mobile devices to access applications and they want security (without having to authenticate multiple times), as well as simplicity and efficiency. In such a highly competitive market, it can be to a company’s detriment to impose too many constraints on users. Identity Federation responds to these issues: it generates user loyalty by sparing users the constraints of repetitive registration or authentication steps, allowing them to access multiple services easily. It offers a real opportunity of growth for businesses, displaying content specific to each user based on their relevant

OPEN ID PROVIDER

information, which is securely transmitted via their profiles. This provides a seamless and consistent experience, which is both efficient and tailored to the customer’s specific needs. Identity federation also provides a secure interconnection between communities. Companies that understand the challenges faced by their organisations implement identity federation as a way of increasing widespread adoption. Now the main objective for all is to combine security, technological simplicity and innovation. Identity federation is, and will very likely remain in the years to come, at the heart of single authentication.

Thierry Bettini Director of International Strategy Ilex International

Issue 2

life

Making Simpler

Enabling Enabling payments payments. Creating Value info@pexintl.com www.pexintl.com Tel: +230 4651001 Fax: +230 4547274

AFRICA FINANCE

Social, Mobile, Crypto PREDICTING THE FUTURE OF ONLINE PAYMENTS On 11 August 1994, it is said that Sting’s Ten Summoner’s Tales CD album became the very first online purchase, selling for £7.74. However, it is probably safe to assume that other “non-tangible services” might have been purchased over the internet long time before that. Anyway, from humble beginnings, e-commerce has rocketed. The global e-commerce marketplace was estimated to be worth $1.5tn in 2014, up by 20 percent on 2013, and this growth is likely to accelerate throughout 2015 and beyond. With growth comes change, and currently we are seeing more change in the online payments industry than ever before. Much of this change is being spurred on by new players in payments, often introducing a new payment method or channel. Tech companies, in particular, are increasingly examining and innovating new methods of payment with the tools available to us in the digital age. Apple is making strides with Apple Pay, and social media companies such as Facebook and Twitter are looking at how to bring payment options to their many millions of users. On the fringes, “alternative” payment options such as cryptocurrencies are making huge waves.

Jens Bader Chief Commercial Officer Secure Trading

It is safe to say that not all of these payment innovations will take hold. Ultimately, the longevity of a new payment method is dependent on how it will affect consumer behaviours. Consumers and businesses alike desire quick and easy payments above all else. Only payment innovation which simplifies or improves a customer’s payment experience or solves a merchant problem will have a real impact and will become permanent. Issue 2

AFRICA FINANCE

Here is a quick guide to some of the current changes in the online payment industry

Mobile payments

Throughout history you can trace how payments and payment behaviour, like everything else, has evolved due to new resources becoming available. First people bartered, and then came coinage, then paper money, then plastic. The internet is the newest resource, and the opportunities it provides us with in the world of initiating and receiving payments are unending, hence the great deal of diversity we are currently witnessing in the industry. But as payment options increase in number, the landscape becomes ever more confusing for businesses trying to navigate the online payment landscape. Which innovations are here to stay? Which payment options will bring tangible benefits to businesses today? What should businesses be doing now to keep ahead of the curb?

Hyped for years, now more established, and undoubtedly here to stay, m-commerce has been a game changer for retailers and the popularity of the payment method continues to grow. UK shoppers are set to spend £14.95bn via mobile devices in 2015, an increase of 77.8 percent on £8.41bn in 20141. This accounts for 28.6 percent of all online purchases in the UK in 2015 while spending using a PC will grow just 2 percent over the same period. It is clear that, with the growing popularity of mobile, the desktop’s grip on ecommerce is slipping. It is a great testament to the rapid rate of change in the digital age that, just 11 years into the history of online payments, there are already signs the predominant method of payment is being usurped. A key driver behind this is, of course, the rise and rise of the smartphone, which has transformed the way we shop. Innovations such as improved mobile website optimisation particularly on check-out and payment pages, responsive web design, improved connectivity and larger phone screens have made it easier for consumers to browse and buy products online and have eliminated some of the common problems associated with mobile transactions such as typing errors. Not all traditional payment options are easily suited for a mobile experience. However payment innovation and re-engineering of payment processes have been instrumental in driving mobile commerce over the last years. Tried, tested and clearly a growing popular payment experience among consumers, it is safe to say that businesses with m-commerce capabilities are going to feel the benefits of various mobile-focused payment options.

Wearable payments

Less certain, is what impact wearable technology will have on the payments industry. The Apple Watch is the latest contender for dominance in the wearables space, and much of its marketing campaign revolved around the benefits it could bring via Apple Pay. Wearable technology could well have implications for e-commerce – not least because it allows retailers instant access to consumers. Brands will be able to send notifications, including price changes, promotions and marketing incentives, to consumers’ smart watches. With the near field communication (NFC) technology installed on the watch, customers could benefit by paying for items quickly and easily with their device. However, I would hesitate to say that wearable technology is a payment band wagon that retailers should be jumping on right away. The uptake of wearable technology, and the popularity of payment with wearable technology, is still far from certain and quite possibly overhyped. There is seemingly no great demand to pay for things with your watch, as opposed to taking out your phone or card which are equally equipped with NFC technology. Furthermore, even if paying with a watch is a tangible benefit, it only affects the world of physical payments; wearable technology offers little change to the online payments world. In reality, the main benefits for Apple Watch are for the retailers rather than consumers – especially the ability to collect highly accurate, personal and applicable data on individuals. With little incentive for consumers to change their behaviours, it is unlikely that wearable payment-enabled devices will replace traditional payment options, at least not any time soon. I consider wearable payment devices a form factor and a proxy for an underlying payment enabler at this stage.

Issue 2

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AFRICA FINANCE

Social commerce and payments

The sheer volume of people on social media sites immediately makes s-commerce a serious contender for changing the online payments landscape. Unlike wearable technology, this is a case of a payment solution which complements already existing consumer demand and behaviours. Already social media users post about their purchases, are guided by social media product reviews and are influenced by social media advertising. Unsurprisingly, social networks are seizing the opportunity to embrace payment options. Facebook’s recent announcement of payment functionality within its messenger service, for example, caused a stir within the industry, as it looks to bypass traditional payment apps such as PayPal. Likewise, earlier this year Barclays became the first bank to allow payments through Twitter, via the Barclay’s Pingit app2. S-commerce is undoubtedly a growing market – expected to bring in $14bn in sales in 2015 in the US alone, 5 percent of total online retail revenue for the year3. Social media has already had a large affect on how businesses operate, from the marketing to their customer service. As with these areas, it is advisable in today’s social networking oriented age that businesses become “sociable” in their payments methods as well. Quick-Response code technology (QR codes) as example are a great carrier to be embedded in social networks and the simplicity of scanning them could cause a viral effect.

Cryptocurrencies

Perhaps the payment option least easy to predict the future of, is the range of cryptocurrencies we have seen coming to market lately. Free from any banking or state authority, and designed for the world of online payments, cryptocurrencies such as Bitcoin are arguably the next step in the evolution of money. Yet, despite the revolutionary potential, this is a payment option that many businesses are wary of. The big concern with cryptocurrency is how secure an investment it is; without the same levels of regulations in place, and with no insurance, how can you guarantee your money will retain its value, or be there at all? Yet, with so many benefits to be gained from the use of cryptocurrencies, we should by no means dismiss them as a payment method for businesses today. Cutting banks and regulatory authorities out of the payment process makes money transfer far easier, quicker and cheaper, as bank processing fees and commissioning charges are bypassed. Furthermore, cryptocurrencies offer exciting opportunities for businesses eager to take advantage of future online markets – especially as smartphone apps bring Bitcoins more easily into the hands of potential customers. As a result, already many large merchants including Apple, Amazon, Microsoft and Virgin are accepting Bitcoins. As a currency uniquely exposed to speculation, with notoriously insecure exchanges and with no insurance to support businesses should the money become worthless – cryptocurrency is not yet the safest investment. Yet, if we are talking in terms of payment transactions then yes, it is perfectly safe for businesses to begin to accept cryptocurrencies. With simple in-out transactions, there is virtually no risk at all. It is hard to see a currency purpose built for the online payment age as anything other than the next stage in the evolution of payments, making cryptocurrency a payment method that businesses should very seriously consider. Today, technology is the driver, simplicity and safety are still the deciding factors for customer and merchant adoption of new payment methods and channels. Integrated customer authentication and new forms of transaction authorisation as in Apple’s biometric approach will also play a big role in changing customer payment behaviour. But as we all know, it is so hard to change behaviour and patterns, so let’s be patient. Source: 1 ww.internetretailing.net/2015/02/uk-m-commerce-spend-to-grow-by-77-8-to-14-95-billion-in-2015-outstripping-the-rest-of-the-world/ 2 www.theguardian.com/money/2015/feb/25/barclays-to-allow-payments-with-twitter 3 www.invesp.com/blog/us-social-commerce/

Issue 2

WE ARE YOUR

FLEET PARTNERS WE FACE THE HASSLES OF YOUR VEHICLES, WHILE YOU FOCUS ON YOUR BUSINESS.

EMPOWERING AFRICA 24B, Omorinre Johnson, Lekki Phase 1, Lagos, Nigeria Phone: +234-1-2902635, +2348035960464 Fax: +234-1-2902635 Email: info@fleetpartners.ng Website: www.fleetpartners.ng

AFRICA FINANCE

It’s More than Leasing Over the years, the leasing industry in Nigeria has grown steadily and the number of companies involved in leasing transaction has increased. Good News! However, whether leasing is simply and only a profit-making venture or also, more importantly, a tool for economic development in is one question that needs to be answered. Small and Medium Enterprises (SMEs) play a vital role in economic development, by increasing competition, fostering innovation, and generating employment. However, inadequate funding has been cited as one of the major challenges limiting the performance of most SMEs in developing countries. In Nigeria, SMEs are strongly restricted in accessing the capital that they require to grow and expand. A critical look at the challenges that these SMEs and startups face with regards to accessing finance from the formal financial institutions would reveal that most of them (SMEs) are unable to provide the necessary collaterals to access loans from the banks and in the process good business ideas could not be implemented and consequently die off. Traditional financial institutions find it somewhat difficult to finance SMEs given the small size of these companies and/or their unproven

track record. The alternative for SMEs could be an outright purchase with one’s resources (equity), debt financing (borrow and buy), hire purchase, conditional sale or installment sale.

facility from the bank for another need. Invariably, this to a great extent ensures that the lessee indeed uses the equipment for the original intended purpose (business) and not something else.

Equipment leasing therefore comes in as a very good option for SMEs as an alternative mode of financing the acquisition of capital asset. Leasing financing for equipment and capital goods is an important alternative to traditional means of financing, especially for startups and smaller businesses that lack the credit history or the required collateral to access traditional forms of financing.

As such, in addition to already established and successful business organizations and conglomerates, FleetPartners Leasing considers SMEs and small startups a major part of our target market in a bid to contribute our own quota to the development of the Nigerian economy according to our vision.

Leasing generally implies lower transaction costs compared to loans and, where available, it can also be an attractive financing option for rural and agricultural small-scale operators. And as in the case of a lease transaction, the lessee is provided with the required equipment for his business, not cash thereby curbing the risk of misusing a loan

It is my honest opinion that leasing must be integrated into SMEs development in developing countries to catapult the economic development of these nations.

Samuel Akinniyi Ajiboyede Group Managing Director FleetPartners Leasing Ltd

Issue 2

AFRICA BUSINESS

Issue 2

AFRICA BUSINESS

Watch the sales come in There are only two ways to grow revenue: Sell new products and services to existing customers. Sell existing products and services to new customers. It is 5 to 10 times more costly to acquire a new customer than it does to retain an existing one. Most companies spend their marketing on acquiring new customers, but don’t forget the more predictable source of revenue right under your nose … existing customers. The rule that 80% of revenue comes from 20% of your customers often applies. In my experience with underperforming companies, there is a lack of focus on the fundamentals of selling and marketing. Get back to basics to understand your buying audience. Determine what the customer values, in what context he values it, and how he measures that value. Honestly answer some questions regarding your focus, and make changes to hone your approach. What is your customer trying to accomplish? What customer needs will and will not be satisfied? What is the benefit to the customer of the product we provide? What is the generic customer need that motivates them to buy? Why will the customer buy from us, what are our distinct competencies? You must differentiate your product and company from the competition.

The answer to one simple productrelated question really predicts success or failures. The problem is that most marketers ask the wrong question and sales show poor results because of it. The wrong question: “What product do I want to create?” This doesn’t sound wrong; it makes sense and even caters to what you like to do. Don’t get emotionally attached to stuff that you would want. The dilemma is that your audience may not be ready for your product. A better question is: “What does my audience say it wants right now?” It is a much easier sell when you deliver a solution to your customer because they are pre-sold.

Existing Customers

Develop an account management and customer service selling philosophy and utilize incentives tied to customer’s goals to establish the importance of these functions. Continue to understand what your customer values and how you can improve their results. Work with customers to increase what you can provide to grow their business … they will grow yours. Offer complimentary products and services. I had a client in the printing business who began to offer digital versions of catalogs, forms, and CDs in addition to just their pre-press and print services, which increased sales by 150%. Issue 2

AFRICA BUSINESS Another client stopped selling fullcompliment software functionality as their only offering and began selling the individual modules at a 25% to 50% premium … sales increased by 35%.

Talk with your clients. Listen to them. New Customers/Market Expansion

Take small steps into new markets. Utilize what you understand and adapt to a new environment. Look for the universal in your product. Deliver what works generically in one market and apply that functionality to other markets. Discover differences between target markets and cultures and incorporate those considerations into the product itself… ‘product regionalization.’ A product that fits one region or country will not necessarily sell in another. A product’s features and the way it operates must fit the culture and constraints of the regional market where it is to be sold. Manufactures can not rely on their marketing alone to sell the same product all over the world. It has taken U.S. manufacturers a long time to recognize that products that are designed for sale in the United States do not automatically fit the Japanese, United Kingdom, European, or Chinese markets. For example, U.S. auto manufacturers were puzzled when Japanese consumers were not buying products they imported. It took years for the American auto companies to figure out that not only were their cars too big for the average Japanese person, but the steering wheels were on the wrong side of the car (left side, as in the U.S.). Drivers in Japan use the left side of the road (as in U.K. and one-third of the world), and prefer a right-hand-drive auto. For years, U.S. manufacturers chose to ignore this fact, which contributed to their lack of sales. In fact, Ford in 2015 is just now beginning to offer a right-hand-drive version of the Mustang in the U.K. I had a client that provided sophisticated simulation modeling, weapon systems, and airframe design to government and military agencies. They lost contracts due to cutbacks; sales suffered dramatically by 25%, and backlog was eroding rapidly. I helped them realize that their core strength was really measuring the movement

of objects through space – but those objects didn’t have to be defense-related. I suggested a shift to the environmental market to analyze how particles of pollution float and move through the air. They told me I was crazy. The company’s new horizons include identifying radiation patterns from nuclear reactor chimneys, measuring forces of weather patterns, examining the movement of acid rain particles, and the list goes on. Within six months the company won three contracts, many more followed, which allowed the company to grow three-fold in as many years. Government contractors who participate in the 8a set-aside program often don’t build a selling organization to prepare for when they graduate to a competitive marketplace. This is a case where their products and services can apply commercially, but they aren’t prepared for the transition. Learning how to compete is critical. Transitions can be very successful when they change their thinking to adapt to a new customer base.

Bid to Win – Put a Bid Information Review Process (BIR) in Place

The Business Development and Selling people don’t always ask hard questions, which leads to false information and lost sales. Strive for a high ‘Win Ratio.’ The BIR process is structured with 40 to 100 questions that force the selling people to ask specifics about the company/agency seeking solutions. This is really getting to know your customer. It helps sales people get a real feel for what the customer wants. From that, management can figure out how to differentiate from others and win the bid. Often the best thing the BIR can do is let your management know if the opportunity is or is not a good match, before wasting resources. Remember, bid only what the customer asks for. Be prepared to deliver add-ons that your product contains for an added price.

Incentives Bring Results

When employees can see dollar signs, their mindset changes and they become more creative. The keys to success with IC are to: Set realistic goals and time frames Hold managers accountable for performance Communicate measurement and reward methodology step back and let them perform

Always reward positive results when goals are achieved, but never give a full reward when goals have not been accomplished.

Develop an incentive pool based on a percent of gross margin and distribute bonuses based on a weighted average to the team. When the company does well, gross margin improves, thereby increasing the size of the bonus pool, and IC is greater. When I pay managers IC based 50% on what they are directly responsible for, 30% on how their performance impacts other key departments (for instance, how sales can improve production throughput), and 20% on their ability to improve equity value, we get amazing cooperation among departments and personnel. Watch the sales come in.

John M. Collard Chairman Strategic Management Partners, Inc

John M. Collard is Chairman of Annapolis, Maryland, USAbased Strategic Management Partners, Inc. a turnaround management firm specializing in interim executive CEO leadership, asset and investment recovery, outside director governance, raising capital, and investing in and rebuilding underperforming distressed troubled companies. www.StrategicMgtPartners.com

Issue 2

Americas 26

Issue 2

AMERICAS INTERVIEW

PPP FINANCING IN

Latin

America Director at Odebrecht Latinvest, who leads the development of the Interoceanic South and North Highway.

Ronny Loor Investment Director Odebrecht Latinvest

IIRSA, the Initiative for the Regional Infrastructure Integration of South America, was created to promote a strategic vision for the physical integration of South America shared by the twelve countries in order to agree on basic principles and on future actions aimed at ensuring the sustainable economic growth of the region, focusing on social equity and taking physical integration as a condition necessary for development. IIRSA projects in Peru, both North and South Highway, set up an innovative model to finance infrastructure in Latin America, thanks to a collaborative effort between the private and public agents.

IIRSA ,Cusco, © Odebrecht

The Odebrecht Latinvest team worked closely with the Peruvian authorities and multilateral agencies to design, test and implement for the first time this approach to financing Public-Private Partnership (PPP) projects. Global Banking & Finance Review spoke with Ronny Loor, Investment

I’d like to talk for a minute about IIRSA South Highway project. What was the participation of Odebrecht Lantinvest in this project? Odebrecht was and remains the largest shareholder of the South IIRSA Concessionaire Section 2 and Section 3 and described as Strategic Partner in structuring the business and project construction, is currently responsible for the Conservation and Operation of the built infrastructure. What were the main features of the financing? Funding for the construction of Section 2 (Urcos - Inambari in the Cuzco region) and Section 3 (Inambari - Iñapari in the Madre de Dios region) of the South Interoceanic Highway, was obtained through the signature of a Financing Agreement (“Southern Interoceanic CRPAO Purchase and Sale Agreement”) between the concessionaire companies Interoceanic Sur Tramo 2 SA, concessionaire Interoceanic Sur Tramo 3 SA and Merrill Lynch Pierce Fenner & Smith Inc (as Purchaser) for future sale Certificates of Recognition of Right to Annual Payment for Works (CRPAO) to be issued during the construction period by the Government of Peru (GOP), acting through the Ministry of Transport and Communications (MTC), which represent rights the concessionaire to pay for the work performed. Issue 2

AMERICAS INTERVIEW Through the Financing Agreement, the Buyer agrees to buy all future CRPAO issued by the GOP; turn Licensee agrees fully and irrevocably sell, assign, transfer, dispose of and transfer to the Buyer the right and title to all CRPAO.

All this, as it was unfolding at the same time, it was perfected on the basis of different experiences from the implementation, both the applicable regulatory framework and the same risk allocation in contracts.

As consideration for the execution of the construction, the concessionaire by the GOP receives an annual payment for works (ODP) equal to the total amount of the proposal submitted during the contest that deserved the award of the project. The PAO will be paid by the GOP in semi-annual installments over a period of 15 years after completion of the works, as is Implemented investment, the dealer will becoming the law of the PAO mentioned in the same percentage of the progress of work approved by the Agency Regulator (Regulator).

In Latin America, PPP’s have a positive meaning for the countries that have implemented breakthrough. Through them, it has been able to develop roads, ports, airports, sewage works, and other sectors, providing significant benefits for much of the population. Private participation can accelerate the pace of public investments, proper maintenance also ensures longterm and deliver timely and quality user service of public infrastructure.

Each time you reach a certain minimum level of investment (hereinafter Milestone), the dealer asks the Regulator was granted a Certificate of completion (hereinafter, CAO), by which the investment amount is recognized executed and the percentage of completion executed (for each construction stage). Based on each CAO GOP issue and deliver the 30 Dealer CRPAO, where each equivalent to one-thirtieth (1/30) of the investment amount stipulated in CAO; CRPAO each entitles the holder the amount shown as compensation for the works accepted in the CAO. Once CRPAO are issued, it will require the GOP to make the payments without interruption in the expiration dates on each CRPAO notes. Once the dealer gets the CRPAO, these are sold to Buyer, according to a list of pre-established in the Financing Agreement according to the date of sale and construction stage to which each belongs CRPAO prices. How would you assess the development of Public-Private Partnerships in Latin America? PPPs are emerging as a way to streamline and unite efforts, the public sector, and the private sector, seeking to develop infrastructure in the countries that decided to use this system to strengthen its development growth. In recent years, several Latin American countries have implemented different models of PPP’s to build, maintain and operate public infrastructure, mainly through concession contracts. 28

Issue 2

It is true, the PPPs in Latin America do not work in mass, but each country has certain characteristics, where what works for one does not necessarily work for another. So it is possible to appreciate in general that PPP’s are being developed and occupying a leading role in the different countries. For example, in Chile and Peru the model works actively, and there are other countries such as Panama and Paraguay that have already passed legislation to begin implementing the model, that is, probably before long this model will be practiced in most Latin American countries, creating new investment opportunities with innovative proposals for the construction, maintenance, and operation of public infrastructure. From your perspective, what are the major challenges and opportunities that PPPs represent for the country and the business? Being that most Latin American countries are aware that infrastructure is critical to the development of the economy of a country pillar, and is promoting the integration of regions becomes an effective way to advance towards a society sustainable. In Latin America, the infrastructure gap is still important, and the volume of investments to realize all that is required can only be achieved through PPP schemes.

Peru is no exception, in a recent study, “National Infrastructure Plan 2016-2025” conducted by the University of the Pacific, at the request of the Association for the Promotion of National Infrastructure (AFIN), provides that the infrastructure gap of Peru amounted to USD 158 billion for the period analyzed. This includes several projects that exceed the financing capacity of governments and also fail to be sustainable for the private sector. All these projects being long-term, almost certainly they pass to become bond projects, but will have to start like PPP’s, which is an opportunity for both the State has better and more infrastructure and provides quality public services. As for the private sector to propose innovative forms of financing (funds from financial markets and domestic capital markets and/or foreign), as well as implement new techniques and technologies for construction and operation of this infrastructure. On the other hand, although Peru has a very structured regulatory and institutional framework, and with a good climate for investment, it has several challenges to overcome. In the current context, where social responsibility plays a fundamental role, private enterprise has the challenge to be increasingly aware of the environmental impacts and demands that the projects involved can generate. Private enterprise will have to grow with the company to evaluate learning how to compensate and balance the damage and how to mitigate them through the benefits it brings each project. Not only is this project to be delivered in due time and cost, but also within the parameters agreed sustainability to society. For states, not governments, which vary from time to time, the big challenge is to target the welfare of the population in the long term, defining a vision of the development of the common good in the long term, and generating political, social, economic, and especially institutional, enabling its realization. These conditions also allow, that PPP’s are place in an appropriate environment, in which the strengths and benefits to balance the three pillars: government, private and financial company.

AMERICAS INTERVIEW

IIRSA Sur, © Odebrecht

The State must achieve tangible benefits for the community, focusing on projects that also bring development to the region and country. For this, the rulers have the opportunity to strategically select groups of projects according to the perception and relevance for each region, where the infrastructure is complemented by other investments in both infrastructures, and productive and social, generating opportunities associates and, in the long term, strengthening poles of sustainable development. This should also go hand in hand with proper dissemination policy will bring benefits not only to the population of the area of influence but for all as a nation. On the other hand, in cases where there are several state institutions participating in the development of PPP’s, it is important to be very coordinated. Each party has clearly established its responsibility and independence, to ensure that you do not miss the effectiveness of the system, and lack of appropriate definitions of this normal execution of a project is difficult. In general, schemes and PPP models are quite young, so it is still a pending task that governments and companies understand their fundamentals as well as the opportunities and challenges for development. Here, the active participation

of unions strengthened, is an opportunity, so as to encourage greater private sector participation in the implementation and financing infrastructure projects. In Latin America, project bonds are increasing. What are the challenges for the establishment of these bonds? A healthy financial structure is a direct result of having compiled correctly and responsibly on previous phases in the project implementation; so that if the PPP steps are followed correctly, the efforts and funding processes would be provided. Another important factor is the ability of public debt of the State. To maintain the strengthened system is needed the combined efforts of banks, multinational agencies, and capital markets, each assuming the risks as defined financial structure, its competence within the project. In this context, projects must have serious and prestigious sponsors willing to invest for the long term, with a financial structure that offers creditors bond guarantees a safe flow on the basis of concession contracts. The challenge to establish bonds means that projects that, as they come to their conclusion are structured, and have a part in operation for recovering the investment to meet creditors.

Why are these bonds appealing for investors? Because governments must meet the needs of the population, increasingly thinking in the long term and not only for electoral cycles, strongly defined project proposals with longterm strategic vision, increase. A long-term vision is defined as a stronger growth, with plans for infrastructure development, which should emerge in a state of maturity that makes them resistant to the tensions of the cyclical policy. It is in this circumstance that bonds become due consolidated agents, strong investment, and contribute to the promotion of investment, within a government that can support the weight of the political crisis and electoral cycles. Strategic planning to achieve the vision of the development of the country is what attracts the bond investor: the long-term financing that matches the needs of financing major infrastructure projects; projects whose deadlines makes it difficult to be financed by the simple commercial banks. The bonds have competitive costs, which will enable and ensure the sustained development beyond governments prevail. Issue 2

AMERICAS TRADING

MONITORING

MEMBERS

Is exchange system monitoring the answer to systemic risk? In the intricate financial services world - and for exchanges and trading venues especially - tackling such systemic risk has been one of the biggest priorities in recent years, and it’s essential that venues monitor their technology for potential problems.

Guy Warren CEO ITRS

Guy Warren of ITRS looks at how exchange system monitoring can help protect the markets, and the reputational, regulatory and revenue drivers for exchanges and trading venues to implement best practice. Do you remember the famous Honda advert a few years ago, known as ‘The Cog’? One small initial movement, through a fascinating series of complicated mechanisms, can result in a much larger result – like moving a car. However, they can be incredibly fragile. Move one piece of the puzzle ever so slightly out of position and the machine breaks down. The lesson is that in a complex system, even a small event can contribute to catastrophe. 30

Issue 2

Technical difficulties

Systemic risk is a concern for the entire market, but for exchanges, in particular, the stakes are high. Failure to tackle risk can result in devastating failures, and a series of high-profile outages on the Moscow exchange this year has kept the reliability of exchanges in the headlines for all the wrong reasons. However, the markets are yet to collapse around us, so might such hiccups merely represent a minor glitch? The answer is no – exchange failures can break the entire machine, and exchanges should be making moves to stop them for three key reasons.

The regulatory push

Ever greater scrutiny of the financial services has been a familiar feature in the post-crisis world. For instance, in February the Securities Exchange Commission (SEC) implemented Regulation Systems

TECHNICAL Compliance and Integrity (RegSCI), aimed at protecting the market from the vulnerabilities posed by technology system issues. RegSCI became an increasing priority of the SEC in response to high-profile failures at exchanges and trading venues. Though not an exchange error, the Bank of England suffered a major outage for its Real Time Gross Settlement System (RTGS) in October last year. This resulted in working hours extended into the night and the temporary inability to process a number of large payments. An economy is dependent on this basic feature, and it’s easy to guess the effect a more significant outage could have had. The incident reiterated how these, and other system errors, present a huge risk to market integrity. RegSCI is an implicit recognition of the importance of exchanges and large venues to market stability and represents a major regulatory incentive for rigorous monitoring. Done well, compliance is a significant expense to be balanced against the bottom line; mishandled, it can become a convoluted and incredibly costly

AMERICAS TRADING

EXCHANGE

Move one piece of the puzzle ever so slightly out of position and the machine breaks down

SYSTEMIC RISK

TRADING

DATA VENDORS SECURITY

burden to a business. In the worst-case scenario, a failure to adhere to regulation can mean large fines: in 2013 the SEC levied fines of $6million and $4.5million for oversight violations on the Chicago Board Options Exchange and the New York Stock Exchange respectively.

Reputational risk

Perhaps even more damaging to exchanges, is the reputational risk associated with high-profile errors. Problems at exchanges and large trading venues garner a lot of attention and many media column inches. Members of exchanges trust them with large sums, and a string of reputational knocks can lead them to wonder whether their trades are safe. If this causes members to withdraw, the venue loses liquidity and becomes a less attractive place for the remaining members, potentially creating a vicious circle - especially if problems are not perceived to be dealt with promptly. Reputation is a nebulous concept - difficult to measure in dollars and pounds - but even if an exchange doesn’t lose members thanks to an error, it can still have a

significant effect on the business. With the proliferation of trading venues, the landscape is increasingly competitive - whether for traditional exchanges protecting market share or new and alternative venues establishing their presence. It’s not inconceivable that a strong reputation for reliability could be a differentiating factor in winning members.

feeds - are robust and maintain quality. Outages could mean data clients look elsewhere. Such revenues are a major incentive for venues to act responsibly and, therefore, reduce systemic risk. Despite these three drivers, though, the sheer complexity of these organisations makes the task extremely difficult.

Diversification of revenues

Exchanges depend on vast networks of interconnected technology. If an error - be it the result of a glitch or a human mistake - goes undetected, it can have a knock-on effect on other application sets. The error may then escalate into a major incident for the venue, its members or the market as a whole.

Finally, it’s important to recognise that exchanges are rarely just trading venues anymore: modern exchanges are technology companies and data vendors. For example, proprietary market quotes, once a by-product, are now an important chargeable item. Firms such as exchanges, brokers and MTFs are dependent on more areas of their business for revenue. In order to remain competitive, such firms don’t just need good data, they need high-integrity data and reliable feeds for it. The firm buying the data can’t, for example, make trades based on patchy, or incomplete data. This means exchanges and venues need to ensure the underlying systems - such as their proprietary data

The problem of complexity

To understand the scale of the risk, it is important to recognise how much can go wrong. Traditional exchanges are complex enough, however, their younger siblings, MTFs and ECNs are equally susceptible, relying as they do on third party price feeds. SEFs and other swaps and fixed income venues can also suffer; with the market maker model they have multiple sets of prices and order books for the Issue 2

AMERICAS TRADING

same instrument to deal with. Other venue types include OTFs, similar to exchanges in that they have their own internal matching engines, and dark pools, which recent headlines have proved are more vulnerable than most to the shocks of reputational damage in particular. Each of these venues represents a complex network of application sets, and through interaction with the wider markets there is a further layer of complexity to factor in. Inbound order flows into the exchange must be monitored, including client gateways and connectivity. Then, core matching engines are essential too, as are market data distribution feeds (bi-directional: rely on inbound and sell outbound). Connections to back office and clearing systems and CRM and risk platforms are also essential. All of this adds up to a wholly interdependent and mission-critical infrastructure. A market comprising so many such venues contains a startling number of possible points of failure. 32

Issue 2

Monitoring

In such complex systems, itâ&#x20AC;&#x2122;s peculiar - to say the least - that so many firms persist in relying on disparate monitoring practices. Different parts of the company monitor different aspects of the infrastructure applications or flow without a holistic view. This greatly increases the chance that a glitch or human error goes undetected and can have a crossover effect on different systems. Monitoring needs to encompass potential infrastructure errors, such as a CPU exceeding its upper-performance threshold or a FIX gateway outage preventing inbound flow from clients. It must also cover behaviours which could indicate a system glitch or human error. Further, it must give a view across all application software systems and how each one affects another. Monitoring that does all this gives venues visibility of where problems occur in their infrastructure and allows them to resolve

errors early, before they escalate, cascade across different systems and spill into the market. The reward for best-practice monitoring for firms is maximum uptime, protected business data and in and outbound data flows, reduced reputational risk and protected market-data revenue streams as well as readiness for impending regulation from the SEC or other regulators. For its part, the broader market also benefits from a more robust infrastructure that protects exchanges and members, whilst supporting the global aim of reduced systemic risk and more stable financial markets. The problem of systemic risk is complicated, like a Rube Goldberg machine, and we are unlikely to find a single simple solution, but exchange system monitoring is surely at least part of the answer. Only through a holistic approach to monitoring their complex technological ecosystems can exchanges and trading venues keep the machine running without breaking down.

Innovation is a Must. What about you? Best Banking Technology Innovator 2015

Best Investment & Securities Outsourcing Provider - 2015

Best Investment & Securities Outsourcing Provider

Diversity. Change. Speed. Regulations. That’s the market. Customization. Evolution. Real Time. Solutions. That’s Inversis. It’s time to meet us. Visit inversis.com Brokerage –Clearing & Setllement- Custody Open architecture. Equities. Fix Income. Funds, ETF’s Real time technology. Mobility solutions

AMERICAS BANKING

Issue 2

AMERICAS BANKING

Banks old and new have taken full advantage of the technologies at their disposal to understand exactly how people want to consume and interact with their products and services.

INNOVATE, ADAPT

SCALE Success in modern banking

Neil Sholay Head of Digital Oracle

In a recent article1, Reid Hoffman, co-founder of LinkedIn, argued that for Silicon Valley businesses, being first to market is now less important than being able to scale rapidly. After all, Facebook was not the first social media platform, but it was successful because it was able to rapidly increase its customer base. The same is increasingly true of the financial sector; especially when it comes to retail banking. Whereas in the past banks could rely on size and reputation to win and retain customers, today customers demand more of their financial service providers and are more willing to change banks if they do not get what they want. The ability to launch innovative new digital services and, crucially, to rapidly scale the successful ones, is, therefore, becoming an essential factor of competitiveness within the financial sector. The era of companies leading their markets based on sheer size alone has come and

By Neil Sholay

gone. Over half of the companies that featured in the Fortune 500 fifteen years ago are now bankrupt, have been acquired, or have ceased to exist altogether2, thanks in large part to the disruptive impact of digital technology on the industries they operated in. The banking and finance sector have not been immune to these changes and the recent past has seen a shake-up of the sector. In retail banking, for example, we have seen new entrants to the market, while some larger brands have fallen by the wayside. Â While change within the financial sector is primarily driven by the impact of financial markets and regulatory pressures, digital technology is also having a transformative impact. Success in the digital age is closely linked to how effectively financial institutions connect with the people they serve, and those that are pulling ahead today continue to find innovative ways to improve the customer experience. Issue 2

Your partner in ﬁnancing public infrastructure projects in Mexico

+ 52(55) 5326.8600 www.interacciones.com Paseo de la Reforma 383 Col. Cuauhtémoc C.P. 06500 Méx., D.F.

AMERICAS BANKING

Banks old and new have taken full advantage of the technologies at their disposal to understand exactly how people want to consume and interact with their products and services. Using these insights they’ve been able to improve the way they deliver their services and ensure their customers have access to everything they need – sometimes even before they know they need it. Prime examples of this trend include mobile banking. Continuing to evolve at a breathless pace, mobile banking applications get more features added to them seemingly every month. Linked to this has been the rise of mobile ‘contactless’ payments, which has already caused a stir in retail banking. Both are important not just because they offer great new services to customers, but also because they generate an enormous amount of data that financial institutions can analyse to further understand their customers, market trends and potential business opportunities. The underlying point here is that “going digital” is about much more than just adopting new technologies. Mobile, cloud computing and advanced data analytics are essential to the modern business, but it takes a unique vision and an entrepreneurial spirit across the entire organisation to bring these tools together in ways that create genuine value. Central to successfully bringing this vision to life is an appreciation for the value of data, and a willingness to use it creatively to develop a more complete view of the customer. With the ability to access and act on an enormous pool of user data from smartphones, social media and other digital touch points, financial service organisations today are sitting on a goldmine of insights to help them develop more personalised and engaging services. The onus falls squarely on banks to use these insights in ways that add value for customers through more personalised experiences.

However, companies can’t just rest on their laurels once they’ve achieved this. Digital leaders understand that nothing of value is ever complete -there’s always room for improvement, and with competition coming from all angles they need to keep the flow of ideas constant to stay ahead of the game. Today’s digital leaders understand this and are constantly building on what they’ve created so far to deliver an ever-improving quality of service. That’s why it’s no longer enough to just flood the market with a product or service to make an impact. Companies need to be more adaptable. They need to come up with a great idea and be able to roll it out in a flexible way so that they can adapt to changes in the market and the needs of their customers. They also need to be sure they can react immediately to services that prove popular. This means being able to scale them at the required rate to ensure that no customer is left behind. Take the popular streaming music and video services many of us use each day. These highly personalised experiences have been built on a single digital platform, meaning they can scale quickly in-line with their growing user bases and be seamlessly updated with new features or improvements based on up-to-the-minute subscriber data.

quickly as they can think them up, making it much less risky (and costly) to bring new ideas to market. This flexibility, coupled with a willingness to adapt to customer needs, is what separates the disruptors from the disrupted in today’s world, and no matter how tight a grip a market leader might have that is a reality no business can escape. So what does a scalable digital business model for the financial sector look like? For one, it unifies operations across the banks’ operations and channels. Running on a single digital platform allows banks to roll-out new services or updates to every one of their users with minimal downtime. A scalable model is also built on real-time analysis of customer data. Customer connectivity is at the core of modern banking, and financial sector organisations today must be able to tap into the uniqueness of each person they serve no matter how many people they serve. Finally, going digital isn’t only about technology; it’s about the interactions that are enabled by that technology. The platform itself should handle roughly 60-70% of the banks’ needs. Creativity and talent must then be added to the equation to bring the company’s digital vision to life. Source: 1 Wired, ‘Silicon Valley Success Goes to the Fastest,

Successful digital businesses are able to deliver and revise their services almost as

Not the First’, September 14, 2015

2 Ray Wang, Constellation Research

Issue 2

AMERICAS BANKING

CHALLENGING THE STATUS QUO â&#x20AC;&#x201C;

INNOVATIVE BANKING

SOLUTIONS IN CHILE Juan Manuel Matheu CEO Banco Falabella

Issue 2

Wanda Rich, Editor, spoke with Juan Manuel Matheu, CEO of Banco Falabella about the banking sector in Chile Letâ&#x20AC;&#x2122;s talk for a minute about the banking sector in Chile. What are the biggest challenges and opportunities you see taking place? The retail banking sector in Chile is serving a more demanding client, facing increased regulation and going through a digital disruption in channels. We serve clients that demand for transparency in prices and in the terms of products offered. Clients have more options to meet their needs, and can easily shop around. This context requires clear communication from banks, help customers become more financially literate, provide a consistent service quality, and reduce prices constantly.

AMERICAS BANKING

Regulation is putting pressure on interest margins and charges while at the same time requiring more capitalization and liquidity.

In this context, banks strive for constant operational efficiency improvement and service differentiation. Regarding digital, this is a long announced trend that has finally arrived to Chile. We observe, for example, doubling numbers of mobile devices´ transactions year after year. Customers value the convenience that this channel provides, smartphone penetration is growing, and people are trusting more and more in the security and reliability of this platform. How are customer behaviors and the increased use of technology changing banking in Chile? Chile is among the countries with higher mobile phone and internet penetration. This, combined with widespread real-time money transfers, has led to a fast migration of banking services to digital channels. Expected changes in regulation will allow fostering this trend, and contribute to an increase in financial product sales through these channels (e.g. electronic sign acceptance in court). On the other side, there is still a lot of room for growth in digital and mobile payments. There are few and slow moving players in Chile if we compare with more developed markets. Customers value convenience, and technology is the most helpful tool to provide it efficiently. We are seeing less and smaller bank branches focused on client acquisition, and growing remote digital service. We also see growing presence of digital within the branch, and some few examples of frictionless payment processes that are starting to gain traction.

With technology playing such a significant role in banking, how is Banco Falabella meeting the challenges of IT development? Banco Falabella is undergoing a 5 year IT transformation journey that will provide us with a platform for sustainable business growth. The plan has 3 main pillars: core banking up-grade for solid backend processing, which is almost fully implemented; world-class risk decision engines deployment for agile response to clients; Omni-channel platform for fast channel up-grading and consistent customer experience across channels. In parallel with this structural, transformational plan, we deploy optimizations to our existing channels to keep surprising our customers. For example, this year we launched a fully renovated mobile app with intuitive customer experience and more functionality. This release, together with innovation in our web channel, helped us double our fully digital sales. However, we think that it is not enough for us to include technology to our offer. We need to define the customer experience we want to provide and use technology to enhance it. The customer experience is at the center of everything we do. Transparency, convenience, and simplicity are the cornerstones of our value proposition and we are very auto-critic on how we materialize this promise in each customer interaction. Customer relations are very important in retail banking, how do you ensure customers are receiving the best customer experience available? Customer centricity is deep in Falabella’s DNA. We are a service company, and we believe that service providers differentiate themselves by the culture of their people. We have stated five defining principles of our culture. I have travelled across the country discussing with our sales representatives, tellers and back-office staff, on how to strengthen these principles. We also have several initiatives such as having breakfast with customers to understand how we are accomplishing our corporate mission of enabling our customers’ aspirations. We believe that KPIs and incentive schemes are important to align the organization, but if we are able to align the hearts and minds of our colleagues with our corporate mission, we’ll be able to ensure the best customer experience consistently.

What are some of the innovative products and services created in direct response to customer needs? Our minds are always focused in strengthening transparency, convenience and simplicity in our offer. For that reason, our innovation aims to provide more agile service, simple products, and to provide clear information to help use our products responsibly. For example, when we analyzed what convenience means for our customers in their account opening Journey, they talked about the importance of a fast, paperless process, immediate product usage, early benefits, and low account maintenance fees. Today, we offer a 20-minute account opening process, with digital access to customer information to avoid paperwork, immediate debit card use, discounts in the first purchase in our retail stores, and no account maintenance fees during the first two months. This process allowed us to go from the 12th place in number of current accounts in the market to the 5th, in less than 4 years. Banco Falabella continuously strives to innovate and provide the best solutions for retail customers. What is your strategy for continued success and growth? Five years ago, in Banco Falabella we realized, that transparency, simplicity and convenience were gaining importance for banking customers. Then, we decide to re-formulate our strategy around these elements. We broadened our product offer that at the time was very much focused on credit, to a more complete offer, and strengthened our value proposition with discount and affinity rewards in retail partner companies. We streamlined “moment-of-truth” journeys and leveraged technology to absorb customer and transactional products growth, without deteriorating customer satisfaction and improving our operational efficiency. This strategy is paying off. We have 8 times more current account customers than what we did 5 years ago who have honored us with the first place in customer satisfaction several times; net profits have multiplied by 6x in this period. This encourages us to keep on thinking on how to boost the customer experience we deliver. Issue 2

AMERICAS BUSINESS

The importance of operational change in driving risk management improvements The Chief Risk Officer (CRO) has emerged as one of the most important positions in the senior management team in financial services businesses over the past decade, mainly as a result of the 2008 financial crisis and the continued unpredictability in the global economy. With CROs and other senior risk executives being constantly challenged to ensure that their businesses remain compliant with changing legislation and fit to meet operational objectives, we recently surveyed 115 risk executives across the capital markets, insurance and banking industries to understand their primary concerns. The message was clear. Two-thirds of the respondents cited risk management and regulatory compliance as their biggest challenges.

This article touches upon these issues and provides some suggestions for the changes that CROs can make to meet the challenges they face.

Regulatory compliance

Not surprisingly, those we interviewed were highly concerned about regulatory compliance. Since the financial crisis, the financial services industry has been hit with a raft of high-profile new regulations such as the Dodd-Frank Act, Basel III, Solvency II, Know Your Customer (KYC) and Anti-Money Laundering (AML), amongst many others. CROs face an uphill task ensuring their structures and processes are flexible enough to meet the changing requirements, particularly as regulation is sometimes contradictory and unfinished.

At the same time, the consolidation of businesses within the industry has led to an increase in operational silos, making it difficult for the CRO to develop an integrated risk strategy across the whole business.

Risk management

The second major concern identified in the survey was in relation to risk management and the associated adequacy of capital within the business.Â Financial services businesses are required to ensure they are holding adequate levels of capital. However, many institutions are getting caught out because they do not have the correct processes in place within their operations to monitor and ensure that this is the case.

Issue 2

AMERICAS BUSINESS

Systems of engagement can automate and improve processes, increase visibility with actionable reporting and real-time decisions, and generate better collaborations between teams. Finally, the growing risks presented by KYC legislation and the threat of money laundering. This requires financial services organisations to build a strong layer of master data and overlaying it with intelligent analytics technology which can then be accessed by the risk management teams.

The result

In addition, rising regulatory scrutiny of AML programs and increasing penalties for non-compliance have challenged financial institutions with the need to strengthen their Customer Due Diligence (CDD) processes, amongst others.

Addressing these challenges through applying ‘intelligent operations’

CROs need to take a step back and look at their operational processes. I believe that the transformation of their business processes to implement advanced operating models can play a big part in the adaptation needed to meet these challenges. However, process maturity levels and preparedness for transformation vary widely. There are three different ‘levers’ of operating model transformation that CROs can use to create impact differently – technology, process re-engineering and advanced organisational structures (such as shared services, and business process outsourcing). CROs need to look at their own organisation to work out which of these levers are most suitable. That said, our research did show that on average CROs see the greatest financial impact coming from the implementation

and use of new technology. As a result, in the remainder of the article I demonstrate how technology can be used to improve risk management.

Harnessing technology

New technology and advanced analytics can be applied across many risk functions to produce better and more accurate insights which the CRO can then use to make more timely and accurate decisions. There are a number of examples of this.

These are just a range of options for the implementation of technology within the risk management industry. Ultimately, we would advocate that CROs look at the three levers of technology, process re-engineering and advanced organisational structures. Regulatory compliance and the need for risk management is only going to continue to grow for financial services business and, as such, CROs will need to continue to adapt and should put their operational structures at the heart of changes that they make.

Take stress testing for instance. Stress testing is a core requirement for a significant number of financial services businesses. The use of advanced analytics can help improve the accuracy of the modelling, ensuring that it is more predictive and insightful. Intelligent operations can also be used to solve compliance issues with reporting practices. In many cases, business units work in silos and information is not shared effectively, and legacy IT systems and processes are inflexible and unable to effectively respond. The key to address this is to leverage the “engagement” layer that sits between process and core technology applications.

Manish Chopra SVP, Global Risk Services Genpact

Issue 2

AMERICAS INVESTMENT

IMAP’s view on how M&A is reshaping the Pharma industry In 2015, Mergers & Acquisitions in the pharmaceutical industry was arguably at an all-time high. Up to the end of September, the total value of announced transactions reached US$ 850bn – not including the US$125bn merger which Pfizer and Allergan began discussing in October. Valuations reached eye-watering levels, with buyers often paying 6 or 10 times revenues for large, established companies with average growth rates. These valuation multiples are unseen in any other industry. Feeding frenzy and collapsing champions

In part, the increased pace of deal making – some call it a “feeding frenzy” – and the high valuations are driven by quantitative easing and the availability of cheap money. Another fuel for M&A has been the desire of US-domiciled companies to use overseas cash piles and in some cases, change their domicile to a low tax jurisdiction at the same time (“tax inversion”). However, the strong undercurrent driving deal-making is the simple notion that “bigger is better”. 15

Salix/Valeant

USD 15bn

13 Allergan/Actavis

Revenue multiple transaction Revenue multiple perper transaction

12 11

Perrigo/Mylan USD 63bn

10 9

USD 35bn

Weighted average 2014

6 5 4

Weighted average 2010 Weighted average 2011

Weighted average 2013

Weighted average 2015

Weighted average 2012

2 1 0 2009-11-06 01/2010

07/2010

2011-05-06 01/2011 07/2011

01/2012

2012-11-03 07/2012 01/2013

07/2013

2014-05-03 01/2014 07/2014

01/2015

Transactions involving targets in the Pharma industry Each bubble represents one transaction. Bubble size indicates transaction size, and the position on the y-axis the valuation relative to the revenues. Source: MergerMarket, KP analysis.

Issue 2

2015-11-01 07/2015

AMERICAS INVESTMENT Some companies, most notably Valeant and Allergan, have implemented business models based largely on serial acquisitions and created phenomenal shareholder value. In Valeant’s case, value creation was just not sustainable, as can be seen by its stock market precipitation of more than 40% between the summer and late autumn of 2015. Investors started not only to doubt Valeant’s ability to reduce its high level of debt (resulting from its many acquisitions) but also its business model in general.

Share price increase: >1’700% in <8 yrs

Kythera

350350 350

Allergan

300300 300

Sprout

250 250250

Amoun

AGN Share Price [USD] AGNShare Share Price Price [USD] [USD] AGN

Durata

GR GR CA CA % % 39 39

250250 250 200200 200

Auden Mckenzie Rhythm Furiex

Warner Chilcott Actavis

100100 100 Arrow Watson Pharmaceuticals

Salix Precision

200 200200

Dendreon GR GR CA CA Bausch + Lomb % % 45CAGR45AGR OBAGI C %

250 150150

Forest Laboratories, Inc

150150 150

50 50 50

300300 300

Share price increase: >1’200% in <8 yrs

VRX VRXShare SharePrice Price [USD] [USD] VRX Share Price [USD]

400400 400

100100 100

Medicis Ora Pharma

Pharma Swiss Inova Valeant

Specifar

50 50

Allergan

0 00 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2013 2014 2015

Biovail Dow Pharmaceutical Sciences

Valeant

00 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015

Share price development of two serial acquires

Source: Thomson Reuters, MergerMarket, Allergan/Valeant, KP research

There is a growing feeling in the deal maker community that the overheated phase of M&A in the Pharma industry is likely to abate soon. However, there are strong strategic drivers for further M&A throughout the next decades, which we explain as follows.

Innovation meets inefficiency

Broadly speaking, the healthcare investors’ mood is very positive. There are great technological advances and new treatments coming to the market which, for some diseases like Hepatitis Virus C (HCV) infection or certain types of cancer, deliver stunning results. Innovation is fueled by a healthy ecosystem of government-sponsored research, serial entrepreneurs, and savvy venture capitalists. All of which bodes well for both people’s health and the Pharma industry in the long run. On the other hand, the industry is still fundamentally inefficiently organized. Many players have not yet adapted to the new realities which have emerged over the last decade: firstly, evidence-based medicine as a basis for drug development and reimbursement and secondly, that funding for healthcare in general and drugs, in particular, is limited.

“Better than the Beatles” problem

There are great technological advances and new treatments coming to the market which, for some diseases like Hepatitis Virus C (HCV) infection or certain types of cancer, deliver stunning results

Many older drugs – often household brands – would fail the scrutiny of today’s regulators because the clinical trials on which their claims are based do not meet the modern criteria of evidence-based medicine. Drugs can’t be launched anymore based on a scientific concept or anecdotal evidence alone. Today, regulators only grant marketing authorizations for a new drug if it can be shown that it is better (i.e. causes a stronger benefit and fewer side-effects) than the best treatment which is already on the market (the so-called “standard of care”). As medical development advances, beating this standard gets more and more difficult, hence the so-called “better than the Beatles” problem. Rising standards and very cautious regulators have caused the average expenses for developing a new drug to amount to US$1.4bn (including the spending for programs which fail along the way). This excludes the cost of capital required which increases average total costs to US$2.6bn. Not surprisingly, financing of drug development is in the realm of fewer and fewer large companies. Issue 2

AMERICAS INVESTMENT Rising costs but limited pricing – and bad public relations

While the cost of drug development increases, there are stronger societal pressures on drug prices. Cost-cutting efforts in the healthcare system (by payers or governments) find in Pharma companies easy and highly visible targets. The Pharma industry’s average profitability is comparatively high compared to other sectors. Steep price increases as implemented in the US and highly public scandals raise eyebrows. The fact that most spending for drugs in industrialized countries is shouldered by society (through health insurances or benefits programs) makes pushing back on Pharma a rewarding political agenda point, as shown by Ms. Clinton’s famous tweet sent in September 2015.

ently…

… with Pharma one of the most visible drivers

Healthcare costs rise consistently…

… with Pharma one of the most visible drivers

Pharma is one of the profitable industries … with Pharma onemost of the most visible drivers Pharma is one of the most profitable industries Pharma is one the most profitable industries Net proﬁtNetmargin ofof top 10 companies by sector, 2014 proﬁt margin of top 10 companies by sector, 2014 (%)

Healthcare costs rise consistently…

Total Health spending, % of GDP

OECD countries. spending, % ofTotal GDP Health spending, % of GDP Healthcare costs rise consistently… OECD countries D countries 13.0% 13.0% 12.5% 12.5%

Net profit margin of top 10 companies by sector, 2014 (%)

… with Pharma one of the most visible drivers Banks

Pharma is one of the most profitable industries Banks Banks Pharmaceuticals Net proﬁt margin of top 10 companies by High sector, 2014 (%)

Total Health spending, % of GDP Media Pharmaceuticals OECD countries Pharmaceuticals

12.0% 12.0%

13.0%

11.5% 11.5%

Automobiles Automobiles Automobiles

15%

30 30

Low

High Medium Low

Constant price increases Constant 5% price increases Annual % increase, wholesale drug prices Annual % increase, wholesale drug prices

2103

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

10%

Median

Key:

Constant price increases Oil & gas Annual % increase, wholesale drug prices Oil & gas

Oil & gas

Medi

High

0Media 10

2001

2000

High

Low

Media Pharmaceuticals Oil & gas Media

12.5% 11.0% 11.0% 12.0% 10.5% 10.5% 11.5% 10.0% 10.0% 11.0% 9.5% 9.5% 10.5% 9.0% 9.0% 10.0%

Median

Automobiles Banks

9.5% Source: Worldbank

The Pharma industry’s average 9.0% profitability is comparatively high 15% compared to other sectors.

2011 2012 2013 2014 Constant price increases 10% 10% Annual5% % increase, wholesale drug prices 5% 2010 15% 15%

0% 0%

10%

2010 2010

2011 2011

2012 2012

2013 2013

2014 2014

Source: Financial Times

5% 0%

2010

Rationalizing benefits – health economics

2011

To curb costs in healthcare and in particular for new drugs, payer systems in many countries (with the notable exception of the US) have started to apply sophisticated health economic computations to set the reimbursed prices for drugs. Payers set a price which reflects the monetary value of the improved outcome by the new drug versus the outcome of the standard of care along with the cost savings for the total health care systems the new drug will realize. For example, Gilead’s Sovaldi (the “one-thousand-dollar-pill”) which cures Hepatitis Virus C (HCV) infections will reduce the number of liver transplants and thereby leads to substantial cost savings for the healthcare system in the long term, even with the drug’s high price tag. Some Pharma companies go even further in order to show the value of their products and only charge for those patients for which the outcome is favorable. Such schemes are discussed more and more for oncological treatments but are also proposed by Novartis for its new heart insufficiency drug Entresto. 46

Issue 2

2012

2013

2014

AMERICAS INVESTMENT For less severe diseases which can be relatively effectively treated for most patients with drugs already on the market (such as blood pressure or heartburn), these health economy considerations may make the development of a new drug financially unattractive. If the best available treatment happens to be a generic drug with a low price, the improvement in effectiveness and safety must be vast to justify a price which pays back development costs.

4 strategic archetypes emerging

These two drivers - increasing costs of drug development and cost pressure on drug prices - will lead to a fundamental reorganization of the Pharma industry. IMAP’s “4 strategic archetypes” model gives a conceptual framework for the industry structure as it evolves and is a good predictor for future, strategically driven transactions.

Relative market share

Absolute size

Originators Find, develop, launch innovative new treatments. Globally, based on strong R&D organization

Medical excellence

Providers of low-cost copies Manufacture and deliver standard quality at lowest possible costs

Cost efficiency

Generics

Medical excellence

Consumer Marketing

Point-of-call specialists Provide comprehensive solutions for an indication / TA. Build niche competence OTC Market consumer products with medical claim utilizing branding know-how

Biosimilars

Source: KP/IMAP

Originators’ mission is to find interesting therapies in the huge pool of innovative startups, develop them and bring them to market. Very few of the large Pharma players are big enough to finance a sustainable R&D pipeline, thus originators must combine big absolute size with medical excellence (and many other qualities, of course). Providers of low-cost generic drugs must be big and have optimized capacity utilization at each level of the value chain, from the manufacturing of chemicals to their sales force (or, in many countries, their tender management). Consequently, generic drug manufacturers have consolidated substantially over the last years. The market of biosimilars (copy-cat products of biotech drugs) is just beginning to evolve and it is yet to be seen who the big players will be, though it is clear that generic drug providers will not compete in this market as they generally lack the skills in clinical development required to bring biosimilars to the market. However, it is already apparent that the winners will have the same features as generic drug providers today: huge size and razor-sharp cost control.

Sandoz (Novartis) 11%

30 20

Mylan 9%

Lupin 3% Sun 6%

2015

2014

2013 2105 2015

2012 2104 2014

Fresenius 3%

2011 2103 2013

2012 2010 2012

2011 2011 2009

10 10

Other 36%

2010 2010 2008

20 20

Teva + Actavis 21%

2009 2009 2007

30 30

Top 10 global generic drug manufacturers, 2014

5 deals >1bn

2008 2008 2006

40 40

2006 2006 2004 2007 2007 2005

50 50

Top 10Top global generic drug manufacturers, 2014 2014 10 global generic drug manufacturers,

2005 2005

60 60

Cumulated deal value [USD bn]

70 70

2004 2004

Cumulated deal value [USD bn]

Acquisitions of generic drug manufacturers Acquisitions of generic drug manufacturers Acquisitions of generic drug manufacturers Deal values >USD 1bn Deal values >USD 1bn Deal values >USD 1bn

Sanofi 3%

Hospira (Pfizer) 4% Aspen 4%

Source: Statista, 2015

Source: MergerMarket, Evaluate Pharma, KP research

Issue 2

AMERICAS INVESTMENT

Comfortable gross margins and complex manufacturing processes have led to average capacity utilization in Pharma manufacturing of only 35%, whereas in related industries such as personal care, 85% capacity utilization is the target

OTC drugs - medication which can be purchased by individuals without a doctor’s prescription - follow a different dynamic. More closely resembling other consumer products like shampoos, they are driven by brands and consumer habits. This means that relatively small companies (by global standards) can compete with brands which are strong in a local market. In fact, looking at OTC products in Europe, we see that most brands are strong in only one market. Nonetheless, as the market matures, smaller companies will be acquired by global OTC companies such as J&J, Bayer, GSK/Novartis, or Perrigo and global brands will dominate the market in the long term. Point-of-call specialists form another archetype that do not necessarily require huge absolute size. These companies provide products for one therapeutic area or medical condition. Their key objective is to combine medical excellence in their domain and a strong position in the relevant market. All orphan drug companies fall into this category, but also large firms like Novo Nordisk, who focus on diabetes drugs. Obviously, there will be many exceptions to these four archetypes. For example, some types of drugs are very resistant to generic competition, such as topical drugs (treatments acting on the skin without entering the body), drugs which are applied with dedicated devices such as inhalators, or drugs which have only a very small market. Providers of these types of products may have less to fear from cost pressures than the others.

Manufacturing – Pharma’s Achilles heel

While the 4 strategic archetypes will fundamentally change the industry landscape and with it the companies known to the patient/consumer, Pharma manufacturing is also undergoing significant changes. Historically, Pharma companies were fully integrated, incorporating R&D, manufacturing, and distribution. Comfortable gross margins and complex manufacturing processes have led to average capacity utilization in Pharma manufacturing of only 35%, whereas in related industries such as personal care, 85% capacity utilization is the target. The issue is exacerbated by the many successive acquisitions which result in unwieldy and inefficient manufacturing networks. Consequently, the last decade has seen the closure of many manufacturing units and the consolidation of production to larger sites. A next step in the evolution of Pharma manufacturing will see increased outsourcing to Contract Manufacturing Organizations (CMOs). This means not just the transfer of manufacturing to a CMO, but also the sale of integrated manufacturing units to a buyer who then also becomes a service provider. We agree with McKinsey, the consultancy, that the Pharma industry’s value change will morph to a system like that of the automotive industry: the brand owners (Pharma companies) will control the most critical elements of manufacturing whereas all other steps are outsourced to CMOs who will be organized in tiers; with some very large operators and a number of CMOs who are specialized and have strong positions in certain technologies.

More focus on strategic deal making

Dr. Christoph Bieri (left) Chair IMAP Health Care Group and Managing Partner Kurmann Partners AG (IMAP Switzerland) christoph.bieri@imap.com

Michel Le Bars (Right) Managing Partner Kurmann Partners AG (IMAP Switzerland)

In conclusion, whereas much of M&A deal-making in the last few years has been driven by financial, tax or merely “bigger is better” considerations, future transactions will follow a pattern by which streamlining the businesses of Pharma companies. Many companies today do not follow a clear strategy or even mix different archetypes within one business. These players will have to focus their business on one strategic archetype which, given the size and complexity of their operations, will necessitate large-scale M&A. Some early examples are the proposed US$ 40.5bn sale of Allergan’s generic drugs portfolio to Teva, and the famous strategy shift which Novartis engineered in 2014: selling its OTC, vaccine, animal health business and increasing its oncology portfolio, all in just one day. In view of these developments, Boards of Pharma companies are advised to carefully scrutinize the strategic merits of transactions. Acquisitions to merely gain size (no matter what) may be detrimental. In turn, investors should steer clear from the “whales” who buy anything. Issue 2

AMERICAS FINANCE

11 31

7 3

6 15 0

ITCOIN XT

THE NEXT GENERATION OR THE END OF THE LINE? Bitcoin XT, a recently released new Bitcoin software, has been heralded as a potential breakthrough in greatly speeding up blockchain transactions. Now that it is out, the world will be waiting to see if enough miners will support it as the consequences could be significant if they do. One of the concerns among industry observers is whether it will kick off a “disastrous scenario” of “two competing and incompatible versions” of Bitcoin mining software. The developers of Bitcoin XT have created a “fork” in the blockchain, and the question is how many Bitcoin developers and miners will choose it above continuing to build on the existing version of the blockchain. Here is how ex-Google executive Mike Hearn described the process to CoinDesk, a news site dedicated to Bitcoin and digital currencies: “By mining with bitcoin XT you will produce blocks with a new version number. This indicates to the rest of the network that you support larger blocks. When 75% of the blocks are new-version blocks, a decision has been reached to start building larger blocks that will be rejected by bitcoin Core nodes.” The new software has already been praised for widening the appeal of Bitcoin for mainstream users since Bitcoin XT 50

Issue 2

permits 8-megabyte blocks of data that can process up to 24 transactions per second instead of the existing version that caps data at 1 megabyte and generally permits only three to seven transactions per second. One interesting aspect of this development is that it shows how changes are made in the decentralized mining segment. If the take-up amongst miners of Bitcoin XT is insignificant, the current situation will not change. However, if miners and other stakeholders start moving in large numbers to XT, the consequences could be very important. How do the businesses that deal in Bitcoin today view this development? Most see it as inevitable, and a natural evolution of the blockchain process. Ed Boyle, CEO of Blade Payments, an API-accessed platform that makes legacy payment rails interoperable with blockchains, explained: “We feel that the development of new coins, private blockchains and hard forks such as bitcoin XT are symbolic of the dynamic adaptability of open source protocols. While the debate on block size and forking to create bitcoin XT can be discomforting, especially to those used to corporate or chain of command decision-making processes, it is how consensus is achieved among peers using open source platforms.

It is not just expected that such disagreements and competitions will occur; it is necessary that they do. This is the natural selection process of open source.” Just as Bitcoin and digital currencies evolve, it is important that the legal and regulatory protections follow. Although global regulation of digital currencies such as Bitcoin is spotty, where digital currencies are regulated, such laws tend to be flexible and can adapt as digital currencies evolve. For example, this definition of regulated “virtual currency” from the New York State “Bitlicense” regulations would clearly cover both Bitcoin and Bitcoin XT: “Virtual Currency means any type of digital unit that is used as a medium of exchange or a form of digitally stored value. Virtual Currency shall be broadly construed to include digital units of exchange that (i) have a centralized repository or administrator; (ii) are decentralized and have no centralized repository or administrator; or (iii) may be created or obtained by computing or manufacturing effort.” Similarly, the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issued anti-money laundering guidance regarding digital currencies that included with in its scope:

AMERICAS FINANCE

2 27

6 3 0

By mining with bitcoin XT you will produce blocks with a new version number. This indicates to the rest of the network that you support larger blocks 1

“In contrast to real currency, “virtual” currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. This guidance addresses “convertible” virtual currency. This type of virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency.1 In addition, the same perceived risks that regulators see regarding bitcoin would also apply to Bitcoin XT. These risks include: Digital currencies are not legal tender, and are not backed by governments, value balances or insurance; Transactions made with digital currencies are often irreversible; The value of digital currencies depends on other market participants and can be extremely volatile; Acceptance of digital currencies for the purchase of goods and services is not guaranteed. Thus in terms of legal or regulatory requirements, the development of Bitcoin XT – or indeed other future iterations – should not change how the legal framework, such as it is, applies to the digital currencies themselves.

Where there may be concerns is how the fork will impact the blockchain which is increasingly the focus of new interest and investment. The Bitcoin blockchain is considered more secure because it has a large global base of users, miners, and developers. The capability of the blockchain to record any information in a secure and unchangeable manner and that is accessible publicly has led financial institutions, investments companies, and stock exchanges to explore how the blockchain can be used for global secure record-keeping purposes. Some worry that a fork in the blockchain, especially one that divides miners and users, might weaken or even compromise the strength and security of the blockchain. Is this a bona fide concern? Time will tell. I suspect that the payments and data revolution started by Bitcoin will continue, despite the fork. As Ed Boyle noted, the beauty and power of Bitcoin derives from the fact that “nobody is in charge; nobody is the ultimate arbiter or boss here – the market is. And, as long as the market (represented by nodes doing the processing) is not controlled by any consolidated entity or group, it can be expected that the fittest solution will survive and, over time, the ecosystem will continue to grow stronger and more adaptable”. If Bitcoin XT is indeed the “fittest” solution, many believe that it will survive, and will make the blockchain even stronger.

Judith Rinearson Partner Bryan Cave LLP

Judith Rinearson, Partner at the global law firm Bryan Cave LLP, is the leader of the firm’s Prepaid and Emerging Payments Team. She had been a resident in the New York office. She has officially relocated to London in order to expand the firm's Payments Practice in Europe. Source: 1 FinCEN Guidance, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” FIN 2013-G001 (March 18 2013).

Issue 2

AMERICAS BANKING

With our specialization we go beyond banking services

Dr. Gerardo Salazar Viezca Chief Executive Officer Banco Interacciones (Grupo Financiero Interacciones).

Global Banking & Finance Review interview with Dr. Gerardo Salazar Viezca, Chief Executive Officer of Banco Interacciones (Grupo Financiero Interacciones). What can you tell us about Banco Interacciones’s performance during the last year? I have to say it’s been an outstanding year. We have a solid business model that rests on three main pillars—market segmentation, product specialization, and skillful execution—and it was this that enabled us to continue our growth in 2015. We are a specialized bank. Any other business prospect that does not fall within these criteria does not distract us. We have set a higher standard each year during the last 15 years. For example, in the last 12 months, core commission generation, high asset quality, high-cost control, higher productivity and better efficiency have all contributed to an annual loan book expansion of 28.53%, an ROE of 19.42% and a non-performing loan ratio of just 0.13%. These three metrics are truly better than the standards of performance in the Mexican Banking System.

Issue 2

What makes Banco Interacciones different from other banks, and which ingredients are determinant in this? First and foremost, our business model. This is constructed on the basis of two value propositions, one that we offer our borrowers and one to our depositors. To the former, we offer swift access to the markets, and to the latter, an incomparable risk-return ratio. We are able to do this because our branch network keeps operating costs to a minimum and because we control risks by ensuring a high-quality mix of infrastructure loans to sovereign entities—federal, state and municipal governments as well as to Special Purpose Vehicles (SPVs). Our excellence within the banking industry stems from this dual value proposition.

In this segment, commissions advanced by an impressive 33% between the close of the second quarter of 2015 and end of the third.

What are the principal sectors that Banco Interacciones targets? Our operations are organized into four business units. In order of importance, we have Government Banking, which accounts for 61.5% of our total loans; Private Infrastructure Banking accounts for 21.8%; small and mid-sized enterprises (SME) Banking accounts for 8.3%, and the last, Federal Banking, which accounts for 7.9% of total loans. There are a few minor loans placed outside these categories, but the vast majority of our resources are committed to these four banking units.

Doing business in this country requires a mastery of three crucial aspects: first, risk mitigation—an area where we have a strategic advantage. Second, structuring credit operations that are truly bankable. And last but not least, offering a “one-stop shop” where clients can find an array of services that go well beyond traditional banking: legal and tax consultancy, technical and economic services, for example. These are all areas where Banco Interacciones excels.

Loans to the SME sector have grown substantially in the last 12 months. Which components have played a significant role in this? I would attribute it to our ability to bring innovative financial solutions to the market, particularly leasing companies.

Although there are some very different factors at play in this growth, what they have in common is the component of innovation, coupled with our unwavering commitment to prudent lending standards. Many consider Banco Interacciones, the right “partner in financing public infrastructure projects in Mexico.” Can you explain why? I think our past track record and solid reputation in this area have a lot to do with it. We’ve earned widespread recognition for our proven know-how in Mexican public infrastructure.

One thing that makes us truly unique in the industry is our in-house consultancy firm. No other Mexican bank has this type of dedicated operation, and it offers our clients an unparalleled advantage in finding high value-added services over and above the business-as-usual banking and financial assistance others might provide.

AMERICAS BANKING

We’ve earned widespread recognition for our proven know-how in Mexican public infrastructure. El Cajón Dam, Santa María del Oro, Nayarit Mexico

Issue 2

AMERICAS TRADING

FX rates fluctuate. Expertise stays the course.

Voted Best Forex Provider North America* for the fifth year running, our foreign exchange team has the consistency, global perspective and expertise to help you achieve your FX goals.

* Global Banking & Finance Review, 2011-2016. BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A. (member FDIC), Bank of Montreal Ireland p.l.c, and Bank of Montreal (China) Co. Ltd and the institutional broker dealer businesses of BMO Capital Markets Corp. (Member SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Canadian Investor Protection Fund) in Canada and Asia, BMO Capital Markets Limited (authorised and regulated by the Financial Conduct Authority) in Europe and Australia. “BMO Capital Markets” is a trademark of Bank of Montreal, used under license. “BMO (M-Bar roundel symbol)” is a registered trademark of Bank of Montreal, used under license. ® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere. ™ Trademark of Bank of Montreal in the United States and Canada.

AMERICAS FINANCE

Dodd-Frank: what happens next? Five years since the enactment of DoddFrank Act provides a poignant moment to evaluate the progress and analyse the challenges still being faced by banks looking to comply with landmark legislation. Responsibility for delivering reform lies firmly at the door of policy-makers tasked with strengthening our financial ecosystem, but to believe the progress hinges solely on the policy-makers would be short-sighted. While banks are understandably stalling on implementation measures, they too must play their part in the regulation game, not only in the interest of compliance, but to stay lean and agile in a rapidly changing regulation landscape. As the implementation of Dodd-Frank progresses, financial companies are developing a better understanding of the legislationâ&#x20AC;&#x2122;s costs and implications â&#x20AC;&#x201C; but equally, of its potential benefits.

July 21, 2015, Senate Democrats Mark 5th Anniversary Of Dodd-Frank Wall Street

What is clear is that the sooner these banks put measures in place to ensure compliance, the better theyâ&#x20AC;&#x2122;ll act to compete with their industry counter-parts. The open-ended nature of Dodd-Frank poses its challenges, but there are very good business reasons for banks to comply. The problem is that many banks have yet to understand that when it comes to compliance, technology can play a key role in making the transition as easy as possible. In recent years banking technology has evolved to keep pace with the changing nature of the landscape. By using banking technology, governance programmes are much more likely to work and banks will find it much easier to change their habits and comply with regulations.

Karen Winter Sales and Marketing Manager Fonetic

Issue 2

AMERICAS FINANCE Here is a brief overview of why and how trading surveillance technology can help:

The role of voice analytics

Trading environments are among the most challenging for voice recognition software. They are loud, home to low-grade quality recordings, and traders often speak a number of languages, using trade-specific terminology.

Voice analytics software is designed specifically for these unique environments.

Technologies that are more effective than transcription-based analytics and are able to reconstruct the history of a trade in

30seconds The result is that financial institutions have the tools to proactively assess and manage trading floors, making compliance with Dodd-Frank regulation a non-issue for their organization.

The end of working in silos

Hosting a number of conversations with compliance teams from major banks, it appears that there is little to no provision in place to transfer data across front, middle and back office functions, meaning huge swathes of data (and money) can be lost without trace. It’s not only transferring data which is important, it’s about the front, middle and back office being able to view the data in relation to each other, rather than in silos. Each of them have a different need, and the benefits of being able to view the data across the borders of their areas is beneficial for business intelligence.

For example, if someone in the front office is concerned with the conduct of a trader, by linking all the data from all of the sources, from HR systems to trading data, they can link the relationship between all this data and be able to closely monitor what the trader is doing right and wrong. Seeing the force of penalties for noncompliance, with penalties severe enough to suggest those failing to prepare for DoddFrank regulation are preparing to fail, banks need to seriously consider incorporating the right technology to their business. Five years after the signing of Dodd-Frank, many banks are arguably still “too-bigto-fail”. In fact, the top bank holding companies may have even become larger. It’s certainly true that the Dodd-Frank Act has given regulators new powers to pursue enforcement against banking malpractices, and that it has done so with a mix of gratitude and wariness. However, much can be learnt from the tough regulatory approach of the Dodd-Frank Act and the

apparent desire to break-up the largest and most complex US banks. Dodd-Frank is a huge and complex reform and it’s by no means perfect, it has failed to reach many of its goals, especially regarding bank sizes, but it has also brought a lot of progress in some areas of financial regulation and this should not be underestimated. With access to technology that can decode behaviours and flag potential problems early on, banks can avoid the harsh penalties and recognize that in fact compliance with Dodd-Frank and other regulations bring with it many benefits. Meeting regulation measures makes sound business sense, but these regulations alone will never be able to overcome the problem of an occasionally corrupt banking culture. Nobody likes to be regulated but that isn’t to say that regulation isn’t saving some bankers from their worst instincts. Banks may need a little help to make the transition faster and smoother, but with trading surveillance technologies to support them, they can definitely succeed. Issue 2

AMERICAS BUSINESS

BRAZIL THE LAND OF OPPORTUNITIES FOR MERCHANTS

Climbing the e-commerce market ladder

According to Statista, 36.1 million people of Brazil’s 200 million population will make purchases online. In comparison to Europe, this figure may seem low. However, it still means that more people are shopping online than Benelux and Nordics combined. Not only is Brazil famous for its extravagant annual carnival and world class footballers, but it is also now the largest e-commerce market in Latin America with total sales expected to reach 37 billion USD in 2015. Brazil is not only the biggest market in Latin America for macroeconomic reasons such as population and economy but also because it has one of the most mature e-commerce markets in the region.

Planning a strategy

Merchants need to be aware of the rising figures in mobile penetration; 53.7 percent of Brazilians are now accessing the internet and by 2017, it is estimated that almost all of these online users will access the internet with their mobile device. As such, merchants need to think about adding mobile payments as a payment option for their customers. This way they will have the chance to fully capitalise on the future potential within the market. 43.7 percent of Brazil’s population is aged between 25 and 54, with 85 percent residing in urban areas1, whether it is in the emerging modern apartments in the Leblon region or the famous Favelas on the outskirts of Rio de Janeiro. 58

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Almost half of online shoppers are aged between 18 and 342, with the majority located in urban zones in the southeast (including São Paulo, Rio de Janeiro), the northeast (Salvador and Recife) and the south (Porto Alegre, Curitiba, Florianópolis). In the last couple of years fashion and accessories overtook household appliances as the most popular items for Brazilians to place in their shopping carts.

Different ways to pay

In Brazil, it’s not just the likes of Visa and MasterCard that e-commerce sites need to accept. It is important for those wishing to dance to the samba beat to differentiate between national and international cards and ensure they have payment systems in place for all. Only 20 percent of Brazilian buyers have access to international credit cards and their national cards only process in Brazilian Real, making them unsuitable for cross-border payments. Therefore, international merchants are advised to process payments locally if they have a domestic presence and bank account. Retailers need to look particularly at providing support for the local Hipercard and ELO credit cards that are targeted at lower income earners; they are gaining in popularity and will play an increasingly important role in coming years. Boleto Bancário (Portuguese for ‘bank ticket’) is a payment method regulated by the Brazilian Federation of Banks and represents about 15 percent of all payments. A boleto can be paid at ATMs, branch facilities and

internet banking of any bank, post office, lottery agent and some supermarkets until its due date. After the due date, it can only be paid for at the issuers bank facility. It remains a popular payment method, particularly for the half of Brazilians that don’t currently have access to a bank account3, this needs to be a consideration for retailers wishing to physically enter the market.

Piece by piece

Payments in instalments are very common in Brazil and currently make up around 80 percent of all e-commerce payments. Spread across anything between three and twelve payments depending on the goods being purchased, payments in instalments are usually free of interest for the buyer and are collected monthly by the vendor. Vendors have the possibility to anticipate the payment of the full amount, but this generates a so-called anticipation fee, which is charged by the acquirer. Anticipation fees may be as much as 18 percent depending on the amount of instalments to be paid upfront.

AMERICAS BUSINESS

Rio de Janeiro, Brazil. A soccer fan browses through one of the many street vendor stalls in Rio who are selling merchandise relating to the 2014 Soccer World Cup

An appetite for digital currencies While online payments are currently dominated by Credit Cards and Boleto Bancário – accounting for more than 93 percent of all online purchases in total in Brazil4– in many ways, Brazil is a progressive nation when it comes to e-commerce.

Research from PwC5 shows that some two-thirds (66 per cent) would be open to purchasing with the new breed of digital currencies, ahead of China’s 58 percent and significantly higher than the 28 percent in US and 23 per cent in the UK that would be comfortable to do so. In the next few months there is expected to be a hearing involving representatives from Banco Central do Brasil; the Receita Federal, the Brazilian tax enforcement agency; Conselho de Controle de Atividades Fiancerias, the country’s antifraud agency; and representatives of the local Bitcoin industry to discuss digital currency regulation.

Taking a leap across the virtual border

The US remains the primary destination for cross-border e-commerce by Brazilian buyers, but it has dropped from 79 percent in 2013 to 71.7 percent in 20146. Moving east to China meanwhile has increased from 48 per cent to 55.1 per cent as a destination for cross-border purchasing during the same time. This is followed by Hong Kong (18 percent), Japan (15 percent) and Canada (9.5 percent). The good news for online retailers is that returns in Brazil are comparatively low – only 15.6 percent of customers in Brazil returned goods, 10 percent below the global average of 27.5 percent.

The bottom line

Retailers that are willing to adhere to Brazil’s cultural traits and varied payment methods and presented with a great opportunity now and in the future. With less than a year before it hosts the Olympics for the first time, Brazil is full of potential for merchants willing to take the plunge.

Ralf Ohlhausen Chief Strategy Officer The PPRO Group Source: 1 www.thepaypers.com/ecommerce-facts-and-figures/brazil/7 2 www.thepaypers.com/ecommerce-facts-and-figures/brazil/7 3 www.worldbank.org/en/news/press-release/2015/04/15/ massive-drop-in-number-of-unbanked-says-new-report

4 www.thepaypers.com/payment-methods/brazil/7 5 www.pwc.com/gx/en/retail-consumer/retail-consumer-

publications/global-multi-channel-consumer-survey/surveyhighlights.html 6 www.thepaypers.com/ecommerce-facts-and-figures/brazil/7

Issue 2

AMERICAS INVESTMENT

U.S. Investor Immigration Program

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AMERICAS INVESTMENT

73% of visa holders invested $500,000 through the Regional Center program. Interestingly, 8.5% invested more than the upper threshold of $1 million.

The U.S. Immigration Act of 1990 led to the creation of the EB-5 visa, an immigration route for those willing to invest at least $500,000 in U.S. businesses. The program was in some ways similar to Canada’s Investor Immigration Program, which had enjoyed strong uptake since its introduction in 1986. The EB-5 program grew in the mid-1990s, led by strong demand from wealthy citizens of Hong Kong, who were wary of the impending handover from British to Chinese rule in 1997. There was also a large number of applications from Taiwan, which was undergoing democratic reform and faced uncertainty over its relationship with mainland China. However, uptake for investor immigration in the U.S. was much lower than in Canada. In the late1990s and early 2000s, with demand from Hong Kong and Taiwan falling, the program fell into obscurity. The mid-2000s saw the emergence of better management and regulation of the program. The Investor and Regional Center Unit was created at USCIS to oversee the EB-5 program. In 2005, Invest in the USA (IIUSA), a trade association for EB-5 Regional Centers, was founded. This led to improved oversight and the creation of many more Regional Centers, offering

increased investment opportunities for prospective immigrants. Consequently, the program grew steadily, led by increasing demand from China. In 2014, for the first time in the program’s history, the quota of 10,000 was met, with more than 9,000 Chinese citizens receiving visas.

2. Invest in a Regional Center

Investment Options

Investments in Regional Centers are by far the more popular option, with investors seeking a higher likelihood of meeting job creation requirements while also looking to invest passively and live in areas other than those of their investments.

The investment requirements for the EB-5 visa have remained unchanged since the program’s inception. The minimum investment is $1 million for investments in most of the country, but $500,000 in Targeted Employment Areas. Investors can either manage their investment personally or invest passively in a Regional Center: 1. Creation of a new U.S. Enterprise Invest either $1 million or $500,000 in capital acquired through lawful means. The general minimum requirement is $1 million; for Targeted Employment Areas, the minimum is $500,000. Targeted areas include areas with unemployment of at least 150% of the national average. Rural areas, defined as those outside a metropolitan statistical area or outside the boundary of any town having a population of 20,000 or more, are also included in the $500,000 minimum. Create full-time employment for at least 10 qualified U.S. workers, who must be direct employees of the enterprise. Actively manage the day-to-day activities or policy of the enterprise.

Make an investment of $500,000. Create full-time employment for at least 10 qualified U.S. workers, directly or indirectly. Active management of the enterprise is not required.

Regional Centers

Regional Centers are organizations, designated and regulated by United States Citizenship and Immigration Service (USCIS), which pool EB-5 capital in approved economic development projects within defined regions. Regional Centers can be publicly owned, privately owned, or a publicprivate partnership. By pooling foreign capital, they facilitate investment in large-scale projects, often in coordination with regional economic development agencies. As with all EB-5 investment options, Regional Center investments must be proven to have created 10 jobs. However, with Regional Centers the job creation may be indirect, so long as it is demonstrated through economic analysis that the minimum requirements have been met.

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AMERICAS INVESTMENT

The number of Regional Centers has grown with the popularity of the EB-5 program. In 2006, there were only 25 Regional Centers. As of May 2015, USCIS had approved 652 Regional Centers. All investment offerings made by EB-5 Regional Centers are subject to U.S. securities laws, enforced by state securities regulators and the U.S. Securities and Exchange Commission.

Mykolas Rambus Chair of Global Investor Immigration Council

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AMERICAS INVESTMENT

Independent Studies

In 2005, the U.S. Government Accountability Office (GAO) issued a report to Congressional Committees addressing the reasons for falling demand for the EB-5 program. Among the reasons cited for the decline in applications were uncertainty among investors, the onerous application process, lengthy adjudication periods, and the suspension of processing of more than 900 EB-5 cases in relation to changes in USCIS regulation. The study also looked at trends among past applicants, finding that immigrants primarily invested in hotels or motels, manufacturing companies, real estate companies, domestic sales companies, farms, import/export companies, restaurants, and technology companies. The authors also estimated that 38% of approved immigrant investors had so far applied for U.S. citizenship. In 2009, USCIS commissioned policy consulting firm ICF International to undertake an independent study of the EB-5 program and its impact. The report found that EB-5 participants had a substantial impact on GDP and job creation. Between 2001 and 2006, a period in which the program suffered from a lack of uptake, estimate average impact on GDP was $117 million per year. Over the same period, an estimated total of 12,000 jobs were created directly and indirectly as a result of EB-5 investments, at an average of 2,000 per year and 21 per investment. Impact on federal tax revenues was estimated to average $17 million per year, while state and local government were estimated to have seen increases in tax revenues of more than $10 million per year as a result of the EB-5 program. The USCIS/ICF study found that, based on a sample of 295 individuals who received their visa between 1992 and 2007, the median age of the investor at the time initial investment was 44. The survey also found that 85% were married, of whom 92% had at least one child. The study also offered insights on how wealthy immigrants prefer to invest. Real estate was by far the most popular industry, accounting for 35% of investments, while dairy cattle, hospitals, aircraft manufacturing legal services and crop farming were also common.

Information on ownership structure revealed that 56% owned less than 10 percent of the business in which they invested, indicating a preference for taking minority stakes in larger or more established companies. However, 24% owned 100% of the business, suggesting that a significant number preferred to fully acquire small businesses or establish their own. Finally, the study looked at investment amounts, finding that 73% of visa holders invested $500,000 through the Regional Center program. Interestingly, 8.5% invested more than the upper threshold of $1 million. More recent studies of the program have been commissioned by IIUSA. While the organizationâ&#x20AC;&#x2122;s support for the EB-5 program means it cannot be described as independent, its studies were conducted by economic impact analysis company IMPLAN and peer-reviewed by the Association for University Business Economic Research. The most recent report estimates that the EB-5 program contributed $3.58 million to GDP and supported more than 41,000 jobs in fiscal year 2013. Spending by EB-5 investors was estimated to have contributed $520 million to federal government tax revenues and $285 million to state and local government tax revenues in the same period.

Support and Reform

The EB-5 program, despite not yet having received permanent approval, has generally received bipartisan support and has been renewed without fuss under both Republican and Democratic governments. However, the program has not been without criticism and various aspects have been amended and improved over time. The most significant changes have been around the Regional Center investment option, introduced by Congress in 1992. However, this route did not really take off until the mid-2000s, following the passing the Basic Pilot Program Extension and Expansion Act in 2003, aimed at revitalizing the program. Additionally, the 2005 formation of Invest in the USA (IIUSA), a trade association for EB-5 Regional Centers, led to the creation of many more Regional Centers, offering more investment opportunities and increased oversight.

Government oversight of the program through USCIS has also been reformed over time. In 1998, USCIS issued changes that required investors to prove that that investment funds originate from lawful sources. Despite these changes, there have been criticisms that the program may be exploited or create conditions for fraud. A notable case occurred in the U.S. between 2011 and 2013, when a businessman misrepresented his credentials and led an alleged $156 million investment fraud case, through which nearly 300 Chinese EB-5 applicants invested in a hotel and convention center project in Chicago. Although the project never came to fruition, around $147 million was successfully return to applicants following an investigation by the SEC and USCIS. Critics of the program have also highlighted that, despite the Regional Center program targeting areas of low income and high unemployment, developers and investment companies have been gerrymandering to ensure that projects in affluent neighbourhoods are still eligible for EB-5 funding. Thus, the majority of EB-5 supporters acknowledge that the program requires further reform to prevent fraud and abuse and to ensure maximum economic impact. Regulatory changes are currently being debated with the program, which recently received a temporary extension from Congress having been set to expire on September 30, facing an uncertain future. The American Job Creation and Investment Promotion Reform of 2015 Act, introduced by Senators Patrick Leahy and Chuck Grassley in June this year, would reauthorize the Regional Center Program for five years, while reforming the program to improve oversight, security, and transparency. The bill seeks to increase the minimum investment amounts from $500,000 to $800,000 for Targeted Employment Areas and from $1 million to $1.2 million in other areas. Earlier this month, Senator Rand Paul introduced The Invest In Our Communities Act, which suggests making the EB-5 program permanent, increasing the number of visas available, keeping the minimum investment for Targeted Employment Areas at $500,000, and introducing transparency measures. Issue 2

Middle East

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MIDDLE EAST INTERVIEW

PROGRESSIVE, INNOVATIVE AND TRANSPARENT

Hussain Al Qemzi, CEO Noor Bank

A seasoned banker with over 28 years of experience working with leading financial institutions in the UAE, Hussain Al Qemzi is the Group CEO of Noor Investment Group and CEO of Noor Bank. During his tenure as CEO, Noor Bank has emerged as one of the top Shari’a compliant banks in the UAE and has been rated ‘A-’ IDR by Fitch in 2014. Earlier this year he was named the ‘Islamic Banking CEO of the Year’ by the CEO Middle East Awards 2015 as well as the Islamic Retail Banking Leadership Award 2015 by Cambridge IF Analytica.

Noor Bank (then Noor Islamic Bank) was established when the global financial crisis broke in 2008. As a young, innovative and progressive bank with none of the legacy issues common among more established banks, Noor Bank was able not only to ride out the financial storm that engulfed the world but eventually thrive. This was because of its prudent growth strategy that prioritised the fundamentals of capital and liquidity management, aligned with competitive and dynamic financial services and solutions. Today Noor Bank is a leader in the Islamic banking space. In 2014, the bank rebranded – from Noor Islamic Bank to Noor Bank - in a strategic move to appeal to a wider range of customers, both Muslims and non-Muslims, in the UAE and abroad. The bank still remains Shari’a Compliant at its core and continues to maximise returns for customers by eliminating unfavorable functions, including hidden fees, complicated charges and inflexible services. Today, in line with its business promise ‘Noor Gets It Done’, Noor Bank provides financial services to a new generation of always connected customers who want instant and constant access to banking whenever, wherever and however they desire.

The bank has addressed the needs of its tech savvy customers by leading the way in implementing mobile and online banking services, including offering the first Arabic enabled mobile internet Islamic banking service in the Middle East. Today, Noor Bank continues to place technology and digitisation at the forefront of the products it offers. Since its beginning, the bank has significantly increased its profitability, client base, and asset infrastructure, consistently recording year-on-year growth. Most recently, Noor Bank chalked up net profits of AED272 million for the first six months ending June 30, 2015, up 26% from the same period last year. In the first half of 2015, Noor Bank’s assets crossed the US$10 billion mark for the first time. 2015 has been a strong year for the bank, with many milestones. These include the launch of its debut $500 million global Sukuk, which was well received worldwide, with around 45% allocated to European and Asian investors. The bank also expanded its Shari’a compliant service dedicated to the financing of SME’s - Noor Trade - to ensure that it can service prime small and medium enterprises operating in commercial zones such as Al Quoz and the adjoining business centres. Issue 2

MIDDLE EAST INTERVIEW

Customer satisfaction in Noor Bank’s financial solutions was also reflected in Global Banking & Finance Review honouring Noor Bank with five awards: Most Innovative Islamic Credit Card UAE 2015 Best Islamic Bank for Auto Financing UAE 2015 Best Islamic Bank for Personal Financing UAE 2015 Best Bank for Priority Banking UAE 2015 Best Bank for Home Finance UAE 2015

Global Banking & Finance Review Editor, Wanda Rich traveled to Noor Bank’s offices in Dubai in early September to speak with Hussain Al Qemzi, CEO, and Waleed Barhaji, Business Head of Consumer Finance, about the bank and its consumer finance business. This interview was conducted in early September at Noor Bank’s Dubai Office. Thank you so much for having us here in Dubai. Noor Bank was established in the year 2008 during the economic crisis. That was a challenging time, can you tell me little about why it was created and how it has evolved? Hussain Al Qemzi: I think the fact that the bank commenced operations in such a challenging time was a great learning experience, giving us the resilience that is now part and parcel of our brand. We have learned a lot about how to best look after our customers, how to seek our business and how to protect the bank from the difficulties associated with a global crisis. The experience helped shaped the distinctive identity Noor Bank has today, giving us character and contributing to a bond of trust between us and our customers. That experience was something that has added so much to the character that we are today. 66

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Noor Bank was launched to create a new breed of Islamic bank, a bank that is progressive, innovative and transparent, three attributes that have greater relevance than ever before in this fast-evolving world. What are the biggest challenges you see as well as the opportunities facing Islamic financing both within the UAE and Dubai specifically? Hussain Al Qemzi: For the Islamic banking industry as a whole the biggest challenge is the standardisation. Standardisation is very important for all Islamic banks because without this we cannot claim to be transparent. Transparency is a very important component of what we sell to the clients. We are selling ethical banking; we are selling clarity and equality in a transaction. Today we constantly face issues regarding the differences in standards, not only between one country and another, but often within the same nation there are varying opinions about what is Shari’a compliant and what is not. This is something we’ve been striving to address, and I think we need to take concrete steps to order to achieve this universal industry challenge. The second challenge for Islamic banking is that despite the success and growth we are seeing, Islamic banking is still a small industry compared to the conventional banking sector. There is still room to improve, to grow and to increase our reach multifold so that Islamic banks can play a much bigger role in the global economy. As for opportunities, yes, there are a lot of opportunities because we have a strong captive audience. There is a big pool of liquidity that has enabled Islamic banks to be more resilient during the financial crisis compared to others, and this brings us back to our roots. I think that is the real opportunity we should build on in order to develop the Islamic banking sector over the future. When it comes to banking, in general, technology is playing such a vital role. How have you seen it changing both customer behaviors and the way that banking operates within Dubai? Hussain Al Qemzi: Customer behaviour has changed not only in banking but across all sectors. We have seen what is called the ‘digital revolution’, which in the finance world is branded as ‘Fintech’.

A lot of new technologies are being created every day, geared towards the mobilecentric user. I can see in the next five years this will change the landscape, the way we manage our business and reach our clients. New generations of clients, as well as our future staff, are more dependent on rapidly changing developments in communications, technology and accessibility. Transactions that can easily be done online, or over the phone, will move exclusively to those channels, reducing the need for bricks-and-mortar branches and offices. Of course, there is an issue between improving security and adapting to these new channels. I see the branches of the future as information and advice centers, with the reach and the interaction with the customer and the bank of the future moving online. I think that will disrupt the model that we have today. At Noor Bank, we intend to be the first people in the industry to adopt and hone this kind of technology in order to stay competitive. So reaching out to your customers both through online and mobile technology, you essentially see the branch banks fading away and more emphasis going directly to the customer. Hussain Al Qemzi: It’s not what I see but what is happening in the world, and we are witnessing this transformation day by day. The shift is really about making our services more mobile-centric, not just online. You recently launched a 500 million US dollar Sukuk on the Nasdaq Dubai. Can you tell us more about this product? Yes, this was one of our strategic initiatives that we have undertaken this year. We wanted to tap the capital market to create more diversification for the bank, which we think is a great way of improving our standing, our rating and our ability to access funding more conveniently and cost-effectively. The idea is not to rely on one source of funding but to diversify and to demonstrate to our future investors the ability of the bank to achieve this. I’m very happy with the listing. We are one of the best-priced Sukuk financial Institutions listed on Nasdaq Dubai. We are very proud of this and are going to continue to highlight that Sukuk is one of the products essential to the growth of our industry. We will continue to look to diversify and seek alternative funding channels for Noor Bank.

MIDDLE EAST INTERVIEW Waleed Barhaji, you are looking at a triple win. Most Innovative Credit Card UAE with the Best Rate Card, Best Islamic Auto Finance for UAE, and Best Islamic Personal Finance for UAE. Can you tell me how that feels and what this mean for Noor Bank? Waleed Barhaji: The consumer finance team, has worked very hard to create the products that cater to our customers’ various financial needs. With these products, the customer benefits from Noor Bank’s personal banking solutions to help them invest in their children’s education, start up a business, even to go on holiday, at very affordable rates. They also enjoy our multi-faceted auto financial solutions which suit their requirements, convenience and budget as well as the Noor Bank Murabaha facilities. The triple win, coming from an internationally recognised publication, is a great honour for Noor Bank, and we hope to continue seeing recognition for our efforts towards providing the best services for our customers. Can you tell us a little bit more about what makes the best rate card so successful? Waleed Barhaji: The Best Rate Card offers one of the lowest profit rates in the region, of 1.66 percent per month. Clients can also opt to transfer balances on other cards issued by other banks at lower profit rate and access easier payment solutions. Other benefits include the latest chip and pin technology that offers security whether you’re at home or abroad, international acceptability at 35 million outlets worldwide, and online banking capabilities, plus a long repayment period of 51 days, making it a great tool for debt management.

So that is really the advantage for Noor Bank customers, that you are readily accessible to them, when they need you and how they need you. Waleed Barhaji: Yes, precisely and we are committed to giving customers the highest level of accessibility and convenience possible. What’s next for your consumer finance division? Waleed Barhaji: We have just concluded a very successful summer spend campaign where we have offered significant rewards to our cardholders who have used their cards overseas. We are running a promotion where we offer a payment holiday of three months on our personal finance products, which means customers who are given a loan now, do not have to begin repaying until 2016.

We are dedicated to ensuring Noor Bank is the most efficient and reliable bank in the UAE, and we constantly strive to live up to our business promise ‘Noor Gets It Done’.

We are planning to launch a new auto finance product, which will enable our clients to get their dream cars at very affordable monthly installments. We are also very focused on our customer service; customer-centricity is a priority as we seek to deliver the best possible banking experience.

Is that complicated to set-up? You said that the customers can transfer their balance from another card is it a long process? Waleed Barhaji: No, it is not complicated at all, the balance transfer can be done over the phone. We live in a process-oriented environment where we need to make our services as accessible as possible for the clients, so we work towards ease of transactions to suit our client base and its diverse needs. We want all our customers to have a great banking experience, so we have worked very hard to eliminate the friction points.

Waleed Barhaji, Business Head of Consumer Finance Noor Bank

Issue 2

MIDDLE EAST BUSINESS

MANAGING MILLENNIALS

THE EVOLVING BREED OF BUSINESS TRAVELLER 68

Issue 2

MIDDLE EAST BUSINESS By 2025, it is estimated that millennials - that is, the generation born between the early 80s and 2000 - will make up approximately 75% of the workforce, becoming increasingly influential, particularly in large companies with prominent graduate schemes. Millennials are having a big effect on corporate expense and travel programmes, and companies that try to understand and meet the needs of this generation will benefit from more productive and engaged employees. In our recent whitepaper, ‘The Path to Innovation: Insights on the New Frequent Traveler’, one travel programme decision maker at a global technology firm said, “Our job is to figure out how to wow our employees, not just serve them. This is what is particularly compelling about millennials”. Of course, technology is a huge factor in this. Digitally fluent and tech savvy, millennials are accustomed to high-tech solutions that offer access to data 24/7 at the click of a button and expect the same when travelling for business or filing expenses. For example, with Apple Pay and other innovative consumer applications gaining traction in the consumer market, millennials are beginning to question if this can translate into their corporate life. This technological evolution has also contributed to another factor that is increasingly shaping corporate travel programmes: the mix of leisure and business worlds. Bleisure - as it is known - can relate to adding a few personal days to a business trip, but can just as equally apply to the experience itself and a desire to have the same experience in both personal and business travel. Millennials, in particular, don’t want to be treated as one unidentifiable commodity in a long line of business travellers, but as customers. This means a personalised service - from the way they are treated by corporate travel managers and the user interfaces they have to use, to the customer service they receive at hotels and venues. However, the rise of ‘bleisure’ has also created a challenge for some travel programme managers. According to PhoCusWright, “26% of travellers think

they can find better pricing on travel components on their own”. This sense of autonomy is not just restricted to the millennial employee: it can also be true of firms that have a large proportion of independent consultants. This can present problems for organisations that have a single standardised company policy and are trying to achieve high levels of compliance to that policy.

The technological changes outlined in this article present corporate finance and travel managers an opportunity for better employee engagement and operational efficiency.

However, there are a number of ways that companies can address these challenges and improve the service they provide for employees.

Whereas previously corporate travel managers could only influence purchasing decisions before a journey, now with mobile technology they can communicate with employees at any point in the purchasing path. This provides greater insight into and influence over - micro-purchases such as WiFi, taxi services or restaurant spend. What’s more, the rise of bleisure extends to social media: millennials enjoy sharing information about their travels online with peers and networks, whether for business or pleasure.

New technology, such as apps that offer the automatic pre-population of expense recipes and cloud technology that provides travellers with the same interfaces and files as in the office can help to simplify the expense claims process and maximise productivity when on the road. What’s more, companies can leverage GPS-based tools to provide ‘just in time’ recommendations and reminders, push out real-time alerts on pre-negotiated rates or complimentary services or, in the case of disruption, configure SMS tools that respond to key word inquiries such as ‘taxi’ and ‘restaurant’ by sending automated messages with in-policy recommendations. Companies can also leverage the concept of gamification - that is, rewarding employee behaviours such as programme loyalty or efficient expense claims through gaming mechanics such as leaderboards, levels and rewards - to help influence traveller behaviour. This is all part of the wider incentivised culture that we face everyday as consumers, so it makes sense for this to cross over into our corporate lives. In order to put in place such policies, travel programme managers need to first ensure they have good existing suppliers, and then negotiate extras such as free WiFi or car parking. Engagement strategies, such as extending frequent traveller perks and privileges (flight upgrades, access to airline lounges, fast-track security clearness, and allowing employees to retain points earned for business travel), all help to incentivise employees, in the same way, that they are marketed to in their personal lives.

This crucial data allows travel managers to identify and eliminate suppliers that receive repeated negative feedback, socialise positive feedback, and offers a way to tap into the needs and thoughts of their most important stakeholder. New technology and changing demographics are certainly changing the business travel and expense management landscape. However, when managed correctly, companies can use these changes in a positive way to empower employees on the road, deliver companywide savings, and ensure they have engaged and loyal employees that aren’t tempted to deviate from official policies.

Alan Gillies Vice President American Express Global Corporate Payments

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MIDDLE EAST INVESTMENT

WEALTH MANAGEMENT

IN SAUDI ARABIA Eng. Tarek Al-Rikhaimi CEO Saudi Kuwait Finance House

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MIDDLE EAST INVESTMENT Wealth Management is a growing industry in Saudi Arabia as the number of funds increased by 21.4% between 2014/13 as per the Capital Market Authority. With an increased number of listed companies and competitiveness in the market, investors have built an appetite for professional management of their funds.

Total values of investment funds’ assets grew considerably to SR 162.1 billion at the end of 2014, an increase of

16.0% over the preceding year, and coincident with a 21.4% rise in the number of investment funds to a total of 578.

To find out more about this growing industry our editor Wanda Rich spoke with Eng. Tarek Al-Rikhaimi, CEO of Saudi Kuwait Finance House (SKFH). Mr. Tarek Al-Rikhaimi, thank you for taking the time to speak with us. In your view, what are the greatest challenges and opportunities you see for investors? Market volatility is one of the major issues that investors face in any frontier market. However, this risk can be reduced by diversifying your investments across geographical regions, or difference asset classes, etc. There are plenty of funds being managed by professional managers that are well diversified. There are a lot of opportunities in KSA despite the recent volatility in the market and economic slowdown due to the negative effect of oil on the economy. Individual company fundamentals are still strong. There is a string of IPOs coming up which are usually underpriced though international investor can only gain access to such IPOs via mutual funds. The government, contrary to market

expectations, has continued infrastructure spending which will have positive implication for the economy going forward. What impact are regulations and reforms having on the investment landscape? Capital Market Authority has been controlling the market using different laws and regulation to protect the investors. These regulations are being constantly improved to follow the international best practices and standards of conduct. Further, the recent opening of the market to Qualified Foreign Investors is definitely going to increase the liquidity in the market which is good for listed companies. However, the capital inflow is not at the pace expected due to oil glut and effect of China’s hard landing on global capital markets. We consider it a major step by Saudi Capital market towards joining the emerging markets pool. How does Saudi Kuwait Finance House help high net worth investors achieve their financial goals? Our team of qualified Private Wealth Managers interact with each client to devise a formal Investment Policy Statement. We understand their risk and return objectives, their limitations, their preferences with respect to asset class and categories and their individual circumstances. It is only then we determine the optimal asset allocation for each client in order achieves their stated objectives. What investment strategy do your asset managers use? Our team has diversified background with expertise ranging from Debt and Equity Capital Markets to Real Estate and Private Equity investments. Our investment strategy varies with respect to the objective and the term and condition for each individual fund. Multiple approaches are employed in order achieve those objective. For example, Top down and Bottom up approaches to equity valuation. Active to Semi-active approaches to portfolio management depending on the market conditions since market here is more volatile as compared to the developed markets in US and UK. What investment products you offer? Currently, we have two operating public funds “Batik IPO Fund” which invests in IPOs and right Issues and “Batik Al Waed Fund” which is pure equity fund with the objective of investing in income generating stocks.

In addition to above we have private funds and DPMs for the institution and individual investors. We have a number of projects in the pipeline including sector-based and real estate funds. Can you tell us more about the Saudi Kuwait Finance House Batik IPO Fund and its success? Batik IPO fund has proved to be a start performer. It was launched in mid-2014. There are a total of 23 IPO funds, and 18, or 78% of them were launched after us. While more than 60% of these or 14 funds were launched only in 2015. We have set the trend in the market with our initiative and performance. We expect the trend to continue in 2016, and there are a number of IPOs expected in 2016. Since IPOs are usually underpriced here, and there is a restriction on foreign investors to invest directly in IPO, we believe that investors would tap that opportunity by investing in IPO Funds. As to how we achieved this, we focus on timing the market. We engage in fundament and technical analysis with a focus on macroeconomics to analyse the trend and direction of the market in the long term. What advice would you give new investors? Keep yourself up to date with basic investment techniques. If you are investing through a fund, seek information about the funds objectives, understand the risks involved. Make sure the objectives are parallel to your own goals and risk tolerance. What does the year ahead look like for Saudi Kuwait Finance House? Though the recent decline in oil prices worried the investors, we are very optimistic as the market has been resilient to short-term hiccups and emotions. As mentioned earlier, Saudi market has recently been opened to Qualified Foreign Investors who now can have a direct access to the local market. Capital inflow is low due to low oil prices as foreign investors typical prefer Petrochemical sector. Huge inflow is not expected unless oil recovers. However, we believe that, strong company fundamental, government spending, and an increase in the number of companies looking for IPO, will continue to support the market. Issue 2

MIDDLE EAST INTERVIEW

PRIVATE BANKING IN QATAR

Chaouki Daher, General Manager and Head of Private Banking at the International Bank of Qatar (ibq) talked to Global Banking and Finance Review about the private banking sector in Qatar.

Qatar, Doha, City

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MIDDLE EAST INTERVIEW What are the current trends you see taking place in the private banking sector in Qatar? The private banking sector in Qatar has shown significant growth in recent years. In response to the rapidly expanding population of affluent clients and the remarkably high pace of wealth creation that has taken place in the country as a result of a strong economy, the needs of our clients have evolved. Private banks had to adjust their value proposition to meet these new requirements by focusing on more sophisticated financial planning tools and a full range of innovative wealth management solutions. A recent BCG report also indicates that Qatar has the highest density of millionaires, where 143 out of every 1,000 households had private wealth of at least $1 million, followed by Switzerland, Kuwait, Hong Kong, and Singapore. Therefore, significant opportunities have emerged in the private banking market in Qatar, which require the recalibration of existing business plans emphasizing deep understanding of client concerns and needs and coming up with a differentiated advisory offering that addresses the aspirations of this growing segment. In particular, private bankers are enhancing their service and product offerings, investing in the personal development and qualifications of their wealth managers and financial planners to offer quality advice and services. Realising the current trends in the private banking sector, ibq has taken a very proactive strategy in developing strong relationships of trust and consistently enhancing its wealth management service offering to be able to best serve the growing and evolving needs of its clients.

Chaouki Daher General Manager - Head of Private Banking International Bank of Qatar (ibq)

ibq is one of the first banks established in Qatar. This has helped cement personal client relationships based on trust that have been developed over generations. In particular, ibq has a long-standing legacy within the local HNW and UHNW communities, which originated around the same time as the conception of the bank in 1956. Possessing these comparatively deep-rooted relationships with Qatar’s affluent community has allowed ibq to develop unparalleled levels of knowledge and deep understanding of their needs and financial objectives. How have Qatar’s high-net-worth individuals’ attitudes towards wealth management

changed over the past few years? According to the GCC Wealth Insight Report, GCC HNWIs including Qatar’s HNWIs continue to grow, and investment behaviors have evolved over the years. This segment is increasingly entrusting their wealth to local banks. Wealthy individuals also feel that local banks have a better understanding of their family backgrounds, culture, risk tolerance and local regulations. This opportunity requires local banks to capitalize on this shift in preference by continually investing in developing their wealth management platforms and achieving excellence in their service offering based on the prevailing best practices in this field. How does the private banking division at ibq help clients manage their finances and achieve their long-term financial goals? The primary objective of our private banking division is to provide premium advisory services to our clients and offer guidance on all aspects related to their financial objectives. At ibq, we retain our core basic principles of sound corporate governance, strong understanding of client needs in-depth knowledge of the prevailing investment landscape coupled with service excellence and tailoring investment solutions that achieve those objectives. I can proudly tell you that ibq has been offered award-winning and high quality personalised banking services. Guided by our values of privacy, confidentiality and integrity, our Private Banking continues to extend unparalleled service quality and expert advice based on relationships of trust that the staff has cultivated with its client base over the years. Our experienced team help clients meet their short and long-term traditional banking needs with expertise in local real estate financing, project finance, equity release, collateralised lending against cash, equities or investments and overdraft facilities, among others. Moreover, ibq is embracing the trusted advisor model as one of its strategic initiatives for 2016 one that will further strengthen its competitive advantage in the private banking business. Finally, we can attribute ibq’s success in private banking to the bank’s core guiding principles of “privacy, confidentiality, trust and people” and continuously developing its service and product offering to match the evolving needs of its clients. Issue 2

MIDDLE EAST BUSINESS

Five key things to know when paying staff in Israel For businesses with operations in Israel, or for those considering expanding into the country, there are a number of local considerations to be aware of. In this article, TMF Group’s Gilad Levi and Monika Harel explain five key aspects of local legislation that you’ll need to factor into your payroll processing.

1. Overtime payments

Work performed on Israel’s days of rest (Shabbat, i.e., Saturday, and on national holidays) sees employee overtime remuneration calculated within the regular salary (base salary prior to added work on rest days) as follows. For the first two additional hours: The employees’ salary for each of the first two additional hours will be 175% of their regular salary. That is, an additional 50%

of regular salary applies for his/her work on the day of rest, plus 25% of regular salary for his/her work in overtime hours. For each hour over the first two overtime hours: The employees’ salary for each of these additional hours will be 200% of his/her regular salary. That is, an additional 50% of his/her regular salary for his/her work on the day of rest plus 50% of his/her regular salary for his/her work in overtime hours.

3. Educational fund

Historically, this was a savings fund with which Israeli employees could finance further education such as professional conferences and work-related programs. Today, it is used for the most part as a general savings channel for the medium term.

5. Severance payments and employee termination

2. Recuperation pay

Staff who have been employed for more than one year with the same employer in Israel are entitled to an annual payment for convalescence (or recuperation), the rate of which is updated from time to time, and the quota of which is dependent upon the employees’ period of service.

4. Army reserve duty

Employees who have had to take a leave of absence due to Israeli Army reserve duty are entitled to compensation pay from social security. Payroll departments are required to receive an absence certificate from the employee, complete and submit a request to social security and make the complex calculation for payroll.

Since 2008, it has been compulsory for employees in Israel to be registered for pension insurance, which is funded through payments made by both employer and employee. In addition to this, the employer must allocate a specific amount to a severance pay (“pitzuyim”) fund for each employee. In 2015, the total allocation amount for these schemes is 17.5%, of which 5.5% is paid by the employee and the remainder (12%) is paid by the employer. 6% of the employer’s contribution is allocated to the employee pension payment and the other half to the employee’s severance pay fund. While the employer can choose to make the maximum contribution for severance payment - 8.33 % - the percentage usually depends on the employees’ pension plan and whether the employer approves the higher contribution. Employees in Israel are usually terminated under one of two scenarios: voluntary leave or dismissal. In each case, the employer must check if the employee has a section 14, and the severance payment will be calculated accordingly. Where the employee didn’t have a section 14 and was dismissed after working more than a year, the employer must pay an additional amount for severance purposes excluding the amount already accumulated in the employee’s pension plan (the pension plan is always released to the employee).

Gilad Levi Account Manager TMF Group Israel

Monika Harel Payroll Controller TMF Group Israel Issue 2

MIDDLE EAST BANKING

Regulation and Compliance in Saudi Arabia Banque Saudi Fransi is a full-fledged commercial bank in Saudi Arabia that provides services to both domestic and international customers

Abdulrahman H. Al-Sughayer Secretary General, Chief Governance, Compliance & Control Officer Banque Saudi Fransi Banque Saudi Fransi (BSF) is a Saudi Arabian Joint Stock Company established by Royal Decree No. M/23 dated June 4, 1977. The Bank is affiliated with Credit Agricole Corporate and Investment Bank that holds an equity interest of 31.1%

Banque Saudi Fransi (BSF) aims at creating a long-term and personalized partnership with all its customers, gaining loyalty through recognized banking expertise, quality of service, as well as innovative and customized financial solutions.

However; SAMA is very keen on appropriate implementation of global banking requirements e.g. BASEL and FATF to keep abreast local industry with global phenomena.

Editor Wanda Rich spoke with Abdulrahman H. Al-Sughayer, Secretary General, Chief Governance, Compliance & Control Officer at Banque Saudi Fransi about the regulatory trends taking place in Saudi Arabia and the important role compliance plays in the banking sector.

Moreover, Saudi banks are working very well with SAMA on FATCA compliance SAMA is more focusing towards strong credit practices. More and more strengthen controls and policies are being introduced for enhanced controls and risk mitigation including uninterrupted customer services, customer rights, etc.

What are the regulatory trends taking place now in Saudi Arabia? Saudi Arabian Monetary Agency (â&#x20AC;&#x153;SAMAâ&#x20AC;?) through its wise and prudent regulatory environment and policies has kept Saudi banking industry away from any negative impact of global banking issues.

In your view, how are EU and US regulatory reforms impacting the Middle East? I would say that EU and US regulatory reforms have brought significant change in banking operations and practices. However, these regulations are positive by nature, and we will get good benefit out of these reforms. Issue 2

MIDDLE EAST BANKING

We always get the support of SAMA to implement the new rules and SAMA has always gone the extra mile to support the banks. On a different note, Banque Saudi Fransi posted a Net profit for the third quarter of 2015 of SR 1,020 million. This is an increase of 10.15% compared to the same period last year. What do you attribute to this success? A strong regulatory regime in the Kingdom; well-defined regulations from SAMA and strong leadership of the chairman, the board, senior management and the commitment of our most valuable asset, our staff, has all translated into the profits of BSF. Banque Saudi Fransi has established a robust compliance and AML culture. Can you tell us more about your compliance program, the challenges you faced in creating it and the successful outcome? Our compliance program describes BSF’s Board of Directors and Senior Management’s well-founded resolution towards Compliance and its significance for BSF and its stakeholders. We believe that Compliance is an integral part of BSF, its banking practices and responsibility of compliance lies with everyone.

Kingdom tower, Saudi Arabia

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In order to achieve set goal by senior management; We have used multidimensional approach for a strong compliance culture including risk-based compliance reviews; utilization of strong monitoring tools, system enhancement, appropriate implementation of controls, timely escalation, investment in human capital and even a strong bond with all the entities of our bank that resulted in a strong compliance culture and smooth flow of compliance program and activities. What do customers need to know about compliance? Saudi Arabian Monetary Agency is very keen about customer rights and their know-how about compliance and its related affairs. I believe that Compliance with rules and regulations indicates better management of any banking activity and provides a satisfaction. I think every customer should know its rights and duties while dealing with any financial institution. Moreover, knowing rights and responsibilities by customers is a part of compliance with rules and regulations. Secondly; control measures taken by banks are for the benefit of customers. Thus, we fully support the initiatives of SAMA in this regard and are a strong believer of an informed customer is a better customer.

Going beyond compliance how do you effectively embed transparency and accountability into the corporate culture at Banque Saudi Fransi? Based on our culture, value systems, and ethical principles we have built our corporate conscience. We are a corporation of individuals with strong professional background and ethical values. Our code of conduct is a primary document that describes our values, fair practices, transparency in our deeds and actions and establishes clear indicators of accountability for everyone. We as compliance ensure that everyone is aware and has read and understood his/her responsibility and duties while working for BSF. Additionally; Compliance on regular basis keep informed the employees about transparency and accountability including tools to highlight/ escalate any such relevant matter.

MIDDLE EAST BANKING

Focus on Special Transactions Banking business including banking transactions is sensitive by nature and requires robust review, monitoring, analysis and timely decision making.

Mr. Abdulrahman Al-Sughayer provides us with an example of why a strong compliance structure is important in banking

There are several types or categories of banking transactions which are not regular or normal in nature and may because of various types of risks are considered and classified as special transactions. Transactions based and built on the following elements are considered as “Special” transactions: Size, complexity or to their unusual nature High-Risk Customer (any part of the transaction involves high or potentially high-risk client(s)) Geographic Area/ location (where any part of the transaction involves a “high risk” country) Nature of business (where any part of the transaction involves a high-risk business segment) Thus; to enforce preventive measures to avoid the risks that may arise from the foregoing categories of transactions, sound and resilient preventive measures and processes must be instituted. Banks must give sufficient time to understand, analyze and for the assessment of special type of transaction including its nature, involved parties and destination. The following examples are indicative but not exhaustive provide guidance on the types of situation that are discussed in this article: Transactions involving non-local law or regulations

Letters of credit or guarantee where at least one part of the transaction involves a High-Risk country or business.

Transactions with a client that may impact their regulatory position.

Transactions involving an ethical risk that could impair the Bank’s reputation

Transactions relating to securities of companies with special attention given to Listed Shares

Cross Border risks or issues to a transaction (basically Cross Border is defined as where at least two countries are involved in a transaction)

Transactions that reveal a conflict of interest between a company and one of its executives

Transactions that are tied to another one.

Transactions with no apparent economic purpose or unrelated to the counterparty’s usual business.

Transaction involving simultaneously two or more capital market products

Conversions, exchanges or redemptions of bonds into/with shares.

Transactions that have a significant price differential compared to market price

Any transaction related to military equipment or services to the military.

Transactions arranged specifically at a client’s request.

Transactions in which the margin/spread features, result, size or characteristics are significantly unusual.

Absence of a vigorous and strong compliance structure to deal with the referred situations and transactions may lead a banking institution to Reputational Risk Legal Risk

Regulatory fines and sanctions Financial risks

During the last couple of years, the banking sector has witnessed many issues some of which have been discussed above. Prudent banking practices with a strong commitment to compliance are the only way forward to protect the interest of all the stakeholders. Issue 2

MIDDLE EAST TECHNOLOGY

STORAGE

IN FINANCIAL SERVICES MOVING ABOVE AND BEYOND THE PARALLEL

In financial services, data capture, algorithmic trading, back testing, risk management, pricing and fraud detection, and competitiveness all depend on speed and volume. In a previous article on Global Banking and Finance one of my colleagues, Laura Shepard, wrote about how today’s finance houses want to analyse more data from more sources than just databases and exchanges to better understand the market. Two years on and the amounts of data being collated and queried is continuing to grow to terabytes and petabytes in volume. This phenomenal growth isn’t just affecting the financial services industry – every sector in every vertical is facing similar challenges. Of course, the challenge is no longer about storing that data, and the costs associated, the challenge is around how to capitalise, and take advantage of, big data. Financial Services firms have always been at the forefront of big data analytics - it is the staple of most FS firms. Data sources such as additional trading venues for best execution, news feeds for sentiment analysis, cross product customer databases and more are being added all the time. When the best result 80

Issue 2

depends on having the optimal algorithm consuming the most relevant data, the ideal approach is to be able to analyse more data, faster. Effectively solving big data problems in these workflows has a significant upside. Providing faster time to results with richer data inputs yields answers that much more accurately reflect the trading world than smaller sample data models of the past.

Moving beyond cache

Band-aiding traditional approaches that are already at the limits of the amounts of data being analysed and processed isn’t going to help. This approach limits data sampling. Inherently, cache is faster than storage. However, when data sizes exceed the system cache, the performance degradation created by batching data through cache very quickly exceeds the ‘round trip’ latencies of the right external storage approach. By using fast, scalable, external disc systems with massively parallel access to data, analysts can perform take advantage of much larger data sets than they can by batching smaller pieces of large datasets through cache memory.

Having a parallel file system offers several advantages over a single direct attached file system, which includes the ability to scale upward to support ever-larger workloads as well as allowing users to treat any data workloads independently from other workloads, and supporting simultaneous read/write operations for an entire data set. However, this isn’t an entirely new approach, for the past several years visionary hedge funds, proprietary trading firms and other financial institutions have been changing their infrastructure to take advantage of parallelism in order to analyse more positions faster and develop more effective trading and risk management strategies – which they are deploying in much less time.

Where next?

As more firms take advantage of parallelism, the question really is around what’s next. If you can scale parallel file systems up and out efficiently and effectively, what other improvements can be made to help tame and capitalise on big data growth. Throwing more hardware at the problem works on paper, but eventually this overprovisioning solution encounters diminishing returns vs. increased overheads of scale, not to mention it being very costly.

MIDDLE EAST TECHNOLOGY

So what if you could take the heavy Input/ Output (I/O) lifting and virtualise it? That is to say, using software-defined storage to manage and control the flow of data in and out of storage. An intelligence layer on top of storage can, in many instances, actually give one-third more data processing availability in current infrastructure and can mean 70% less hardware needed to reach performance requirements. Traditionally, storage systems are sized based on anticipated peak performance requirements, not sustained requirements – which results in a lot of unused or underutilised bandwidth and capacity. If software-defined storage could perform all of the heavy I/O lifting while leveraging parallel file systems and spinning discs behind for a persistent storage layer, you are potentially opening up a 1000x performance increase with your current infrastructure. It would mean you wouldn’t have to throw more hardware to meet the growing data and analytics demands. Adding an intelligence layer to storage moves the data much closer to the

compute, avoiding traversing multiple layers of protocols and networking. When you’re able to virtualise disparate flash resources into a single pool of really fast in-memory storage, all of a sudden spinning disc storage array buying criteria becomes all about having the most efficient capacity density, instead of the number of spindles. This decoupling of performance and capacity enables you to eliminate overprovisioning of compute and storage resources just for peak bandwidth needs. Your compute is a major investment, so maximising the amount of time spent processing and minimising latency and idle times are key to delivering faster results. By eliminating the need to build discfull, server-full storage architectures to support bursty I/O you can dramatically reduce storage requirements and liberate your compute to do the processing it was actually purchased for.

measurement, and faster-consolidated analytics for mixed I/O for in-transaction “envelope” fraud identification. It’s all well and good to be able to say that you can carry out more tests against more data in less time, but without putting that into context it can all sound a lot like hyperbole. Such are the requirements of financial services organisations that competitive advantages are achieved by being able to bring to bear successful new strategies while phasing out less successful ones in real-time. That means your infrastructure needs to support projects in the petabytes and GB/s of sustained I/O.

But what does all this mean for financial services?

It means more test iterations, against more data in less time for more profitable trading strategies, calculate Value at Risk for thousands of securities in seconds for accurate and actionable intra-day risk

Chirag Dekate Sr. Manager Vertical Markets DDN

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We aim to make the complex financial world easy for you At Emirates NBD Wholesale Banking, we power your business to succeed with our local expertise and global connections. As one of the largest banking groups in the Middle East, we cover your banking needs with our full suite of Transaction Banking Services, bespoke trade solutions and open account propositions to improve your cash flows and maximize the utilization of your assets. We fully understand the value of time, convenience and efficiency to the success of your business and we offer a host of services such as direct email / sms alerts, document imaging for trade finance transactions, smart cash deposit machines for bulk deposits, remote cheque deposit solutions and direct debit collection services for timely collections of your dues. Our reliable and secure online banking platform smartBUSINESS provides you 24/7 access to your accounts, payments, collections and trade services. So that whatever your horizon may be, we will help you get there.

emiratesnbd.com |

+971 4 316 0214

MIDDLE EAST BANKING

Using Small Data to Catch Big Fraud

Mannie Da Silva Global Product Line Manager, Financial Crime Risk Management Solutions, Fiserv

In October 1997, Michael Cox and David Ellsworth established this key challenge for computer systems, “…data sets are generally quite large, taxing the capacities of main memory, local disk, and even remote disk. We call this problem “Big Data”.1 Since then, the term “Big Data” has been used and overused in many industries, including financial services. When it comes to fraud prevention, many banks and solution providers emphasise how their systems leverage Big Data to find patterns of unusual activity by using data analytics to process through millions of transactions and pinpoint suspicious or confirmed fraudulent activity. While Big Data has many advantages in fraud detection and other lines of business, it has also alienated some banks, insurance companies and other financial services institutions that think they can’t be a part of this data revolution due to their size. Big Data often seems to be synonymous with “Big Companies Solving Big Problems with Big Data”. What about smaller companies?

Can they not take advantage of the revolution? What about the fraud manager in the bank that only has a database of a few hundred rows of fraud data to work with – are they out of luck? I don’t think so and here’s why.

Small Data – The Next Big Thing

If Big Data is used to describe the way companies can leverage massive volumes of structured and unstructured data, then the industry needs a term to describe the alternative – let’s call it “Small Data”. How do banks leverage smaller volumes of structured and unstructured data particularly in areas where the data is new, emerging and perhaps not yet well defined and understood – for example, the newly emerging patterns of fraud on Apple Pay? Apple Pay only launched 6 months ago. The patterns of fraud are not yet well understood, and some banks are experiencing rates of fraud in excess of 600 basis points (60 times the level of traditional credit card fraud). How can this seemingly sparse Small Data be used to stop this big fraud? Issue 2

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at all. Forget Big Data, these companies were starting from ground zero. By contributing data to a Mortgage Fraud Consortium and collecting each originator’s Small Data, a pooled database was created for the benefit of each contributing lender. Within a couple of years, 65 million loans were pooled, and highly effective predictive fraud models were built based on the fraud data that lenders amassed and shared.

1 This approach is effective to help banks pool limited data on a variety of fraud risks. Whether it’s Check Fraud, 1 ACH Fraud, Wire Transfer Fraud or AML Risk, banks can pool their limited data to share fraud and risk patterns 1 with each other - turning Small Data into Big Data. 0 Method 2 – Leverage Scorecards as an Analytic Technique 0 Scorecards are a powerful and simple technique that can be built using sparse or limited data. Scorecards are 1 made up of scenarios that are typically risky, such as high transaction velocity, high transaction amount, or other unusual event. An analyst then assigns a weight to each scenario based on a combination of limited

0 data analysis and practical fraud expertise. This weighting allows the scenarios to be used together to better 1 assess risk than rules alone. A scorecard may be a relatively simple analytic technique, but it can create big 1 results with its impact on fraud. Scorecards can be the next big thing until Big Data is available. 0 3 - Deploy a Rules-Based System 0 Method In the absence of any data at all, the next best thing is leveraging the experience of the people on the front

lines. Banks that have no data but a lot of experience fighting fraud can operationalise that knowledge through 0 1 1 fraud rules. Leveraging the knowledge of these business experts can create business rules that prevent huge 1 0 0 amounts of fraud. Sometimes the best data points are experiences that the fraud experts on the front line 1 have. For example, rules may be set to have any transaction over a certain amount routed to an analyst for 0 a review. Another rule might flag transactions that happen at international merchants or that happen at 1 1 0 0 0 unusual times, such as after midnight local time. 1 1 1 Method 4 - Leverage Analytic Science Techniques 0 0 0 Sparse or Small Data can present challenges to analytic scientists. However, a variety of analytic techniques 0 0 can be used in these scenarios to improve results. For example, in industries where fraud data is limited, fraud 0 0 scientists have turned to Unsupervised Modeling, which relies on training computer generated models to detect 0 0 outliers in the data. As we have learned, fraud typically reveals itself as an anomaly to normal behavior and 1 1 these models will often make the offending transactions stand out like a sore thumb from the rest of the data. 1 1 1 1 Scientists can also use creative techniques such as proxy tags when robust fraud data is not available. 0 0 Proxy tags can be things such as returned checks or reversed wire transfer transactions. These do not always mean that the transaction was fraudulent, but typically when a transaction is reversed there has been some 1 1 problem with that transaction and in many cases the data can be used for modeling. 1 1

Source:

0 1 1 0 0

MIDDLE EAST BANKING 0 0 0 Here are five ways banks can unlock the power of their own 0 data - even when it’s small. 0 0 Method 1 – Participate in a Fraud Consortium 0 Pooling data through a consortium has been an effective fraud prevention approach for more than 15 years. 1 It has been proven to reduce fraud in card portfolios and most recently mortgage originations. 0 1 In the case of the mortgage industry, lenders didn’t have robust databases of known fraudulent loans to help 0 them prevent origination fraud at the time. They had sparse data that was often collected by different lines of 1 business throughout the organisation, and at best the compilation was found in spreadsheets or at worst, not

Method 5 – Link Analysis - Look at Data from Different Perspective

Sometimes flat data just doesn’t reveal any particular good insight. It’s in those cases that the bank needs

0 0 0 1 0

1 Application-controlled demand paging for out-of-core visualization”, Proceedings of The Institute of Electrical and Electronics Engineers (IEEE) 8th conference on Visualization.

0 to look at the data in a new way. For example, Link Analysis whereby data is joined to other sources of internal 0 data can sometimes reveal a “network fraud” where fraudsters use common pieces of information such as 0 phone numbers, addresses or IP addresses. By looking at Small Data through a different lens, a company can 1 sometimes reveal fraud that was hidden. 0 Analytics and Big Insights are for Everyone 0 Big Data is inherent in banking origination strategic goals, but let’s not dismiss the power of Small Data. Analytics 1 and big insights can be gleaned even from the smallest sources of data. Whether it’s pooling data with other 1 lenders or using techniques that unlock that data’s value in a productive way, Small Data is the next big thing. 0 Issue 2

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Europe 88

Issue 2

EUROPE TRADING

Europe TRADING IN

WHY, HOW, AND WHY NOW?

If firms can understand – and indeed embrace – the intricacies of these markets, there is a real opportunity for growth in the region.

The benefits of trading Europe William Fenick Strategy and Marketing Director, Financial Services. Interxion

Bill Fenick, Interxion, looks at why trading Europe is a significantly more attractive option for investment firms than ever before. The European trading marketplace is going through a major transitional period. Part of this change is being driven by the introduction of MiFID II, which is set to come into effect in January 2017. This new regulation will provide a more reliable and clear-cut market structure across asset classes, which will in turn make the European market resemble the US and create a more appealing landscape for US investment firms. Markets in Europe are highly complex, and anyone deciding to invest or trade here needs to understand the complexity of those markets. There are 28 countries, numerous currencies, a host of regulatory bodies and many different cultures.

The authors of MiFID II have created opportunities for US traders on a number of different levels. In the first instance, Europe is the clear choice for those wishing to diversify. If firms aren’t investing in Europe, they should be asking themselves – why? The similarities between the European and US market structures are key to enabling US investors and traders to look towards Europe. The newly democratised MiFID II European trading landscape means it bears an ever-closer resemblance to the US, providing US investors with the opportunity to broaden their scope into a relatively familiar landscape. All this, without the restrictions of the re-routing rule from Regulation NMS. In addition, the similar trading infrastructures and approaches in both markets are making Europe an attractive prospect for US firms. This idea encompasses networks and hardware, as well as applications and business processes. To be successful in the region, firms need access to the same strong network connections, latency monitoring and other essentials found in a successful US firm. Issue 2

EUROPE TRADING

There are also historical investment characteristics and regional idiosyncrasies which make Europe an attractive option for investment firms. For example, the close relationship between major organisations and their local markets was weaker after MiFID I. In the wake of this, industry sectors started to play a more significant role, and performance became more closely linked to a company’s European industry peers than to its local equity market. This is still changing, and companies are starting to rekindle links to their national governments, but what’s key is that US firms are conscious of these quirks to effectively trade Europe. Facing fragmented liquidity, ultra-low latency connectivity and relatively new pre-trade risk management requirements, financial institutions operating in Europe need to be realistic about their own capabilities for participating in a way that is in line with the new regulatory environment and yet is profitable. A reliable point of entry, and a flexible technology and connectivity framework is essential if firms are to succeed in interacting efficiently with the new European market structure.

Why now?

MiFID II has ushered in a level playing field in Europe. This, combined with the sheer scale of the EU and its period of economic upheaval, makes the EU a persuasive choice for US traders. The market structure established by the first MiFID regulation saw the European landscape flourish into a modern trading environment, introducing new execution venues (as multilateral trading facilities) and pushing forward major technology and infrastructure innovations. However, while this initially focused on the equities marketplace, the new MiFID II will extend its reach into other markets – significantly, listed derivatives. The new regulation aims to increase transparency across all asset classes, even for nondisplayed trading, which in turn will result in a more stable trading environment, reduce trading costs and provide an overall improvement to European markets.

In addition to this new regulation, the EU is seeing a return of volatility. The US and Europe are affected by many of the same political and economic factors, and mature markets in the EU are now seeing their fair share of volatility following incidents such as the Greek debt crisis, which has dominated markets in 2015. US liquidity providers are being enticed by this ongoing volatility and in turn are recognising Europe’s potential.

Succeeding in Europe – the ‘how’ There are numerous considerations firms should take on board to get onto the path for success in Europe, from infrastructure to regulation and connectivity. Looking at the EU as a whole, it’s important that US firms look at the appropriate entry point into the market. London – Europe’s main financial centre – is the rational first step for US firms looking to trade both in London and in other major EU cities including Stockholm and Frankfurt.

Fast access to Frankfurt is essential if US firms are to succeed in Europe. Eurex, for example, is a key Frankfurt-based player in asset price movements – and its futures price changes affect many price moves on other markets. Firms trading in London have access to low latency connections to Frankfurt, boosting the UK capital’s appeal to traders. In the past 10 years, new players have been able to enter the space through a single gateway thanks to Europe’s adoption of an

effective supply of dark-fibre connections. They can then quite easily extend into other key markets. Indeed, the use of mesh network configurations across Europe are also increasing. This in turn means traders can select just one main colocation site and gain access to secondary markets through the vast mesh of fibre connections now available. In terms of regulatory authorisation, anyone offering investment services to EUbased customers following the introduction of MiFID II will have to have a MiFID license. However, there are exceptions to this rule, and non-EU investment firms servicing EUbased professional and institutional clients can be exempt from needing a licence if the European Commission feels their country of establishment – e.g. the US – has an equivalent regulatory framework. In this instance, firms are able to register as an authorised non-EU investment firm and can subsequently service clients throughout the EU. However, the key to success will be deciding how to most effectively connect to optimise the flexibility and choice of instruments and execution venues available. US companies are effectively deciding their fate based on the point of entry they select. And, by selecting the optimal point of entry to European markets, firms can ensure lowlatency connectivity to those venues that are key to the investment strategy. It is the first step in being well on their way to success in Europe. Issue 2

EUROPE FINANCE

Despite all the attention, SME finances is still fundamentally

The Financial Conduct Authority (FCA) and the Competition & Markets Authority (CMA) have both investigated the supply of SME banking services in the UK. The joint FCA/CMA study delivered its report in July 2014 – the CMA then continued its formal Retail banking market investigation including SME banking markets alongside its review of the personal current account (PCA) markets. The CMA has since delivered its provisional findings and possible remedies in October 2015. What is staggering is despite significant attention from regulators, from politicians, from the industry itself and those groups representing small businesses, SME finance is still fundamentally broken, and arguably the next UK financial scandal in the making. The chronic undersupply of small business overdrafts by banks – and why it matters It has long been argued that there is an SME finance gap in the UK, and in the business overdrafts market the statistics are clear. The British Bankers Association (BBA) have been tracking the number of overdraft facilities approved on a monthly basis since July 2011 and reporting this quarterly. They define smaller businesses as those with an annual turnover of less than £1 million. By taking a rolling 12-month figure to correct for any seasonality in the 92

Issue 2

numbers, the number of approved facilities to smaller businesses is down from 227,000 to 121,000 per year in just a threeyear period – a 47% drop. And it’s not just the number of facilities that have fallen, but the amount borrowed also. According to Bank of England statistics, the aggregate balance of overdrafts drawn by SMEs has fallen from £21 billion in April 2011 to less than £13 billion by August 2015 – a 40% drop. Why has this happened? In short, regulatory capital requirements are to blame, coinciding with a low-interest rate environment. Banks are typically required to hold capital against the limit of an overdraft, rather than the drawn balance. Therefore with average utilisation at 50%, a bank is required to hold twice as much capital for the same amount of SME borrowing as a term loan (before you even take liquidity costs into consideration). This makes this form of lending uneconomic for most banks. Why does it matter? Overdrafts are the best tool for managing cash flow if you are a small business. Beyond a fee for the facility, you only pay interest on what you borrow, when you

borrow. This makes it an ideal solution for short-term working capital needs. Businesses have regular expenditure; salaries, rent, VAT, etc. however their income may be less certain. This is especially true in an era where elongated payment terms are becoming an endemic problem: late payment means small business suppliers are effectively extending free credit to big business buyers. Without an overdraft businesses either hoard cash or pay for expensive alternatives, limiting growth and profitability. Invoice finance – the next banking scandal in the making? Small business? Problem with customers paying you late? Can’t get an overdraft from your bank? Don’t worry – the banks (and others) have a solution for you – it’s called invoice finance. Unlike the business overdraft market, the invoice finance market is in rude health. According to the Asset Based Finance Association, invoice finance advances in the UK are currently running at £19.3 billion per quarter and has grown 25% in the last three years, feeding off the restriction in the business overdraft market and the late payment crisis.

EUROPE FINANCE

James Sherwin-Smith CEO Growth Street

The FCA/CMA report even acknowledged this trend – “We have been told during the study that invoice finance is increasingly being used as an alternative to overdrafts. One bank, for example, noted that, in its view, factoring and invoice discounting were close substitutes to overdrafts. It also noted that invoice finance balances had increased while overdraft balances had decreased.” Invoice Finance is, however, a poor substitute for a business overdraft, for four mains reasons, and people need to wake up to a new scandal in the making. 1. Eligibility. A business can only use invoice finance if it has invoices to sell. If you’re not a B2B business, because, for example, you’re a retailer selling to the public, invoice finance isn’t an option for you. 2. Higher administrative and operational costs. Managing separate sales ledgers, changing payment processes, and in some cases putting a third party (the finance provider) between the business and its customers. 3. Higher financial costs. The sharp practices that are being used by invoice finance providers (both banks and non-banks) means businesses are

almost certainly paying more than they would for an overdraft. Business owners are tempted in by attractive headlines rates, but examine the fine print, and you can expect to find myriad fees buried in the terms and conditions. 4. No regulation. Invoice finance isn’t technically lending; it’s the buying and selling of a business asset (the invoice). This lack of regulation raises concerns that some providers aren’t sufficiently focused on customer outcomes. If late payments and a lack of overdrafts are the diseases, many are pointing to invoice finance as the wonder drug to fix all ills. Instead, as in medicine, it would be far more effective if efforts were focused on prevention. Possible remedies fall short of the real fix The CMA provisional findings have suggested several possible remedies to address what they perceive as adverse effects on competition in the SME banking market. These include: nudging customers to consider switching banks when they are dissatisfied, opening up bank data to reduce information asymmetries currently in the banks’ favour, and setting up price comparison websites that could help

SMEs consider alternatives to the current provider of their business current account. While the CMA included a possible remedy to make it easier for personal current account customers to find out whether a new provider would provide an overdraft – SMEs are sadly not included in the scope of this proposal. But perhaps the biggest omission is this: despite finding that “prices are opaque, and lending products are complex” and proposing changes to making comparing prices easier, the CMA has fallen short of the real fix for SMEs – defining the standard by which price is calculated. Unlike consumer lending, commercial finance isn’t required to carry an Annual Percentage Rate (APR) which helps customers compare prices by taking interest and fees into account.

Without an APR, banks and others will continue to hide fees and overcharge SME customers for the product of the day: invoice finance. The last thing the UK banking market needs is another mis-selling scandal. Issue 2

EUROPE INSURANCE

Deregulation Sets Businesses Free in the World of Insurance

The financial and insurance industries have traditionally been well regulated; some might say too much so. That has, however, started to change. Widespread deregulation and commoditisation across the financial and insurance industry has removed red tape as to how processes and practices are executed. Consequently, the opportunity to adopt technologies that automate these processes has opened up, removing unnecessary admin and freeing up the highly skilled knowledge worker to focus on jobs that really create value. Simple business rules and decision engines can automate processes reducing the time they take to execute from days or weeks 94

Issue 2

to an hour or minutes. This isn’t just a nicety; it’s a necessity for the financial and insurance sector. This period of deregulation has been accompanied by a wave of new, non-traditional competitors into the sector such as supermarket chains. Similarly, start-ups providing commoditised offers for financial products such as insurance are making moves to disrupt the space. The financial sector has always been a dog eat dog world but never in quite the same as it is today. If a provider – new or old – wants to maintain, let alone grow its market share it must evolve and innovate, bringing new products to market quickly. The answer to this is using technology to do so.

EUROPE INSURANCE

Cutting the ‘red tape’ to give businesses the freedom to innovate

Legislation such as the Deregulation Act 20151 has been introduced with the aim of reducing the burden of “red tape” upon business; the upshot of this is to give businesses greater freedom to provide products and services to consumers. For insurers, this reduction in regulation around policy has proved to be good news. The insurance and wider financial sector is hugely complex – the number of components and processes needed to build and bring a product to market is extensive. If an insurance provider wants to offer a new product, perhaps one aimed specifically at retired men who drive sports cars this means a large number of tweaks. In the past, this was done manually due to the many regulations around the way data is stored, accessed and used. To make matters worse, those new entrants to the market mentioned earlier which are competing to offer both banking and insurance products, pose an additional threat in an already crowded sector. A nimble and commoditised approach which is able to react to changes in the marker gives the best chance of appealing to the mass market consumer.

Stay nimble to stay ahead of the pack

IT and software teams are busy. Too busy, many would argue, to address and modify the multiple lines of code needed to update software in line with bringing new offers to market. The impact of deregulation lies in how it has reduced this admin burden allowing companies to implement clever decision engines that automatically update product components according to needs and in-line with changing data regulations. These engines, often otherwise known as business rules management systems, can only be a good thing for cutting costs and creating efficiencies in businesses. By decoupling business rules from application code, the IT department and developers no longer need to code to bring new products to market or change existing ones. This can slash development and change cycles by up to 90%. Rather than being faced with updating rules or decisions through a developer text editor, others in the business such as business analysts can do this instead in a spread sheet like interface, making it easy to define and manage the business logic that becomes rules. As an added bonus technology such as this can cut out many of the mistakes that result from human error in busy developers. By automatically recognising errors such as rule conflicts and syntax errors the quality and assurance production phases are passed much more quickly. With this being the period in which it is traditionally much costlier to fix bugs in rules, this provides a further safety net. When the cost of making mistakes is as high as it is in the financial sector the saying ‘better safe than sorry’ has never been so true.

A Minefield with Gold at the End

Mark Armstrong MD EMEA Progress Software Source: 1 www.insurance.dwf.co.uk/newsupdates/2015/06/the-deregulation-actremoves-the-red-tape-but-not-the-needfor-careful-consideration/

In many ways, the wave of deregulation has created a gold rush. Old and new players alike are all lining up to stake their claim on the business that is there to be won. This isn’t the Wild West though and in spite of deregulation there are guidelines that need to be followed. Fines are still a very real risk, and new entrants to the market, in particular, would be well advised to beware of the risks. This is where rules can mitigate risk and ensure efficiency. Businesses in the insurance and financial sector should seize on the opportunity deregulation offers them to implement automation technology that frees resource across the business. This should also empower those beyond the IT and developer departments such as business analysts to help bring new services to market and improve the quality of services being offered to clients. In a competitive marketplace, this is the only way they will be able to compete against nimble, yet well-established brands that threaten to slice off-market share for themselves. Issue 2

EUROPE TECHNOLOGY

BANKING MEETS THE COGNITIVE ERA:

BACK TO THE FUTURE

ON PERSONALISED SERVICE

Issue 2

EUROPE TECHNOLOGY

Cognitive computing can evaluate a huge amount of data, understand that data and then negate the complexities of risk exposure

The banking industry has developed a huge amount over the past decades. The traditional view of the bank manager, pinstripe suit and bowler hat is replaced with chip-and-pin, online banking and mobile solutions, which are now the mainstay for consumers across the globe. As competition increases with the rise of smaller providers and vigorous entry from non-traditional competitors (IBM calls this Uberisation1), banks will need to re-examine how they use their data to give them a competitive edge. If we examine the evolution of business, the trend that we see now brings together data analytics within digital business. What we are now witnessing is the cognitive era where the role of cognitive computing is integral to making banking as seamless as possible for businesses and consumers. Put simply, cognitive computing is a framework which allows humans and technology to interact better because the system has the ability to understand and analyse data in natural language. Cognitive computing is close to artificial intelligence in that it can learn, understand and interact in ways which can help at an individual level through using mass data. According to a recent Forbes article2, cognitive computing has the potential to revolutionise the financial services industry. It can help increase efficiencies, save time and give the customer a better experience, and in turn help increase business for the bank. For the banking industry, cognitive computing can truly place customer service back at the heart of business. We all know the modern day frustrations of being put on hold, being sent from one call centre to another or having to repeat your security information numerous times on the same call. What cognitive computing does is end these delays as it allows the bank to ‘recognise’ the customer as an individual, rather than just a member of a demographic subset. By using its faithful friend - big data, the bank will not only know who you are but it will also know details, name, address, what products you use and what services you might need based on your current life stage, so for example, a student account, mortgage or pension provision.

Paul Moores, Director, Banking & Financial Markets IBM UK & Ireland

The result for the customers will be a back to the future “new fashioned” personal approach. Whether you call or access your online or mobile bank, it is able to speak to

you, understand the context of your needs and how best to meet those needs. It will treat you as an individual. A particular area in banking where cognitive computing could make a difference is in the credit and loans functions. Cognitive computing allows for better understanding of individuals, and so banks can write or approve loans with detailed insights from a customer’s credit and banking history, which dramatically reduces the chance of defaults. Again, this is all about offering the right services at the right time to suit the individual. It isn’t just in domestic or high-street banking that cognitive computing can help shape financial services, but also in the commercial and investment banking operations in which the ability to smartly decipher a lot of data is a business imperative. Take risk management, for example. Since the 2008 financial crisis, the ability to effectively manage risk has been firmly in the spotlight (from policy makers, bankers and politicians). Cognitive computing can evaluate a huge amount of data, understand that data and then negate the complexities of risk exposure. The technology can also be used to detect trends and help professionals make the right decision with all the information at their disposal. Financial services is not the only business area which can and will benefit from using cognitive computing. Any industry where cost saving, efficiency and improved business results are required will look to cognitive systems to provide them with the edge. We all expect the best possible service. We are used to seamless online experiences and we want everything we consume to be equally seamless, including how we engage with our bank. What cognitive banking3 does is shift the emphasis from the transaction and on to the customer – and that can only be a good thing.

Source: 1 www-03.ibm.com/press/us/en/pressrelease/47989.wss 2 www.forbes.com/sites/ibm/2015/11/09/how-cognitivecomputing-impacts-banks-and-financial-markets/

3 www-01.ibm.com/common/ssi/cgi-bin/ssialias?subtype =XB&infotype= PM&htmlfid=GBE03704USEN& attachment=GBE03704USEN.PDF

Issue 2

EUROPE INVESTMENT

The evolving role of pension scheme trustees The responsibilities of pension scheme Trustees in the UK are becoming increasingly onerous fuelled largely through more and more Government initiatives and increased regulation. Let me start by setting out the legal responsibilities of Pension Trustees. Although they vary according to the purpose of the Trust and the Trust Deed, in broad terms the responsibilities are: Secure adequate funding to enable them to meet the scheme’s liabilities Ensure that the trust receives the appropriate contributions Invest the money received as contributions, to provide investment returns for the scheme assets Use the assets to provide pensions and lump sums to the beneficiaries, in accordance with rules of the pension scheme Exercise discretion as to the payment of benefits, where appropriate. The main administrative responsibilities of pension trustees are to: Keep proper records for the scheme, including accounts Provide information to scheme members, the pensions regulator (tpr) and others, as required by law and the rules of the scheme Appoint a scheme auditor Appoint a scheme actuary, if a defined benefit scheme. 98

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Trustees also have a duty to act: Impartially, in the best interests of all the beneficiaries With care and honesty, and not to profit personally from the trust (although a trustee who is a member of the pension scheme may act in the interests of all the scheme members generally, including him/herself) In accordance with the trust deed and any overriding law. This is very much the legal definition, but the world of the UK pension Trustees is changing, be they a Member Nominated Trustee, Employer Nominated Trustee or an Independent Trustee. Trustees are faced with ever increasing demands from sponsors, tPR and members. Trustees must keep pace with a plethora of broader regulatory and market developments to survive. For example in the last few months, tPR has issued an update on employer covenant guidance, a code on improving the quality of governance and administration in workplace defined contribution schemes and a code on governance & administration of public service pension schemes. In addition, there was the summer budget with the associated tax implications. Although Trustees remain the guardians of the pension promise, there has been a fundamental evolution in their role.

In stark terms, these days Trustees are expected to subsume some key roles as set out in the chart opposite.

EUROPE INVESTMENT

Accountant

Administrator

Actuary

Communicator

Corporate Governance

Employer Covenant Analyst

Investment Adviser

Negotiator

Taking each of the eight roles in turn, Trustees are responsible for the financial stewardship of their pension scheme. It is the Trustees (one, two or three) who sign-off the Annual Report and Accounts. It is the Trustees who sign-off the letter of representation for the auditors. It is the Trustees who must undertake a fraud risk assessment. It follows that Trustees must have some knowledge and understanding of the Accounts for which they are ultimately responsible. Issue 2

EUROPE INVESTMENT

Trustees must have some knowledge and understanding of the role of the Scheme actuary who provides advice and opinions on all aspects of funding the Scheme as well as the triennial actuarial valuation. Trustees need to understand and challenge the actuarial assumptions - discount rates, inflation, longevity, etc since it is they who formally approve them for the purpose of the valuation. The Administrator plays a key role in the management of the pension scheme but again the Trustees are ultimately responsible for the successful (or otherwise) administration of the members’ benefits. It is essential therefore that the Trustees appoint a proven administrator (be it in-house or third party) to maintain good quality records and pay pension benefits when due. An independent review from time to time by internal audit does not go amiss, and close monitoring of performance against the Service Level Agreement (SLA) targets is an essential duty for the Trustees. I am also a great believer in Trustees monitoring complaints (if any) – these provide a litmus test of the administrator’s performance. Trustees have a huge responsibility for the accuracy of data and tPR has imposed some testing standards. I also consider that it is important for the Trustees to produce a Communications Strategy for the membership. Trustees cannot give advice, but members should receive regular information on scheme developments, scheme funding, the financial position, topical issues and other matters of interest. This can be achieved through a variety of means – the traditional annual or six-monthly newsletter, a designated website as well as presentations/surgeries, particularly for those nearing retirement. Trustees must not underestimate their responsibility for achieving excellent Corporate Governance within the operation and management of their pension scheme. It is important that there is a Conflicts of Interest Policy. The Trustees must also

be conversant with Risk, and maintain a review on a regular basis the Risk Register. I also believe there is considerable merit in the Trustees producing a Governance Statement, which documents the main features of the governance arrangements for the pension scheme. This should be reviewed on an annual basis.

approach to risk management considering employer covenant, investment strategy and funding related risks.

Employer Covenant Analysis is another important duty that UK Pension Trustees have had to take on in recent years. It is vital that Trustees understand the financial strengths (or weaknesses) and prospects of the employer or sponsor. This means that Trustees need an understanding of business plans, forecast profit and loss accounts and balance sheets in agreeing deficit recovery plans.

Being a Trustee is a responsible and important position. I hope that I have demonstrated that Trustees have many varied duties and responsibilities, including ensuring that members receive the correct benefits (per the Rules and Law); and ensure there is enough money to pay those benefits. Many Trustees undertake the role on a voluntary basis despite the responsibilities, workload and ever increasing regulation thrust upon them. For me, it is a very interesting, enjoyable and rewarding role, but the key ingredient is protecting the members’ benefits and serving them faithfully.

Trustees must also possess a sound understanding of investment matters –starting with the various types of investment vehicles and the associated risks. It follows that Trustees must understand pension liabilities and how they can be met and matched over the lifetime of the scheme. In this day and age, tPR expects Trustees to adopt an integrated

Finally, and not least, Trustees need good negotiating skills particularly in relation to agreeing a sustainable deficit recovery plan with the employer or sponsor.

Roger Buttery Independent Trustee for several UK pension schemes

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EUROPE BANKING

THE RISE OF THE DIGITAL NATIVE

BANKS SHOULD BRACE THEMSELVES FOR A NEW KIND OF CONSUMER

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EUROPE BANKING The banking customer base is rapidly evolving, and millennials are just the beginning. A new customer demographic, what we call the Digital Native, is shaped more by technology and structural trends than by age and geography. Who and what digital natives are will define the future of financial services. How banks respond to digital natives will define their role in that future. Unlike previous generations of customers, who chose between a few defined life paths with predictable endpoints, digital natives live in a context full of options and uncertainty. Their lifestyle reflects a logical response to this environment, preferring flexibility above much else. Digital natives are 25-year-old graduate students and 50-year-old entrepreneurs. They are freelancers, early adopters, parents, and students. They share a different relationship with technology and a new conception of continuity and change in their lives. They have fundamentally different expectations than the banking customers of the past and are becoming increasingly dissatisfied with traditional financial services institutions.

Nadeem Shaikh Founder and CEO Anthemis Group SA

Nadeem Shaikh is Founder and CEO at Anthemis Group SA. He is a thought leader and practitioner of innovation within financial services and has an unmatched global network within both the startup world and the established corporates. Before founding Anthemis Group, Nadeem was President at First Data Corporation where he held a number of senior roles, including most recently as Head of the Financial Institutions, where he ran a multibillion-dollar organization overseeing businesses in over 50 markets. Before that, he led the strategy and technology arm at American Management Systems.

Banks must respond with products and services that cater to this new reality. At present, banks and digital natives are fundamentally at odds. Digital native customers of all ages lack three qualities that are central to most traditional financial services products: predictable life paths, financial stability, and long-term consumer loyalty. Banks, for instance, expect their institutional authority to equate with trust; however, digital natives develop trust based on shared interest and their network. Moreover, while banks provide customers with raw information, digital natives want personalised information overlaid with meaning and context. Retail banking has traditionally centred on the current account, where deposits enable highly profitable consumer lending products like credit cards, consumer loans and mortgages. Besides allowing banks to price across portfolios instead of single services, this setup helped maintain a relationship with customers and serve all their financial needs. However, fast forward to the digital financial services revolution and we see that many emerging fintech startups have

turned this model on its head- appealing more to the wants and needs of digital natives. Emerging niche players focus on single-product offerings such as consumer loans or savings accounts. Others provide adjacent services such as credit scoring, security software, and payment interfaces. The ultimate appeal is that consumers can mix and match providers and chose from a range of design-centric socially enabled options, not only in their own market but also across the globe. Long story short: banks are seeing their market share declining at the hands of digital natives because the financial services industry has misunderstood the size and nature of the impact technology has had on customers.

So, where do banks go from here?

One viable option is API banking, where banks allow third-party developers to leverage institutional services to design new products. Credit Agricole was one of the first banks to launch an open API initiative, which enables customers to budget their finances and manage their credit card accounts via a consumerfriendly app. The API also uses its own geolocation service to provide enhanced customer data on how consumers are using the app. At a more macro-level, banks that choose to operate in the B2C space need products and services that meet four crucial preconditions: 1. aligning engagement models to this new consumer mindset 2. thinking beyond segmentation like demographics or life-stages, which aren’t robust enough criteria to capture the complexity of digital natives 3. tailoring new offerings to lifestyle, values and behaviours 4. fitting any products and services within a wider fintech strategy that takes into account long-term customer relationship objectives. For banks that want to maintain the customer relationship, engaging with the digital financial services ecosystem is crucial. From building innovations in-house to acquiring or investing in startups – there are many paths available to increase appeal to digital natives. The time to act on these options is now. The article was based on research findings outlined in the latest research report by Anthemis and Claro Partners titled “Always in Beta”.

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EUROPE BUSINESS

Managing transformation in the utilities sector Power. We always want it, we waste too much of it, and weâ&#x20AC;&#x2122;re endlessly re-thinking where we get it from. But as in every other major industry, emerging technologies, shifting customer expectations, and now dramatic shifts in global energy economics are pushing energy utilities to rethink their century-old business and compliance models. Disruption has arrived in the utility sector with a vengeance, as the ways we produce, transmit, distribute and consume power are being utterly transformed. Electricity no longer flows solely from large central plants fired by fossil fuels. Alongside coal and gas; wind farms, hydroelectric dams and other renewable energy sources increasingly provide electricity to homes and businesses. Energy utilities have to manage a volatile mix of generation variables, including planning the availability of fuel, dealing with price swings and understanding the impact of weather on both demand and supply. Technology plays a huge part in all this. Hydraulic fracturing makes gas plentiful and cheap in the US, highly responsive urban microgrids that optimise usage are

beginning to take hold; while embedded systems in end usersâ&#x20AC;&#x2122; homes and offices feedback a huge amount of data on individual consumption patterns. Despite all these advances, flatlining revenue and profitability have marked the sector since the recession of 2008. Seven years on, investments in IT to manage unpredictability and risk have become more important than ever.

Give us more, but do it with less

Between 2010 and 2040, global demand for electricity is projected to increase by about 85 percent as living standards rise, economies grow, and the electrification of society continues. Demand for fuel to produce that electricity, however, is only projected to rise by 50 percent. That is due to changes in the mix of fuels used to produce electricity, as well as improved energy efficiency in power generation and transmission. The vast majority of utilities are seeing minimal, stagnant or even negative growth in their service territories as a result. Customer-owned generation from solar and other innovations has dampened demand for electricity even further, a trend that looks likely to continue. Wind and solar

This next-generation energy system is transforming utility business models and opening up new opportunities for energy service providers.

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generation are unpredictable, coming on and off the grid and, in the absence of new energy storage technologies, require replacement power that can ramp up quickly. The message is clear: utilities must find new ways to optimise their resources and reduce costs. One way to do that is to bring more intelligence into short-term planning decisions such as unit commitment and bidding. That may also require significant cultural change. As an asset-intensive industry with legacy investments and major capital commitments, utility companies put substantial effort into long-term planning. It is often conducted separately from short-term planning, and both tend to be done in isolation from the trading desk â&#x20AC;&#x201C; a siloed approach that blurs awareness of the market risks that arise when planning for future portfolio enhancements or resource needs.

Smart grids and the data explosion

The traditional, centralised electrical system may be shifting toward a more distributed, responsive grid driven by

EUROPE BUSINESS

technology innovation and evolving customer demands. This next-generation energy system is transforming utility business models and opening up new opportunities for energy service providers. Much has been written about â&#x20AC;&#x153;smart gridsâ&#x20AC;?, which are really a collection of technologies and strategies to make the grid more efficient and more resilient. Whilst their adoption is still in question, smart grids and smart meters deliver huge quantities of data that can be used to improve business insight and surface visibility of risks, particularly in the trading decisions utilities make and the supply chains they manage.

Compliance Risks

Regulatory changes are another area of extreme risk for utilities. The complexity of reporting, markets, transactions, contracts and accounting rules generate special challenges in complying with the ambiguities of regimes like Dodd-Frank, REMIT, EMIR, MiFID II and others. Without accurate internal audits and proper governance, utility companies involved in energy trading can be exposed to significant risk. Forward-looking traders, meanwhile, are seeing that better visibility into the nonstandard, structured deals in their portfolios could create new opportunities.

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Our mission is to add value to your investments

Most Innovative Asset Management Company Turkey 2015

Best Pension Fund Manager Turkey 2015

www.akportfoy.com.tr/en

Mutual Funds Management | Pension Funds Management | Discretionary Portfolio Management About The Awards & Selection Process Global Banking and Finance Review awards were created to honor companies of all sizes that stand out in particular areas of expertise within the banking and finance industry. The awards recognize the innovative banking, investment strategies, achievements, progressive and inspirational changes within the financial sector. The research team scrutinizes the company nominations. The entire awards process is free of charge. This includes Nomination, Selection and announcement under the award winners section. The judging panel that is comprised of the research team, editor and publisher then select a winner using a wide range of criteria. The areas covered include Forex Trading, Banking, Insurance, Hedge Funds, Pension Funds, Business, Brokerage, Islamic Finance, Wealth Management, Corporate Governance, and Project Finance. For a list of the awards that have been presented last year and the recipients of the award please visit: http://www.globalbankingandfinance.com/global-banking-finance-review-awards-2014/

EUROPE BUSINESS Technology to manage change, opportunity and risks With so many factors disrupting their business models, utility companies need to invest in systems equal to the risks they face. Management needs better access to information and tools for decision making, not only for executives but also for personnel engaged in planning and trading. Without a commodity trading and risk management (CTRM) platform, they may not be able to accurately dispatch generation, violate contract terms, or face regulatory scrutiny over feedstock purchases. The assumption has always been that IT will provide access to the right analytical tools. However, the industry has grown up with a complicated landscape of homegrown and off-the-shelf energy trading and risk management applications that may not be ready to meet the needs of todays’ gas and power markets. Spreadsheet-based applications in particular typically need a high level of expensive customisation each time a new type of generation or fuel is added, or a new product or instrument is to be traded. At minimum, a utility CTRM system should offer the following: Integration with robust analytics, such as forecasting, simulation, and optimisation A standardised system to store forecasts to ensure consistency in analysis and the ability to trace back model results or assess risk across power and gas portfolios. Simulation of market, outage and weather scenarios fast enough to handle trading requirements Before you begin evaluating vendors, understand your company’s strategy for hedging risk and complying with regulations in detail. Take an inventory of your most used resource analytics, but also consult traders, risk managers and planners to understand what they need in a system. Investing in a suite of applications that integrate energy trading and risk management with analytics, is an opportunity to reduce the cost of supporting legacy systems or spreadsheets. It will also provide consistency of information across the organisation, which is essential if utilities are going to return to growth and profitability.

Utilities it survey Allegro recently conducted a survey of power and utility company professionals to better understand their technology needs and the business concerns driving their IT strategies.

When asked to rank the areas of greatest importance, more 53% said improving operational efficiency and reducing costs was their main concern. Managing assets around supply and demand accounted for 21%, and commodity price volatility accounted for 17%. Leveraging smart grid/smart meter investment and integration of distributed resources, including EVs, distributed generation and renewables each registering less than 10%. Asked about the issues that “kept them up at night”, price volatility topped the list, with regulatory compliance running a close second. Other responses included changing technology/ aging assets, the economy, weather and associated risk management. When asked to rank their main reasons for considering a CTRM solution on which to run their businesses, 51% of respondents ranked “increased margins: improving operational efficiency and reducing cost” at a score of 8 or better, with 25% ranking it a 10, or extremely important. “Satisfying regulatory needs and pressures” scored 47% at an 8 or greater, with “the marriage of electric utilities and natural gas,” “integration of distributed resources, including EVs, distributed generation and renewables,” and “leveraging smart grid/smart meter investments” all scoring 8 or more 20% of the time.

Methodology

The survey gathered responses from more than 80 participants, including executives, managerial and technical staff, as well as a small number of customers, involved in providing electric, gas, water and emissions and renewable services. Job functions included finance, accounting, operations, risk management, trading, legal and load forecasting. While nearly half of the respondents actively traded in natural gas, more than a fourth of the group were active in coal, with the remainder involved in hydro or other types of commodity trading.

James Stirton Senior Solutions Consultant EMEA, Allegro Development

Companies ranged in size from fewer than 10,000 metered customers to more than one million with the bulk of respondents claiming more than 500,000 customers. Geographically, the group was concentrated largely in the U.S, however, the themes were apparent globally.

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EUROPE BUSINESS

Avoid Contract Pitfalls during Mergers and Acquisitions

Behind every merger and acquisition (M&A) lies a comprehensive review of company contracts. Each contract holds information that can make or break M&A talks. If details within them are missed or misinterpreted the acquiring business can lose significant sums of money. Conducting such a review generally involves a team of lawyers and experts. Itâ&#x20AC;&#x2122;s predominately a manual, expensive and time-consuming exercise and the output it delivers is relevant only to the purpose for which it was conducted.

Toby Hannon Vice President EMEA Seal Software

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Frustratingly, a merger or acquisition is just one reason of many that can call for a contract review. Changes in regulation can mean the same thing. And when that happens, the whole process starts again.

For companies in this position, it could be time to consider ditching the manual approach and opting for an automated repeatable approach to contract reviews.

Groundhog Day

For highly regulated industries, changes in legislation are a fact of life leaving organisations very little time to react and manage the situation effectively. One example earlier this year was the European Banking Authority (EBA)â&#x20AC;&#x2122;s requirement for banks to modify contracts with non-European economic area creditors. The required inclusion is a write-down clause that contracts are subject to modification (i.e. write-down or conversion of their debt) by an EU Resolution Authority in the event that bank starts to fail.

EUROPE BUSINESS changes to comply with such regulations is crucial and unavoidable. Consequently, each time change happens, companies dust off their documents and the whole review process starts again from scratch – a team of experts; a lot of time; a lot of expense. It’s like Groundhog Day. It’s not a simple undertaking. For most companies, contracts and other legal documents are held across multiple systems and in different locations and formats. It’s a challenge to find them all and extract the information needed or make the necessary regulatory changes efficiently.

How Many Contracts?

The sheer volume can be daunting – for some companies it’s thousands of documents, for others tens of thousands; it’s a highly manual exercise to review every one. Working against the clock, the process will always be subject to human error. Yet, precision is important. During M&A procedures, problems with contracts can lead to the wrong sort of headlines. In the case of Hewlett-Packard and Autonomy, it led to trouble for the acquisition.

The impact on a bank could be considerable. They will have to dig into the detail of their existing portfolio of agreements to determine which ones qualify for this write-down clause in the event of future amendment. No company can afford any oversight when it comes to adding clauses or taking action that might be needed as a result of this regulation. The Modern Slavery Act of 2015 is another case in point. It has an impact on commercial terms in supply contracts. Companies need to ensure - and prove - that slavery or human trafficking are not taking place in their own business or their supply chains. Getting visibility into contracts and making the necessary

To meet deadlines imposed by delicate M&A talks firms will either outsource the effort at a hefty cost or take teams of lawyers, paralegals and administrators off their day job to focus on this latest priority. They will need to trawl through contracts looking for specific indemnifications, restricted rights of assignment - which could, in fact, void a contract in the case of M&A - auto renewals and a whole host of other relevant terms and inclusions, a time-consuming process that is prone to human error. With the review complete they know the output is only accurate at the time and for the purpose it was produced. Contracts are living documents with addendums being added every day. Future changes in the market or environment will very likely require the same contracts and documentation to be reviewed again; only next time looking for different information. It’s a repetitive cycle that can add an enormous burden of cost and consume countless man hours.

Future-proof Contract Analytics For most organisations the problem lies in an out-of-date approach to contract visibility. Contracts are filed away

and forgotten about, and then panic ensues when they have to be looked at comprehensively. Settling for this approach companies are resigning themselves to regular manual reviews and leaving themselves open to unknown potential risks, not able to get to the information they need quickly.

Continuing to throw money, time and resource at manual contract reviews will continue to deliver one-off results. Firms need to look beyond the here-and-now; to think more strategically; to look at how they get access to contract-based information each time it’s called for. By looking at contracts as important repositories of information, rather than something to be completed, filed away and to never see the light of day again, organisations open up the possibility of discovering hidden revenue opportunities or identifying previously unknown risks. Companies can employ the emerging and practical application of machine learning and natural language processing techniques to their contracts in order to react quickly and effectively. Leveraging such innovation can help future-proof their approach to meeting the long-term demands of regulators, the business and even government. In contrast to human labour, automated contract discovery and analytics can run 24/7 and is ideally suited to repetitive information extraction that can be subject to myriad errors when conducted manually. Crucially, it gives companies control over the analysis and reporting of their contractual information, enabling them to deliver added value instead of repetitive processes that add cost, time and consume unnecessary resource. In the case of M&A, the cost, accuracy and time advantages will be eagerly realised, and the benefits will be felt time and again. Issue 2

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EUROPE BANKING

Biometric Banking – yesterday’s vision, today’s reality? It feels like biometric technology has been with us forever. However, most British people’s experience of it has been limited to film and television. Star Trek fans know that voice recognition systems were used by computers to identify users while, more recently, in Golden Eye James Bond’s pistol used palm registration technology to prevent it being fired by others. Yet biometrics appears to have struggled to make the transition from films and into everyday life. That is unlikely to be the case for much longer. Fujitsu has pioneered the development of biometric systems and is an expert in its application to financial services. Consequently, we have noticed – but are not surprised by - the growing interest of the British banking industry into technology, something that has existed in other parts of the world for some years. But why now? 110

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We believe that three key industry and social developments are driving today’s interest in biometrics. Firstly, security - or, more accurately, fear of the consequence of a breach of security - has led financial services organisations to explore costeffective ways to strengthen defences. High profile incidents of fraud and identity theft have led managers to question existing security arrangements and explore other, additional and newer options. Secondly, biometric solutions are creeping into other areas of life. Biometric passports, introduced in the United Kingdom in March 2006, remain most people’s primary exposure to biometric technology, but we expect this to change rapidly. Users of Apple and Samsung mobile phones can already use their fingerprints to open their devices. Users of Microsoft’s Windows 10 can opt to access it through Windows Hello, which will offer face, fingerprint

and iris biometrics as log–in options1. Moreover, as society becomes more exposed to biometrics in different walks of everyday life, we believe that familiarity and confidence in the technology will grow with it ultimately becoming seen as the gold standard of security options. Thirdly, the practicalities the speed, accuracy and cost of biometric technologies have all improved in recent years, making the mass roll-out of biometric solutions feasible. In the UK, banks have not been in a hurry to roll-out the technology on a wide-scale basis, although it has been deployed in some business areas. It’s true that parts of the Barclays and Santander groups have piloted the use of voice recognition technology, primarily for identifying customers who approach contact centres, and Barclays has announced plans to

EUROPE BANKING deploy finger scanning readers to business clients for use in authorising payments and other transactions. However, in other parts of the world, significant deployments have been made in three key areas. Firstly, biometrics is being used to identify and verify customers. In countries such as Brazil, Japan and Turkey, banks using biometrics to identify customers is an everyday experience. Perhaps this is because all markets had unique social characteristics which biometrics could help address and which allowed a business case to be built which justified the investment. For example, Banco Bradesco, Brazil’s second largest bank, claims to have virtually eliminated ATM fraud by deploying Fujitsu’s palm vein-reading technologies on its cash machines. Japanese banks have also been impressed by the security–enhancing properties of palm vein technology. In a country still wedded to cash, banks have promoted its use by increasing daily cash withdrawal amounts and lowering bank charges for customers who elect to use biometrics to identify themselves. Secondly, the technology is being used to track access to, and transactions undertaken within key business systems. With security-related issues rising to become “top of mind” for managers, banks realise that attacks do not just originate from outside the organisation. Attention must also be given to addressing the internal threat of hacking and theft. In recent years, for example, one American bank has fallen victim to a $22 million fraud committed by an employee who created fake contracts2; an employee of another US bank leaked personal customer information that contributed to more than $10 million being stolen from customer accounts3; and, in the UK, a bank employee perpetrated a £2.4 million fraud over five years, simply by submitting false invoices to claim payments4.

Anthony Duffy Director of Retail Banking Fujitsu

Clearly, businesses that are heavily dependent on technology increasingly require the ability to track who has access to, and uses, key systems, applications and payment mechanisms. In the United Sates, Fujitsu offers its PalmLock solution to users of SAP Enterprise Resource Planning (ERP) systems. This technology positively authenticates the identity and approved security level of the user at log-on and, once in the system, it ensures that the user

has the appropriate access approvals to conduct transactions within each given areas. Clients using the system report significant reductions in fraud in areas such as purchasing, payroll and at retail Point of Sale. Thirdly, laptop and desktop sign on. Deploying biometric technologies in office and home computing equipment accelerates log-in times and provide a practical and easy alternative to remembering passwords (and thereby reducing requests to IT helpdesks for help with resetting passwords). They also provide added protection to users. Stealing an identity – say in the way that the German defence minister’s fingerprints were copied in 2014, simply by using photographs taken from afar5 – is made much more difficult, if not impossible. That’s why some Fujitsu laptops come with a biometric reader built in, while – for users of other equipment – it offers a mouse with a palm reader embedded in it, which simply plugs into a USB port to provide biometric identification functionality. And, to accelerate access to mobile phones, Fujitsu has pioneered iris recognition technology. Users of Fujitsu phones will be able to access their device quickly by simply holding it in front to their face and allowing the embedded software to scan their eyes. Biometric systems are highly accurate, cost-effective and scalable. They deepen bank defences by providing an unequivocal link to an individual, event or transaction and are very hard to forge. We believe that these are key reasons why banks are exploring, and deploying, the technology on a scale previously unseen – at least, outside of the movies.

Source: 1 www.onwindows.com/Article/windows-hello-brings-

2 3 4 5

biometric-authentication-to-windows-10-45150#. VUdxvZPXvWE www.bankinfosecurity.co.uk/former-citi-vpsentenced-a-4914 www.computerworld.com/article/2508552/security0/ insider-data-theft-costs-bank-of-america--10-million.html www.independent.co.uk/news/uk/crime/exlloyds-securityboss-jessica-harper-jailed-for-25m-fraud-8163418.html www.bbc.co.uk/news/technology-30623611

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EUROPE TECHNOLOGY

The Future Rests On a Programmable Economy

Dr David Andrieux Market Intelligence Manager Sopra Banking Software

Today all banks, escrow agents and other financial intermediaries must hedge risks in transactions between untrusted parties. But imagine if you could sidestep the complex issue of intermediaries and cut transaction costs at the same time? Sopra Banking Software’s Dr David Andrieux takes a look at the rise of ‘smart contacts.’ One of the big promises of cryptocurrency networks, such as those that underpin Bitcoin, is the arrival of a model for transactions that will literally revolutionise the transferring of digital currency and remove the need for trusted intermediaries. The concept underpinning smart contracts is that software automates the contracting process, without necessarily having any human involvement. Its supporters say it can lower costs and make the whole process more efficient and fool proof. In practical terms, when a pre-programmed condition is prompted, the smart contract executes the corresponding contractual clause. At a personal level, you could make sure that your mortgage is always kept at the same rate, for example. At a higher level, other applications come into play such as bonds and assurance contracts.

The model is extremely flexible and can be applied to any transactions or events that the smart contract rules apply to. An example would be setting up escrow accounts when a property is sold. When ownership has been transferred from the seller to the buyer, the funds are automatically released.

Beyond transactions

Smart contracts don’t begin and end at transactions. They can also be embedded into physical properties to create so-called smart properties. Cryptographer Nick Szabo who coined the concept of ‘smart contracts’, for example, explains what would happen if someone breaches a car lease: if the owner fails to make the payment the smart contract puts into play the lien protocol and automatically returns the car keys to the bank. Smart contracts could potentially create affordable and more efficient legal and financial systems. It is possible they could replace notaries, lawyers and banks for handling certain common financial transactions. However, the need for parties to commit to a smart contract from the onset, the need for transactional lawyers to actually structure smart contractual relations may be necessary.

Blockchains uncovered

Smart contracts may be based on blockchain technology, but this does not mean that all transactions and contracts must be expressed in Bitcoin or any other type of digital currency, as this would bring with it major commercial limitations.

Blockchains are public ledgers used by peer-to-peer digital currencies like Bitcoin to record transactions. As these are distributed, each network node stores its own copy to independently verify the chain of ownership of every unit of digital currency. This enables the system to work out what has been spent and to stop double-spending in an environment with no central authority. This could be the missing link in the chain to getting smart contracts off the ground as a viable alternative to what is on offer today.

A Smart future

The industry is taking the whole concept of blockchain seriously and don’t want to miss the boat. Nine of the world’s leading banks, including Barclays, J.P. Morgan, Credit Suisse and the Royal Bank of Scotland have banded together to design and deliver advanced distributed/shared ledger technologies to global financial markets. They plan to establish consistent standards and protocols for crypto technology across the financial industry in order to push broader adoption. The opportunities for creating new business around the concept of smart contracts are enormous. The age of the Internet of Things (IoT) is upon us, with 25 billion devices forecast to be connected by 2020. Supply chains and services will need new models. If standards can be developed for blockchain in banking and financial services, we will see the breakthrough technology of smart contracts adopted faster than many may think possible, all wrapped in the promise of additional security, lower error rates and significant cost reductions. Issue 2

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EUROPE FINANCE

Credit risk scoring – a time for change? When credit and loans are challenging to secure, interest in the factors that impact credit risk scores grows. Lenders with a healthy risk obsession assess applicants on their current ability to pay as well as their credit history over a number of past years. It can be a long, involved and arduous process with a certain amount of emphasis on the individual to produce documentation and supporting evidence. Now, in this digital age lenders are able to explore options around the data sources they use to assess risk level and conduct their risk decisioning processes. Lenders need to apply strict due diligence in loan assessments. They have an obligation to lend responsibly, and the continuing prosperity of their business is dependent on the accuracy of the decisions they make. To establish if a loan applicant carries an acceptable level of risk they use wellestablished credit scoring techniques. This, of course, delivers a certain percentage of refusals. Which is to be expected, although the relative proportions can vary from segment to segment. For small businesses, it can be especially hard. CEB analysis of US Federal Reserve statistics this year revealed less than a fifth of small business loan applications were approved and applicants spent more than three working days pulling together the documentation they needed to apply.

Does one size fit all?

Where a rigid ‘one-size-fits-all’ system exists there are bound to be examples where loan applicants are refused but are in fact viable prospects who would make their repayments. They are denied their opportunity to make their contribution - to start a business; to get ahead; to invest in property; to improve their prospects. 114

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Lenders – both traditional and ‘alternative’ – can now consider additional and complementary data sources for credit risk assessments. These can usefully contribute to established processes and, in time may provide an alternative route to a credit decision. These can include looking at evidence of an applicant meeting regular payment obligations such as utility bills. A Chilean start-up recently won the BBVA Open Talent 2015 Special Financial Inclusion Award taking this approach. Their innovation aims to help individuals who have no credit history and so find themselves excluded from mainstream financial institutions. Taking it one stage further, there is also scope for personalised interest rates to be set. Borrowers with an unimpeachable credit history could be offered preferential rates if lenders were able to accurately predict which applicants would make or miss loan repayments, and when. The University of Edinburgh Business School looked at this and launched a model for credit risk analytics that they claim could pave the way for this.

New data analytics

Access to useful data and the tools and techniques to turn it into actionable information is the important point here. As is the flexibility to be able to integrate new data analytics into risk decisioning and lending business models. Social media is another case in point. Behavioural data exists in abundance throughout social sharing networks. Tapping into it may enable fully informed decisions to be made on potential customers who may not meet the prerequisites of the traditional model.

The underbanked, who may lack a credit history or have a poor financial record may be automatically declined using traditional models. Credit risk approaches that take a more individual look at the applicant could return an approved result. Which, provided the risk assessment is robust, benefits borrower and lender alike - the micro business of today could deliver the entrepreneurial innovator of tomorrow. Then there is the difficulty many people currently face if something negatively impacts their credit rating. It can take years to turn around. Bringing more flexibility into the process could speed up their re-integration into the financial system. Financial institutions, like all businesses, have to adapt and evolve to remain relevant in the market. Ultimately, it needs to be about an inherent desire to want to approve applications and to consider that one size doesn’t always fit all. A flexible approach to scoring credit risk can help with this. In this digital age the data, the tools to mine and analyse it and the capabilities to act on the results exist. They can improve and speed up risk decisioning if lending institutions embrace the possibilities. To be open to change, they need to ask themselves if their existing legacy infrastructure and processes can adapt and integrate new ways of working. We hear all the time of disruption in financial services. The pressure to stay on top of changes in policies and to adapt strategies to meet evolving market demands is never ending. By working with the potential that financial technology solutions offer, lenders could help more people that are unbanked or underbanked while maintaining or improving upon a profitable level of risk.

EUROPE FINANCE

Financial institutions, like all businesses, have to adapt and evolve to remain relevant in the market.

Paul Thomas Managing Director of risk decisioning solutions provider Provenir

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WHITE TIGERS ARE SET TO SHAKE-UP WESTERN BRANDS Either starts as manufacturer of parts for other companies As OEM or ODM “..Learn, assimilate, imitate, innovate” or own product manufacturer Independent or state owned

Asian brands with little to no brand awareness in the West are set to take over their European competitors Traditionally, it has taken Asian brands up to fifteen years to establish themselves in Europe; however research from INNOCEAN Worldwide Europe shows that this is poised to change in a major way. A new wave of Asian brands, mostly Chinese, with little to no brand awareness, are set to shake-up Western brands and their marketing strategies. The pace of brand building could gain strong momentum in the next 18 months, as consumer spending increases in Europe and increasingly “globalized” consumers open up more to international product offerings, less bothered by the “country of origin” barriers that were traditionally a stumbling block for many Asian brands. Despite being virtually unknown to European consumers, these companies are already hugely successful in their home market. These companies have been dubbed ‘White Tigers’ because of their formidable business presence but the lack of distinctive brand personality. 116

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Domestic brand, establishment/leader then diversifies and expands Begins to innovate with new products in preparation for global breakout

These businesses have been able to grow stealthily in the shadows over a number of years thanks to competitive pricing and strong distribution networks. This has allowed them to compete effectively with much better-known Western Brand rivals. Interestingly, many of them actually started out manufacturing for the brands against which they now compete. In order to secure a long-term place in the hearts and minds of European consumers, these companies are beginning to invest in brand building to woo the West and take a place centre-stage as a fierce mainstream competitor. Mobile handset manufacturer TCL Communications is one of the best examples of this phenomenon. Last year the Shenzhen-based company sold 2.9 million units in Europe, accounting for 17% of global revenue, yet only 6% of consumers on the continent have heard of the brand. TCL Communications along with VESTEL (a Turkish company) and ZTE are among the companies identified by our research as all having achieved remarkable penetration in Europe in spite of low brand awareness.

The research has also found that even companies like Haier and Huawei, which have already begun brand and product communication, are likely to invest in marketing more fiercely. “White Tiger” brand building efforts are more likely to be successful given that consumers are now more open minded towards a brand and product’s country of origin. According to our findings, 61% of people now think it’s unimportant where a brand is based or manufactures its products – a marked shift away from the negative connotations that have traditionally been a road block to Asian businesses on the journey to building their brand. The research, based on a survey of 1,000 consumers across Europe, identifies 6 brands in the consumer electronics market which are poised to accelerate brand communication in the months to come. Our research has also established VESTEL as a business to watch closely; as it deliberates its future and whether to breakout onto the world-stage as a brand in its own right, or not.

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Growing brand presence on the world stage - Regionalised /localised branding and expression With diversification of product lines at different price point Potential dual brand strategies Strong Product Communication Global brand breakout using a variety of brand pathways

The Brand impact on the market could be tremendous, as just 7 of the brands are estimated to amount to total net revenue of US $65.8 Billion.

Estimated Assets & Investor Flows through June 2015 Globally established brand

Brand

Country of Origin

European brand awareness

TCL Communications

China

Haier

China

17%

ZTE

China

11%

Xiaomi

China

Hisense

China

Vestel

Turkey

Changhong

China

Aigo

China

OPPO

China

We predict that many of the Asian brands of the future could tread this familiar path, but in a smarter and faster way, having observed the lessons of their Asian predecessors.

We attribute the explosive growth of these ‘White Tigers’ to a number of factors including better access to capital, more aggressive acquisition strategies and direct access to consumers via digital channels. Our research has also mapped the key stages of development these brands go through on their journey from ‘cub domestic start-up’ to globally-established ‘Orange Tiger brand’ (see above illustration) – including some of the marketing tactics and strategies used by successful brands at each stage.

Glen Flaherty Chief Strategy Officer Innocean Worldwide Europe:

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ASIA INTERVIEW

Moving FORWARD IN VIETNAM WITH SCB

Mr. Vo Tan Hoang Van, CEO of Saigon Commercial Bank (SCB) and Editor Wanda Rich discuss the importance of good corporate governance and the future of commercial banking in Vietnam. Mr. Vo Tan Hoang Van explained that given the large operational scope in the banking industry, together with stringent regulatory requirements, fiercely competitive environment and a wide range of customer base, it is of primary importance to ensure the following goals: Provide coherent products of high quality to customers Control business- related risks. Enhance the bank’s ability of competitiveness. As a leader in corporate governance, what do you believe are key elements to good corporate governance? Bellow are some core principles that are requisite for the efficient corporate governance:

Ho Chi Minh City, Vietnam

There must be a clear and distinctive definition and assignment between the roles and duties of the Board of Directors and the Board of Management in the bank’s activities; The system of optimal procedures/ statutes must be available and applied to every banking activity to enhance the effectiveness of the corporate management; Ensure the frequent maintenance of an efficient risk management system.

The above principles are actually reflected in the following specific aspects: The Board of Directors assume roles of setting strategic directions, developing the governance system for the bank and supervision of the implementation of the strategic directions through the operation of the BOD’s committees. On one hand, those committees assist the BOD in its duties. On the other hand, they frequently maintain the interaction with the Board of Management to ensure the realization of key issues in right directions in operational fields such as Trading – investment, risk management, human resources, risk handling and strategic planning. The Board of Management takes proactive roles in revamping the organizational structure, centralizing the decision making, harnessing the tasks of supervisory management and enhance the back offices’ effective performance. Further, the key factors for the efficient corporate governance are the availability of the apparent, specific procedures and internal regulations that can identify clearly the employees’ tasks and duties and avoid the task overlap. Moreover, the continued review and revision of the procedures, statues of operation to accommodate the changes to the markets and regulatory requirements must be taken into account in maintaining the operational efficiency. Issue 2

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In the trend of the global economic integration, the presence of foreign investors in Vietnam has brought about the positive aspects to the Vietnam banking system

Mr. Vo Tan Hoang Van CEO Saigon Commercial Bank

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ASIA INTERVIEW Second, the practices of international standards in corporate governance have been proved to be efficient so far. Therefore, these practices could be updated and applied in the Vietnam banking industry. Third, the foreign investors’ presence in the domestic market as new market entrants create and maintain the dynamic environment of competition and speed up the competitive momentum to support the development of the Vietnam financial market. In what ways does SCB extend their corporate governance obligations to social responsibility? The banking industry is a field having a broad and profound influence on the country’s financial system and the economy as a whole. The good corporate governance is necessary to ensure the sustainable development of the bank, reinforce the customer trust to the bank’s creditworthiness, bring about the benefits and welfare to the employees and the society through the bank’s contribution to the economic development and the provision of facilities and utilities to people and society. What are the risks and challenges facing the business environment in Vietnam? Currently, the top challenges facing the banking environment are identified as the significant volatility of the ongoing economic transformation in Vietnam and the legal system in the process of improvement to the standard practices of the market economy. The market’s selection and flexibility level in the emerging markets like Vietnam have been seen more intensive. Besides that, the steady processes of accumulation in capital, technique, technology and qualifications of human resources have resulted in the big opportunities as well as high challenges to the banks. Therefore, the efficient corporate governance will help to eliminate the potential risks in banking activities, support the bank development in the right direction. What impact are foreign investors having on the Vietnam banking sector? In the trend of the global economic integration, the presence of foreign investors in Vietnam has brought about the positive aspects to the Vietnam banking system as follows: First, there are more supplementary sources of capital to support the bank to expand the business activities.

What is the long-term business strategy for SCB? SCB’s defined strategic vision is to assemble the resources, deliver sustained values to customers, counterparties, shareholders and the employees, enhance the quality of living conditions, prosperity to Vietnamese families and enterprises and the wealth of the country. In the meantime, SCB already set up its long-term business strategy, in which SCB is focused on the reinforcement of its business capability for each stage to accommodate the development trend of the economy. Simultaneously, SCB emphasizes on the leveraging the business segments on which SCB has the competitive edge. For the sake of those goals, SCB is now looking for the opportunities of cooperation with the prestigious banks or the financial institutions in the region to enjoy more favorable access to the governance expertise, technology and capital and develop our service to the whole of our customer base in the context that Vietnamese economy has increased the profound integration of the region and the world through the international or regional organizations/agreements such as ASEAN, WTO, TPP, etc. Let’s talk for a minute about SCBs commercial customers. What financing options do you have available to commercial customers? For recent years, SCB has concentrated on implementing a wide range of products/ services and policies for institutional customers, such as: In deposits: Flexible investment deposits, multi-benefit deposits, SCB 100+ account, deposits on specialized capital account, daily investment deposits, online investment deposits, etc.

In corporate loans and financing: Import-export finance, guarantees, loans with preferential interest rates, overdraft, loans for energy-saving investment, loans for production stability, credit lines for rice industry, loans for sea vessels and fisheries activities, loans for vehicles, etc. In addition, SCB also offers enterprises with first-class financial services such as domestic payment, international settlement, foreign exchange, hedge against exchange rate risks, e-payment (tax, payroll, etc.), account management via internet banking, e-tax payment, national budget collection, financial consultancy, and management, etc. Customer relations are very important in commercial banking, how do you ensure customers are receiving the best customer experience available? In recent years, SCB has established and maintained a stable base of loyal customers. SCB has also designed a diversified range of programs/policies of serving, retaining and attracting customers. They consist of: Programs of high competitive products. Policies on services based on the advanced information technology. And above all, SCB has been developed the culture of customer service tailored for each customers’ segment to ensure the fullest satisfaction to customers. What does the future look like for commercial banking in Vietnam? The Vietnamese banking is in a significant restructuring process, and to some extent, it is seemingly on the path that Malaysian and Thai banking systems underwent. As such, this may likely result in a reduction in the number of banks in Vietnam and the formation of large financial conglomerates with a strong financial foundation and significant capital contribution of foreign investors. The competitive environment will be more intense and Vietnamese financial institutions will soon operate on a legal framework at level playing field as regional ones. This progress will change stronger in the next 03 years. Apart from that, the development of advanced information technology will be an inevitable trend for banks. Vietnam will also have more opportunities to accelerate the development of economy as well as banking system by embracing and enjoying new opportunities from TPP as well as international and regional economic regions. Issue 2

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Double dividend Will the end of one-child policy spur Chinese economic growth? Like nearly all major industrialized nations, China is getting older. By mid-2020, the country’s population will annually include 10 million more elderly and 7 million fewer working adults. By 2050, fully one-quarter of all Chinese will be retirees. China may be the world’s most-populous nation, with over 1.35 billion inhabitants, but the country nevertheless faces a growing demographic deficit. That fact spurred Communist Party leaders to announce in late October the end of 35 years of one-child policy. Doubling the number of allowed children per family would appear, at first glance, to be a reasoned response to the challenge of a graying population. However, previous moves to liberalize state one-child policy – for specific populations and in limited areas of the country – have had only a minor impact on fertility rates. In Guangzhou City, for example, 14,000 couples became eligible to have a second child in 2000. By 2009, only an additional 360 children had been born. Why was the demographic change in Guangzhou so slight – and why won’t the overall abolishment of one-child policy produce a Chinese baby boom, at least in the shorter term? Recent polls show that many couples who could have a second child feel that it is already too expensive to raise one child in China, let alone two. Despite years of sustained economic expansion, average per capita incomes still barely top $6,600. And while consumer

price inflation continues to slow, the cost of quality education, real estate and medical care remains out of reach for many parents of so-called “Little Emperors,” who have come to expect nothing but the best. Just as importantly, multiple generations of Chinese have been raised with the ideal of a nuclear unit composed of father, mother and child. Changing those mindsets won’t happen overnight. As well, many of those couples that may now wish to have a second child have already been sterilized. Taking a longer view, China still remains poised to overtake the United States as the world’s largest economy. Likewise, over the coming decades, the introduction of twochild policy will slowly but surely increase the size of the working-age population. Meanwhile, many China watchers believe the recent announcement is the prelude to the abolishment of all birth restrictions – a 21st-century anachronism whose total cost to Chinese society cannot be measured in dollars. Abolishing the one-child policy is another step towards a China seeking to change its sources of growth. Increased births would lead to an increase in future domestic consumption. Consequently growth would be less dependent on external demand.

In short, the party’s decision is intended to speed up the transformation of the economy, which has been going on for some years. As well as spurring global productivity, the emergence of a younger population over the long term will also have an impact on investment flows in the financial markets. In the first half of their lives, these future baby-boomers will be more likely to opt for the stock market while older ones will be looking for less volatile investments. Chinese stocks will find a new source of buyers. But let’s not get carried away, these babies have to be born first.

Ilario Attasi Chief Investment Officer Luxembourg, KBL European Private Bankers The statements and views expressed in this document are those of the author as of the date of this article and are subject to change. This article is also of a general nature and does not constitute legal, accounting, tax or investment advice

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REGULATORY INTERFERENCE WEAKENS THE LINK BETWEEN IPO ACTIVITY AND MARKET CONDITIONS An initial public offering (IPO) occurs when a private firm offers shares to the public for the first time. Facebook, Google, Apple, Visa, and many other household names have all gone through an IPO to become publicly listed firms. An interesting feature of IPO markets is that they are very sensitive to stock market conditions. IPO volume soars following bull markets and contracts during bear markets. This means that IPO activity exhibits waves in tandem with stock market cycles. The organic link between the level of IPO activity and market conditions is strong. In the US, there were almost 1,000 IPOs during the dot-com boom years of 1999-2000, whereas there were less than 150 IPOs in 2001 after the Internet bubble burst and less than 60 IPOs in 2008 when the financial crisis hit. 124

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An important question regarding the nature of IPO activity that has not been tackled so far is how it responds to changes in the regulatory framework. Would IPO activity be more uniform over time in a more heavily-regulated market, or would it still exhibit cycles? Would IPO volume remain sensitive to changes in market conditions if the regulator exerted more control, or would it behave more independently? IPO markets of China and Hong Kong gives us a perfect opportunity to address these questions since these two markets are very close both geographically and culturally but are substantially different in terms of the ways they are regulated. The institutional setup of the Hong Kong IPO market is heavily influenced by that of the UK IPO market. The regulator makes sure that IPO firms meet the disclosure requirements but do not attempt to control the IPO pipeline, which also the approach is taken in the US IPO market. In stark contrast, the China Securities Regulatory Commission (CSRC), the main securities markets regulator in China, actively manages the level of IPO activity. CSRC is equipped with powers to decide which

firms go public, how many of them and when. In fact, the CSRC can even shut down the IPO market when it deems the market is malfunctioning. This was the case throughout 2013 when no IPOs took place in China. In a recent research paper, â&#x20AC;&#x153;IPO Waves in China and Hong Kongâ&#x20AC;?, I compare IPO activity across the distinct regulatory schemes of China and Hong Kong. The findings suggest that regulatory interference has a big impact on the nature of IPO activity. In Hong Kong, IPO volume (the number of firms going public) is highly sensitive to market conditions. It increases following strong stock market run ups. Moreover, hot markets (periods of unusually high IPO volume) coincide with low stock market volatility, which suggests that more firms come to the IPO market when there is less uncertainty in the stock market. These patterns are consistent with those observed in Western markets such as the US and UK. On the contrary, the link between market conditions and IPO volume is weaker in China compared to Hong Kong. In particular, IPO volume is less responsive

ASIA TRADING

Causeway Bay Shopping District in Hong Kong

to stock market run ups and to changes in stock market volatility. Moreover, hot markets often emerge as a result of regulatory choices rather than market forces alone. For example, a major hot market in China coincides with the launch of the Small and Medium Enterprise Board in 2004 and another one follows the launch of the ChiNext Board in 2009 (both boards are part of the Shenzhen Stock Exchange). In both occasions, the CSRC facilitated the formation of a hot market by approving large numbers of IPOs within a short period of time. It is interesting to observe that hot markets emerge in China’s heavily regulated IPO market. This suggests that IPO activity can be cyclical even when the regulator exerts substantial control on IPO activity. In other words, the regulator does not necessarily smooth out IPO waves when it has the power to do so. On the other hand, the comparison of IPO activity in China and Hong Kong reveals that IPO cycles are at least partially detached from market conditions when the level of regulatory interference is higher. Given

the findings above, it is perhaps not surprising that China’s IPO system is undergoing reforms. The aim is to steer away from an “approval-based” system in which the CSRC decides which firms go public and to move toward a “disclosure-based” system whereby investors judge the quality of IPOs on the basis of information disclosed by issuing firms. This is definitely a step in the right direction. A successful implementation of these reforms can accelerate the IPO process and cut down the queue of Chinese firms waiting to go public. It can also strengthen the link between IPO activity and market conditions by allowing private firms to conduct IPOs in a timely manner when market conditions improve. The Chinese IPO market is already in a much stronger state than it was in the 1990s, but there is still a road ahead in terms of having a mature IPO market that is primarily governed by market forces.

Dr Ufuk Gucbilmez: University of Edinburgh Business School

Dr Ufuk Güçbilmez is a lecturer in finance at the University of Edinburgh Business School. His broad area of research is corporate finance. This article is based on his findings in a paper titled IPO Waves in China and Hong Kong.

Source: Güçbilmez, Ufuk. “IPO Waves in China and Hong Kong.” International Review of Financial Analysis 40 : 14-26. July 2015. Link: http://dx.doi.org/10.1016/j.irfa.2015.05.010

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Chronicles The

OF CURRENCY WARS - CHINA China is being accused of setting in motion a new round of currency wars. Let’s investigate whether these accusations are true or false. If you thought that currency wars were losing their intensity, you could not have been more wrong. Summer 2015 brought up a new wave of severe tensions between both advanced and emerging economies. This time the tensions were centered on China. Not only is the world’s secondbiggest economy being blamed for the global economic slowdown and commodity

selloff, but also it is a big source of currency volatility. Yet, if we look into the matter more closely, we may see that China was not actually aggressive in devaluing yuan. At least it was less aggressive than the media tried to present it. The story shows that the risk of currency wars is now so high that it takes very little to scare both the market players and various economies. 6.4600 6.4400 6.4200 6.4000 6.3800 6.3600 6.3571 6.3400 6.3200 6.3000 6.2800 6.2600 6.2400 6.2200 6.2000 6.1800 6.1598 6.1400 6.1200 6.1000

Nov

Dec

2015

Feb

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May

USD/CNY Weekly chart

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Jul

Aug

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ASIA TRADING

Elizaveta Belugina Leading Analyst FBS Markets Inc

The Chronicles of the Currency Wars by Elizaveta Belugina, leading analyst at FBS Markets Inc., FXBAZOOKA.comÂ is an ongoing series featured on Global Banking & Finance Review. This article is Part 4, you can read the complete series online at globalbankingandfinance.com

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ASIA TRADING

After keeping yuan’s central parity rate stable for a long time, the People’s Bank of China reduced it by more than 3% in the middle of August. The move was abrupt and sent a cold shiver through the global markets. USD/ CNY jumped from 6.2096 on August 10 to 6.3989 on August 13 and then tested 6.4129 on August 25. Analysts and investors all over the world panicked expecting the yuan to keep falling lower and lower. Why did Chinese authorities choose this time to liven up? The answer to this question lies at the surface. Analysts may argue whether this process is smooth or hard, but one is clear: China’s economy is definitely landing, its extraordinary economic growth pace is declining. After decades of double-digit expansion, the nation has lowered its GDP growth rate for 2014 to 7.3%, the lowest levels since 1990. Such slowdown is partly caused by the strategy of Chinese leadership aimed at switching the huge economy from its export orientation to being driven by domestic consumption. However, this is not the only reason of China’s problems. The origins of the nation’s worsening performance also lie in the yuan’s strengthening versus the euro and the US dollar in the recent years. Such revaluation was provoked by extremely loose monetary policy in the US, Europe and Japan as well as stagnating demand in Western economies. The higher yuan affected Chinese trade: exports are rapidly contracting since March when we saw a 14.6% drop from a year earlier. Imports are in no better shape: the indicator fell in August by 13.8%. The chain reaction made the activity in other areas – like industrial production, financial services and factory and real estate investment – fade. In a logical step, the People’s Bank of China provided monetary help to the national economy cutting interest rates and reducing the amount of deposits banks must hold as reserves. However, the central bank’s response to the market was not always timely, so investors got panicky fearing that the authorities cannot or will not manage 128

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the situation. Because of these worries, China’s turbulent stock markets have fallen by almost a third since peaking in June. Loose policy of the central bank was not what made economists and journalists from all over the world accuse China of starting the new round of the currency wars. It was the yuan’s devaluation, which made the West react with many harsh comments. Still, China’s devaluation was relatively small.

On a trade-weighted basis, the yuan gained

50%

since 2004.

Compared with that the recent 3% slip of Chinese currency looks less than tiny. In addition, Chinese authorities kept their promise not to let the yuan fall by 10%. The nation was zealous in its efforts to stabilize the national currency and limit its decline. To do that it was actively reducing its US Treasury bond holdings. According to Bloomberg, the People’s Bank of China has been offloading dollars and buying the yuan to support the exchange rate, a policy that has contributed to a $315 billion drop in its foreign-exchange reserves over the last 12 months. The country has spent much to go against the market. These data show that it is the market in the first place, which wants lower yuan. Bearish pressure on the yuan is a logical consequence of China’s economic slowdown and monetary easing. Chinese authorities could really have liberalization of national currency regime as a goal. The nation’s statement that it is moving towards a more market determined foreign exchange rate might after all be plausible. Beijing wants to make the yuan

an official global reserve currency. August devaluation of renminbi – another name of Chinese currency – is sign that Chinese authorities are working on long-term goals rather than just trying to give export a short-term boost. It is true that the short-term picture also occupies Beijing. For instance, Chinese central bank is widely expected to ease policy further this year. Yet, even the central bank has warned that looser policy may not be effective in lessening the pain felt by companies. It is clear that the Chinese economic bubble has grown so big that the nation’s economy will now suffer no matter what actions are taken by China’s leadership. Of course, China may be planning to drive the yuan lower in the longer term. Still, there can be no doubts that Chinese are perfectly aware of the amount of critics, which will be poured on them if they try to lower yuan abruptly. Moreover, Beijing understands that the negative impact of sharp currency fluctuations on its own economy will be greater than any potential gains and at this point can make the situation get out of control. Moreover, lower yuan would be negative for Chinese companies, which have accumulated large USDdenominated debt. Although China had not wanted to join the global currency clash, its small devaluation triggered a wave of similar moves in emerging market currencies – Kazakh tenge, Vietnamese dong, Malaysian ringgit and many more, This happened as many nations are not satisfied with high values of their currencies. US Federal Reserve cited financial market volatility in China as one of the reasons not to raise interest rate in September. The overreaction on the yuan’s decline gives a very good visual of how nervous and alert are all markets and nations at this point. No one wants to loose in competitiveness because of the cheaper currencies of its neighbors. The recent story with China brings to the front the need for global co-operation in order to achieve sustainable economic growth. Taking into account weak domestic demand and faltering trade the countries will keep competing in currency devaluation. Still, it does not look like China will be the one to lead the attack.

ASIA INSURANCE

TRADE CREDIT INSURANCE COMPANIES STILL UNABLE TO SEE THE

FOR THE

Despite the obvious advantages of switching to electronic documents, operations in the world-wide trade credit insurance and surety bonds market continue to be heavily dominated by paper-based transactions. This state of affairs, imperilling millions of trees, continues despite 60 per cent of corporate treasurers in trade finance stating in a recent survey that it is either important or very important for their organisation to be able to execute trade finance on electronic multi-party platforms. Why would they say this? The answer, I would suggest, is because managing multiple insurers (and banks) individually can be

time-consuming and costly for corporations, particularly those processing high volumes of guarantees and bonds. There is the constant interplay between head office, the regional branches and the financial institutions – all taking up time as paper documents are couriered around the globe.

Manual, labour intensive processes The background to this is one in which participants have long struggled with complex processes, as shown in a review of payment practices in western Europe conducted by one of the world’s leaders in trade credit insurance, surety bonds and collections services. Asked for the main reasons behind delays in B2B payments by foreign customers, more

than 28 per cent of companies put the blame on the complexity of payment procedures, while nearly 22 per cent said it was caused by the “inefficiencies of the banking system”. The problem within the sector is that although the insurance products have developed to meet changing demand, their method of delivery is stuck in the past. So while credit insurance and the surety bonds that support it now meet the needs of all types and sizes of businesses, offering cover for a wide-ranging set of commercial or political events and natural disasters, the instruments are still based on paper, rather than operating from an electronic platform. Issue 2

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ASIA INSURANCE 1245 9012 5678 1234 name 90 5678 1234

15 The future is electronic

Electronic platforms have huge advantages over paper. They give corporate customers the ability to create, approve, send and amend instruments in collaboration with multiple financial institutions. This means credit insurers and surety bond issuers can accept transactions such as application requests via the platform, reducing the requirement for paper and slashing processing time. A major provider of these important services with a firm foothold in 50 countries is for example, using a cloudbased platform to manage surety bond applications and has found that the technology enhances its relationships with the many financial organisations with which it transacts. Most obviously, the platform provides a single and consistent view of all trade instruments, giving a degree of visibility that was previously impossible with paper-based or conventional processes. It comprises a dashboard and messaging platform, and being a cloud-based solution, is accessible from anywhere in the world at any time, eliminating the requirement for complicated and time-consuming software installation. A common interface ensures speed, consistency, accuracy and security for all parties and enables a trade credit issuer to adapt to changing market dynamics.

A changing market Increasingly, for example, large corporate customers are impatient with the requirement to use multiple systems when conducting transactions with numerous guarantee or bond providers. Even though some issuers may have relatively sophisticated online portals, there are still substantial benefits in time and simplicity that flow to a corporate from having a single interface to manage all trade credit instruments.. For credit issuers, it also allows them to take advantage of these market dynamics by accepting transactions, such as application requests, directly into their back office or operations teams. Indeed, the corporate customers’ problems in managing multiple providers have been compounded by a number of external factors. These include the after-effects of the 2008 banking crash which halted the consolidation in the banking sector and in turn led to the spreading of insurance business to different kinds of institutions that provide a high level of competition, but add to managerial complexity. Clearly, having a single interface for multiple credit insurers provides a radically simpler approach for corporates, particularly if they are already conducting their trade finance operations on the same platform.

Extra advantages

Besides greater ease of use and speed, along with optimised working capital, there are also major benefits in risk mitigation and compliance. A trusted platform will be underpinned by a stringent legal framework, delivering the necessary reassurance for all parties that the process is secure and compliant with required internal or external regulations. It is often said that liquid capital tied up in trade credit can amount to 30 per cent of a corporation’s balance sheet. Almost everyone in business knows that when such significant sums are involved, it only takes a couple of failures for the viability of many organisations to be threatened. With this in mind, it seems almost inexplicable that more companies issuing trade credit insurance and surety bonds have not already shifted to electronic platform. The benefits in speed, accuracy, cost-saving and compliance are there for all to see – in a single interface.

Carlo d’Amore Global Head of Financial Institutions and Partners Management Bolero International Issue 2

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Defining Digital Differences amid financial disruption PayPal, TransferWise, Zopa, Fidor â&#x20AC;&#x201C; nimble digital brands are radically disrupting financial services. Whilst traditional banks are investing heavily in developing and promoting their own digital services, there is a need to recognise the differences in how consumers choose to use digital channels. Investment in digital is essential; not only to drive efficiency and cut costs, but to reach new customers as increased competition and technology change the nature of the sector. Alternative choices for managing money mean that retaining and rewarding customers in a way which reflects their personal preferences and motivations is more important than ever to ensure brand loyalty. To help understand these differences, we recently surveyed 4,400 affluent middle class consumers (within the top 10-15% income bracket) in Brazil, China, India, Italy, Singapore, the United Arab Emirates, the UK and USA. This group is increasingly valuable to brands as they have been shown to have the power to influence other consumers. The research identifies four global â&#x20AC;&#x153;tribesâ&#x20AC;?, or groups of people, who share common traits which cut across age, gender and international boundaries:

Christopher Evans Director Collinson Group

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Stylish Spenders expect companies to know who they are and offer highly tailored offers and content. As a result, they can be powerful advocates for brands which develop relevant and engaging digital experiences. 1. Prudent Planners are motivated primarily by family and altruistic goals. Three quarters of this tribe cite spending time with family as their top indulgence. As the largest proportion within the affluent middle class, this group will represent around 2 billion consumers by 2030 and is well-represented in the USA, UK and Italy. They are valuable customers but are less motivated by material products. 2. Stylish Spenders are a small but influential tribe representing 8% of the affluent middle class globally. Over half are under 35 years of age with 32% earning over $190,000 a year and this group is particularly prominent in China and the United Arab Emirates. Despite their spending power, this group is the most loyal to brands they trust, participating in an average of five loyalty programmes and feeling loyal to up to eight companies. 3. Mid-Life Modernists stand out for their enthusiastic use of technology, with 90% spending more than five hours a week using their smartphone and 45% spending over 20 hours a week of their leisure time online via a computer. As a result, digital experience has a significant influence on this group and businesses which invest in this area can create powerful advocates amongst this tribe. This tribe is most prevalent in India and Singapore. 4. Experientialists want unique, money canâ&#x20AC;&#x2122;t buy experiences and exclusivity rather than standard products and services. This group is most likely to enjoy experiencing different cultures and use travel as a way of keeping in touch with friends and family and is prominent in China and the United Arab Emirates. Experiences such as spending on holidays, dining out and luxury foods are also a priority. What does this mean for financial services brands? Delivering a great digital experience is essential in order to remain competitive in the financial services market, attracting and retaining new customers. Using big data to better understand behaviour provides the opportunity to deliver timely and contextually relevant marketing, and to connect with customersâ&#x20AC;&#x2122; emotions.

Each of the tribes shows distinct preferences in how it uses technology and what it expects from their digital interactions. It is more important than ever to address how these consumers wish to engage with their banks. Prudent Planners continue to value face-to-face interactions as well as digital services, so retaining this as an option is key for this sizeable segment. This is particularly important in areas such as banking, where branches are closing and there is a shift towards online and mobile services. Metro Bank in the UK caters for this group, emphasising its branch experience while still offering online banking and apps, which suit other tribes. Banks should also think about the best way to reward these consumers, as they are more interested in experiences rather than pure monetary rewards. Stylish Spenders expect companies to know who they are and offer highly tailored offers and content. As a result, they can be powerful advocates for brands which develop relevant and engaging digital experiences. Banks should look to build services with responsive platforms, as well as applications that provide access to account details and financial planning services. Financial brands need to think carefully about how they deliver digital experiences in China and the UAE, where this group is most prominent. Programmes like Barclays video banking for its premier customers are appealing to the stylish spender, where they are able to have a face-to-face conversation with an adviser via their smartphone or tablet wherever they are in the world. A seamless experience across digital channels is important for Mid-Life Modernists, the most active users of smartphones, tablets, smart TVs and apps. In the US, 90% of consumers use their mobile phone for ten hours or more per week; and our research indicates a growing trend among consumers who use mobile applications for banking services (this is highest in India at 59%). This tribe is interested in modern, sophisticated digital design and a seamless handover as they move between these different channels. Issue 2

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ASIA FINANCE In the U.S. American Express has recently enabled customers to use its reward points to pay for Uber, illustrating a smooth transition between brands and an incredibly convenient experience for users. Banks are currently missing an opportunity to reduce the cost of their loyalty programmes by managing their own reward and redemption programmes. These programmes offer banks an opportunity to increase their revenue streams, allowing them to raise their card fees. Customer benefits like lounge access, card assistance and insurance solutions need to be offered on mobile applications and sites to ensure a truly omni-channel experience. Research by Cognizant has shown that more than 40% of banking happens through a mobile application, and that the quality of this experience is the reason why a third of consumers will stay with their bank. Experientialists ‘live for the moment’ and expect fresh content, regular updates and unique experiences from their financial service providers. Marketing has traditionally focused on geographical or demographic segmentation but digital is making it easier to segment activity based on customer behaviour and common attitudes. It also makes it easier to focus on the customers who will have the biggest impact on the business and for many financial services, travel and luxury brands, this is the affluent middle class consumer.

How to respond Understanding the nuances and variations in how consumers choose to use online channels is important in the rush to digitise financial services. There are however some commonalities which all financial services brands should consider: 1. Personalised service: despite significant investment from banks in digital and customer systems, 83% of UK consumers still feel that their bank does not know or understand them and less than a third feel they receive a high level of personal service. Personalised and consistent communications, rewards and service regardless of how customers choose to interact with a bank is important for the affluent middle class globally. Our research has found that customer engagement improves by a third amongst individuals who ‘feel understood’ by their bank and a further third for those who say they receive a seamless multichannel service – whether in person, by phone or via digital channels. 2. Recognition and reward: our research found that not being rewarded for loyalty is the biggest frustration for affluent middle class consumers, cited by two thirds of respondents, ahead of poor interest rates and charging unnecessary fees. Many banks offer standardised, purely transactional loyalty programmes which rely on traditional points-based rewards and lack the emotional appeal to build loyalty. Optimising digital channels to modernise how customers are recognised and rewarded is key. 3. Choice of reward is important in boosting loyalty: we are seeing companies in other sectors, for example mobile operator, O2, offers a wide range of rewards and the option for consumers to choose what value they derive from a brand relationship. This includes a breadth of offering from concert tickets to unique, money can’t buy experiences, which appeal to the changing motivations of mass affluent consumers. Some banks still tend to think of rewards which relate to other financial services or points-based programmes. Experientialists “live for the moment” and expect brands to offer unique experiences to maintain their interest. Meanwhile the Prudent Planners appreciate rewards which they can share, which offer longer term gain and which can also be extended to their family. The younger generation in

particular display emotional motivations that are altruistic and believe that brands should take action to show wider social responsibility. Offering charitable redemption offers appeal to this audience. 4. Simplify redemption: a well put together and effectively delivered digital experience has real potential to offer immediate rewards to valued customers and a common perception is that many current loyalty programmes make it hard to earn enough points to access the best returns and that redemption processes are too complex. Giving customers greater flexibility in how they access rewards will enhance the experience and differentiation of a programme. For example enabling consumers to pay with cash, points or a combination of both and offering mobile wallet style services allows for accessible and convenient redemption. Many financial services brands do not have a platform which enables this degree of flexibility and rethinking systems to offer this approach can greatly improve engagement and loyalty. 5. Real-time engagement: Social media and mobile services encourage an ‘always-on’ attitude and mean consumers continually expect fresh content from reward programmes. There is an opportunity for card providers to offer real-time, tailored promotions and redemption at the moment of purchase online and in store. This boosts customer loyalty and offers brands the opportunity to build greater connections with their customers. In return, financial services providers can track spend, understand who their best customers are, and motivate behavioural change. This can be jointly funded by merchants who benefit from increased footfall. Customers realise value from frequent use of their bank card, and the perceived value of the loyalty programme is greatly increased. Smartphones, apps and digital experiences are highly valued by Mid-Life Modernists and offering promotions and price comparisons via mobile devices, particularly those that can benefit a whole family, is an effective way to engage with them.

If financial services brands address the points above, there is a real opportunity for the mass affluent consumers, to become powerful brand advocates. Our study found that the affluent middle class are willing to reward organisations which cater for their personal motivations, and financial firms can cater to these at various points of customer interaction as long as there is value exchange for customer participation. Nearly three-quarters (72%) are willing to make a repeat purchase from a brand they feel loyal to, 70% would recommend that brand to friends and family and 53% will choose a particular brand even if it is more expensive – directly impacting the bottom line and driving customer loyalty. Source: www.cognizant.com/InsightsWhitepapers/Retail-Banking-Delivering-a-Meaningful-Digital-Customer-Experience-codex1036.pdf Issue 2

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ADDING COMMODITIES

TO A PORTFOLIO

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The concept of adding commodity exposure as a way to reduce portfolio volatility may seem counterintuitive, but the main drivers of commodity prices often vary from those of other asset classes, particularly bonds and equities. This is the reason why advisors and investors often turn to the commodity sector as a potentially effective means of achieving higher risk adjusted returns in a portfolio. Commodities are important as both diversifiers and volatility reducers in a well-designed, risk adjusted portfolio, especially the big agricultural commodities of sugar, corn, wheat and soybeans. After all, demand for these commodities if often very stable, even in times of economic turmoil, because people and their animals still need to eat, regardless of financial market or global economic performance.

Why Commodities Work In A Portfolio

Why are commodities so popular? The answer is simple: Adding commodities in a portfolio can, over time, actually reduce overall portfolio volatility and even have a slight positive effect on overall absolute returns.

Figure 1: Potential benefits of Including Commodities in a Portfolio Lower Risk & Higher Return, 1994-2013 Domestic Portfolio with Commodities

Domestic Portfolio

60%

40%

28%

Key: Bonds Commodities Stocks Return 7.0% | Risk 11.1%

32% Return 7.7% | Risk 8.7%

NOT REPRESENTATIVE OF ANY TEUCRIUM PRODUCTS. Source: Analysis & corresponding charts were prepared by Teucrium Trading, LLC, using Bloomberg Professional, August 1st, 2014.2 About the data: The 20 year period examined in this study in from 1/1/1994 through 12/31/2013. Stocks in this example are represented by the Standard & Poor’s 500©. Bonds are represented by the Bloomberg/EFFSAS US Gov’t 3-5 Year Total Return Bond Index. Commodities are represented by the Morningstar Long-Only Commodity Index. An investment cannot be made directly in an index.

In the study cited in Figure 1, by reallocating 28 percent of exposure from stock holdings (exclusively) to a broad commodity basket in what is now a 40 percent bond, 32 percent stock, and 28 percent commodity weighted portfolio, the volatility of the portfolio was reduced by 21 percent, from 11.1 percent to 8.7 percent. Given this analysis, it is understandable why institutional investors have effectively utilized commodities in their risk adjusted portfolios for many years. Fortunately for today’s financial advisors and investors, the recent growth of the commodity-based ETP sector provides simplified access to a wide variety of commodities. There are several broad-based commodity ETPs offering access to baskets of up to two dozen (or more) different commodities, and there are single commodity specific ETPs (excluding ETNs, which are backed by credit and not real assets) that represent thirteen various commodities as of this writing.1 Simply put, today’s investors and asset allocators have a wide variety of commodity-based ETPs from which to choose when determining their investment objectives; all can be accessed directly through a normal securities account on major trading exchanges with no need for a futures account or external futures manager. Investors face some basic choices when adding commodities to their portfolios. Primary amongst considerations should be the type of commodity exposure one wishes to achieve. One must ask if a broad-based, multi commodity basket is most suitable; or might exposure to a smaller, core group of commodities about which the investor has some knowledge be best? Issue 2

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ASIA TRADING Most important for investors to remember when choosing a commodity-based ETP is that no two benchmarks are alike; each has its own unique design and results will vary accordingly. Spend some time looking into the design of the ETPs in the commodity sector to find the one that best suits your investment objectives. Some multi-commodity funds give investors equal weighting amongst a wide variety of commodities; others assign weightings to commodities according to their scale of global production or consumption rates. Many of the most popular of these indices are often heavily-weighted in favor of the energy, metals and agricultural commodity sectors. These funds allow immediate, generalized exposure to commodities and offer a convenient way for investors not currently familiar with commodities to gain initial core portfolio exposure. In the single-commodity ETP sector, more narrowly-focused products give investors the ability to custom design or supplement their pre-existing commodity exposure. These funds often appeal to investors wishing to overweight or underweight a core commodity holding, especially those investors familiar with specific commodities or sectors such as energy, precious metals, or agriculture.

Choosing Commodity Exposure for Diversification

How might an investor go about choosing exactly what type of commodity exposure to include in a portfolio? A good place to begin might be with some basic statistical analysis. Many professional investors are well aware that price movements in precious metals are generally not well correlated with the performance of stocks and bonds. However, it often comes as a surprise to investors that many commodities in the agricultural sector have price movements that are less correlated with stocks and bonds than are those of other well-known commodities. Figure 2 illustrates the 20-year price correlation of thirteen major commodities to the S&P 500.2

Commodities

Figure 2: Correlation Coefficients of 13 Commodities to the S&P 500 - A 20 Year Look. 1/1/1995-12/31/2014 0.21 Sugar #11 (ICE) Natural gas Henry Hub (NYMEX) 0.28 Corn # Yellow (CBOT) 0.29 Wheat #2 Soft Red Winter (CBOT) 0.31 Soybean #2 Yellow (CBOT) Silver (NYMEX) Gold (NYMEX) Copper (NYMEX) Platinum (NYMEX) WTI Crude Oil (NYMEX) Brent Crude Oil (ICE) Heating Oil # 2 Fuel Oil (NYMEX) Palladium (NYMEX) S&P 500 Index

0.00

0.01

0.02

0.03

0.41

Conclusion Commodities are being used very effectively as diversifiers in many portfolios. As illustrated in the Morningstar study cited in Figure 1, the inclusion of commodities in a portfolio can reduce portfolio volatility over time without negatively impacting overall returns. Investors now have access through a wide variety of ETP products to a range of principal commodities. These ETPs can differ significantly in benchmark design, which is the main driver of returns to the investor. Of the major commodities represented by single-commodity ETPs, longterm time horizon snapshots in correlation studies show agricultural commodities, specifically sugar, corn, wheat, and soybeans, along with U.S. natural gas, as the commodity sectors having the lowest relationship with the S&P 500.

0.46 0.47 0.51 0.54 0.61 0.61 0.62 0.75 1.00

0.04 0.05 0.06 Correlation Value

0.07

0.08

0.09

1.00

Sources: Charts were prepared by Teucrium Trading, LLC, using Bloomberg Professional January 12th, 2015 Note: Commodities values are from futures (generic first) spot continuation charts. S&P 500 Index taken from Bloomberg: SPX Index – This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Stocks in this example are represented by the Standard & Poor’s 500.

Precious metals and energies can be effective components in a diversified portfolio, and the popularity and presence of these two commodity sectors in many portfolios is widely known. But analysis shows that over time the price movements of energies seem to be more closely correlated with securities than are the price movements of agricultural commodities, particularly those of sugar, wheat, corn and soybeans. In fact, longer-term analysis of the same thirteen commodities available in the single-ETP format consistently shows sugar, U.S. natural gas, corn, wheat, soybeans and gold as the least correlated commodities to the performance of the S&P 500 Index. In fact, along with prices of U.S. natural gas, the major agricultural commodities of sugar, corn, wheat & soybeans have all exhibited weaker correlations to the S&P Index than gold over the last twenty, ten & five year periods. As previously discussed, investors seeking exposure to commodities have easy access to a variety of commodities-based ETP products. They can choose amongst several multicommodity ETPs or they can customize their exposure using single-commodity funds. Again, be certain to study the underlying benchmark of your ETP choices, because benchmark design more than any other factor will be the true source of your expected performance.

Sal Gilbertie President, Chief Investment Officer and co-founder of Teucrium Source: 1 A study of the correlation of those thirteen commodities represented by an ETP (excluding gasoline) to the S&P 500 can be seen in figure 2 on page 2. 2 For this purpose, the correlation analysis for each specific commodity is Spot Continuation (generic futures contracts) as defined by and sourced on Bloomberg: “Generic contracts, such as US1, US2, US3, ..., are constructed by pasting together "rolling" contracts, according to the pre-selected roll types on the commodity default page. The generic contract uses the value of a particular contract month until it "rolls" to the next month in the series. You can access a generic contract by replacing the month/year code with the number 1, i.e. A 1<CMDTY>. Replacing the month/year code with the letter A will yield the active contract.”

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Haiduong, Vietnam

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CONSUMER FINANCE IN VIETNAM

StoxPlusâ&#x20AC;&#x2122;s view on possible cap on lending rates for consumer finance in Vietnam Background

Consumer Finance has become the new sensation in Vietnam. According to the latest market research report of StoxPlus, Vietnam consumer finance market reached US$10.4billion in August 2014, and CAGR recorded at 15.7% from 2007 to 2013. The market has been dominated by a few foreign and local finance companies such as VP Finance Company, Home Credit PPF, HDSaison Finance, Prudential Finance, etc. Besides these existing companies, a series of M&A deals concluded recently between commercial banks and local finance companies. The race to acquire finance companies reflects the new trend as banks move from traditional corporate lending to retail banking including payment cards, housing loans and especially the consumer lending to ensure a healthier bottom line.

Pham Minh Hang StoxPlus

Attractive as it is, this small but fast-growing industry faces negative reaction from the public due to exorbitant interest rates. In comparison with the rates offered by banks, the interest rates charged by finance companies are much higher as its nature of the business, falling in the range of 30-60% annually. Due to the high rates, consumer finance companies have been accused of being usurious, and this creates a debate on whether to put an interest rate cap on consumer lending activities or not.

Many articles were written on how finance companies robbed off their customers with unreasonably high-interest rates, comparable to that of the black market. This has led the Ministry of Justice to announce a new draft of the amended Civil Law with the aim to protect the rights of consumers.

Event

Currently, there is no interest rate cap in Vietnam. According to the 2005 Civil Law, negotiated interest rate in a civil transaction is regulated to not exceed 150% of the prime interest rate (currently at 9%), equivalent to 13.5% annually. Meanwhile, in 2010 Law of Credit Institutions, Article 91 allows the flexibility of interest rates, depending on the negotiation between two parties. Due to this inconsistency, financial institutions still apply the flexible interest rates as stipulated in the Law of Credit for lending contracts. In the National Assembly Congress in October 2015, Ministry of Justice has submitted the Draft Amended Civil Law, which proposes to enforce an interest rate ceiling in lending. The ceilings are proposed in Article 483 to be linked to the prime rate and the highest rate charged has to be posted and no higher than 200% of the prime rate (9% at this moment), equivalent to 18%. Issue 2

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ASIA FINANCE The development of consumer finance in Vietnam has proved to be inevitable. Historically, Vietnam banking system focused the majority of their loan book to corporates and not individuals. Corporate lending accounted for approximately 69.31% of the country’s total loan book by the end of 2014. Due to the financial crisis from 2012 to 2014, corporate lending environment saw a downward trend due to the soaring of non-performing loans (“NPLs”). Corporate lending was tightened, and banks had to branch out to retail banking for growth.

Meanwhile, financial inclusion is still a challenge. Vietnam has as much as

million people

If the interest rate cap is put into practice, the existing business model of finance companies simply does not work to cover the cost. Detailed analysis of the cost structure of finance companies is illustrated below.

Figure 1: Cost structure of a finance company under an interest rate cap of 20% 25.0

20.0

15.0

Interest rate

StoxPlus’ View

10.0 20.0 7.6

5.0

4.6 0 Lending Rate

Funding Cost

-5.0

Operating Cost

NPL provisions

Operating Loss -2.6

Source: StoxPlus’ analysis

in the working age being unbanked

(i.e. having no bank accounts). Banking infrastructure such as branches, ATM, or POS concentrates mostly in Hanoi and Ho Chi Minh City. With this in mind it is easy to see why the lower income segments are left with no financing sources other than pawnshops or black credit market, and which can bear a very high-interest cost of 180-300%. Consumer finance companies, therefore, help fill the gap to extend credit to people who would not be served by the banking system otherwise. The target market of consumer finance companies are lower income individuals. Besides, the business model of these companies focuses on quick and easy credit with very convenient application process: customers are able to receive a loan in less than 30 minutes. As such, the risk born by consumer finance companies is not the same as banks, and interest rates cannot be compared to those of banks either. Interest rates of finance companies are thus higher, ranging from 30-60% annually depending on the risk of individuals.

As in Figure 1, if the lending rate is capped at 18-20% according to the draft New Civil Law, finance companies would not make any profit but rather an operating loss of 2.6%. The reason is because these companies cannot take deposits and have to borrow from other financial institutions, and funding cost usually averages 10.6%. Operating cost takes another 7.6% while provision expenses for NPLs of finance companies are estimated at 4.6%. In other words, finance companies would be driven out of the market. The consequence is that people who want credit but do not qualify for bank loans will be denied access to financing. They would have no options but resort to informal financing sources such as pawnshops or loan sharks who are not monitored and charge unscrupulous interest rates. As outlined above, the interest rate cap is not feasible for the business model of finance companies. From a policymaking perspective, it is very difficult to set a reasonable ceiling interest rate. If the ceiling is too low, some consumers would be left out of the credit system and could not buy the goods and services they need. In such cases, consumers have to turn to

the black market at an even higher cost, making the problem even worse. For that reason, it is StoxPlus’ viewpoint that there should be no interest rate ceiling imposed on consumer loans, a more effective approach to ensure reasonable rates and protect consumer rights is to encourage competition among finance companies. This will spur innovation which will reduce the risks and thus the costs associated with unsecured lending.

Parliament passed the amended regulation at the end of November 2015. Officially placed interest rate cap on civil loan, closed at 20%. National Assembly of Vietnam began in October 2015 and at the end of November 2015, passed its official cap on interest rates for personal lending. Surprisingly, the Committee decided an absolute value – closed at 20%, instead of based on prime rate like the old version or the previous submitted draft. The Government accepted majority of recommendations put forward and will implement them progressively. People who borrow from individuals will get more protection under the new framework. Nonetheless, the law states clearly that in case of other law regulates regarding the same issue, the interest cap will be inapplicable. In line with Law of Credit Institutions, licensed finance companies will not be restricted to maximum rate when the new measures kick in. Consumer finance, as the expectations of experts, tends not to be affected and deprived customers may lean toward the access to financing via consumer finance model. In addition, market witnesses the good sign to ensure that the industry remains commercially viable. So there is a role for finance companies that distressed borrowers will meet their need urgently.

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