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FP&A INNOVATION AUG 2015 | #7
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Analytics In Banking James Ovenden looks at how Big Data analytics is helping to solve some of the problems facing the banking industry. 16
Will Digital Money Kill Cash Digital money has had significant press coverage recently, but is it set to bring about the extinction of paper money?
THE GROWTH OF MICROFINANCE COMPANIES Microfinance is giving low-income groups access to credit. But is it a force for good?
ISSUE 7
EDITOR’S LETTER Welcome to the 7th Edition of FP&A Innovation Magazine
e are now in Q2 of the financial year, and the world of finance continues to be as turbulent as ever, with the aftershocks of the financial crisis still being felt to this day. In this month’s edition, we look at the issues that the modern CFO is facing, and the new technologies that can help them to address these. The UK Government has classified cyber security as a ’tier 1’ threat, on a par with international terrorism. Aaron Fraser examines how cyber attacks are impacting on finance, and whether companies and governments are doing enough to prevent them. Big Data analytics means big breaches if a cyber attack does take place. It could also mean big opportunities though. I take a look at how analytics can help banks, why they seem to be slower to adopt data science than other industries, and whether their reasoning is warranted. Beset by problems, banking needs to be employing the best talent available, but it is becoming increasingly apparent that there just isn’t that much out there. Amy Hill looks at why this is, and offers some possible solutions. FP&A and S&OP are both vital processes for companies to get right, but unfortunately, they often approach them in the wrong way. Emma Taylor debates which one plays a more important role in an organization’s success. Microfinance companies have risen to prominence over
the last few years. Kirsty Donovan discusses their rise, and whether this can be maintained given some of the criticisms being leveraged at them. With the amount of disruption being seen in finance, it seems only a matter of time before cash becomes extinct. Abigail Fletcher evaluates the future of digital money, and whether it can really supplant cash in day-to-day financial transactions. As always, if you are interested in contributing or have any feedback on the magazine, please contact me at jovenden@theiegroup.com
James Ovenden
Managing Editor
Are you are looking to put your products in front of key decision makers? For advertising contact Abigail at afletcher@theiegroup.com
CONTENTS 04 | ANALYTICS IN BANKING
James Ovenden looks at how Big Data analytics is helping to solve some of the problems facing the banking industry.
16 | WILL DIGITAL MONEY KILL CASH?
MANAGING EDITOR | JAMES OVENDEN
Digital money has had significant press coverage recently, but is it set to bring about the extinction of paper money?
06 | IS THERE A DATA TALENT SHORTAGE IN BANKING?
20 | THE GROWTH OF MICROFINANCE COMPANIES
Is the skills gap biting banks particularly hard? Amy Hill investigates why the skills gap within financial institutions is larger than in other industries.
A look at how microfinance is giving low-income groups access to credit. But is it a force for good?
EDITOR | SIMON BARTON ART DIRECTOR | NATHAN WOOD CONTRIBUTORS | AMY HILL EMMA TAYLOR KIRSTY DONOVAN ABIGAIL FLECHER AARON FRASER
brought to you by
10 | CYBER SECURITY AND THE IMPACT OF A DATA BREACH ON FINANCE
Cyber security tops most firms’ list of concerns, particularly financial companies. But can anything be done? 13 | FP&A OR S&OP - WHICH ADDS MORE COMPANY VALUE?
Emma Taylor investigates whether S&OP or FP&A contributes more to a firm’s success. brought to you by
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The problems facing banking are customer dissatisfaction, fraud, increased competition, and regulations
ANALYTICS IN
BANKING BY JAMES OVENDEN MANAGING EDITOR
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ANALYTICS IN BANKING
In the years preceding the financial crisis, the banks on the whole had everything their own way. Regulation was loose, they could lend to pretty much whoever they wanted to, and there was next to no competition. Any customer who decided that they were getting a rough time of it was left with one of two options - like it, or lump it.
The problems facing banking are customer dissatisfaction, fraud, increased competition, and regulations - all are issues that Big Data analytics can contribute to solving. Nearly every major decision to drive revenue, to control costs, or to mitigate risks can be infused with data and analytics.
technologies can also integrate external watch list screening systems and unstructured emerging data sources, such as geolocation. This should hopefully reduce the incidence of false positives.
Big Data analytics can help spot vulnerabilities in the system, and predict where an attack may come from. It can spot any deviations in customer behavior that could indicate fraud
In terms of customer service, analytics is enabling a hyperpersonalized experience. It does this by allowing for more targeting - looking beyond traditional structured datasets and segmenting by transactional, behavioural and social data. The other advantage of this is that customers are more willing to hand over more information, as they feel they are getting something in return.
to exploit Big Data in a way that big banks can’t. The larger banks have to integrate new analytics technology with legacy systems that are often difficult to combine. Newcomers are far more agile and have been built with analytics in mind. Big banks do, however, still hold the advantage through the sheer wealth of data that they hold, but they will need to act fast if they are to leverage it to maintain their competitive edge.
In the years since, this has changed. Maybe not as much as some would like, maybe more than some would like, but they have changed. A raft of regulation has been introduced, and, in the UK, government attempts to increase competition in the market have led to regulations that make it easier for customers to switch their accounts. This means that banks must be more on their game than ever when it comes to customer service. There have also been a number of newcomers looking to exploit the rise in online banking, such as Atom Bank.
Risk management is one of the main ways in which analytics can be of help to banks. Keeping on top of incoming regulations is an exceptionally difficult task for a big bank in particular, and compliance requires a standardized model that can adapt to different territories and cope with any sudden changes. Moreover, cyber crime is growing, and banks and their customers are some of the main victims. Big Data analytics can help spot vulnerabilities in the system, and predict where an attack may come from. It can spot any deviations in customer behavior that could indicate fraud. Big Data
For newcomers to the Fintech sector, there is an opportunity
Keeping on top of the raft of incoming regulations is an exceptionally difficult task for a big bank in particular, and compliance requires a standardized model that can adapt to different territories and cope with any sudden changes
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IS THERE A DATA TALENT SHORTAGE IN BANKING? BY AMY HILL
GLOBAL SUMMIT DIRECTOR
The advantages of Big Data are being seen across all industries, and nowhere more so than in the financial sector. Banks need information. They need it in real time, and they need it to be as accurate as possible. Financial institutions are expanding their use of data analytics in key areas, such as customer retention, increasing share of wallet, and risk management. These are all vital in an age in which mistrust in the sector is at an all time high, and governments are imposing regulations and rules around competition that have created a more challenging environment than ever to operate in. The tools for processing this data are improving rapidly, with new technology being released all the time. Unfortunately, finding people with the necessary skills to then analyze this data is becoming increasingly difficult. This is a situation being experienced across the business
world. A report conducted by McKinsey & Company predicts that there will be a shortfall of between 140,000 and 190,000 people with analytical expertise by 2018 in the US alone. IDC has projected similar numbers, estimating that 181,000 will be needed by 2018. According to the Harvard Business Review, ‘data scientist’ is the 21st century’s sexiest job. Salaries are high, thanks in part to the skills gap itself, yet it is still not attracting enough people to fill the roles needed by companies.
Financial institutions are expanding their use of data analytics in key areas, such as customer retention, increasing share of wallet and risk
One of the main issues is the technology itself. Big Data is a highly innovative area, and the software is constantly evolving. It takes time for anyone to grasp the finer details of its operation. The necessary skills needed for analytics in the finance sector are also particularly complex. Thomas Statnick, Global Head, Treasury and Trade Solutions Technology at Citibank, says that: ‘It is difficult to recruit people right out of school for these positions. For big data, it is a hybrid role...business and technology. You have to train them or recruit them from business positions. It takes business, engineering and computer science skills. it is an interesting hybrid of a position, but it is really hard to find those people.’ To train people with business experience, either from college or coming from previous employment, in data science costs money. However, many have
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DATA SCIENTIST THE
TALENTED MAN
8 reported a lack of returns from Big Data, with business leaders expressing disappointment in the insights that are being found. KPMG has recently released a global survey of 830 senior business leaders which found that, while 97% use data and analytics in their organizations, just 19% say they are very satisfied with the insights the analytics deliver. This is putting some off investing in the area to the degree that is necessary to fully exploit it.
KPMG has recently released a global survey of 830 senior business leaders that found that, while 97% use data and analytics in their organizations, just 19% say they are very satisfied with the insights the analytics deliver The solution for filling the skills gap starts at university level, with banks increasing collaboration with educational establishments to ensure that graduates are coming out with the right skills in place. Bank of America, for one, is working with the University of Virginia Darden School of Business, the McIntire School of Commerce, and the University of Michigan Ross School of Business on programmes that ensures it has a strong pipeline of IT leaders, helping to train them in different IT competencies at the bank, such as risk management, architecture and IT-business integration.
IS THERE A DATA TALENT SHORTAGE IN BANKING?
It is not simply a case of financial companies struggling to recruit the right talent either, they are also finding it difficult to retain it. According to Dr.Usama Fayyad, Chairman of Oasis500, a startup accelerator in the Middle East, and former CDO at Yahoo!: ‘Finding Big Data talent is difficult, retaining it is nearly impossible. And the role of a data scientist is impossible to fill, especially outside of the US.’ Investment in staff is key, and banks have to be patient with seeing returns. Training is a necessary expense if the insights being garnered are to be leveraged effectively, and a culture in which data scientists feel valued is important to create.
It is not simply a case of financial companies struggling to recruit the right talent either, they are also finding it difficult to retain it. Finding Big Data talent is difficult, retaining it is nearly impossible. And the role of a data scientist is impossible to fill, especially outside of the US
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CYBER SECURITY AND THE IMPACT OF DATA BREACHES ON FINANCE BY AARON FRASER HEAD OF FINANCE
Cyber security is at, or near the top of, most firms’ list of concerns. And if it’s not, it should be. The UK Government has classified cyber security as a ‘tier 1’ threat, on a par with international terrorism. The tenth annual Cost of Data Breach Study, conducted by Ponemon Institute and sponsored by IBM, found that the average consolidated total cost of a data breach is now $3.8 million, up 23% on 2013. The study also found that the cost incurred for each lost or stolen record containing sensitive and confidential information went up 6% from a consolidated average of $145 to $154. The USA Today, meanwhile, reported that an FBI official recently claimed that over 500 million records have been stolen from US financial institutions over the past year as a result of cyber attacks.
CYBER SECURITY AND THE IMPACT OF A DATA BREACH ON FINANCE
The tenth annual Cost of Data Breach Study, conducted by Ponemon Institute and sponsored by IBM, found that the average consolidated total cost of a data breach is now $3.8 million, up 23% on 2013 The dangers are particularly pronounced in corporate finance, one of the UK’s primary economic activities. Corporate finance covers Mergers and Acquisitions, buyouts, venture capital and IPOs, areas in which there is a vast amount of commercially sensitive or otherwise confidential information being shared between disparate parties. The sector was worth a total of £216.8 billion to the UK in 2013, and was a major driver of entrepreneurship, innovation and business expansion. Of such importance is the sector to the economy, the Government last year launched a review led by David Willetts that called on firms to make cyber security a higher priority during transactions. It is not just the monetary impact of a data breach for financial institutions, the reputational effects can be equally as damaging. Cyber attacks have caused massive hits to stocks prices, with Citigroup, Bank of America and Wells Fargo dropping by between 0.4% and 0.9% in their stock prices as a result of attacks, and JPMorgan Chase’s fell by 1%. Financial institutions are subsequently spending vast sums of money on cyber security, reaching into the hundreds of
11 millions, although even this is not the highest cost of a breach, with customer reimbursements and audit and consulting services costing institutions even more. The size and complexity of financial institutions also makes security a mammoth task, with holes inevitably being left in spite of the huge investment. The attacks show no sign of abating, as the costs to hackers of launching them are so negligible. Mark Clancy, the chief executive of Soltra, a cross-party collaboration of banks and regulators to automate intelligence sharing, told the Telegraph: ‘It’s very inexpensive to launch an attack, [hackers] can build one thing and then use it to attack bank one, bank two, bank three and bank four the same way.’ The forces at work are also often, according to experts, at the very least being supported by large nation states such as Russia, clouding the issue in geopolitics. Hackers are agile, fast moving, and have limited costs. For banks operating incredibly complex systems, awash with valuable information to hackers, and of such importance to their economy, they are a prime target for disruption by countries looking to do harm to other nations. So much so, in fact, that it could be no amount of regulation or investment will ever see the problem completely eradicated.
It’s very inexpensive to launch an attack, [hackers] can build one thing and then use it to attack bank one, bank two, bank three and bank four the same way
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FP&A S&OP OR
WHICH ADDS MORE COMPANY VALUE? BY EMMA TAYLOR DEPUTY HEAD OF FINANCE
Both departments have grown in stature in recent years as the business world has changed, particularly for companies that are still dealing with the hangover from the financial crisis
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FP&A and S&OP are two of the most important strategic processes for companies to get right. Both departments have grown in stature in recent years as the business world has changed, particularly for companies that are still dealing with the hangover from the financial crisis. They are both now looking to take more of an active role in the managerial decision-making processes, and have been aided in this pursuit in similar ways by the introduction of new technologies.
The main benefit of FP&A is that it helps to predict the outcomes of decisions. It does this by analyzing past performance and current actions, which requires the right data to be readily available at any point across the company where it’s needed Big Data analytics, in particular, is helping them to become more responsive, and has made dynamic forecasting a reality. Asking which one adds more value to their
FP&A OR S&OP? WHICH ADDS MORE COMPANY VALUE?
organization is a bit like asking whether Rizzo or Gonzo is the more important Muppet. They’re both in the mix, one’s just a bit more understated about it than the other. The main benefit of FP&A is that it helps to predict the outcomes of decisions. It does this by analyzing past performance and current actions, which requires the right data to be readily available at any point across the company where it’s needed. Clearly, knowing the outcome of a decision is a tremendous business advantage. Evaluating both the positive and negative impact of decisions is essential to success and mitigating risk, and helps greatly when establishing a number of planning components going forward. Well managed FP&A will not only reduce costs, but add value when it comes to helping partners make choices. S&OP, on the other hand, is one of the central components of effective supply chain management. It helps to reduce supply chain inefficiencies by enabling an holistic approach, getting the whole company working towards the same goals. This enables firms to cut down greatly on the waste that arises as a result of poor communication. The knock on impact of delays that can occur in the supply chain can cost companies large sums, and in smaller and growing companies in particular, cutting down on these could be the difference between failure and survival.
When it comes down to it, measuring which one adds more value to a company is near impossible. The supply chain is becoming increasingly important as a result of globalization, and it must be more responsive than ever to change, and able to react almost immediately to mitigate risk. S&OP can solve these issues when handled correctly. However, FP&A contributes so much across the entire organization, from budgets to forecasting. Without it, S&OP may very well be irrelevant.
S&OP, on the other hand, is one of the central components of effective supply chain management An American Productivity & Quality Center survey found that 50% of respondents believe the value FP&A delivers in their organization ‘is not optimized.’ S&OP is similarly hard to get right, and many firms are failing in their management of it. The question of which department theoretically adds more value is really secondary to the question of how to go about getting them running to their maximum capability. When that happens, they are both vital to an organization that wants to maintain a competitive edge.
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WILL DIGITAL MONEY KILL CASH? BY KIRSTY DONOVAN FINANCE THOUGHT LEADER
Digital currency has had significant press coverage over the past two years. We have seen Bitcoin being portrayed first in the media as a shady way for people to buy drugs, then as a viable investment for people, then as an unstable roller coaster currency. In much the same way, we have seen digital payments go from fraud risks to useless gimmicks. Now, they are an increasingly popular method of paying for goods and services. This begs the obvious question: Is there a place for cash? I frequently find that when I am walking down the street and somebody asks me for spare change, I genuinely have none to give them. My pockets no longer
jingle when I walk, and my wallet is considerably lighter than it used to be. It has nothing to do with a lack of money, but instead my ability to pay for almost anything through digital payments.
Although the number of payments through digital means has increased, there is certainly a demand for cash to be used in transactions throughout the world Traditionally, cash has been used for small payments, whilst cards and cheques have been used for
higher value transactions. For instance, it would seem strange and suspicious today if you were to pay for a car with cash alone. It is this market that many of the big players in digital payments have been aiming at, simply because this is the largest at the moment. There are many more purchases under $10 than over, making it more profitable than targeting the larger transactions and also making it simpler for users. Despite the increased use of contactless payments, online money transfers and mobile payments, we have seen a rise in the amount of cash in circulation throughout the world, meaning that although mobile payments have increased, they have not killed cash. Why is this the case though?
WILL DIGITAL MONEY KILL CASH?
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18 Put simply, it is easier to monitor your basic outflows and payments through cash. You have a certain amount in your wallet, then you have less until you are at the end and need to get more. With mobile and digital payments this is not the case, unless you are writing it down or methodically recording every transaction, it is difficult to know how much you are paying altogether. In fact, studies have shown that the largest adopters of the new payment techniques have also been those who have increased their use of cash - the young in society. This is a strange set of circumstances, but shows that rather than mobile payments replacing cash, it seems to be creating a landscape where young people are equally happy using both.
There are many more purchases under $10 than over, making it more profitable than targeting the larger transactions and also making it simpler for users There clearly is still a place for cash, but we have seen that despite more being in circulation, the number of transactions that see no cash changing hands far outweighs the number that do. Even the most basic stats show this, with over $5 trillion of e-commerce activity in 2014, which, by its very nature, cannot use cash as a payment type.
WILL DIGITAL MONEY KILL CASH?
We have seen digital payments go from fraud risks to useless gimmicks. Now, they are an increasingly popular method of paying for goods and services So although the number of payments through digital means has increased, there is certainly a demand for cash to be used in transactions throughout the world. Whether this number increases or decreases in the next few years is a moot point, because regardless of how much use it is likely to get, there will always be a demand for it.
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THE GROWTH OF MICROFINANCE COMPANIES
BY ABIGAIL FLETCHER GLOBAL FINANCIAL OFFICER
THE GROWTH OF MICRO-FINANCE COMPANIES
A microfinance company is a financial institution that caters for the banking needs of lowincome groups or individuals. Since the financial crisis, the demand for such a service has risen exponentially, with mainstream banks less willing to loan money than before. While the concept was developed by Bangladeshi economist Professor Muhammad Yunus and his Grameen Bank for villagers, the practice was really brought into the public consciousness in the 2010 Simpsons episode ‘Loan-aLisa’, which saw Lisa Simpson lend school bully Nelson Muntz money to set up a bike shop. Yunus actually provided a voice for the episode.
While providing the poor with funds with which they may be able to escape the cycle of poverty, it also overburdens the most vulnerable with debt - debt they often cannot pay back. There have also been numerous reports of profiteering in the sector, as the idea has been leapt on by some of the more unscrupulous operators Growth in the industry has been particularly strong in developing countries, such as India. Many of the country’s regions lack access to mainstream banking, and the practice has been embraced and
promoted by the Reserve Bank of India as a means to help lift people out of poverty. The microfinance industry in India expects to see 40% growth in the gross loan portfolio in 2014-15, driven largely by an increase in credit flow from commercial banks to the sector for on-lending. The industry body Microfinance Institutions Network, meanwhile, revealed that as of September 30 last year, MFIs provided loans to over 27.9 million clients, up 23% on the second quarter of 2013/14.
There is an increasing level of scepticism as to whether microfinance actually provides the sort of benefits it promises though The success has been seen across the developing world, with MFIs in Mexico among those to have brought in fortunes from small loans. The industry has also won praise from the Clintons and a number of other high profile figures for the impact it has had. There is an increasing level of scepticism as to whether microfinance actually provides the sort of benefits it promises though. The weight of evidence suggests that there are limited, if any, ways in which it helps poverty, with a review funded by the UK government concluding in 2011 that ‘enthusiasm [for microcredit] is built on … foundations of sand’. The way microfinancing works means that capital providers, such as governments, often use ‘intermediaries’ to get the loans to people. Problems arise when these
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22 intermediaries decide to charge whatever interest rate to the poor they want, in unregulated markets, with limited client protection. There are a number of ethical issues. While providing the poor with funds with which they may be able to escape the cycle of poverty, it also overburdens the most vulnerable with debt - debt they often cannot pay back. There have also been numerous reports of profiteering in the sector, as the idea has been leapt on by some of the more unscrupulous operators. Harvard economist David Korten noted in his foreword to Hugh Sinclair’s book, Confessions of a Microfinance Heretic, that ‘many micro credit programmes are nothing more than predatory lending schemes rebranded as socially responsible investment opportunities.’
The microfinance industry in India expects to see 40% growth in the gross loan portfolio in 201415, driven largely by an increase in credit flow from commercial banks to the sector The obvious answer to this is increased regulation. The comparisons with payday lenders in the UK are there to be seen, with both charging extortionate interest rates and aggressive debt collection methods. However, whereas payday lenders have now been regulated by the UK government, microfinanciers across the world still operate with a distinct lack of transparency, largely unfettered by any of the rules that apply to most lenders.
THE GROWTH OF MICRO-FINANCE COMPANIES
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