International Finance Jan - Mar 2018: Global Economic Trends by International Finance

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Special Feature

January - March 2018 October - December 2017

Volume IV Issue 2 Volume IV Issue 1

UK £4 | Europe €5.35 | USA $6 UK £4 | Europe €5.35 | USA $6

Banking & Fintech pg.35-70

ANNIVERSARY ISSUE pg.56

Special Feature: Global Economic Trends

pg.98

Cars, bulbs, mobile phones and now Bitcoin

pg.52

Harnessing Oman’s energy potential ‘New Kuwait airport means challenges and opportunities’

OOCEP is supporting the Sultanate’s drive to diversify sources of national income while strengthening and growing the oil and gas sector

Interview with Khaled A Al-Sughaier, CEO of Finance and Administration, KASCO

pg.52

Note FROM EDITOR

he world of banking is being overshadowed by technology. Almost every new financial product may well be the outcome of a technological idea. Theoretically, it is quite possible for banking to reach every human on Earth who has access to technology. In other words, a smartphone. Theoretically, that should keep the global economy on a path of growth for many years to come. At the beginning of last year, most events were influenced by two major developments â&#x20AC;&#x201D; the election of Donald Trump as the president of the United States and the surprise outcome of the Brexit referendum. Trump has done some disruptions of his own, but I see his influence also waning in the face of these technological advances. While at one time, the US economy dictated the pace of the global economy, today that job has been taken over by technology.

Note that technology is not constrained by borders. Breakthroughs can come from any part of the world. I believe the scenario at the end of this year would be even more interesting than last year. This is a good time for people to pay more attention to technology, as breakthroughs will be faster. In fact so fast that some of us will miss a few and not even be aware of it, as they are overtaken by other, better innovations. Meanwhile, with PSD2 upon us, this could be the year when banks will either find yet another lucrative stream of revenue or be relegated to serving as the back-end of fintechs. If there will be anything to rival the impact of PSD2, it will be cryptocurrency. Bitcoin has set a standard that many will try to emulate. And, while they are at it, the world will learn more about blockchain, which is the technology underpinning cryptocurrency.

Dhiraj Shetty Editor editor@ifinancemag.com

Director & Publisher Sunil Bhat Editor Dhiraj Shetty Production Sarah Williams, Mark Miller Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Madhurima Roy Business Analysts Dave Jones, Adam Lobo, Sharon Mendis, Sean Thomas Business Development Manager Steve Martin Business Development Newton Gois, Sunny Shah, Benjamin Philips, Sid Jain Accounts Angela Mathews Registered office INTERNATIONAL FINANCE is the trading name of INTERNATIONAL FINANCE Publications Ltd 843 Finchley Road, London, NW11 8NA Phone +44 (0) 208 123 9436 Fax +44 (0) 208 181 6550 Email info@ifinancemag.com Press Contact press@ifinancemag.com Associate Office Zredhi Solutions Pvt. Ltd. 5th Floor, Sai Complex, #114/1, M G Road, Bengaluru 560001 Ph: +91-80-40901144

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Design & Layout Rahil Shaikh Miya

Jan - Mar 2018 International Finance

INDEX January - March 2018

Volume IV Issue 2

32 36 pg.10

Brexit notwithstanding, Irish economy is doing well

economy: Developing the Northern Sea Route

economy: Daryl Liew Trade doesn’t need trade deals, but financial services do

banking: New era in open banking Opinion: Banking

Vincent Deluard

A demographic case for higher rates

banking: BNU connecting China with PSCs

Wealth Management: MiFID II will trigger consolidation

banking: Sophie Guibaud ‘Expect more AIbased products and solutions’

economy: Finance

24 28

Richard Hayllar and Jenai Nissim

Top five litigation risks under GDPR banking: Open banking is now reality

International Finance Jan - Mar 2018

‘A trader must now have strong financial engineering skills’

COVER STORY

Harnessing Oman’s energy potential pg.52

2018: Banking Need a global standard for APIs

Find a rental without visiting the property

2018: Airlines Not revolution, but an evolution in travel experience

Sector Insight Building A Better home

Sector Insight Adding a human touch to technology

108

Don’t leave it to robots

66 70 76

2018: Real Estate Proptech will elbow out letting agents 2018: Technology ‘Control artificial intelligence before it controls us’ Company Profile: Subic Bay Freeport: Economic driver of the Philippines

pg.114

OUT OF OFFICE

‘Investing is my hobby and my profession’

Jan - Mar 2018 International Finance

Opinion Matters Economy/Brexit: Michael Mainelli Alderman Professor Michael Mainelli is Master of the Worshipful Company of World Traders, and Executive Chairman of Z/Yen Group. His book, The Price of Fish: A New Approach to Wicked Economics and Better Decisions, written with Ian Harris, won the 2012 Independent Publisher Book Awards’ Finance, Investment & Economics Gold Prize Trade doesn’t need trade deals, but financial services do | P20

Banking: Sophie Guibaud

Sophie started her career in investment banking in New York before joining TIME Equity Partners, a Growth Capital fund in Paris. Along with investing in startups, she advised Internet and Media companies on their development strategy. However, wanting to be more deeply involved in start-up operations, she moved to London and was instrumental in the launch of HelloFresh UK, a Rocket Internet backed e-commerce company. She previously headed product strategy at Bankable and is currently VP European Expansion at Fidor. Sophie is passionate about startups and has previously mentored at Seedcamp and UKTI. She can advise young start-ups on their fundraising strategy as well as operational strategy including business model review, new product launch strategy and international development. Originally from Bordeaux, Sophie studied Finance at HEC Montreal and Bocconi in Milan. Six predictions for 2018 | P56

Banking: Hans Tesselaar Hans Tesselaar is the executive director of the Banking Industry Architecture Network (BIAN), a worldwide not-for-profit association with over 30 members. BIAN aims to create the de-facto open standard for Service Oriented Architecture (SOA), for the banking industry. Tesselaar has over 30 years’ experience in the financial services industry, within banks, insurance companies and pension funds. He previously held various management positions within ING, including chief architect and director of sourcing, innovation and governance. His areas of expertise include strategic business planning, enterprise architecture, and innovation. Hans is a frequent speaker at congresses and universities. Need a global standard for APIs | P58

Technology: Nicholas Gregory Nicholas Gregory’s career in technology and finance has seen him take senior roles, including Vice President at Merrill Lynch, where he worked in the equity derivative risk team, and Vice President at JP Morgan, where he worked as a technical architect in the market risk team. He has been working in the cryptocurrency sector since 2015. Cars, Blubs, Mobile Phones and now Bitcoins | P98

International Finance Jan - Mar 2018

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COntributors

Tim Evershed

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Suparna Goswami Bhattacharya

Tim Evershed is a freelance business journalist with over a decade’s experience of reporting on the world of business and finance. As well as contributing to International Finance his work is published across a number of titles including Global Reinsurance, Insurance Post, The Journal, Financial Solutions and Global Trader.

Susanne Jakobsen Financial technology entrepreneur Gene Pranger has designed more than 500 bank branches since 1995. In 2008, he pioneered the market of video banking with the uGenius platform, acquired by NCR in 2012. His latest venture, BankOn Mobile

Financial technology entrepreneur Gene Pranger has designed more than 500 bank branches since 1995. In 2008, he pioneered the market of video banking with the uGenius platform, acquired by NCR in 2012. His latest venture, BankOn Mobile

It’s the best way to to reach our audience that is spread across over 100 countries Susanne Jakobsen

Susanne Jakobsen

platform, acquired by NCR in 2012. His latest venture, BankOn Mobile

and to know what’s latest inFinancial technology entrepreneur Financialreads technology IFM entrepreneur Financial technologythe entrepreneur Gene Pranger has designed more Gene Pranger has designed more Gene Pranger has designed more Banking, than 500 bank branchesFintech, since 1995. thanwealth 500 bank branchesManagement, since 1995. than 500 bank branches since 1995. In 2008, he pioneered the market In 2008, he pioneered the market 2008, he pioneered the market Insurance and Islamic banking Inof video of video banking with the uGenius of video banking with the uGenius banking with the uGenius Contact: Benjamin Philips Email: bphilips@ifinancemag.com

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Economy

Brexit notwithstanding, Irish economy is doing well Ireland is set to be at the top end of the euro area growth league table for a fifth year running in 2018 Loretta Oâ&#x20AC;&#x2122;Sullivan

International Finance Jan - Mar 2018

Economy

t is eighteen months since the UK electorate went to the polls and opted to leave the EU. While it will take time for the repercussions of such a momentous decision to fully play out, two immediate consequences of the Brexit vote have been a fall in the value of sterling and a rise in uncertainty. Both affect Ireland. The first is a headwind for firms selling into the UK market, with the second leading to some softening in consumer and business sentiment.

Having fallen to 77p or so in advance of the referendum, sterling depreciated further against the euro following the result and after the Bank of England eased monetary policy in August 2016. It recovered some ground in the opening months of 2017 but hit an eight year low of almost 93p in late August, as the inconclusive outcome of the general election and concerns about the health of the UK economy dominated the headlines over the summer. Sterling’s slide has had knock-on effects for inflation, which prompted

the Bank of England to raise interest rates for the first time in a decade in October, although it says that any further hikes will be limited and gradual. This, and the headway that has been made in the first phase of the Article 50 negotiations, has helped cap the downside for the pound. It has been trading in and around the 88p mark of late and, going forward, will be sensitive to the ups and downs of the withdrawal talks. As a small open economy, Ireland is exposed to adverse exchange rate movements and it is clear that the weak pound is

starting to bite. The same can be said for Brexitrelated uncertainty. Sentiment took a knock in the wake of the leave vote and a year-and-a-half later, the Bank of Ireland Economic Pulse – which surveys 1,000 households and over 2,000 businesses on a monthly basis – is still off its pre-Brexit levels. Unsurprisingly, talk of what Brexit might mean for the Irish economy was to the fore in the aftermath of the referendum result. In July of 2016, for example, over two in five households were holding out on spending money because

Dr Loretta O’Sullivan, Chief Economist, Bank of Ireland

Jan - Mar 2018 International Finance

Economy

of these is around foreign direct investment. Given our young population, skilled and English speaking workforce and business friendly environment, Ireland is well placed as an attractive European base for financial service and other firms looking to relocate outside of the UK. Indeed, there has already been some positive news on this front. So, as the repercussions of the UK’s decision to leave the EU play out, the challenge for Ireland will be to minimise the negative impacts and, to the extent possible, exploit any advantages Brexit may provide. IFM

they weren’t sure what way economic policy was going to go. Job and income gains have continued since then though, and the unemployment rate has fallen further. Households appear to be taking some comfort from all of this, with those holding out on spending down to one in three in July of 2017 and consumer confidence on a broadly upward trajectory over the past while. But with a lot still up in the air, business sentiment has been more subdued. Economic theory suggests that when uncertainty is high, firms have an incentive to postpone or cancel investment plans until the situation settles down or new information becomes available. This looks to be happening in the Irish case. Our research finds that similar to last year, around half the businesses affected by the UK’s decision to leave the EU are putting

International Finance Jan - Mar 2018

their plans for this year on hold and are adopting a ‘wait and see’ approach to investment decisions. Interestingly though, there has been a slight uptick in those intending to increase investment because they are seeing or expect developments in the UK to bring new opportunities, albeit such firms are still few and far between. It is of course important to put these developments in context and to say that, Brexit clouds notwithstanding, the Irish economy is doing well. Domestic activity is continuing to recover and momentum in our other main trading partners – the Euro area and US – is providing support. So the outlook is positive and Ireland is set to be at the top end of the euro area growth league table for a fifth year running in 2018. Looking further ahead, the nature of post exit arrangements will be key,

particularly the trade agreement between the UK and the EU. Now that sufficient progress has been made on the phase one issues of citizens’ rights, the UK’s financial settlement with the EU and the Irish Border, the focus will be squarely on the new relationship and a transition period to it. Getting to this point has not been easy, however. There have been a number of bumps in the road and there will likely be more during the second phase of the withdrawal negotiations, meaning it could be a while before there is clarity on what the final deal might look like, assuming there is one. All of this suggests that Brexit will be on the radar for some time. Its potential to significantly alter the close economic, political, people and cultural ties Ireland has with the UK makes it a very real concern, though it may be that there are upsides as well. One

editor@ifinancemag.com

Dr Loretta O’Sullivan is Group Chief Economist of Bank of Ireland

Economy

Developing the Northern Sea Route The transport route from Europe to Asia in high latitudes was one of the main topics of discussion during the Eastern Economic Forum in September 2017 Alexey Volostnov 15

he Northern Sea Route (NSR) is the shortest sea route from Asia to Europe. According to experts, after 2050 it will be available for year-round passage for conventional vessels with no ice reinforcement. Given this, it is a good strategy right now to develop the NSR not only for pure export of natural resources from the Arctic zone or for the ‘Northern Supply’, but also for container transportation. In 2016, a model for creating a regular Arctic container line on the basis of the NSR was developed. A niche where NSR shipments are more profitable compared to the southern route is the transit of container cargo between the ports of Northeast Asia (China, Japan, the Republic of Korea) and North Europe (Rotterdam, Hamburg, etc.). The container traffic on routes where the use of the NSR can potentially give a significant payoff

to carriers is about 455 thousand TEU. The commissioning of new facilities for the production of liquefied natural gas (LNG) and the development of infrastructure in the Arctic will help significantly increase traffic along the NSR. The transport route from Europe to Asia in high latitudes became one of the main topics of discussion during the Eastern Economic Forum, which was held in Vladivostok on September 6–7, 2017. Status update The commercial operation of the NSR is in full swing, especially in the western part (from Murmansk to the port of Sabetta). The traffic volume can already be compared to the European numbers. The growth of cargo traffic is evident and the trend is expected to continue. In 2016, the volume of cargo

transportation along the NSR reached a record breaking 7.3 million tonnes, which is a 35% increase YoY. The volume of the infrastructure dry construction cargo alone reaches 1.5 million tonnes annually. The growth of cargo turnover was facilitated by the implementation of projects on construction of Sabetta port and on the development of gas fields in Yamal (Yamal-LNG). The increase in the total traffic also affected the growth in the volumes of transit traffic along the NSR. “By 2022, the volume of traffic will reach 40 million tonnes,” predicts Evgeny Ambrosov, the First Deputy General Director of PJSC Sovcomflot and Vice-President of the Arctic Economic Council. “The further growth in freight turnover will be due to the commissioning of new LNG production capacities (Arctic-LNG, Pechora-LNG) and the development of

Jan - Mar 2018 International Finance

Economy

International Finance Jan - Mar 2018

Economy

oil and gas fields. By 2025, the NSR will transport about 65 million tonnes of hydrocarbons.” Leonid Petukhov, the General Director of Far East Investment and Export Agency, said, “The development of the NSR is moving in all major directions—the icebreaker fleet is gradually growing, the infrastructure is being upgraded, work is being done to remove administrative and trade barriers; on the whole, conditions are being formed for increasing the volumes of container transportations in the medium term, private (including foreign) investors are involved in the projects.” The fleet of Russia’s largest shipping company, Sovcomflot, has recently been supplemented by three new MR vessels (6 in total), and in August 2017, Christophe de Margerie (reinforced ice class Arc-7) gas carrier made its first commercial flight delivering LNG from Norway to South Korea. The vessel went through the NSR for a record 6.5 days without the help of an icebreaker. Christophe de Margerie is the first gas carrier in a series of 15 vessels of this type planned for

construction. The initiative of PJSC Sovcomflot on the

construction of new vessels using LNG as fuel was also developed. According to Ambrosov, this decision will reduce the volume of carbon dioxide emissions by 15%, nitrogen emissions by 80%, and sulfur emissions by 90%. Construction of the ships will start in 2019 at the Zvezda plant, and the first ship will leave the shipyard as early as in 2022. Pooling resources Infrastructure upgrade will also require significant investments, so it is necessary not only to rely on the strengths and capabilities of Russia, but also to use international cooperation. In the opinion of Tero Vauraste, ViceChairman of the Arctic Economic Council, the investment proposals should be prepared right now, including the ones for interested foreign players and for proactive attraction of the private capital. “We need to increase the investment attractiveness of the northern regions. Today, the money of taxpayers alone is not enough for the development of the Arctic, so we must work hard to increase the transparency of doing business,” he says. “I do not think that container transportation will become the main direction of using the NSR in the foreseeable future, but in one way or another, we need to work on eliminating the trade barriers. In the next 2–3 years, we will not be able to switch to the free trade regime, but we will cope with individual trade barriers.” Foreign companies are

demonstrating high interest in using the route. “Japan has two main interests related to the NSR. The first one is the diversification of transport routes between Asia and Europe and the second is the development of the energy base,” said Shinichi Ishii, senior consultant at Nomura Research Institute Ltd. “The Hokkaido government has a program to participate in the NSR, and in the future, Hokkaido intends to become a gateway to the NSR.” According to Dmitry Purim, CEO of PJSC Sovfracht, it is equally important to ensure the development of information technology and the Internet in the Arctic. This will simplify the work of supply vessels and reduce the container logistics cost. “Over several years of work in the Arctic, we managed to reduce freight costs by about 40% in terms of freight tonne,” Purim said. “This is not only due to the strengthening of coordination, quality of work and planning, but also to the introduction of information technologies.” He also acknowledged that “the main driver of the Arctic development, the undisputed mainstream, is the realisation of hydrocarbon projects, but the development of IT products is very important for small and medium-sized businesses: if the Arctic had an accessible Internet, it would help significantly reduce all Arctic logistics cost”. According to Dmitry Gudimenko, CEO of Capital

Development Group, the project of a broadband Internet cable from Europe to Asia is already in a stage of high readiness. “The project shows good profitability in the short term,” he believes. “One of the key issues to date is the involvement of major players such as Facebook, Google, and Chinese telecommunication companies.” Challenge of the ice cover New opportunities for trans-Arctic navigation through the NSR will also emerge due to the reduction in the ice cover in the Arctic region. As the ice retreats, the Arctic routes will become shorter and faster. With the current trend, by 2030 the Arctic will completely get rid of ice in the warm season. So, cargo ships will be less likely to require the help of icebreakers, and navigation will be open at least 6 months a year. Reduction in the ice area in summer and autumn makes the NSR more attractive for sea container transport. “On the average, over a decade the ice thickness is reduced by 13%,” said Riccardo Valentini, professor at the Tuscia University (Italy) and head of the European Mediterranean Climate Change Center. “We need to improve the accuracy of sea forecasts, ice conditions and seasonal risks.” According to Kirill Golokhvast, Vice Rector for Research at the Far Eastern Federal University (FEFU), the situational Arctic

Jan - Mar 2018 International Finance

Economy

Center (“Arctic Campus”) in Arkhangelsk will be created in the near future with the support of the Polar Association, which will provide online visualisation of the fleet and available cargo base, and will allow to predict the most optimal routes of vessels on the basis of current information about the ice situation and forecasts for its change, as well as to project the cost of the Arctic logistics. Question of management Lately, the lack of a counter-party in the form of a management company with the functions similar to the management companies of Suez or Panama Canals has been referred to as one of the factors constraining the development of the NSR. Today FGCP “Administration of the Northern Sea

International Finance Jan - Mar 2018

Route” performs only administrative functions, issues permits for the right to pass through the NSR and, on the whole, has limited capacities in the system of the Russian government. As a result, companies are faced with the need to interact with a number of counterparties, including ministries, local ports, companies providing agency and bunkering services. There are also questions related to the quality of ‘on-site’ services. Vasily Grudev, investment director of the ANO Far East Investment and Export Agency, said that in April 2017, the government of the Russian Federation instructed to work out the issues related to the possibility of creating a special structure for managing the NSR. According to Purim, creation of the management

company will allow to render business services in the “one stop shop” mode and, as a result, to eliminate a number of administrative barriers. “But it is important that the management company does not interfere in those segments that the business can cope with independently”. Vladimir Korchanov, first Vice-President of FESCO transport company, shares this opinion, saying that the presence of a counter-party in the form of a management company will facilitate development of NSR’s eastern part, optimisation of logistics and enhancement in the navigation safety. “We now have no problems with navigation on the NSR. Problems begin on the shore and are associated with obtaining permits for unloading cargo and brigades, etc.,” he says.

After the discussion on ‘Development of the Northern Sea Route. From words to action’ on September 6, the session moderator, Managing Director of the Russian Frost & Sullivan office Alexey Volostnov and the Director General of the ANO Far East Investment and Export Agency Leonid Petukhov signed an agreement on coordination of activities to improve the conditions for implementation of the socio-economic development strategy of the Far East until 2020, and on the effective assistance to the development of the Northern Sea Route. IFM editor@ifinancemag.com

Alexey Volostnov is Director for Russia, Frost & Sullivan

OPINION OPINION: economy

OPINION

Michael Mainelli

Trade doesn’t need trade deals, but financial services do Finance only exists to support commerce, trade & investment

rexit starts, sputters, and stalls. Why is it so hard? Does it matter? It brings to mind the 19th century ‘Schleswig-Holstein Question’, a twisted mess of diplomatic issues involving two duchies — the Danish crown and the German Confederation. Lord Palmerston commented on its complexity: “Only three people have ever really understood the SchleswigHolstein business — the Prince Consort, who is dead — a German professor, who has gone mad — and I, who has forgotten all about it.” Brexit seems to be SchleswigHolstein for beginners. As one guest speaker remarked to the Worshipful

International Finance Jan - Mar 2018

Company of World Traders earlier this year, “What’s so hard about trade deals? We want to buy your lovely cheap goods, and it would be nice if you reciprocated by letting your economy benefit from our cheap goods.” He went on, naturally, to explain why trade deals can be hard, pointing out that local politics around subsidies and support interfere with negotiations. Local businesses want protection. Short-term deferral of change overrides long-term transformation. The problem is more home than away, as we see in the UK today. Trade reaps economic benefits from specialisation and comparative

advantage, creates prosperity, distributes success and wealth, and collectively enriches all of our societies and communities. Finance only exists to support the ‘real economy’ of commerce, trade and investment, and there’s one financial centre that has been the top global centre since the late 1980s: London. A global centre should connect to the world, not just its domestic economy, and it should attract global financial transactions in its own right. There are frequent deals in London that have no domestic commercial interests — a deal involving the Chinese, Australians and Swiss recently concluded in London, for example. Due to legal

OPINION

and regulatory complexity, that rarely applies in New York. Despite globalisation, only London, Singapore, and Hong Kong are truly global for all in financial services. In the same way that ‘America First’ isolationist rhetoric damages perceptions of future US trade, Brexit uncertainty harms perceptions of UK and European trade. Economists have long studied trade and conclude that free trade benefits everybody enormously. There are nuances. For example, global zero-tariff regimes appear to be better than bilateral trade deals. Consumer safety and quality standards, antimonopoly enforcement, and avoiding externalities, such as pollution, are genuine complications. Trade causes change, and change potentially harms some jobs in the near term. Plans and budgets are needed for retraining and transition. The certainty of Brexit uncertainty Trade in goods repeatedly overcomes many of these issues. Trade in services is, at best, only halfway there. Trade in financial services is hardly free. Finance is not just money; finance is money plus regulation. Thus,

an essential service to free trade in goods and semi-free trade in services is the least free trade of all. And then, there’s Brexit. Government officials frequently state that ‘business wants certainty’. This is balderdash. Businesses thrive on uncertainty, and if there was certainty, there would be no need for markets. All quantities and prices would be known. There would be no change and no opportunity to compete. Businesses realise that the rules of the game need to change and improve over time, or there will be no progress, but no business wants certainty about how the rules of the game change or will change. Politicians do not shine on ‘certainty’. Certainty over how the rules will change requires a process that looks ahead. For example, following a strict consultation, recommendation, drafting, revision, implementation timetable every so many years. Instead modern politicians react with more laws to most crises. Often, these crises are media generated crises and the responses are designed to garner votes rather than solve a systemic problem. Brexit, almost by definition, changes all of the rules of the game. Trade in goods, services, and labour all change,

with a deep rewrite of how money works with regulation. One negotiating team exhibits little professionalism. This is dangerous. Nixon once suggested a negotiating tactic for the Vietnam War, “We’ll just slip the word to them that ‘for God’s sake, you know Nixon is obsessed about Communism. We can’t restrain him when he is angry — and he has his hand on the nuclear button.’” H R Haldeman, Nixon’s chief of staff, wrote that Nixon termed it ‘The Madman Theory’. Ask sportsmen or chess players about playing with amateurs who love the game. It may be slow, but is frequently rewarding. But random and unpredictable poor behaviour just results in bad games for all. The Madmen Theory of Brexit negotiation terrifies businesspeople worried about how the rules of the game will change, yet not terrified about change itself. One consequence of Brexit is clear: The UK will leave the Single Market and Customs Union. But there is little clarity on anything else, such as movement of people, scale of mutual recognition, or timescales. The most opaque subject is where are we going? Transition, Trade and Talent UK financial services have

Jan - Mar 2018 International Finance

OPINION OPINION: economy

•

emphasised ‘transition, trade, and talent’ to the UK government. ‘Transition’ means spelling out where things are headed and the process for getting there. Basically, “where are we going and how are we going to change the rules of the game getting there?” ‘Trade’ emphasises that a no-deal Brexit cuts deeply into what financial services support in the real economy. ‘Talent’ points out that people come to London for the best financial services in the world, not just the best British financial services. Financial services are not decamping in toto. There are various responses. To highlight a few: • Very large financial services firms are unlikely to ‘leave’ London. They will always have an office. But they are changing their domiciles and moving towards EU regulators, thus shifting hundreds of jobs at a time in risk, compliance, regulatory affairs, and core HQ staff. The firms moving most urgently are international banks that use the UK to serve their EU clients. In the absence of confidence about the way ahead, their plans will harden when they change their terms

International Finance Jan - Mar 2018

•

of business with clients, most likely in early 2018; small and medium-sized firms are more likely to leave London if the EU is their principal business. Most smaller firms are not committed to multiple country offices. The more regulated they are, the more they will move to service EU clients. Interestingly, a number of ostensibly large firms, Asian or Australasian banks for example, are mediumsized, single office businesses in London. This may force a complete move given a choice of 27 bilateral agreements, or one certain move and negotiating a UK regulatory agreement in future; small and medium-sized London firms controlled by a non-UK citizen are common: think hedge-funds, family offices, some asset managers. EU citizens in particular have not been given any certainty over their personal circumstances since June 2016 and often have the ability to move their business back to the Continent. Individual circumstances matter. Again, the more regulated, the more

likely to move; business lines matter. Regulation varies tremendously by sector. For example, the focus is often on banks, but insurance has around 200 substantial brokerages and 100 underwriters employing 52,000 people, with 35,000 in the City of London. Some of these are already having difficulty convincing Continental counsels that they will be able to pay claims legally after March 2019, but these contracts need to be written now.

Business people live daily in a condition described by Voltaire: “Doubt is not an agreeable condition, but certainty is absurd.” Despite government rhetoric to the contrary, the continuing lack of guidance on where we are going and opacity about the process for changing the rules is rapidly becoming the new certainty. It’s a certainty that will lead to hard decisions that could have been avoided. IFM editor@ifinancemag.com

About the author Alderman Professor Michael Mainelli is Master of the Worshipful Company of World Traders, and Executive Chairman of Z/Yen Group. His book, The Price of Fish: A New Approach to Wicked Economics and Better Decisions, written with Ian Harris, won the 2012 Independent Publisher Book Awards’ Finance, Investment & Economics Gold Prize

OPINION OPINION: finance

OPINION

Richard Hayllar

Jenai Nissim

Top five litigation risks under GDPR

International Finance Jan - Mar 2018

OPINION OPINION: finance

In the event of a data breach, in addition to a fine, organisations could potentially face claims for damages from millions of affected individuals

ith GDPR and the Bill at the forefront of data protection regulatory changes in 2018, data protection and privacy law will continue to be a key part of the litigation landscape. Some of the possible areas of conflict facing controllers/ processors are: • Failure to erase personal data This right, often referred to as the ‘right to be forgotten’, will allow individuals to request that their personal data is erased. This right only applies in some circumstances, such as where the personal data is no longer needed for a specific purpose. It clearly has the potential to conflict with an organisation’s record keeping regulatory obligations, which will prevail over a request to erase personal data. Where organisations refuse a request to erase personal data, we anticipate numerous claims and complaints from individuals who have misunderstood these competing obligations. • Failure to rectify The GDPR reinforces the requirement for personal data to be accurate and up to date. Organisations will have one month from receipt of a request to correct any inaccurate data (or three months in complex cases). Organisations are already facing numerous claims from individuals, who consider that their credit rating has been harmed by incorrect credit reporting. Organisations are likely to see a significant rise in claims of this nature as the

implementation of GDPR continues to receive attention from both the media and consumer protection groups. • Failure to respond to Data Subject Access Requests (DSARs) DSARs are already a commonly used litigation tool to circumvent pre-action disclosure. As individuals’ awareness of their rights as a result of GDPR coverage has increased, we have noticed a significant rise in the number of DSARs and expect this trend to continue. Claims and complaints already arise from delayed and/ or incomplete responses. With the removal of the £10 fee and reduction in response time from 40 to one month, organisations’ internal processes will be further tested. • Failure to provide portable information Data portability is a new right under the GDPR through which organisations will be required to provide a copy of their personal data (subject to certain exemptions) to individuals upon request. Data will need to be provided in a structured, commonly used and machine readable form within one month of a request. Claims and complaints are likely to arise from individuals testing the scope of this new right, including steps and measures implemented by an organisation to meet the requirements from a technological stand-point and rationale for relying on exemptions under the GDPR. • Data breaches and the financial consequences Media attention has focused on data breaches with high-

Jan - Mar 2018 International Finance

OPINION OPINION: finance

profile companies, including Morrisons and Equifax, being the subject of sustained media coverage. Enshrined within GDPR are two separate forms of financial consequences; (i) an individual’s right to compensation and/or damages and (ii) substantial fines by the Information Commissioners Officer (ICO) of the higher of 4% of an organisation’s annual global turnover or €20m (£17m in the Bill). Data breaches will therefore be of particular concern to organisations as they hold large amounts of valuable and sensitive personal information. Should a data breach occur, in addition to an ICO fine, organisations could potentially face claims for damages from millions of affected individuals. As has been seen in the Morrisons’ litigation, there is scope for data breaches to result in group litigation. Even modest damages awards per head could lead to substantial pay-outs if a significant number of individuals are impacted. Remedies and liabilities As we have highlighted, the ICO will have the ability to impose fines up to the higher of 4% of annual global turnover or £17m. This is perhaps one of the most talked about changes but arguably wrongly so. Elizabeth Denham, the Information Commissioner, has recently commented that ‘Issuing fines has always been and will continue to be, a last resort’ and that ‘Focusing on big fines makes for great headlines, but thinking that GDPR is about crippling financial punishment misses the point’. Although individuals will have the option to complain to the ICO and a right to judicial remedies against decisions by the ICO, this will not provide individuals with the financial remedy they feel they deserve; i.e. monetary recompense. The power to award compensation will remain with the courts. Under the DPA, an individual could not claim damages

International Finance Jan - Mar 2018

unless these were linked to financial loss. The Court of Appeal’s landmark ruling in Google v Vidal-Hall marked an important change and established that individuals whose data is not handled properly may be entitled to compensation for ‘mere distress’ even if they have not suffered pecuniary loss. This right to compensation for distress is now enshrined in the GDPR. Comment Although the media attention on GDPR has brought data protection issues to the fore, it has focused on the headline of potential substantial fines that could be awarded. Perhaps of greater significance to businesses is the potential for wide-scale litigation and claims for damages. As highlighted, of particular concern for organisations will be the financial consequences arising from data breaches which could affect millions of customers. Although the ICO has re-iterated that fines are a last resort, the ICO will take action against organisations if it is appropriate to do so and furthermore, damages and compensation will remain in the control of the UK courts. A timely example is the judgment in the Morrisons’ group litigation trial which took place in October 2017. On December 1, 2017, Morrisons were found liable for the data breach and they will face a further trial to decide the level of compensation IFM payable to each individual. editor@ifinancemag.com

Richard Hayllar is a Partner and Jenai Nissim is Legal Director at UK law firm TLT. Emily Black, Associate; Alanna Tregear, Solicitor; and James Tithecott, Solicitor, contributed to this article

banking

Open banking is now reality International Finance Jan - Mar 2018

banking

The risks and benefits of PSD2 Alex Bray

Jan - Mar 2018 International Finance

banking

n January 13, 2018, banks will need to be prepared for the introduction of Payment Services Directive 2 (PSD2), with which will come open banking. Underpinned by PSD2 and the access to accounts rule (XS2A), open banking means that banks will be required to make customer’s data more accessible than ever to other financial services companies and payment providers through application programming interfaces (APIs), at their clients’ request, of course. It is possible to see the high-level opportunities that the aggregation of financial data in one place will offer for customers, banks, and service providers. However, there are security implications banks face when exposing their API as well as the competitive challenge provided by start-ups and challengers who are waiting to get their hands on this data.

International Finance Jan - Mar 2018

Benefits and risks for the customer From a customer’s perspective, there are some significant benefits to having your financial data aggregated in one place. Finally, financial analysis tools will provide meaningful insights as data from other financial institutions – for example credit card statement data, can be integrated alongside current account statements. This transparency of data will be one of the main benefits to retail and small and medium-sized enterprises (SME) customers. It is highly likely that we will see more innovative financial services apps provide personalised services and information to cover all of a retail customer’s financial needs in one place, wrapped up in a snazzy user interface. This aggregated data will be easier to monitor, offering new insights into personal income and expenditure, leading to much easier comparison

between the experiences of ‘other customers like you’ and products from other banks. This means it will be easier than ever for customers to find out what bank account is best for them. Aggregators will be able to provide more targeted advice through the analysis of aggregated data. Request to pay is another aspect of open banking; allowing customer payments to become more flexible and automated. Naturally, these are just the initial benefits. As start-ups begin to have access to increasing amounts of banking data, it is reasonable to expect that we will see greater innovation across the board. Of course, the sharing of data across several platforms and organisations is always going to create risk. Conflicts of interest may become an issue with increased competition in the market, as could asymmetries of power with one party (product or service

banking

A key driver behind the introduction of open banking by regulators is to increase competition in the market by facilitating innovation in the quality of products and services that customers receive

provider) holding more information and resources at their disposal than another (customer or SME). Benefits and risks for banks A key driver behind the introduction of open banking by regulators is to increase competition in the market by facilitating innovation in the quality of products and services that customers receive. While this increased competition does bring risks to established banks, there are also some benefits to consider. For example, the initiative will open a number of new opportunities for banks; with customer permission, they will also be able to access customer information held by competitors. They will be able to use this to seek out new opportunities and try to meet customer needs more effectively. PSD2 will give banks the ability to make more accurate marketing and credit decisions, therefore offering an improved customer service and pricing. With a wider range of customer data, they could become the relationship hub for customers. This can help them win a greater share of customer wallet – after all, they are already starting from an advantaged position. From a start-up’s perspective, there’s partnership potential and the possibility of shared revenue from working with banks. There will inevitably also be opportunity to collaborate in order to keep propositions fresh or to leverage thirdparty innovation. We can already see examples of this from the way that HSBC has partnered with Bud for account aggregation.

On the other hand, start-ups are one of the main issues that will face established banks once open banking kicks in. While there is the prospect of becoming a customer hub, banks also risk becoming a back-office utility as customers transfer their interactions to challenger apps that disintermediate the banks. In fact, a possible outcome is that banks could end up surrendering their direct customer relationships, becoming a commoditised payment back-end as new aggregators or payment initiators, such as Moneyhub and others, swoop in. While easier comparison may offer better customer service, for banks this will likely start to eat into profit margins. As could maintaining data security and managing regulatory risks around data protection, as they will own liability for unauthorised transactions. An issue many banks will face, or already are facing, will be the cost of enhancing legacy systems in preparation for the implementation in January. What can banks do now? Banks will need to rise to the challenge in order to maintain their position and continue to earn the right to maintain customer relationships. They will need to find a balance between openness, privacy and data protection. In order to prepare for PSD2, they will need to improve their analytics so they and their customers can understand the huge amounts of new data that will become available. They will also need to enhance the data they provide for use by third parties. Moving forward, innovation needs

to be at the heart of what banks do in order to compete. Banks that have focused on building next-generation services will be supported and rewarded once open banking becomes embedded in customers’ expectations. The possibilities created by mixing up APIs, financial data and other tech are enormous but as they create benefits, they also create potential for harm and there are many in the industry who have expressed reservations. The power of open banking depends on its ability to disrupt the market and we are yet to see how it will do this. Where will it solve problems or simply exacerbate them? What we do know is that the sharing of transactional data will give momentum to other markets, the Internet of Things, and artificial intelligence. The risks are there but there is also huge potential. Success will depend on whether financial institutions can reduce the risks while taking advantage of the opportunities. IFM editor@ifinancemag.com

Alex Bray is Assistant Vice President for Retail Banking at Genpact

Jan - Mar 2018 International Finance

banking

New era in open banking As PSD2 comes into effect, opportunities and risks for banks and FinTechs Nicole von Mulert

International Finance Jan - Mar 2018

banking

hrough Open Banking, or API Banking, new chances and development perspectives are set up for the financial industry. As the second EU-Payment Service Directive (PSD2) becomes effective on January 18, 2018, payments via internet and mobile devices will be newly regulated, stricter safety rules established, consumer protection at the same time increased and the market is opened for new financial service providers, which are subjects to permit. Especially the entry of new financial service providers is on the one hand regarded as a chance but on the other hand as a threat for banks. Even though PSD2 does not apply in Switzerland, it is widely discussed. Nowadays banks in Switzerland grant Swiss third-party providers access to the customer interface if it is in the interest of the customer. Committed experts agree that the Open Banking development cannot be stopped. The most important question

financial institutes are currently facing is which role they want to take over in the new constellation with the third-party providers. Do they want to lead the Open Banking development together with the FinTechs, or are they willing and able to develop their own models for the future cooperation with their customers? At the point when PSD2 becomes effective in the EU and therefore FinTechs, telecommunication providers, tech and data companies become more active as participants within the payments transaction market, then it will be possible to offer completely new services to the customers. Amidst all the fascination emerging with the new possibilities, it is going to be exciting to see how the customers will react to the evolving offers. The range of Open Banking is enormous: from small isolated solutions to consolidated platforms, on which the account holder can manage all his bank business, including the desired value added services,

everything is imaginable. Banks get the opportunity to offer attractive and individual products and services of third-party providers to their depositors with the objective of increasing the customer loyalty or to gain more attractiveness towards new clients. Numerous creative ideas are waiting for being established, and considering the process of digitisation, there will be a lot more we can be looking forward to. The next step for banks is to grab the chance of profiting from the innovational strength of the FinTechs, and to get them and their ideas on board. For account holders, banking will be more comfortable, easier and more customer-friendly. There are even value added services thinkable, which primarily cannot be associated with banking at all. And, however promising Open Banking might be, it holds pitfalls as well, especially for the established banks. Starting with change management in the company, ending

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The Swiss Payment Forum took place in Zurich on November 6-7, 2017

Jan - Mar 2018 International Finance

banking

with the newly reinforced laws, there is plenty to be looked after. In order to learn more about opportunities and threats, visit the Open Banking Forum on March 21, 2018 in Zurich and discuss with committed thought leaders, experts and colleagues.

Blockchain: Close to its final breakthrough About 10 years ago, the blockchain technology emerged. Committed experts agree that the final breakthrough is now imminent. The main question, which accompanied the whole development of the blockchain is, how people, who do not know and do not trust each other, can directly exchange goods against money â&#x20AC;&#x201C; without the authorisation of a third party, which certifies the transaction. People, who do not know each other, and who do not even necessarily need to own a bank account can settle transactions. Through that fact, one can derive the currently most prominent implementation: the creation of a cryptocurrency which is completely independent of governmental institutions and banks. It is certain that the blockchain technology within the last few years won a regular place in the media, and that for several reasons. Its possible applications are diverse. As a decentralised database, it cannot only be used for monetary units, but

also for financial investments, titles or fundamental rights. Blockchain is said to be fast, efficient and safe. Many experts agree that our time now, is easily to be compared with the year 1993, only one year later, in 1994, the internet had its final breakthrough. The blockchain technology can be seen as a base for a disruptive, digital business model, which overcomes the principle of a centralised organisation being responsible for transactions. If one has a look at the development of the value of a Bitcoin, with a more than tenfold increase in value since the beginning of 2017, then the parallels with the soaring New Economy about 20 years ago stand out. While the Bitcoin value reaches unexpected and unimaginable heights, there are voices which remind people to be careful. The US Securities and the Exchange Commission, for example, warn customers of frauds and criminal schemes. Just in time, before Thanksgiving 2017, there was the next new development established, Cryptokitties, which are bought as Cryptoassets, and can be grown and again auctioned. Taking into account the trend of the tamagotchies in the 90s, again one can draw a parallel and the Cryptokitties do not seem too innovative anymore. Astonishing enough are the prices on which they are listed and sold.

However, is the blockchain really suitable for each sector in which it is theoretically possible to introduce the technology? Is it in any way fast, efficient and safe? Technology groups invest a lot of money, to develop commercial applications. The future will show which ones will prevail. But what does this revolutionary invention really promise? And in which way shake up business models of whole industries, or rather how can organisations take full advantage of the enormous potential of this new technology? Meet and exchange notes with speakers, interesting facts and current opinions at the Blockchain Forum in Zurich on March 20, 2018. In highquality presentations, all aspects of the blockchain technology will be highlighted and discussed.

IFM editor@ifinancemag.com

Nicole von Mulert is the Event Director Payment & Banking

International Finance Jan - Mar 2018

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• Open Banking & PSD2: How corporates profit

• Smart Contracts: Saviour of the finance sector?

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www.blockchain-forum.net

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• Open Banking initiatives in Switzerland and worldwide • Open Banking: Real Life Experiences from Sweden • Change Management for effective Open Banking initiatives • Digital identity as a business case for banks

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Interpretation

OPINION

Vincent Deluard

A demographic case for higher rates

International Finance Jan - Mar 2018

OPINION: banking OPINION

From a global savings glut to a savings squeeze

emographics are usually the biggest argument of the ‘lower for longer’ crowd. As the world’s population ages, more countries will join Japan in the deflationary trap of low rates, low growth, and low inflation. Indeed, long-term yields are tightly related to their population’s median age: age currently explains 92% of the variation of the yields of the world’s largest economies. It is important to understand the theoretical rationale of this empirical observation: the life cycle theory’s hypothesis that households borrow and

save to smooth their consumption over their lives. The young borrow to finance education expenses and household formation, while the middle-aged save to prepare for retirement. In 1975, the world’s median age was 25. Today, it is about 30 and 42 in developed countries. As the world’s population has aged, desired net savings have gone from a net deficit to a net surplus. Prices have adjusted to correct the imbalance: according to the United Nation’s database, the world’s population median age started to increase in 1975. I do not think it is a coincidence that

the secular bull market in bonds started five years later. If the lifecycle hypothesis holds true for the world, ageing will eventually become inflationary as ageing households will start drawing down savings. This process is already happening in Japan: despite a culture that values thrift, the Japanese savings rate has fallen to zero and briefly turned negative at the height of Abenomics1. The Japanese now save less than credit-card obsessed Americans as the country’s 10 million plus octogenarians are drawing down their nest eggs.

A recovery in birth rates may also contribute to the rapid drawdown of Japanese savings. After 10 consecutive years of increase, the average Japanese woman could expect 1.46 children in 2016. Raising kids in Tokyo is just as expensive as in New York or London. So this (still-tiny) Japanese baby boom will likely squeeze savings some more. From glut to squeeze In order to understand future imbalances in savings, we need a longterm forecast for global economic growth. Since I would rather avoid the ridicule of being confronted

Germany, which has ageing much faster than the rest of Europe, has also seen its household savings rate drop 2.4%.

30-Year Yield versus Median Age Yield on 30-Year Treasury Bond

World's Largest Economies

India

China Australia

y = -0.321x + 15.73 R² = 0.920

U.S.

Canada U.K.

Median Age

France

Germany Japan 45

Source: Bloomberg

Jan - Mar 2018 International Finance

OPINION: banking OPINION

to my own predictions in 10 years, I cowardly relied on the OECD’s long-term forecasts, which estimates GDP to the nearest million for 43 countries all the way to 2060 (!).

China has accumulated trade surpluses of $3 trillion, and has accounted for 23% of the world’s economic growth. However, these factors are abating: China’s current account surplus has dropped to 1.5% and its growth rate is levelling off. The OECD predicts that Chinese growth will fall to the OECD average of 1.5% by 2060. On the other hand, most deficit countries are relatively young with strong economic potential: Latin America, Africa, and, of course, India. As a result, growth in deficit countries will outpace that of surplus countries by 2022, putting secular upward pressure on interest

I divided the world’s countries into two groups: the net savers, which have a positive current account balance, and the net borrowers, which have a current account deficit. The chart below shows the GDP-weighted growth of the two groups. For the past 10 years, the surplus countries grow faster than the deficit countries, feeding a massive savings glut. The high growth rate of net savings rate is really a ‘China story’. Since 2002,

rates. The Chinese and German savings glut were unique floods of biblical proportions that are rooted in extraordinary demographic conditions. In both countries, the largest age cohort in history committed demographic suicide. Germany’s greatest generation was born in the post WW2 baby boom: the ‘bump’ in the middle of the German age pyramid indicates that there are about 7.6 million 50 to 54-year-old. Yet, there are only 4.6 million 20 to 25-year-old, which translates roughly to 1.2 kids per household. China’s bump happened a little later, between 1967 and 19712. This bump

corresponds to the short period between the end of the cultural revolution in 1969 and the start of the one child policy in the late 70s. Birth rates collapsed after that: there are just 78 million in the 5-to-9 age group, which is a little more than half of the ‘boom’ cohorts of 45-49 and 25-29. In both countries, unique historical circumstances explain this unique demographic pattern. In both China and Germany, the largest generations were born in an unusually large baby boom that followed traumatic historical events. The German boomers were born on the ashes of WW2. China’s greatest generation was born a few years after the cultural revolution,

38 2 3

China’s pyramid shows an ‘echo’ baby boom 20 years later of babies born between 1987 and 1991 With the exceptions of Poland and the ‘bloodlands’ between Germany and Russia, which experienced a total civilian death toll of 14 million between 1933

and 1945

Net Savings Over Time According to the Life Cycle Theory

International Finance Jan - Mar 2018

Age

OPINION: banking OPINION

Median Age of the World’s Population 60 55 50

Inflation peaked in the mid 70s when the world was the “youngest” Rates peaked five years later

45 40 35 World

Less developed regions

High-income countries

Middle-income countries

15 Source: United Nations

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Japan’s Stealth Demographic Revolution

Household Savings Rate

Birth per Woman

Household Savings Rate

Total Fertility Rate

Japan’s fertility rate has recovered as the household savings rate collapsed

Source: OECD, Bloomberg

Jan - Mar 2018 International Finance

OPINION: banking OPINION

which claimed the lives of 30 million. Traumatic events are usually followed by a surge in natality, as if populations wanted to replace the lost lives. Since Germany experienced more human losses than any other European country during WW23, its post-War baby boom was much larger than that of France or the US. Since no other country4 experienced the agonies of the cultural revolution, the 1970s Chinese baby boom is unique in human history. These post-traumatic generations do not behave like ‘normal’ generations. After the

war, American boomers went on with their lives, bought houses in the suburbs, took credit cards, and made a little more than two children per household. German boomers worked, saved a lot, rented small houses, and made barely more than one child per household. Of course, Chinese households did not have much choice when it came to babies as urban births were strictly limited to one after 1979. But even without the government’s ‘incentives’, China’s greatest generation was unusually thrifty, conservative, and

in the middle of the night to seize property — if not lives. These stories were carried down from parents to children, and generations that were raised in relative prosperity and freedom were haunted by the long shadows of these bygone ghosts. As a result, they saved more and repressed their desire for children. This squirreling psyche also expressed itself at the national level: the leaders of Germany and China pursued mercantilist policies to accumulate precautionary savings. The Chinese directly manipulated their exchange

hard-working. By the time the post-cultural revolution entered the work force in the 2000s, the country’s savings rate jumped above 50% — an astonishing figure for a developing country. I believe psychology, and especially C. Jung’s shadow, explain this behavior. The trauma of WW2 and the cultural revolution have left lasting scars in the German and Chinese psyche. The generations that were born after these events were raised knowing that the social order could collapse, that the gestapo or the Red Guards could come knocking on one’s door

One could see the Khmer rouge genocide as an offshoot of Mao’s policies, but the absolute death toll was much lower.

Projected World Growh Rates Based on OECD Long-Term Forecasts

Deficit Countries GDP Growth Surplus Countries GDP Growth

Excess savings will turn into a deficit by 2022 Source: OECD, IMF

International Finance Jan - Mar 2018

OPINION: banking OPINION

rate to hoard more than $3 trillion foreign reserves. The German used the fixed parities of the European Monetary System, and then the structurally undervalued euro to build large surpluses with the rest of the world. The ‘lower for longer’ crowd is betting that these unique historical events will last forever. But shadows

eventually fade away: in the last federal election, 13% of Germans voted for a far-right party, as in pretty much every other European nation. Chinese consumer loans have grown by almost 50% this year, as more and more young households view credit as a ticket to the middle-class, rather than a moral sin.

Fortunately, the upcoming giants of the next century will not carry the same historical scars and psychological shadows as Germany and China. Emerging consumers in India, Latin America, and (to some extent) Africa, are more interested by the appeal of shopping malls than the ghosts of history.

That means that the world is likely to move from a savings glut to a savings squeeze, and that the investors who do not understand history will be punished by the vengeful Gods of higher rates. IFM editor@ifinancemag.com

About Vincent Deluard Vincent Deluard completed a dual master’s degree at Sciences-Po Paris (Cum Laude) and Columbia University. He is the global macro strategist for INTL FCStone. Prior to this, he was the Europe strategist for Ned Davis Research and executive vice president for TrimTabs Investment where he designed quantitative strategies for large macro hedge funds. He is frequently quoted in the Financial Times, WSJ and Bloomberg, and speak at CFA and industry events around the world. He teaches Level 1 and Level 3 classes at the CFA Society of San Francisco. In November 2013, he was awarded the Padraic Fallon Editorial Prize by Euromoney/ institutional investors for his work on the European debt crisis.

INTL FCStone Financial Inc. is a wholly owned subsidiary of INTL FCStone Inc. INTL FCStone Financial Inc. is a broker-dealer member of FINRA and SIPC and registered with the MSRB. This material should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, promotional element or quality of service provided by INTL FCStone Financial Inc. It is not meant to be viewed as analysis or opinion of any security, country or sector. This information should not be taken as an offer or as a solicitation of an offer for the purchase or sale of any security or other financial instruments. The Economic Data presented is currently available in the public domain and while it is from sources believed to be reliable, it is not guaranteed to be complete or accurate. The content is not research, independent, impartial or a recommendation. This communication is not intended to be disclosed or otherwise made available to any third party who is not a recipient. INTL FCStone Financial Inc. is not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material. INTL FCStone Financial Inc. in its capacity of market maker may execute orders on a principal basis in the subject securities. INTL FCStone Financial Inc. may have long or short positions in securities or related issues mentioned here. This market commentary is intended only for an audience of institutional investors as defined by FINRA Rule 4512(c). Investors in ETFs should read the prospectus carefully and consider the investment objectives, risks, charges and expenses of an exchange traded fund carefully before investing. Past performance is not indicative of future results.

Jan - Mar 2018 International Finance

OPINION: banking OPINION

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1986 poster by Zhou Yuwei

China and Germany Have Supplied the World with Ample Excess Savings 1600

Chinese Surplus German Surplus

1400

All Deficit Countries Borrowing Needs

Deficti / Surplus in Billion

1200

China and Germany accumulated $6 trillion in excess savings since 2001!

1000 800 600 400 200 0

Source: OECD, IMF

-200 -400

1990

1994

International Finance Jan - Mar 2018

1998

2002

2006

2010

2014

OPINION: banking OPINION

Share of world deficit financed by China & Germany

China’s Surplus as % age of Deficit Countries (RS) Germany’s Surplus as % age of Deficit Countries (RS)

Chinese and Germany financed 50% of the world’s borrowing needs!

0 Source: OECD, IMF

-10

-20

1990

1994

1998

2002

2006

2010

2014

43 Male

Germany 2016

Female

Male

China 2016

100+

4 3.2 2.4 1.6 0.8 0

Population (in millions)

Female

100+

95-99

90-94

85-89

80-84

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

0-4

0-4 0 0.8 1.6 2.4 3.2 4

Age Group

Population (in millions)

65 52 39 26 13 0

Population (in millions)

0 13 26 39 52 65

Age Group

Population (in millions)

Source: Index Mundi

Jan - Mar 2018 International Finance

Banco Nacional Ultramarino (BNU) connecting China with PSCs The Bank is ideally placed to leverage Macau’s role as a trade platform between China and Portuguese-speaking Countries

T 44

he Belt Road Initiative (BRI) proposed by President Xi Jinping is a platform that will be open to all countries wishing to contribute and benefit from rebuilding the ancient trade routes connecting China, Central Asia and Europe. The initiative is also expected to connect Europe with Asia and Africa, including the Indian Ocean region. This region has 4.4 billion people, constituting 63% of the global population and with a combined GDP of $21 trillion. China has already signed MOUs of cooperation on joint development of BRI with some countries. The concept is more than construction of roads, railways and ports. China’s vision is to form an infrastructure network connecting all sub-regions in Asia, and between Asia, Europe and Africa, that includes energy and communications infrastructure as well as transportation.

International Finance Jan - Mar 2018

Bay Area Initiative The Greater Bay Area will include Hong Kong, Macau, and nine cities in south China’s Guangdong province, namely Guangzhou, Shenzhen, Zhuhai, Dongguan, Huizhou, Zhongshan, Foshan, Zhaoqing and Jiangmen. The initiative, aimed at forming a global innovation hub, was among the priorities announced by the central government in March 2017. It is an updated version of previous regional development initiatives. But while ‘Delta initiatives’ focuses on mainland development, Bay Area Initiative stresses external links and grabbing a commanding position in the global industry chain. It is designed to coordinate economic and infrastructure development in the area to tap into the Southeast Asia and South Asia markets. and features an open economic structure, highly effective resource allocation and advanced international

communication network. The government plans to boost economic output of the region beyond that of greater Tokyo, New York and San Francisco by 2030 with factory upgrades and hubs for innovation, finance, shipping and trade. Macau is strategically positioned to be a significant part of the BRI and the Bay Area Initiative in terms of being a platform to connect China, especially the Pearl Delta region, and PSCs. Macau does not only have historically close relations with PSCs, but Portuguese is one of the official languages in the territory. Macau is an ideal choice for bridging China and PSCs on trade and investment, as it is a free port and adopts a simple and low tax system. Macau’s economy is back on an upward trend after the slowdown in the past few years. The growth of Macau’s current trade and investment environment is impressive, positive

banking

and sustainable. Tourism continues to flourish with more than 30 million tourists every year recently. In addition, the new infrastructure, such as the ferry terminal, the Hong Kong-ZhuHai-Macau bridge and the Macau light rail, will bring in new opportunities and result with an even closer ties with China. Additionally, Macau holds annual events that are designed to promote trade and business partnerships, especially between companies in China and PSCs. An important example is the Macao International Fair – MIF, an international event where one pavilion is usually dedicated for the PSCs. Macau’s importance in the development of relationship between China and PSCs is enhanced by the relocation of the headquarter of the ‘Fund for Co-operation and Development between China and PSCs’ to Macau and the recent launch of three strategic centres in the city — a business and trade service centre for the SMEs in PSCs; a distribution centre for PSCs’ goods; and a convention and exhibition centre for economic and trade cooperation between China, Macau and PSCs. The Macau and Mainland Closer Economic Partnership Arrangement (CEPA) lowers threshold for Macau incorporated companies to enter into certain industries of the China market and receive the same treatment as a local national entity. This puts Macau in a very good position to attract the interest of PSC companies when considering entering the Chinese market. Enterprises from PSCs have set up offices and/or contact points in the territory to market their products to the Mainland by enjoying the preferential treatment under CEPA. BNU promoting business between China and PSCs BNU is part of the Caixa Geral de Depósitos (CGD) Group, which is one of Europe’s largest financial institutions with an extensive global network in 23 countries in Europe,

Asia, Africa and the Americas. CGD has a presence in seven PSCs and holds a leading position in five of them — namely Portugal, Mozambique, Cape Verde, Sao Tomé and Príncipe, and East Timor. No bank in Macau knows PSCs as well as BNU. With the extensive network in PSCs by its parent company, BNU is in a unique position to promote bilateral trade between China and PSCs to support Chinese investors and companies from PSCs seeking to expand into China. Companies from PSCs can fully take advantage of Macau’s privileged geographic position in the Pearl River Delta to enter China. To support business in this region, BNU opened a branch in Hengqin this year, to complement its representative office in Shanghai. This shows the dedication of BNU in playing an even more active role in promoting business between China, Macau and these countries. As the first international financial group to enter Hengqin Free Trade Area, BNU is very confident about the future of Hengqin within the overall development of the Pearl River Delta Region, and to bring together entrepreneurs from East and West as Macau’s ambitious five-year plan. To further strengthen relations within the CGD network, BNU and other CGD subsidiaries have established an International Desk to focus on business referral and supporting clients or investors wishing to invest or trade in the various markets that CGD has presence. Knowing that information is the key to success, this team is assigned to obtain information and develop new business opportunities between PSCs and China. As a result, BNU has been referring business opportunities to its sister banks and uses local market knowledge to identify potential partners, suppliers and / or potential customers for its clients. Support to Renminbi Clearing Centre

CGD Group is committed to Macau’s role as the Renminbi Clearing Centre. The internationalisation of the Renminbi (RMB) brings numerous opportunities not only by attracting the attention of the Mainland business community, but also global financial markets, for many reasons: a) The rise of the RMB reflects the growing economic importance of China and the increase in Chinese exports; b) As one of the two largest economies in the world, China pursues a greater role for its currency in global trade; c) With the inclusion of the RMB in the basket of special drawing rights of the International Monetary Fund and being one of the currencies with the highest growth in transactions in world trade relations, RMB is expected to be one of the main currencies to be used in trade between Portuguese Speaking Countries and China; d) As an evidence of our Group’s commitment to the internationalisation of RMB, CGD Group has already made available a full range of RMB denominated financial services, through its international network; e) The results of Macau as a RMB clearing platform between China and PSC have also been encouraging and will certainly have an even greater impact in the future. With a wide presence in the PSC markets, CGD Group is very supportive of all these important initiatives. CGD seeks to establish itself as a strong partner to leverage the opportunities derived from the above initiatives, and is a strong believer and supporter of the China and Macau government’s mission to reinforce the role of Macau as a privileged platform for closer commercial, economic and financial relations between China and PSCs. IFM editor@ifinancemag.com

Jan - Mar 2018 International Finance

â&#x20AC;&#x2DC;A trader must now have strong financial engineering skillsâ&#x20AC;&#x2122; An interview with Olivier Bossard, Executive Director of the MSc Finance program at HEC Paris Business School IFM Correspondent

International Finance Jan - Mar 2018

Olivier Bossard, Executive Director, MSc Finance at HEC Paris Business School

Jan - Mar 2018 International Finance

INTERVIEW INTERVIEW markets

livier Bossard has spent over two decades in the trading industry, particularly at Lehman Brothers Europe (1998-2008) where he was Managing Director and member of the Global Equities Management Committee. He thereafter joined the Australian Bank Macquarie to run its Derivatives Trading

business worldwide ex-Asia, and was Senior Managing Director in charge of its European Derivatives Division. Passionate about teaching, he now dedicates his time sharing his experience with the younger generation. Since 2016, he has been the Executive Director of the flagship MSc Finance program at HEC Business School in Paris.

Excerpts from an interview:

What would be the trend in the trading industry in 2018? The role of a financial market trader has seen more than just an evolution, I’d rather call it a revolution, since the Global Financial Crisis (GFC) of 2008. This revolution has accelerated over the last three years, and especially today as we get into the tenth anniversary of the GFC. First of all, from a prudential perspective, trading activities are increasingly regulated, enabling financial participants, starting with banks, to identify and apprehend potentially risky trading activities earlier and with less disruption than before. In particular, the Basel Committee has implemented a revision of the Fundamental Review of the Trading Book (FRTB), which will come into full force in 12 months, in January 2019. Meanwhile, the rules published in 2016 under the title ‘Minimum Capital Requirements for Market Risk’ have already changed the way traders operate in their risk management activities. Without going into too much technical detail, a financial market trader must now calculate risk indicators (Delta, Vega and Curvature in the jargon) according to methodologies that are now standardised. Previously, traders did not have to calculate their Expected Shortfall (ES), however now this must be calculated on a daily basis in addition to the conventional Value-at-Risk (VaR). Not only is it now a mathematically-

International Finance Jan - Mar 2018

consistent risk-measure, but in addition, the effects of diversification of a portfolio can finally be modelled there. The second revolution of the trading functions in recent years is that a trader must now have very advanced technical skills. On one hand, this has become necessary in order to calculate the aforementioned risk indicators — with sophisticated mathematical methods such as Monte Carlo simulations or ‘Peaks Over Threshold’ that require advanced skills in mathematical modelling and financial engineering. On the other hand, access to electronic markets in near-realtime (with latency well below one millisecond) has led to the emergence of new ‘high-frequency’ trading techniques, which require advanced computer skills. Financial transactions are now processed a million times faster than in 2008. The ability to design and implement complex algorithms, and programming in Python language, has become essential to trading functions. What impact is the new ‘Code of Good Conduct’ having on currency trading? The Global Code of Conduct (GCC) for the Foreign Exchange Markets, decided under the aegis of the Bank for International Settlements (BIS), was launched in May 2016, and rolled out in subsequent phases in 2017. It is no substitute for regulations, but is rather intended as a complement, recalling the main rules and principles which

must uniformly govern behaviour in this market. The Code provides 56 recommendations for good practice in six key areas: ethics, governance, transactions execution, information sharing and transparency, risk management and compliance, and finally the confirmation and settlement processes. The majority of investment banks have already implemented most of these recommendations internally, following the manipulation scandals that have affected the global currency market since 2013. However, it is the other financial institutions that will benefit most from this new code of good conduct: private banks, institutional investors, hedge funds and especially high-frequency trading businesses. This is due to investment banks already implementing internal policies similar to the GCC, meaning it is only a new code of conduct for buyside market participants. This is a fantastic evolution: as trading functions are adhering to better morals. Each new financial scandal provides the opportunity to clean up and better regulate a profession historically lax in this area. What skills and qualities do you need to get into a trading role? A trader must now have strong financial engineering skills, and needs to be very comfortable with financial mathematics. Moreover, the regulatory, prudential, legal and customer support components mean that a trader must

INTERVIEW markets

also have the widest possible training, covering the entire spectrum of modern finance. Despite growing automatisation, the trader recruitment market has generally maintained well, but it has also become much more elitist than before. Only the best candidates can now find a place there. The recruitment market is extremely conducive for young graduates with the right profile. A series of skills is requested from them: — BSc with mathematics or engineering specialization — Computer skills (programming in C++ and Python) — A thorough knowledge of the financial markets acquired through a high-level MSc Finance programme. Those who manage to combine the above will find themselves in high demand, receiving multiple job offers even before they graduate. How is the recruitment market for more senior roles, and what are the desired profiles? At a more senior level, the most sought-after traders are those who master the development and implementation of highfrequency trading (HFT) algorithms. Nowadays, 90% of transactions are driven by algorithms that can transact on markets at a magnitude of 5 microseconds. Acting on a microsecond scale (one million times smaller than a second) is equivalent to being able to condense in one day of trading, more than 4,000 years of trading activity! This race for speed also requires the trader to be able to apprehend this competitive challenge from a purely physical perspective. And believe me, all means are good to be the quickest: ‘co-sharing’ computer hubs next to the Exchange data centres, shortening submarine cables (the famous Hibernia Express, that was built under the Atlantic to gain six milliseconds and was acquired last year for $590m), using microwaves instead of optical fibres, or even purchasing pylons

at a cost of €5 million in Belgium, so that transactions can cross the Channel faster. The new trader must understand and know how to apprehend such technologies! Finally, new trading roles require mastery in the treatment of the gigantic databases, known more commonly as metadata or big data. Typically, the orders and transactions database used by high-frequency traders, is in the magnitude of tens of terabytes, a monstrous figure that sometimes requires weeks of processing before you can calibrate or backtest an algorithm. What recruiting channels are currently preferred by recruiters? Modern finance is a very closed environment where recruitment by classified ads and applications through HR departments hardly work. Word-of-mouth and personal recommendations are the key elements for a good hire, and above all, they guarantee a better integration in the longer term. Knowledge of the employer’s culture and the skills of the candidate, are essential to a successful marriage. At HEC Paris, my MSc Finance students moving into trading have mostly been hired by former colleagues, friends or acquaintances. They trust me to present the best elements to them, but in return, I also know that I put my credibility at risk if the candidates I bring them are not up to their requirements. At a more senior level, recruitment firms and specialised head-hunters also try to influence the hiring market, but again it is rather reputation and word-of-mouth that make it possible to place high-ranked traders in large investment funds or at the helm of trading teams. Senior traders never send their resume; instead, they are directly approached by the potential employer. It often happens that I am asked, formally or informally, to evaluate the suitability of a senior trader for a

position to be filled, or even to serve as a ‘matchmaker’ by organising an introduction diner. Who will recruit traders in 2018 (Corporates, Investment Banks, Asset Managers, Hedge Funds, brokers...)? Brokers and intermediaries are recruiting very little nowadays, as intermediation trades are rapidly losing relevance, because of the automation of flows and the direct access to trading platforms. According to a London-based headhunter, corporates represent about 7% of the market, but they typically recruit senior traders who have already worked in investment banking. Investment banks, with about 42% of traders, continue to attract young graduates. Meanwhile, I especially note the growing share of Asset Managers in the broader sense: institutional investors, hedge funds or highfrequency trading companies which, with 51% of hires, offer real career opportunities for young aspiring traders. Where traditionally a junior trader had to learn the job at an investment bank before being able to move to the ‘buy-side’, it is now possible to directly integrate the trading desks of asset managers, insurance companies, or hedge funds. I expect this trend to continue throughout 2018, as we see more and more financial markets jobs moving away from the traditional ‘sell-side’ investment banks into a more vibrant and dynamic buy-side area. IFM editor@ifinancemag.com

Jan - Mar 2018 International Finance

Wealth Management

MiFID II will trigger consolidation The reason is the cost of the technologies required for compliance Mash Patel

International Finance Jan - Mar 2018

Wealth Management

ne of the most wide-ranging and farreaching pieces of legislation will be enacted into law across the EU in early January 2018 and it will have a massive impact on the asset management industry. Already as asset managers prepare for MiFID II — the revised Markets in Financial Instruments Directive, to give its full title — they find themselves with a number of difficult decisions to make about budgets, technology and even their very futures. The legislation itself has several key objectives, from creating a coherent regulatory system across the EU to increasing transparency and boosting protection for investors. It will also come at a significant cost to asset managers, and with further extensions to the deadline for when MiFID II comes into force highly unlikely, the industry is running out

of time to get its ducks in a row. One of the major headaches is that there are few clear instructions within the clauses of the MiFID II regulations. Rather, much of it is based on overarching principles, meaning that a great deal of interpretation of the grey areas is required by asset managers. MiFID II is going to affect almost every aspect of asset management. There are very few back office processes that will remain unchanged due to the regulations, but the cost of compliance will also have a massive impact on business models and almost inevitably lead to consolidation in the market. The way trades and transactions are reported will change, playing into one of MiFID II’s overarching themes — transparency. All communications with clients need to be monitored and recorded, and there needs to be evidence that communications have not

only been received but actually opened as well. Asset managers will also need to be able to prove that they have their client’s best interests at heart, not just in the provision of real-time trade and transaction data, but that ‘best execution’ efforts have been met as well. The kind of technologies required to meet these needs will come at a considerable cost. While digital transformation has been an industry buzz-phrase for some time now, any investment in technology must be carefully planned and thought out. While some asset management firms will be asking the question ‘build or buy?’, the former option will only be realistic to Tier 1 organisations. For the vast majority of the market, there’s a great deal of due diligence to be done when assessing the third-party solutions that they will have to buy in.

Software vendors are likely to suffer a capacity crunch in the coming months as they struggle to cope with demand for their products, which brings a new set of problems. A third-party partner could end up costing asset managers in the form of fines for non-compliance if their software isn’t working properly. In what is already a challenging market, MiFID II couldn’t have come at a worse time for many businesses. The regulations are a significant burden for them and with margins wafer-thin, organisations such as active asset managers, hedge funds, and high-frequency traders could be especially at risk. While we’ve seen some large mergers in the past couple of years — Aberdeen and Standard Life, Janus and Henderson — MiFID II could be the trigger for a wave of M&A, and even in some cases liquidation. Consolidation seems inevitable as a lot of firms with a narrow focus look to diversify and streamline their operations. Size and scale matter, but it will be the organisations that have solved the digital transformation puzzle that will be best set to survive in a post-MiFID II world. IFM editor@ifinancemag.com

Mash Patel is CEO of Kurtosys

Jan - Mar 2018 International Finance

COVER STORY

COVER STORY 52

Harnessing Oman’s energy potential OOCEP is supporting the Sultanate’s drive to diversify sources of national income while strengthening and growing the oil and gas sector

man’s petroleum and other liquids production ranks seventh among the Middle Eastern countries. In 2016, the sultanate reached a new high with total annual oil production topping 1 million barrels daily. Today, Oman is the largest oil and gas producer in the Middle East that is not a member of OPEC. Before setting the country’s oil production record in 2016,

International Finance Jan - Mar 2018

Oman’s annual petroleum and other liquids production had peaked at 972,000 b/d in 2000 before dropping to 715,000 b/d in 2007. Since then, total oil production has risen due to the increasing use of enhanced oil recovery (EOR) techniques coupled with new discoveries of oil reserves. Oman was on track to maintain this production level till the country reduced production to approximately 970,000

COVER STORY

Isam AL Zadjali , CEO, OOC

Jan - Mar 2018 International Finance

COVER STORY

b/d in early 2017 as part of a mutual agreement with OPEC member countries. The emergence of Oman as a successful oil and gas producing country came after a long period of development. Though geological reconnaissance was conducted as early as 1925, no conclusive evidence of commercial oil reserves was found for some decades. However, the search of the subsurface geology continued. The first commercial discovery of oil was in the Yibal field, followed by giant discoveries in the Natih and Fahud fields in 1963 and 1964, respectively. These discoveries were the starting point of commercial scale oil production in Oman which began in 1967. Today, the Sultanate boasts of modern infrastructure with a stable and growing economy while offering a business-friendly environment, which is renowned for transparency. Following the oil price slump in 2014, the Sultanate took a number of measures to keep the economy on a solid footing and diversify sources of national income while working to strengthen and grow the oil and gas sector with a focus on increased efficiency, productivity and continued exploration and investment. Under these circumstances, the oil and gas sector in Oman remains resilient and is showing signs of sustainable growth. Although oil prices have rallied somewhat since the lows of

International Finance Jan - Mar 2018

$24/b in January 2016, Oman’s 2017 budget continued to focus on reducing expenditure while maximising revenue. Progressive initiatives from the government, such as the Tanfeedh economic and social growth programme, the development of public-private partnership projects, and creating an attractive environment for foreign direct investment (FDI) are helping to stimulate economic growth and sustain employment. OOCEP driving growth The activities of Oman Oil Company Exploration & Production LLC (OOCEP) continue to support this drive for growth in the Sultanate. OOCEP was founded in May 2009 as a subsidiary of Oman Oil Company SAOC, which is the government investment arm in Oman for the oil and gas sector. OOCEP combines the management of investments in non-operated upstream assets in Oman and Kazakhstan, and operatorship of upstream and service/midstream businesses across the Sultanate. Its investments seek to draw upon Oman’s deep experience in the oil and gas industry to achieve strong operational results and financial returns, pursue opportunities that will contribute to meeting the future energy needs of the Sultanate, and provide a platform for professional development and

innovation. Operated assets The asset base of OOCEP continues to generate sustainable growth while developing new reserves and optimising recovery potential. The company has 100% of the Abu Bu abuI tight gas field in Block 60 (known as ABB), which was first discovered by Petroleum Development Oman in 1998. This project is anticipated to deliver a plateau of 70 MMscf/d produced through the ABB Gas Processing Plant. The processed gas is currently delivered to the government through a tie-in to the South Gas Line (SGL) and the condensate to the Main Oil Line (MOL) going to Qarn Alam booster station. The Musandam Gas Plant (MGP) is an oil and sour gas processing plant located just north of the border with Ras Al Khaimah, UAE, in the Musandam province of Oman. The MGP processes well fluids from the existing Bukha fields offshore platforms. These fluids are transported from the platform to MGP through a subsea pipeline where they are processed to produce sales quality gas, oil, Liquefied Petroleum Gas (LPG) and sulphur. Meanwhile, geological surveys have indicated Block 42 as a suitable starting point to implement OOCEP’s goal to further conduct exploration operations in Oman. An agreement to this effect was signed with Shell in 2017. The block covers an area of approximately 25,600 square kilometres and comprises mainly the northeast coastal range of the Oman mountains and the basin immediately to their south. In 2017, OOCEP signed the Block 48 Exploration and Production Sharing Agreement with the government of the Sultanate of Oman pursuant to which OOCEP acts as the operator of Block 48 with a 100% Participating Interest. Block 48 is an exploration block adjacent to the OOCEP-operated Block 60 and covers an area of 2,995 square kilometres.

COVER STORY

As operator of the Abu Bu Tabul field, OOCEP is uniquely positioned to fast track any potential discoveries in Block 48 through the existing Block 60 facilities and infrastructure. Non-operated assets OOCEP also holds a number of nonoperated assets in Oman, including a 40% interest in the Khazzan natural gas field in Al Dhahirah governorate, Oman. The field, which was discovered in 1994, is currently the biggest new upstream project in Oman. Operated by BP, the first phase of processed gas production became operational in September 2017. In 2016, the company obtained a 45% interest in Block 9 north of Oman. Block 9 has been operated by Oxy for over 30 years. The block started production from the Safah field in 1984. In 2000, water flooding using horizontal wells was implemented. The production has been trending up and the block is currently producing around 90 thousand barrels of oil equivalent per day (MBOEPD). In November 2017, the government of the Sultanate of Oman, OOCEP and Oxy entered into an Exploration and Production Sharing Agreement (EPSA) for Block 30, located in the Dakhiliya region onshore Oman. Pursuant to the EPSA, Oxy is the operator of Block 30 and holds a 72.86% stake while OOCEP holds the remaining 27.14%. Block 30 was awarded to Oxy and OOCEP following an international bid round process launched in October 2016. The block is located in the northeast mountainous region of Oman, approximately 200 km southwest of Muscat and covers an area of 1185 square kilometres. It contains four discoveries made by several operators under previous agreements, namely the Nadir, Al Sahwa, Hafar fields and the Hamrat AlDuru field. In November 2017, the government of the Sultanate of Oman, OOCEP and Eni Oman BV, a subsidiary of Eni, entered into an EPSA for Block 52, located offshore Oman. Block 52 was

awarded to Eni and OOCEP following an international bid round process launched in October 2016. Pursuant to the EPSA, Eni Oman BV is the Operator of Block 52. Eni Oman BV holds an 85% stake whilst its partner OOCEP holds the remaining 15% stake in Block 52. At the same event, Eni and Qatar Petroleum signed an agreement for the assignment of 30% interest in Block 52 to Qatar Petroleum. The assignment is subject to obtaining the required approvals from the government of the Sultanate of Oman. Following the completion of the assignment, the Contractor under the EPSA will consist of affiliates of Eni with a 55% stake, Qatar Petroleum with 30% and OOCEP with 15%. Block 52 is an underexplored area with hydrocarbon potential located offshore in the southern region of Oman. The area extends from Al Wusta region towards the Dhofar region, encompassing the Hallaniyat islands. It covers a total area of approximately 90,760 square kilometres with the water depth ranging from approximately 10m to 3,000m. Commenting on the EPSA, Oman Oil Company Group CEO Isam Al Zadjali said, “The exploration of the area is part of our plans to contribute towards increasing the country’s hydrocarbon reserves and production potential, in turn realising further growth in Oman and strengthening the local economy. I am confident the collective experience of both companies will prove valuable in exploring the offshore Block 52.” Another non-operated asset is the Mukhaizna field, which is located 500 kilometres from Muscat. The field holds an estimated heavy crude oil reserve of two billion barrels with Occidental as the project operator. The project has drilled more than 2,900 wells through the end of 2016. Production has ramped up from 10 Thousand Barrels of Oil per Day (MBOPD) in 2005 to over 120 MBOPD by 2012, and has gone higher than 120 MBOPD since then. Gross oil

production during 2016 averaged was 126.5 MBOPD. Additionally, the Karim Small Fields (KSF) is a cluster of 18 fields located in PDO-Block 6 concession area. OOCEP holds a 25% stake in the service contract while MEDCO, the field operator, holds 75%. The objective for KSF is to enhance oil production from several marginal oil fields that are mostly sandstone reservoirs (Haima and Haushi). More than 240 new infill wells were drilled since 2007. Another cluster field is the Rima Small Satellite Fields. Another non-operated OOCEP asset is the Dunga Oil Field, which is an onshore field located 50 km to the north of the city of Aktau in western Kazakhstan. Also in Kazakhstan is ‘The Pearls’, which is an offshore project located in the northern part of the Kazakhstan section of the Caspian Sea. The contract area covers 895 square metres, with an average water depth of 8-10 m. OOCEP is also a market leader in Oman for services via its subsidiary company Abraj Energy Services SAOC, which concentrates on midstream activities. Abraj offers a number of services in the midstream sector, including drilling, well services and well engineering. Fastest growing in the Middle East In the last three years, OOCEP has consistently increased its output and profitability. Earlier this year, it was recognised as the fastest-growing oil company in the Middle East since 2015, by Wood Mackenzie, a global leader in commercial intelligence for the energy, metals, and mining industries. OOCEP earned this recognition after reporting its net production significantly increased to 57,000 barrels of oil equivalent per day since 2015. IFM editor@ifinancemag.com

Jan - Mar 2018 International Finance

banking

‘Expect more AI-based products and solutions’ Six predictions on what 2018 holds in store Sophie Guibaud

W 1.

ith 2017 coming to an end, here are six predictions on what 2018 holds in store.

Payment Services Directive (PSD2) Finally Goes Live It has been a long road to PSD2, given that it was approved in November 2015 by the Council of the European Union. It will finally be coming into force in January 2018 and that means that banks must open up their customer data to third parties on request — whether these third parties are their direct competitors, challenger banks or nascent fintech

International Finance Jan - Mar 2018

startups. For everyday consumers, much will change due to this. There will be a huge increase in banks seeking to become a ‘one-stop shop’ for their customers. In reality, this means that banks will provide wide access to a range of services, from the ability to pay from bank accounts at a touch of a finger to accessing integrated comparison tools to find the best banking deals. Thanks to PSD2, banking as a whole will become much more personalised. The simple fact is that data is now as valuable as gold to financial organisations,

banking

and they need to treat it as such. 2. RegTech Takes Off 2018 is the year when RegTech really takes off, thanks to two key pieces of European-wide legislation coming into force — MiFID II and GDPR. Due to the need to be fully compliant with these new rules, financial organisations will be looking at immediate options to help them decrease their regulatory risk and costs while also improving the customer experience next year. The new regulations will, in future, have a huge effect as financial organisations’ relationships with regulators will rely upon real time data to be shared to improve and speed up risk management and market stability, all through the power of APIs. 3. ‘Real AI’ Really Progresses in 2018 2017 has been the breakout year for artificial intelligence (AI), as the technology moved from the backroom of financial organisations to actually pointing to how banks will operate in the future. We will see this progress further as the first real AIbased consumer products and solutions come to the fore, in the form of responsive chatbots, which will become the new norm for banking customers around the world. Meanwhile, in the background, such technology will be heavily used to collect and organise data, which is especially needed with the implementation of PSD2 and will ultimately lead to more personalised banking for consumers, not only improving the customer experience but ensuring that the bank remains relevant by offering consumers the right offers at the right time and supporting them with proactive notifications whenever they encounter a situation that require the support of the bank.

4. SME Banking Comes To The Fore While this year, the UK government struck a deal with Britain’s biggest high street banks to extend millions of pounds of lending to SMEs, loan applications actually fell. However, due to the challenging environment that European SMEs will find themselves in this year, we’ll likely see more players enter this market, which already picked up since last year, especially from new innovative fintech companies. These challengers will be focused on simplifying onboarding process, facilitating access to banking services and cutting down the red tape faced by SMEs in applying for a business loan, especially around lengthy and complex application procedures. With more players on the market, it will also become the time to find the right business models for those players, those being potentially different across geographies. 5. Cashless Society Continues. Blockchain Will Help Despite the UK introducing new one pound coins and 10-pound notes this year, we’ll see a further acceleration to a cashless society, not only in Britain but globally. This profound shift in how people pay for goods and services will also have an effect on the rise in Blockchain adoption. As all money can more easily be traced to its rightful owner and beyond government’s control, Bitcoin will continue to rise in popularity and also valuation. 6. Banking As A Service (BaaS) Goes International & The Rise Of The MarketplaceBanking As A Service (BaaS) will take off globally next year, as to date it has been primarily driven in Europe. What this means is that we’ll see an increasing number of companies competing to provide ‘white label’ banking products to organisations struggling to keep up with the digital revolution. In tandem with white label products taking off next year, banking marketplaces, which offer consumers a host of different financial products will be a natural byproduct of this. They offer banks a huge opportunity to remain relevant and remain the main contact for consumers in terms of their financial needs as marketplaces will have all the financial products that a consumer could want, all in one place. IFM editor@ifinancemag.com

Sophie Guibaud

Sophie Guibaud is VP of European Expansion at Fidor Bank

Jan - Mar 2018 International Finance

2018 trends: banking

Need a global standard for APIs

Hans Tesselaar

International Finance Jan - Mar 2018

2018 trends: banking

At the moment, every bank is defining its own set of APIs, thereby hampering connectivity, easy integration and openness

here are several acronyms that have topped the agenda in banking technology discussions, forecasts and predictions over the last few years. DLT, or Distributed Ledger Technologies, often makes headlines, though given that the technologies that are in place for payments are already robust, I don’t forsee reason for drastic change in this arena. With that in mind, I’d be surprised if we saw massive leaps forward in this sector in 2018, beyond some more closed group

Hans Tesselaar, Executive Director, BIAN

proof of concepts. The little collections of letters that I think will define next year in terms of competition, collaboration, innovation, and new services, are API and PSD2 (Payment Services Directive II). This is a fundamental piece of paymentsrelated legislation in Europe that will accelerate digital disruption and re-shape the retail banking industry. Payments UK highlights that this change will bring ‘wide-reaching implications for a range of parties including banks, other PSPs, FinTechs

and customers’. Two key drivers behind this law are increased competition and choice, by facilitating market entrance for regulated non-bank players, and driving increased transparency and customer protection. This new ‘sharing’ culture will be underpinned by Open APIs, which will allow the banks to open up their payment services to third party payment service providers. Open sesame This requirement to open up data to third parties is one of the most hotly discussed elements of the regulation, and a worrying concept for many banks, who fear the competition from flexible, tech-savvy challengers. This development will of course, and by design, increase competition, but also presents significant opportunities to grow new revenue streams, capture customer ownership and progress towards an extended ecosystem. On top of enabling collaboration with FinTech or broader tech organisations, developing and opening APIs will finally allow banks to embrace cloudbased solutions that will enable them to operate a leaner tech model. To comply with the regulatory requirements and realise the benefits outlined above, the banking industry will need to build new functionalities. It’s a common misconception that these APIs are just sat behind the scenes waiting for someone to cut a ribbon and declare them ‘open’. The reality is significantly more complicated, tied up with banks’ tangled and archaic systems, regulation and compliance, with a focus on privacy around information sharing. A recent spot survey conducted by

Jan - Mar 2018 International Finance

2018 trends: banking

BIAN corroborates this – over 60% of respondents expressed concerns that banks will struggle to open up their APIs because of the ‘current state of banks’ core architecture’. APIs and micro-services One significant trend we will see will be the continued development and maturity of APIs, and the associated move to micro-services. We saw the first APIs become available this year, though these have largely been simple versions – e.g. APIs that can provide an address. As we move into 2018, we expect to see organisations orchestrate much more complex APIs, such as those that allow customers to initiate a loan. If the industry can understand and migrate to micro-services, we can expect to see a bank that no longer relies on core systems within two to five years. This way of operating will completely change the way that banks work and how software providers will have to design and package their solutions.

International Finance Jan - Mar 2018

Change is needed However, before banks even think of opening up their systems to newcomers, they need to first untangle their old and inefficient infrastructure and streamline their core banking processes. Each API should then be designed to sync up with the core architecture. The problem at the moment is that every bank is defining its own set of APIs, thereby hampering connectivity, easy integration and openness, which sort of defeats the purpose. There is currently no universally adopted reference model or taxonomy to lay out clear standard definitions for all the various banking business functions. Without this, it’s almost impossible for banks to visualise the different information flows within all the banking capabilities within their model, let alone how these are connected and which should be taken up for API enablement. Following on from this conversation, banks will then also need to decide whether to keep these various business capabilities in-house, or simply

consume them off the cloud as and when required. Without clear sight of what they have in play at the moment, how can they possibly move ahead? A global standard and model for API development will be crucial in taking this innovation forward and allowing banks to realise their full potential. A global agenda PSD2 is a European directive, though I hope that it will be the prompt that the international banking arena needs to start really looking at these challenges on a global scale, and in earnest. Rather than waiting to see whether the regulation itself travels beyond Europe, banks outside of this jurisdiction should address the opportunities presented by open APIs today. Regulatory push apart, there are strong business compulsions for bringing about standardisation and interoperability among APIs en route to open banking. Aside from the ‘building block’ approach to innovation that this technology affords, there is a huge

2018 trends: banking

As we move into 2018, we expect to see organisations orchestrate much more complex APIs, such as those that allow customers to initiate a loan

opportunity for banks to start embracing partners from overseas. The problem of tangled and complex systems through years of layering on technology products is by no means limited to Europe. This issue is particularly prevalent for Islamic banks for instance, which have traditionally developed tailored, inhouse banking technology systems to ensure they comply with Shar’iah, Islamic legal code. No collaboration without standardisation I hope that the real shift that we see in 2018 will be one of mind-set, in terms of how banks think about innovation. In short, they should be

thinking about customers first, then business, then technology. All updates and change must come from market demand. The current architecture of traditional banks does not fully facilitates collaboration, nor for them to prosper from the incoming sharing culture. We need to come together across the banking and IT sectors to standardise a framework across the entire banking industry that will guarantee its progression. In 2018, these old dogs will need to start learning new tricks, re-allocating IT budgets from ‘run the business’ to ‘change the business’, to remain competitive and gain ground over their new counterparts. The emergence of

new players need not signal the end for high street banks – it should be just the start of a new era of competition and innovation. IFM editor@ifinancemag.com

Hans Tesselaar is Executive Director of BIAN

Jan - Mar 2018 International Finance

OPINION 2018 trends: Airlines

OPINION

Niall McBain

Not revolution, but an evolution in travel experience

International Finance Jan - Mar 2018

OPINION 2018 trends: Airlines

What will happen to the passenger experience and airline technology in 2018

n 2018, airlines will face two conflicting imperatives. First, they will seek to keep costs down in a highly competitive marketplace where margins are seldom guaranteed. Secondly, airlines will need to continue their increased focus on future technological innovations. Artificial intelligence, full AR/VR entertainment, and even windowless fuselages are on the horizon and should be on airlines’ agendas. Twenty eighteen will see a continued evolution of the passenger experience, and the technology behind it. This will be a year of quiet progression as the

inflight experience shifts in subtle, yet identifiable ways. These changes will provide a better experience for passengers and more effective opportunities for brands. We will see the inflight advertising market become an increasingly effective place to reach passengers and new brands will take advantage of these changes. Companies as diverse as fashion houses, whiskey distillers, and even banks, are trying to reach audiences effectively with significant spending power. However, in 2017, the online pursuit of these audiences resulted in notable incidents of advertisements appearing alongside terrorist videos or other objectionable content. With internet advertising in the dog house for many brands, 2018 will be the year they seek elsewhere and the inflight category provides one of the most high-value audiences in

the world. Those of us in the inflight industry know that a thousand ways of doing things can come and go, but there is still nothing quite like having an influential business-class traveller, who normally has a raft of disruptions and lives a high-output life, sitting ‘forcibly’ at leisure on their backsides and willing to have their considerable intellect engaged with. Inflight brand advertising, entertainment and content will continue to move away from its longstanding, traditional formats (aka ‘This Months’ New Movies’). 2018 will see on-board entertainment become more and more like the non-linear, on-demand, any-device content we all enjoy on the ground. The year will see further rise of platform-agnostic products that will bring new information and e-commerce opportunities to

Jan - Mar 2018 International Finance

OPINION 2018 trends: Airlines

highly targeted audiences. Driven by an increase in data and more sophisticated means of using it, platform-agnostic products will allow companies to speak directly to business leaders through a safe, targeted portal. Twenty eighteen will also see a greater integration of existing technology into the passenger journey. Weâ&#x20AC;&#x2122;re already seeing some airlines beginning to increase the technologies they use to engage with their passengers, not just during the flight but also before and after. British Airways, for example, launched a chatbot that engages passengers preflight and offers them personalised solutions and recommendations. By integrating services that allow passengers to personalise their flight experience, 2018 will be the year airlines prove to their customers that the flight experience can be so much more than access to their personal

International Finance Jan - Mar 2018

Netflix account. Passengers will not see a revolution in their travel experience in 2018, but an evolution, resulting in a noticeably more enjoyable and more useful service. In common with nearly every industry everywhere in the world, airlines are facing a coming storm of tech disruption. This is not just from within the industry, but from every company in the world that interacts with customers. Perceptions are shaped by what everyone else is doing; airlines are no longer just competing against each other. In terms of customer experience, they are competing against every company a passenger can conceivably interact with. This includes the likes of Amazon, Facebook, Google, Apple and Microsoft. Airlines are nearing the stage where they will have to make their next seven-year bet on major tech changes.

Twenty eighteen must be the year where, internally, airlines up their game to the level passengers expect and prepare to take on not just each other but every company in existence. IFM editor@ifinancemag.com

Niall McBain is Chair and CEO Spafax

2018 trends: Real Estate

Proptech will elbow out letting agents Overall, the private sector will most likely bring about the greatest changes in the UK real estate market in 2018 Fareed Nabir

s the end of the year approaches, people’s eyes naturally cast forward to what the future has in store. And there is no need for a crystal ball to safely predict that the UK’s rental market is set to undergo an important transformation in 2018. Along with the property sector as a whole, the lettings space is facing significant pressures that both the government and industry bodies must work together to address; the coming 12 months will therefore almost certainly play host to some significant changes for landlords and tenants. Meeting rising rental demand One of the most obvious drivers of this change is that the number of

International Finance Jan - Mar 2018

people living in rental accommodation is forecast to rise steadily next year and beyond. According to PWC, the population of private renters in the UK is predicted to grow from 2016’s figure of 5.4 million to reach 7.2 million by 2021. In turn, this will place further strain on the rental market and the need for enough suitable properties in areas of high demand for renters to choose from. To help meet demand, the Conservative Party has made clear its intention to focus on the construction of new houses – the number of homes

being built in England is currently 21% higher than last year, a number not seen since the financial crisis almost a decade ago. Indeed, to match demand from renters and buyers alike, the government anticipates that between 275,000 and 300,000 new homes will need to be built each year to alleviate market pressure. As such, improving supply for the rental market will

2018 trends: Real Estate

The number of homes being built in England is currently 21% higher than last year, a number not seen since the financial crisis almost a decade ago

remain a critical target for the public sector in 2018. Further legislative changes afoot? Away from the construction drive, it is possible that new legislative changes will be introduced next year. Following on from the banning of letting agent fees in March 2017, Labour leader Jeremy Corbyn has been vocal in pushing for greater rent controls, such as no increases in rental prices above inflation. While Theresa May and her party have fought off the initial calls for another general election after losing seats in June’s vote, the Conservatives remain under pressure and may have to take heed of calls for changes in the rental market. This means more regulatory changes could be brought in over the months ahead. Meanwhile, other policies may come into effect that will either directly or indirectly impact tenants and landlords. For example, changes to Stamp Duty or the expansion of Help to Buy initiative could see more people get on the property ladder – indeed, the government has long stressed its desire to turn Generation Rent into Generation Buy, but whether or not meaningful

progress will be made towards this goal remains to be seen. The proptech revolution Whatever steps the government takes in 2018 to address critical issues in the rental market, improve the protection of tenants’ interests and help more people get onto the property ladder, it is the private sector that will most likely implement the greatest changes next year. Specifically, the rise of property technology – or proptech – is going to have a significant impact on all levels of the rental market, for tenants, landlords and lettings agents. In 2016, the share prices of Foxtons and Countrywide fell by 47.5% and 56.9% respectively. Meanwhile, the number of tech startups in the UK increased by a massive 200%, with proptech accounting for a large proportion of this. Evidently, the tide is turning; started by the likes of Zoopla and Purplebricks, there is now a new wave of proptech firms fundamentally changing the entire real estate sector. In particular, over recent years there has been a notable rise in the number of ‘online’ letting agents; some are newcomers to the market, while more traditional high street

agents have also attempted to rebrand themselves as such. The reality is that many businesses claiming to offer online property services, where the househunter can view and secure a rental property online, are actually hybrid solutions. Rental properties may be listed online, but much of the process – such as registering your interest, completing the paperwork and sending over a deposit – actually still takes place offline. New research commissioned by LetBritain among more than 2,000 UK adults illustrated the frustration that renters have with these outdated processes. It found that 51% of consumers now go online to source the majority of their products and services, while 29% actively avoid those businesses that do not offer an online service. Moreover, 31% think that using high-street letting agents to rent out a property is overly-burdened by reams of paperwork, with a quarter (25%) preferring to use online-only services to source and secure a property. Bringing lettings into the 21st Century The coming 12 months will see these issues addressed. Next year proptech will continue its

exponential rise – genuine online and virtual letting agents will bring the rental process into the 21st Century, making it quicker, easier, cheaper and more transparent for both the tenant and the landlord. With the UK’s population of private renters forecast to grow, and increasing pressure being placed on both the private and public sectors to help improve the fortunes of Generation Rent, 2018 will bring about important changes in the rental market. Not only will the government continue its efforts to alleviate rental demand, but virtual lettings agencies and innovative proptech firms will also rise in prominence in a bid to tackle the current issues that are rife in the industry. As a result, the year ahead should be a period of progress to help all aspects of the country’s rental market, modernising processes and empowering tenants and landlords with greater control and choice. IFM editor@ifinancemag.com

Fareed Nabir is CEO of LetBritain

Jan - Mar 2018 International Finance

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Companion for a quality life

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Technology

â&#x20AC;&#x2DC;Control artificial intelligence before it controls usâ&#x20AC;&#x2122; There are growing concerns that technologies are developing outside of any system of internationally-agreed regulation or ethics Haakon Overli

he all-consuming Brexit argument currently overwhelming political discourse is stifling crucial discussion of artificial intelligence technologies that could transform our lives for the better or even threaten our very existence. Policymakers have

International Finance Jan - Mar 2018

completely failed to engage with the debate over how to develop AI technologies in a controlled way that will deliver benefits for humanity rather than jeopardising its safety. There are growing concerns that technologies are developing outside of any system of internationally-agreed

Technology

regulation or ethics to ensure that AI applications do good rather than cause harm. Influential scientists, such as Professor Stephen Hawking, have warned that the future for AI is unpredictable, with the potential for technology to have a transformational impact, for good or for bad. AI technologies are developing very rapidly and the potential is hugely exciting, but we must manage this science with great care; it is no exaggeration to say that uncontrolled AI could in the future pose an existential threat to humanity, but you would never guess that was the case from the indifference to this debate shown by policymakers with little interest in anything other than the minutiae of the Brexit negotiations. Here are five examples of questions that policymakers should now be engaging with:

Haakon Overli

How do we prepare our young people for work in the AI era? AI technologies will transform the labour market, taking responsibility for any task involving repetitive or predictable tasks, but we continue to educate our young people as if the world of work is not about to change fundamentally. The skills young people will need to succeed in the future will be very different – creativity, in particular, will be a valuable commodity. How do we manage the data on which AI will depend? AI technologies depend on a constant stream of data from which they learn in order to perfect their decision making, but data is an increasingly regulated area. The challenge will be to balance data protection and security concerns against the need for a free

flow of data to underpin AI development. The UK may even have an opportunity to secure competitive advantage here following Brexit, given the EU’s exacting data regulation. Should we allow AI to kill? Governments and military strategists around the world are already making substantial investments in AI-powered weapons systems that will reduce the need for human intervention in the process of selecting targets and then hitting them. In effect, decisions over who to kill, how and when, will be delegated to a computer programme. How will we ensure AI is unable to exert its superiority over mankind? Current AI technologies are task-specific – highly skilled at carrying out one role, but unable to learn to do other work. That will change over time, however, to the extent that AI machines capable of amassing vast amounts of generalised intelligence could eventually outpace mankind – and asset their superiority with hostile acts against humanity. How do we build international consensus on the regulation and ethics underpinning AI technologies? While UK policymakers must engage with the AI debate, this will be a global phenomenon requiring collaboration and co-operation between

governments. Many countries have reached similar conclusions about how to regulate developments in areas such as embryology; an equivalent discussion about AI is now crucial. ‘Not science fiction’ You might think that sophisticated AI with the potential to overwhelm humanity is the stuff of science fiction, but these technologies are developing at a very rapid pace and it’s crucial that we begin to discuss the implications right now; there are many positive aspects of AI, and we’re already seeing businesses harnessing these technologies to work more effectively, but there are dangers too. Unfortunately, the UK’s political climate currently allows little room for discussion of anything other than the Brexit debate; this is getting in the way of our country playing its part in the debate about how to develop robust governance structures around advances in AI technology. That puts the UK in an unacceptable position: without engagement right now, we run the risk of missing out on many of the benefits that AI can deliver and of failing to counter the threats potentially posed by these technologies. IFM editor@ifinancemag.com

Haakon Overli is the cofounder of London-based Dawn Capital

Jan - Mar 2018 International Finance

business leader

â&#x20AC;&#x2DC;VCs, incubators, angels are not just about moneyâ&#x20AC;&#x2122; Interview with Nick Cinquino, founder of White Birch Consulting, which supports entrepreneurs and investors with their investment deals Madhurima Roy

International Finance Jan - Mar 2018

business leader

ick Cinquino graduated in Business Administration and Accounting from Monmouth University before pursuing Financial Planning and Services from New York University. He started his career as a staff accountant at Baker Tilly Virchow Krause, LLP. He served as Senior Financial Planner at GF Management, CFO at BW Health and CEO at Startup Financial Model.

In October 2016, he founded the Philadelphia, Pennsylvania-based White Birch Consulting, LLC. The company supports entrepreneurs and investors with their investment deals. It offers the support they need to help them successfully raise funds and maintain the fiduciary responsibility to those who invested. Through fundraising consultation and virtual CFO services, they ensure startups are best prepared for what lies ahead.

Excerpts from an interview: How has the investment domain transformed over the years? When I was raising money for companies 5 years ago, almost everyone was investing with their hearts. While a lot of investors still do this, I have seen more due diligence now more than ever. A 12-month pro-forma financial spreadsheet is no longer enough. More and more investors I speak with want to know exactly how the company will be generating revenue and what their exit plan is. Investors need to trust that the entrepreneur will spend their invested money in the most effective

Nick Cinquino

way possible. Are banks missing out entirely on the action in the start-up space? How are they ensuring that they also get a piece of the pie? Yes. I do believe that banks are missing out on the action in the startup space. Venture capital, incubators, angels – these are all so necessary to startups, not because of their money but because of the experience they bring to the table. A traditional banker has never really played the role of business advisor, so most entrepreneurs look at a business

loan as their last option. What they are not seeing is the power that comes with leveraging a venture backed fundraising round with a bank loan. If an entrepreneur can raise $4M of their $5M fundraising round through a VC, they should be thinking of closing out the round with traditional debt. This is a beneficial scenario for all parties. The VC alleviates risk. The bank ‘gets a piece of the pie.’ And the entrepreneur proves that their startup can effectively service debt. It should be noted though that since most startups don’t have the collateral to secure a loan, founders will have to guarantee the loan. Banks like Silicon Valley Bank are well ahead of other banks when it comes to accommodating startups in this manner. That said, a traditional big bank would not be as enthused about backing these types of loans because they have lived through many market swings and have been slapped on the wrist enough times to know that it is very risky business to back these startups in such early stages. Will the amount of regulation being put in place overwhelm banks? What will banks need to do to make enough money to support the increase in investment in compliance and cyber security? In the United States, bank regulation appears to be easing rather than increasing. A bill to erase some of the Dodd-Frank banking rules has already passed in the house this year. Rolling back these regulations should

Jan - Mar 2018 International Finance

business leader

mean that banks will have easier time lending money. This should allow for banks to generate more revenue. Banks should be more concerned about cyber security than anything. Threats are only on the rise. The issue should remain a top priority for banks for years to come. Banks should look to bring on an out-sourced firm to handle threats until the bank is educated enough to begin building its own departments and initiatives. Banks also need to stay on top of blockchain technology and the cryptocurrency boom. It could be viewed as a massive threat or a massive opportunity. It will be interesting to see which banks are effective in honing the new technology.

Will Amazon put every competitor out of business in the e-commerce space? Is it becoming too big? I actually think the opposite. Amazon has created a safe and secure environment for online shopping that has enabled an entire generation to feel more comfortable shopping online. This will generate more business across all ecommerce sites. Also, a lot of customers still want an intimate customer experience and Amazon, like Walmart, can never provide that. So, there will always be room for small businesses to operate

International Finance Jan - Mar 2018

online just as there is on main street. The growth of Amazon is all relative. I believe that a company should seek to grow to its full potential but that it should always keep its core competencies in mind. Amazon has done this and their valuation reflects that. But if they continue to grow at this pace and they lose sight of what made them Amazon in the first place, it could spell trouble. That said, there are a few areas of commerce that align with Amazonâ&#x20AC;&#x2122;s core values but they have not yet entered. The two that really stand out to me are healthcare and automobiles. I see Amazon being able to disrupt both industries in a very meaningful manner. What is your outlook on the financial sector of the US? The Fed is expected to raise rates, but would that be because the economy is growing or due to inflation? What, if any, is the difference between the two scenarios? Ms. (Janet) Yellen has stated that increasing competition for workers was driving up wages, and inflation was likely to follow. The Fed could raise rates more slowly if it concludes that its inflation expectations need to be revised. She says: â&#x20AC;&#x153;Given that monetary policy affects economic activity and inflation with a substantial

lag, it would be imprudent to keep monetary policy on hold until inflation is back to 2 percent.â&#x20AC;? In my opinion, the economy is growing but I think that local government needs to do a better job at bringing the right jobs to its residents. If computer programing became as common a profession as a truck driver or a teacher, I believe our economy would reach new heights. The world is changing and we need to do a better job at showing our workforce the types of fulfilling and secure careers they can have in that changing world. From your experience, which nation has the best tax codes and collection system in place? Estonia, Ireland, Finland, Sweden and Switzerland are all famous for their corporate tax structure. Estonia, which is ranked #1 in the International Tax Competitiveness Index Rankings by the International Tax Foundation, provides a low corporate tax rate, no double taxation of dividend income, a nearly-flat 21% income tax rate, and a territorial tax system that exempts 100% of foreign profits. IFM editor@ifinancemag.com

Banking

SBMA CEO Wilma T Eisma and 4As Chairman Norman Agatep sign a memorandum of agreement for holding Ad Summit Pilipinas 2018 at the Subic Bay Freeport Zone in March 2018

Subic Bay Freeport: Economic driver of the Philippines It is the preferred location of more than 2,800 investor-companies from various countries and the workplace of more than 126,000 highly skilled and educated people

International Finance Jan - Mar 2018

Company Profile: SBMA

ubic Bay Freeport is known for being the best tourism attraction in Central Luzon, and, in as far as sports tourism is concerned, the best in Asia. And yet this premier free port is more than that, for the Subic Bay Freeport has been a major economic driver in the Philippines since its creation in 1992. According to Subic Bay Metropolitan Authority (SBMA) Chairman and

Administrator Wilma ‘Amy’ T. Eisma, a total of 2,877 companies are now operating inside the Subic Bay Freeport, a 32 percent increase over last year’s figure of 1,942. In all, these companies have committed investments of more than $8.4 billion. “And with the growth of companies, the number of jobs generated grew as well. We now have a workforce in the Freeport numbering 125,288. This is a 10 percent

increase over last year’s total of 112,653,” she said. With the basics in place, the SBMA is also set to prioritise key projects that will further develop the Subic Bay Freeport while sustaining its current economic status. Eisma said the agency has allotted a budget of about P2.46 billion to further develop Subic’s seaport facilities. These include the 15 piers and wharves that can

serve various purposes, from transshipment of containerised and breakbulk cargoes, fuels and lubricants, and grains and fertilizer, to servicing vessels and passengers. “The piers and wharves are undeniably the biggest assets of Subic Bay, and our seaport generates the biggest income among all the SBMA units,” Eisma pointed out. “While Subic has its own airport, its seaport is the most viable

SBMA CEO Wilma T Eisma

Jan - Mar 2018 International Finance

Company Profile: SBMA

Officials of Subic Bay Metropolitan Authority led by CEO Wilma T Eisma (second from right) and officers of SS Seri Bakti on board the Malaysian LNG tanker

facility to develop and earn from.” Accordingly, the SBMA’s seaport rehabilitation project would complement the Duterte government’s ‘Build, Build, Build’ program, which includes the construction of the proposed Subic-Clark Cargo Railway. This was envisioned to ease the transfer of cargo from vessels docked in Subic to the nearby Clark Freeport and other destinations in Central and Northern Luzon. Projects and incentives Some of the major

International Finance Jan - Mar 2018

projects of the agency also include construction of the Magsaysay Bridge, which leads to the Freeport main gate; upgrading of facilities at the Subic Bay International Airport; concreting and repair of roads; port dredging; building of the proposed SBMA-Olongapo Museum; and establishment of an SBMA Corporate Center to house the various SBMA offices that are now scattered among several US Navy-era buildings. To further generate trade in the Freeport, the agency is also giving some incentives to companies

locating in Subic, such as exemption from all local and national taxes with only a five percent corporate tax on gross income. The Freeport also offers tax- and dutyfree importation of raw materials and capital equipment; 100 percent foreign ownership of equity; issuance of visas to foreign investors and workers by the SBMA; and the free movement of goods in and out of the Freeport. Origin of Subic Bay Freeport Zone The name ‘Subic’ was derived from the native

word ‘Hubec’, which means ‘head of plow’. As local legend has it, this was the name of the main town in Zambales, on the island of Luzon, which boasted of a deep and serene harbour that attracted the Spaniards to position their galleons for commerce and war in the 15th to 18th centuries. During those days of prosperous trade and influential Spanish acculturation, the name ‘Hubec’ became the more popularly known ‘Subiq’. When the Spaniards lost their grip of the Philippines to American colonisers in 1898, the more enterprising

Company Profile: SBMA

Subic Bay Metropolitan Authority officials led by CEO Wilma T Eisma (second from right) and officers of SS Seri Bakti on board the Malaysian LNG tanker

newcomers turned the place into a more advanced maritime facility and began the preservation of its ecological surrounding. Under the Americans, ‘Subiq’ was changed to ‘Subic’” and from there Subic came to be known as the biggest US naval facility of the United States in the Asia Pacific. It was used for ship repair, became a munitions supply and oil depot, a place for rest and recreation, and also played a major role during World War II, the Vietnam War

and the Gulf War. When the US Navy’s Seventh fleet pulled out of Subic in 1992 following the rejection by the Philippine Senate of a new treaty to extend the use of US bases in the Philippines, the government, with the help of about 8,000 volunteers, responded to the clarion call of then Mayor Richard G. Gordon to secure the facilities. In pursuit of progress, the ready-made facilities valued at about $8 billion were transformed into

a special economic zone that was named the Subic Bay Special Economic and Freeport Zone. Under the stewardship of the Subic Bay Metropolitan Authority (SBMA), Subic was opened to business and foreign direct investments as the first free port zone in the Philippines. Hence, from the word ‘Hubec’ that pertained to an agricultural past, ‘Subic’ went on to become a thriving centre of industry and commerce that is poised to play a major strategic

role in the economic development of the Philippines and the growth of trade in the Asia-Pacific region. Today, the Subic Bay Freeport Zone is the preferred location of more than 2,800 investorcompanies from various countries; home of the biggest shipbuilding facility in the Philippines and the fourth in world; and the workplace of more than 126,000 highly skilled and educated people. Through the years, the

Jan - Mar 2018 International Finance

Company Profile: SBMA

Employment Record (2012-2017) Business Category

2012

2013

2014

2015

2016

2017

Manufacturing

15,176

16,000

15,076

14,533

12,780

14,019

Services

37,998

39,712

45,342

48,396

54,458

69,676

Shipbuilding/Marine Related Services

27,279

27,216

33,109

35,501

38,041

32,803

Construction

8,105

6,110

2,795

2,545

6,566

8,422

546

636

676

808

1,133

89,104

89,584

96,958

101,651

112,653

126,053

Domestic Helpers/ Caretakers/Others Total

Note: 2017 is as of Sept. 30, 2017

Gross Revenue (in Million Pesos)

International Finance Jan - Mar 2018

Company Profile: SBMA

In 2017, it overtook Vietnam’s 6.2% growth and Indonesia’s 5% growth rate, and was close to China with a 6.9% growth rate in the second quarter of the year Subic Bay Freeport Zone has been reaping various awards. For this year alone, aside from being named as the Fastest Growing Free Trade Zone in Asia and recognised for the Best Social Responsibility Initiative by the Londonbased International Finance magazine, the Subic Bay Freeport also clinched the Best Sports Tourism Destination of the Year award during the Third Sports Industries Awards and Conference Asia (SPIA Asia) held in Bangkok, Thailand on November 7, 2017. On top of it all, SBMA Chairman and Administrator Wilma T. Eisma was adjudged among this year’s winners in the search for the ‘100 Most Influential Filipina Women in the World’, which recognises Filipino women who are influencing the face of leadership in the global workplace. The Philippine economy The Philippines remains among the fastestgrowing economies in Southeast Asia. Driven by broad-based expansion in domestic demand, the economy performed strongly for the past seven years. GDP grew by 6.4% year-on-year in the first half of 2017, moderating from a 7% pace in the same period

last year, but in line with the average 6.3%, which is a major reversal of its fortune, having been branded as the ‘sick man of Asia’ in 2010. In 2017, it overtook Vietnam’s 6.2% growth and Indonesia’s 5% growth rate, and was close to China with a 6.9% growth rate in the second quarter of the year. In the third quarter of 2017, however, the Philippines even pulled ahead of China as it reported growth of 6.9%, slightly higher than the Asian superpower’s 6.8%. Subic Bay Freeport’s contribution to the national economy Back in 1992, when the Subic Naval Base closed down, the surrounding towns and communities were all depressed at losing about 35,000 jobs generated at the US naval facility. Today, the active workforce of the Subic Bay Freeport is at 126,053 as of September 2017. Meanwhile, the Subic Bay Freeport’s revenue successively grew from 2011 through 2016 under a prudent fiscal program, breaking the $40 million revenue mark, and setting a record of a 351% increase in net income. Then in just three years of operation, from 2014 to 2016, the Subic Freeport generated about $921 million in

custom duties, $112 million in custom taxes, and $37 million in corporate taxes, for a total revenue collection of $1.07 billion. Aside from these, the Subic Bay Freeport recorded in the same three-year period dividends totaling $40 million, which were directly remitted to the country’s national treasury. Agreement with Ayta tribe On March 27, 2009, with the assistance of the Subic Bay Metropolitan Authority, the Pastolan Ayta tribe in the municipality of Hermosa, Bataan, Philippines received a Certificate of Ancestral Domain Title (CADT) covering 4,284 hectares that forms part of the Subic Bay Freeport Zone. The CADT was registered with the Register of Deeds on May 12, 2009, and was formally awarded to the indigenous cultural community (ICC) through its tribal council on May 27, 2009 by then President Gloria Arroyo. Since the Pastolan ancestral domain is part of the zone that is managed by the Subic Bay Metropolitan Authority, the Subic agency engaged in consultations with the ICC, the National Commission on Indigenous Peoples (NCIP), and the Ambala Ayta tribe, to formulate a Joint Management Agreement

(JMA) that would contain provisions focusing on poverty alleviation and economic development for the indigenous people in the Subic Bay Freeport. The entire process was not without challenges, but these were overcome through inter-agency cooperation, genuine concern for the Ayta people, and the passion among SBMA officials and personnel to promote, protect and uphold the rights and welfare of the ICC. The grueling formulation and finalisation process included presentation of the JMA to the community; NCIP validation; presentation to the SBMA Board of Directors, and final presentation to the NCIP Chairman and Commission en banc, for approval. After a thorough dissection and review by all parties, the JMA was finally signed on September 3, 2011 at Sitio Pastolan, Hermosa, Bataan. Consequently, the JMA Implementing Rules and Regulations (IRR) was formulated, approved, and officially signed on October 10, 2013 at the SBMA Boardroom, Subic Bay Freeport. IFM editor@ifinancemag.com

Jan - Mar 2018 International Finance

Company profile: Spotahome

Find a rental without visiting the property

potahome is an online platform for accommodation rentals for midto long-term stays. The companyâ&#x20AC;&#x2122;s business model focuses on removing the need for physical property

International Finance Jan - Mar 2018

viewings. Based in Madrid, Spain, the company was founded in 2014 by Alejandro Artacho (CEO), Bryan McEire (CTO), Bruno Bianchi (COO), and Hugo Monteiro (VP of Engineering). As of

October 2017, users from more than 185 different nationalities had booked more than 3 million nights of rental accommodation via the Spotahome website. Worldâ&#x20AC;&#x2122;s largest real

estate video library The companyâ&#x20AC;&#x2122;s business model focuses on the residential rental market. Through its website, one can rent houses, rooms in shared apartments and student halls that can be

Company profile: Spotahome

That’s the lure of Spotahome, which operates in 9 countries IFM Correspondent

“

viewed online thanks to HD first person video tours that shows details of the house, 360º high quality photographs and floor plans of each property, trustworthy descriptions and information about the

neighbourhood. This process is possible due to the work of ‘Home checkers’, who visit every property to develop the audio-visual material and verify the listing. This differentiating attribute

has made Spotahome the first digital video library in the real estate sector, accumulating high quality audio-visual material for more than 40,000 properties in Europe and the Middle East.

It’s hard to be not blown away by the energy and capability of the Spotahome founders, making mid-term renting a pleasant experience Stefan Glänzer, co-founder, Passion Capital

Jan - Mar 2018 International Finance

Company profile: Spotahome

Spotahome had its first few landlords signed up on the first day of operations, before the website was even up and running, using just a pdf presentation

languages, secured bank transactions through payment gateways and last-minute cancellation insurance. The company offers data to potential real estate investors, providing profitability figures per region or city area and customer trends. How it began Alejandro Artacho, CEO and co-founder of Spotahome, was inspired to create the concept by three defining moments in his career. The first was during the time he lived in China for three years when a friend asked to borrow his tablet to help another friend relocating from the

US to find accommodation. They searched classifieds and later created photos and videos to help the friend choose their new place before arriving. The second moment was whilst Alejandro was working in real estate in London where he realised how much time, effort and money people invested in searching for accommodation. The final light-bulb moment was when Alejandro observed that travel agencies were becoming a thing of the past, and envisioned the same model applied to housing. The first customers Spotahome had its first few landlords signed up on

Bruno Bianchi, Bryan McEire, Alejandro Artacho and Hugo Monteiro

The ‘home-checkers’ The company employs around 200 people of 30 different nationalities at its headquarters in Madrid. Additionally, it collaborates with more than 100 freelancers who work as ‘Home-checkers’ in the various countries where the company is operating. It offers additional guarantees to safeguard landlords in case of eventual contract cancellation, guarantee against payment default and coverage of home damages, but also to avoid multiple home visits thanks to its video tour system through highdefinition videos. Tenants can expect customer service in 9

International Finance Jan - Mar 2018

the first day of operations, before the website was even up and running, using just a pdf presentation. As soon as the site was launched on March 5, 2014, Spotahome secured the first tenant in less than two hours — a Japanese man moving to Madrid for 15 months. At this point, co-founders Alejandro Artacho and Bruno Bianchi flew to London to secure the first seed investors, which included Howzat Partners (one of the first investors in Trivago) and angel investors. Typical customer The business model lends itself to people moving internationally, either for

Company profile: Spotahome

an expat assignment or an Erasmus semester. The company says that 80% of their bookings come from the 20-30 age group. But, they have even taken bookings from people in their 70s. It is equally popular among men and women. The top five countries for bookings are France, Spain, US, UK and Italy. In terms of country of origin, the second biggest source country for bookings is within the UK itself. The bottomline In the space of only three years and as of the end of September,

Spotahome generated more than $71.1 million in total contract value for landlords, homeowners and property managers who have entrusted their rental properties to the company. The startup has added $16.1 million to a Series A investment round, bringing its accumulated capital raised to $25 million since the company’s founding in 2014. The company is currently in a growth stage with its revenue multiplying by four year-on-year. The fresh capital will allow Spotahome achieve several goals. Firstly, Spotahome will consolidate its presence

in countries where it already operates, both to strengthen and extend its reach in each of those markets. Additionally, the company will invest in the continued development of digital and technical products to digitalise services in the value chain of real estate, which will improve the experience for both tenants and landlords. Finally, the company will continue hiring first-class international talent as it reinvents the real estate sector by making it more transparent and simple. IFM editor@ifinancemag.com

The company: Spotahome • Founded in 2014 • Facilitates home rentals from any location in the world in minutes • Focused on mid- to long-term rental accommodation • No need to physically visit the property • Operates in Austria, Belgium, France, Germany, Ireland, Italy, Spain, UAE, UK • Operates in 16 cities across the EMEA region

This sector has always had the scourge of being too traditional and not very innovative. At Spotahome, we are working hard to change this. Our mission is to reinvent real estate, make it transparent, instant and exciting, and loved Alejandro Artacho, CEO and co-founder, Spotahome

• Video library covers over 40,000 properties in Europe and the Middle East • Rented out more than three million nights of accommodation • Has closed contracts of $71.1 million in value for landlords

Jan - Mar 2018 International Finance

Sector Insight

Building a

better home Xinyuanâ&#x20AC;&#x2122;s solid financial position allows it great flexibility in executing its real estate development projects

International Finance Jan - Mar 2018

Sector Insight

inyuan Real Estate Co., Ltd is an NYSE-listed real estate developer and property manager primarily in China and a few other countries. It was founded in 1997 in Zhengzhou, the capital of central China’s Henan province, and is headquartered in Beijing. Xinyuan launched its IPO on NYSE in 2007, and over the years has applied prudent financial management while strictly following compliance requirements for both financial reporting and internal controls. It obtained strategic investment from Texas Pacific Group (TPG) in 2013. The company targets the rapidly expanding base of middle-class consumers and provides them with comfortable and convenient real

estate related products and services. Xinyuan’s product portfolio consists of multiple rise buildings, high-rise buildings, and multi-family villas, together with auxiliary services and amenities such as retail outlets, leisure and health facilities, kindergartens and schools. In China, the company develops and manages large-scale, high-quality real estate projects in more than 10 tier one and tier two cities with sustainable economic and population growth, including Beijing, Shanghai, Tianjin, Zhengzhou, Jinan, Qingdao, Xi’an, Suzhou, Changsha, and Zhuhai. Xinyuan also leverages its experience and resources in the industry by providing construction management services for other companies that lack property

development expertise. This asset-light business model allows Xinyuan to charge a service fee for its management while the company can also provide financing support by taking a minority stake in such projects, providing a good supplementary business segment for Xinyuan’s future development. The company also provides property management services and other real estate-related services that complement its core business. In 2016, Xinyuan’s Property Management unit was ranked No. 14 in China by the National Property Management Association as measured by overall competitiveness. The company is listed on China’s National Equities Exchange and Quotations (the “NEEQ”).

Xinyuan launched its IPO on NYSE in 2007

Jan - Mar 2018 International Finance

Sector Insight

Xinyuan’s project in midtown Manhattan, New York

Xinyuan’s blockchain solutions on Nasdaq screen

International Finance Jan - Mar 2018

Sector Insight

In China, the company develops and manages large-scale, high-quality real estate projects

In 2012, Xinyuan was one of the first Chinese real estate developers to enter the US market, and over the past several years, it has been active in real estate development in New York. Xinyuan’s Oosten Project in the Williamsburg section of Brooklyn, New York, has 216 units in total, and was fully completed in 2017. The project captured the No. 2 spot in Property Shark’s ranking of the TOP-10 Bestselling buildings in New York City in 2016, and took the No. 5 spot of the same survey for the first quarter of 2017. Xinyuan’s project in Midtown Manhattan, its second New York development, is located at 615 10th Avenue, Hell’s Kitchen. It has 82 residential units, and Xinyuan has also executed a lease for this project with the national retailer Target Corporation, which will occupy most of the retail space on the ground level. This lease also marks Xinyuan’s first

successful foray into the retail real estate market in New York City. Xinyuan’s third project in New York City is designed by the famous I.M. Pei firm and contains 239 residential units. The project’s location is 13535 Northern Blvd, Flushing, Queens, where a historical landmark — RKO Theater — stands. Part of the existing construction would be protected and renovated as an entrance for the new building, making the project a modern design combined with classic architecture. In addition to its core real estate business, Xinyuan is also a pioneer working to apply blockchain technology in the property industry. Xinyuan’s blockchain subsidiary is one of the first batch of enterprises that have passed the national blockchain standard test, and now provides blockchain solutions to some financial regulatory institutions. Joining hands with IBM and Tsinghua People’s Bank

of China School of Finance, Xinyuan’s blockchain subsidiary has already obtained more than 40 patents and could provide blockchain related technological services in different sectors. Xinyuan’s solid financial position allows it great flexibility to continue executing its real estate development projects. This gives the company a good foundation for growth in the future, in both the domestic market and abroad. Xinyuan looks forward to providing better products and services to its owners, and delivering value to its shareholders. IFM . editor@ifinancemag.com

Jan - Mar 2018 International Finance

Organic farm of the TH Group

Serving Vietnamese fresh milk to the world International Finance Jan - Mar 2018

Sector Insight

TH Group chairwoman Ms. Thai Huong is putting up a $2.7 billion high-tech concentrated dairy and fresh milk production unit in Russia

ver the past few years, Vietnam-based TH Group, which possesses the high-profile TH true MILK brand name, has made two big breakthroughs which have driven the group to work ‘For the sake of the health of consumers’. These have contributed to helping Ms. Thai Huong, CEO of BAC A BANK and Chairwoman of TH Group, to take Vietnamese organic and fresh milk to the entire world. Since 2008, TH Group has been operating a $1.2 billion high-tech concentrated dairy and fresh milk production project in the central province of Nghe An’s Nghia Dan district. This project has made the first breakthrough in the domestic milk industry by using state-of-the-art technology for its activities about grass cultivation and raising dairy cows. The second breakthrough was driving the Vietnamese milk sector to an organic path, on which fresh, safe and organic foodstuff products are produced, with a mindset of ‘creating a safe and organic foodstuff ecosystem’ and ‘becoming a good housewife for the community’. Under Ms. Thai Huong’s leadership, TH Group, financed and consulted by BAC A BANK, has been considered a great contributor in Vietnam to shifting people’s habit from using reconstituted milk to fresh milk. The TH Group’s entry into production of organic milk was triggered by a milk adulteration scandal. At the Global Summit of Women organised in Japan in May 2017, Ms. Thai Huong told thousands of international CEOs, “One night in 2008, I was watching TV, and I saw news about the Melaminecontaminated milk scandal, which can harm the health of millions of children. I was shocked. The next morning, I gathered all senior members of the BAC A BANK’s management board for a meeting. We decided to start producing fresh milk right in our home land. It was the beginning of the TH

Jan - Mar 2018 International Finance

Sector Insight

Thai Huong signing an agreement with the Governor of Kaluga to invest in Kaluga Province of Russia

92 Group.” The breakthrough decision gave birth to the $1.2 billion high-tech concentrated dairy and fresh milk production project in Nghe An, financed by BAC A BANK. At present, the project’s first stage, worth $500 million, has been completed, with a total number of 45,000 dairy cows and a total land area of 8,100 hectares. After reaping successes

with high-quality brand TH true MILK products, Ms. Thai Huong said that Vietnamese people should enjoy the safest and freshest things, as do people in Germany, the US and Japan. Then she turned her focus to organic production. From late 2015 to May 2017, BAC A BANK and TH Group obtained high-profile organic certificates for its organic cow farm, with more than 1,000 animals

and the whole production chain. In August 2017, TH Group launched its TH true MILK organic and fresh milk product. One month later, this product won the award of ‘The most brilliant new product’ at the Moscow International Foodstuff Exhibition in Russia. In addition, TH Group concentrated on producing safe vegetables and herbs in Nghia Dan district of Nghe An, with products branded

“

In order to make a brand name live permanently, we must be patient and steadfast in fostering it, with our kindness and honesty shining the road for the brand name to progress Ms. Thai Huong, CEO of BAC A BANK and Chairwoman of TH Group

Since 2008, TH Group has been operating a $1.2 billion high-tech concentrated dairy and fresh milk production project in the central province of Nghe An’s Nghia Dan district International Finance Jan - Mar 2018

Sector Insight

TH Group’s project in Russia is getting ready

FVF and TH true Herbal. Reaching out overseas To realise her dream of bringing Vietnamese TH true MILK products to the world, Ms. Thai Huong has been implementing a $2.7 billion high-tech concentrated dairy and fresh milk production project in Russia, whose land occupies half of the land area of Europe. This three-stage project is Vietnam’s biggest agrifood one overseas so far. In addition to producing milk, this project will also churn out high-quality vegetables and fruit. Ms. Thai Huong said

that after completion, the project will house more than 350,000 dairy cows, with total processing capacity of 5,900 tonnes per day, equivalent to nearly 1.8 million tonnes per year. The project will also have a total concentrated material area of 140,000 hectares. TH Group expects to take the first high-yield dairy cows to Russia by late October 2017. The first batch of products from this project will be marketed in Russia in May 2018. Millions of Russian people will be able to enjoy TH true MILK products, which are produced to international standards.

While attending the Eastern Economic Forum 2017, Ms. Thai Huong proudly introduced her projects in Russia to Russia’s President Vladimir Vladimirovich Putin in September 2017. TH Group will invest further in the dairy cow project, cultivate highquality herbs, and produce cow feed in Russia’s Far East region. All the products will be marketed locally, and in neighboring nations, especially China. With her strong will and heart, Ms. Thai Huong has inspired many other Vietnamese businesspersons

who wish to make a mark in international markets. IFM editor@ifinancemag.com

Jan - Mar 2018 International Finance

Social Initiatives

Adding a human touch to technology International Finance Jan - Mar 2018

Social Initiatives

ShareTheMeal is a social initiative that aims to eradicate hunger one tap at a time Madhurima Roy

echnology and its advancement thrusts the baton of responsibility in everyone’s hands to aid mankind in their evolution and to ease their lives. As Albert Einstein once mentioned: ‘The human spirit must prevail over technology’. Otherwise, technology will lose its eminence and become alienated. Although technology has eased the lives of many people, the underprivileged are nowhere in the picture. Thus, was born ShareTheMeal, a Berlin

headquartered United Nations World Food Programme initiative with the sole agenda of feeding the hungry and eradicating hunger. This would meet the utmost basic necessity of the deprived. #ZeroHunger Living in a world where everything is app centric and characterised by hash tags, ShareTheMeal pursues its non-profit agenda of #ZeroHunger by assisting people across the globe share meals through its app. Massimiliano Costa, the head of the initiative,

believes that innovation in technology is the key to deal with an issue this intense. He says, “I believe innovation is at the heart of creating a world with zero hunger. Without thinking big, we simply cannot reach this goal. This is why it is important to use technology for good — encouraging communities around the world to step up and aim to reach a world without hunger.” The app The app was the brain child of Sebastian Stricker and Bernhard Kowatsch.

“

I believe innovation is at the heart of creating a world with zero hunger. Without thinking big, we simply cannot reach this goal. This is why it is important to use technology for good — encouraging communities around the world to step up and aim to reach a world without hunger Massimiliano Costa, the head of the initiative

Jan - Mar 2018 International Finance

Social Initiatives

It took off in 2014 with the sole motive of engaging millennials from around the world to fight for a world without hunger. The no-cost app is available for download on the Apple’s App Store and Android’s Google Play in 10 languages and 30 different currencies. Massimiliano believes that in this technology driven world where smartphone users outnumber hungry children by 20:1, ShareTheMeal aims to leverage the latest technologies to engage millennials around the world. The simple and

International Finance Jan - Mar 2018

transparent crowdfunding program has earned nods of appreciation and the trust of the ones eager to help. Massimiliano says, “We believe even more people would be willing to help if there is a simple and straightforward way of doing so. This is where the ShareTheMeal app comes in.” Charging an amount as minimal as 50 cents to feed a child for a day, ShareTheMeal is currently nourishing the hungry in Nigeria, Haiti, Jordan and also the Rohingya refugees. The 50 cents contribution includes costs related to feeding the children —

grocery, preparation of meals, transportation, regular monitoring as well as all other relevant costs. Depending on the valuation of a country’s currency, ShareTheMeal feeds as many hungry children as possible with each 50 cents contribution. How it works “Users can download the app for free, are walked through an on boarding process, and then can tap to share their meal,” Massimiliano says. “Users can create teams in the app, see up-to-date news on whom and where they are spending and helping in a newsfeed, and can invite friends via Facebook to join them in the fight against hunger. We accept payments via credit card, PayPal, Apple Pay and Android Pay (where available). “Once users share a meal, they receive a thank you message from a beneficiary, explaining who they are and how WFP has improved their well-being.” The number of shared meals is increasing with leaps and bounds. At present, the number exceeds the 17 million mark. Massimiliano thanks the ShareTheMeal community for helping the cause grow this big. “We have a community of nearly 1 million who are fighting hunger one shared meal at a time. We are so appreciative of the generosity of the ShareTheMeal community which has helped us feed thousands of hungry children around the world.”

Camera Giving To better engage millennials with the app and its cause, ShareTheMeal introduced the Camera Giving feature that lets users click pictures of their food, use one of the five filters that are named after five beneficiaries, donate and then post directly to social media from the app. “The feature was introduced this year on World Photo and World Humanitarian Day to engage millennials — hacking the large foodie movement on social media. We thought why not ask millennials to do something innovative with their food photos,” says Massimiliano. ShareTheMeal strives for a future where there will be no longer any child sleeping under the blanket of hunger, and they can label Earth as a planet with #ZeroHunger. IFM editor@ifinancemag.com

Social Initiatives

Jan - Mar 2018 International Finance

OPINION: technology OPINION

OPINION

Nicholas Gregory

Cars, bulbs, mobile phones and now Bitcoin International Finance Jan - Mar 2018

OPINION: technology OPINION

Why initial misgivings won’t stand in the way of cryptocurrency

t is true the average person in the street is pretty bamboozled by the idea of cryptocurrency. It’s techy and new, and on the face of it, there is no comparison with the app-based online payments consumers have just grown to love over the last few years. There is still a certain element of distrust among the general population, mainly driven by the more hysterical stories in the media, and this has been one of the major obstacles to crypto’s widespread adoption. However this distrust will fade and, for many in the business community internationally, it is already a thing of the past. We know people hate change. Then again, they are also prone to failures of imagination. Society, bankers, professionals and politicians all

frequently suffer the collective failure of assuming what we have in front of us now is as good as it gets; as if somehow, it cannot be improved. The idea that we will forever have to live with the imperfections of a system and the way people exploit it is a fallacy that we are doomed to repeat. Until recently, crypto and Bitcoin were technologies championed by a minority and viewed with suspicion by the majority. You have to go back to the late 19th century to find a suitable comparison. That’s when Red Flag Laws meant people had to walk 60 yards ahead of self-propelled vehicles to warn horsedrawn carriages and pedestrians they were coming. People were terrified of them but self-propelled vehicles went on to revolutionise the way we

live. What did it was the internal combustion engine, something that was nowhere to be seen when the motor car’s precursors first rounded the corner. Too good to miss? Today’s red flag bearers are the sceptics who warn that cryptocurrencies are not built to last and are no more likely to survive than the Tulip mania that swept Holland in the 17th century. History shows us that similarly-minded people were afraid to use the first electric light bulbs, ride trains going more than 100mph and, more recently, fretted about the health risks of using mobile phones. It is incredibly unlikely that what we have now will resemble cryptocurrencies’ final evolution no

Jan - Mar 2018 International Finance

OPINION: technology OPINION

100

matter when global adoption occurs. If anything, that’s what is most exciting about it. It’s a matter of ‘when’ not ‘if’, and how good can it get? Even Bitcoin’s most famous critic, JP Morgan CEO Jamie Dimon, is actually a proponent of the blockchain technology that underpins it. Mass adoption will come, not when every individual understands the science, but when people choose to put their reservations aside because the advantages of using cryptocurrency are simply too good to miss. Diamond in the rough People historically have confidence in storing wealth in a currency because it is sponsored by a country’s central bank. But cryptocurrency is more like a language than a traditional fiat. It relies not on the permission of one central body, but the consent of a community. That’s apt for a currency founded in code — the language of

International Finance Jan - Mar 2018

computers. So Bitcoin is less a diamond and more a diamond in the rough that will remain so even after over-excited speculators have taken a few haircuts. It is just a new way of avoiding having to barter that can thrive if people continue to want to use it. Some will find the low-cost, frictionless, international transactions that cryptocurrency permits to be its most useful application. International settlement is currently a complex and costly process. For others, it will be how best to take travel money abroad or how to complete complex mergers and acquisitions across national boundaries without using costly contract lawyers. Many businesses are wasting no time demonstrating it has a future, which creates a business reason for others to follow suit. You can already rent yachts, book flights, buy coffee and houses, and even pay for legal

advice and a university education using Bitcoin. The nuts and bolts Someone has to go first. What all these businesses will be discovering — as they wrestle the focus away from currency speculators — is that they lack a secure way of creating a business paper trail for the blockchain that is inextricably linked to the currency’s ledger, but exists separately and privately. In other words, without banks, who records your cash flow and revenue? For globalised business, where do you build and store KYC information and how do you know the invoice you have been sent has really come from your supplier? When that supplier complains that they have not been paid, what evidence can you produce to the contrary? This is how CommerceBlock acts as an ‘enabler’ and why we created the

OPINION: technology OPINION

So Bitcoin is less a diamond and more a diamond in the rough that will remain so even after over-excited speculators have taken a few haircuts. It is just a new way of avoiding having to barter that can thrive if people continue to want to use it

industry standard ‘BIP175 protocol’, which is available open source for anyone to use. It enables firms to do business in Bitcoin without banks by ensuring the parties involved in a transaction, and no one else, can see who is being paid for what and under what contractual arrangement. This is what the business world needs if use of crypto is going to reach the escape velocity required to enter the commercial mainstream. Evidence, if any were needed, that we are not there yet has come in the form of recent moves by two near neighbours who should be of one mind in removing barriers to trade — but aren’t. Australia is moving to embrace and regulate Bitcoin while Vietnam has banned its use altogether. With such

conflicting approaches worldwide, it’s remarkable Bitcoin is growing at the rate that it is. Similar to Google Docs There has been a lot of fuss about the things you can use cryptocurrency for. Most of the hype has been around use by criminals and anonymity, which is actually incredibly difficult to achieve on blockchains. What you often find is that critics’ knowledge of distributed ledger and blockchain technology is not very sophisticated. The US dollar and British pound are also used by criminals; should we scrap them? Put simply, blockchains are databases with multiple authors that are completely transparent. I wrote this on Google Docs which functions

exactly like a blockchain. You can share it, everyone has a version of it and you can see all changes to it stretching back to its creation. This transparency is part of its power. Anyone doing wrong can rely on anonymity only so long as they don’t ever convert cryptocurrency into assets or fiat currencies. Fiat currencies are actually far more vulnerable to abuse. So, not all things people are afraid of are worthy of that fear and you can’t believe everything you read. Remember that the next time you turn out the lights in your office, jump in your motor car and call a loved one to say you’ll be home early. We’ve all been here before. IFM editor@ifinancemag.com

Nicholas Gregory is CEO of cryptocurrency enabler CommerceBlock

Jan - Mar 2018 International Finance

101

Technology

Your data is the new oil A business has the ability to know more about its customers than those customers will ever know about the business Roger Haenni

102

or the first time in history, a business has the ability to know more about its customers than those customers will ever know about the business. While modern companies have always divided customers into large demographic swaths, what’s happening now is dramatically different. Consumers no longer need to be clumsily lumped into groups demarcated by wide ranges and ‘one size fits all’ phrases. Everything that happens online can be traced, tracked and drilled down to the individual. This hasn’t been a predictable evolutionary change; it’s been a sweeping metamorphosis. While people are fond of talking about a digital fingerprint, that analogy falls far short of what’s really happening. Fingerprints can reveal where a person has

International Finance Jan - Mar 2018

been or confirm someone’s identity, but in the hands of a data-savvy company, the information you generate online can be viewed much more holistically. In effect, you have a digital double that reveals not only where you’ve been, what you’ve bought and what media you’ve consumed, but can even be used to predict what you’ll do.

Technology

Companies know so much about individuals because they constantly collect data that can then be bought, sold, stored, analysed, clustered and compared to other data. Sometimes a company’s core business depends on gathering a certain type of information, like Fitbit monitoring a user’s heart rate, but data can also be gathered inadvertently, like a robot vacuum cleaner mapping a home while routinely performing its chores. Either way, companies are free to buy and sell this information, making tremendous amounts of money off users in ways those users never agreed to. When it comes to social media, people literally give away their privacy by checking a box and agreeing to terms of service on a scrolling contract no one ever reads. The basic services provided by platforms like Facebook, Twitter, LinkedIn and Instagram may feel free to the average user, but the companies behind those platforms profit immensely by selling the data their users generate. This isn’t a business practice that simply developed over time. It was always the plan. Users who share more, have more connections, and use more platforms are seen as more ‘valuable’, so their data is sold at a premium. The fact that users can be quantified this way brings to mind the quote attributed to Andrew Lewis: “If you’re not paying for it, you’re not the customer. You’re the product being sold.” When it comes to the ability to collect data at scale, then take that data and drill down to the individual, the barn door can’t be closed, but just because the horse has gotten out doesn’t mean we need to let it run all over the field. We can put up fences. The technical ability to let individuals sell the data they generate is rapidly becoming a reality. This is a big step towards corralling companies in the data marketplace. However, data isn’t just bought and sold; it’s also stored. This is where security becomes an issue. Fortunately, a fence is being built for that, too. Blockchain was one of the biggest buzzwords in 2017. Don’t expect it to go away anytime soon, if ever. Because of blockchain technology, cryptocurrency is on a meteoric rise, but entities like Bitcoin and Ethereum aren’t the only ones

to benefit from the security of a decentralised system. This past May, 143 million records were taken in the Equifax breach, which means almost half of all US citizens were affected. This happened because Equifax stores its information in one central database, but blockchain technology is the solution to this, making it possible to implement a secure by design data storage network where each individual record is encrypted and only the owner of that record has the key. Until now, database security relied on firewalls, but this is no longer enough. Given enough time, hackers chisel through. Meanwhile, governments find ways to slip in, too. When it comes to the blockchain, it’s not an issue of hackers needing more time to adapt or governments writing new rules. The blockchain simply can’t be compromised. This is the benefit of decentralising storage and taking data silos out of the picture entirely. The dominance of one company in the data marketplace can also have a waterfall effect on other players. For example, Apple’s HealthKit sits under its Health app. But, HealthKit is also used by developers of other apps. These apps gather a wide range of information — from blood pressure to calorie intake — and feed what they collect back to Apple. This allows for the creation of a composite profile of an individual’s health. If HealthKit becomes so prevalent in health app development that using it is an unwritten requirement for anyone wanting to enter the market, Apple could conceivably own all the health data in the world. They may be an exceptionally solid company, but is it right for any single entity to own something so far reaching? Data is being likened to oil, but I prefer to think of this as oil in its earliest days, when it still held untapped potential. Companies have used this gush of information to generate phenomenal wealth. Now it’s time for individuals to stake a claim in a market that only exists because they make it possible with every online decision, website search, and movement of a smart phone. IFM editor@ifinancemag.com

Roger Haenni is co-founder and CEO of Datum

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Why ICO issuers must make sure they are compliant China and South Korea have recently banned ICOs, with China claiming that they have â&#x20AC;&#x2DC;seriously disrupted the economic and financial orderâ&#x20AC;&#x2122; Gordon Harrison

International Finance Jan - Mar 2018

Technology

nitial Coin Offerings (ICOs) are one of the biggest trends in the cryptocurrency arena today. Also known as ‘token sales’, they are a relatively new fundraising phenomenon, used to launch new companies or fund a development project. To take part in an ICO, supporters/ investors of the project use digital

1 2 3 4

currency like Bitcoin (or, in some cases, use credit cards or fiat currency), to send money to a website run by the listing company, and receive digital ‘utility tokens’ in return. These tokens are essentially digital coupons that give investors access to the features of a particular project starting at a later date. They do not confer ownership, but can be traded in the open market, providing fast liquidity to those that desire it. ICOs are largely unregulated, and allow start-ups to bypass the regulated capital-raising process required by banks or venture capitalists. Start-ups have raised more than $1.8bn in ICOs this year1, a value that has already surpassed early stage venture capital funding for internet companies.2 But such rapid progress has already seen ICOs court controversy in jurisdictions around the world. For example, China and South Korea have recently banned them, with China claiming that they have “seriously disrupted the economic and financial order”3. Elsewhere, media headlines have denounced them as scams or havens for fraudsters. With regulators increasingly warning both issuers and investors of an imminent regulatory clampdown4, it is time for prospective ICO issuers to ensure that their offerings comply with the most stringent requirements of national and international Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. Reasons to comply A key benefit of ICOs for many of the individuals that choose to invest in them is the full transaction anonymity they offer. Nevertheless, governments have a legitimate reason to want the process to be transparent in order to thwart corruption and money

laundering. Existing AML systems were originally tailored to address existing centralised financial services systems and, by default, the guidelines cannot account for a finance system based on intrinsic anonymity. In spite of this tension between the desires of ICO participants and the needs of governments, there are several compelling reasons for companies to bring their ICOs up to code: • Establish credibility with banks – Strong KYC during the token generating event will make it easier to work with banks and follow AML regulations. Voluntary compliance in a token sale gives a project a stamp of legitimacy, and many would-be regulators appear to be open to token sales as long as KYC laws are obeyed. • Get ahead of the compliance curve – Many regulatory bodies in large markets, including the US and the UK, are leaning towards classifying ICOs as securities. By being more proactive and complying with local AML and KYC guidelines, ICOs can ensure that they can continue operating in these markets. • Long-term legitimacy – Any business that wants to succeed in the long run needs to be seen as legitimate, and this means demonstrating that its initial crypto-asset and governance contracts are designed and protected. Good governance, including comprehensive oversight, yields predictability, security, and effectiveness, and creates value for all token holders. • Attract big investment – As

https://www.ft.com/content/68c795ca-a680-11e7-ab55-27219df83c97 https://www.cnbc.com/2017/08/09/initial-coin-offerings-surpass-early-stage-venture-capital-funding.html https://techcrunch.com/2017/09/04/chinas-central-bank-has-banned-icos/ http://www.cityam.com/275615/latest-warning-initial-coin-offerings-icos-comes-european

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•

Nick Ayton pointed out in a recent Cointelegraph post, “Institutional money is itching to get involved in crypto, in blockchain, in this emerging market that offers returns traditional opportunities don’t offer. But they need to see certain things done properly so that they are allowed to invest: VCs, Investment Banks, Hedge Funds will invest in the right ICO…as they do IPOs5.” And a big part of doing things properly is adhering to AML and KYC compliance. Improved public perception – The lack of explicit regulations makes ICOs a potential haven for fraudsters and others who are not registering their

•

offering or otherwise providing necessary safeguards for the public. Transparency is something that most investors appreciate and, the more transparent a listing company is about its plans, the better the public can weigh the value and legitimacy of the offering. Expanded reach – Voluntary legal compliance can help new ICOs reach a larger audience, by enabling them to participate in a larger number of jurisdictions than they would otherwise be able to. For example, such compliant ICOs can be offered to a subset of ‘accredited investors’ in the US, UK and Canada. Issuing ICOs in countries with a less

•

https://cointelegraph.com/news/icos-cant-skirt-rules-forever-must-become-compliant-to-attract-big-money

International Finance Jan - Mar 2018

stringent regulatory framework, on the other hand, may give you access to a more limited pool of potential investors. Post funding tracking – By incorporating AML and KYC processes into a token sale, it’s far easier to identify your investors and for investors to disclose their accredited status — providing an added layer of transparency that any would-be investor appreciates. Avoid regulatory fines – The regulatory guidance on ICOs in many countries is unclear, while in others, it’s absolutely unequivocal. Erring on the side of caution and choosing to comply with the existing AML and KYC regulations in a

Technology

additional layer of security. Building trust The ICO phenomenon is still in its earliest stages, but has already demonstrated signs of its incredible potential. For it to fulfil this promise though, issuing organisations need to take steps now to establish the credibility and legitimacy of ICOs through thorough due diligence and compliance with AML regulations. This might seem like a hassle now, when it is not compulsory, but voluntary compliance now will improve the reputation of the issuing organisation, and ICOs in general, with regulators and investors, helping to ensure that such offerings continue to yield profitable results into the future. IFM editor@ifinancemag.com

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Gordon Harrison

jurisdiction can help companies minimise the risk of a fine. Bringing things up to code It is clear that compliance with the relevant local and global regulations is crucial for ICO issuers. But how can such organisations make sure that their listings are up to scratch? The first and most important step towards achieving this compliance goal is for ICO issuers to ensure that they fully and accurately evaluate the identity of the people buying their tokens. Forward-thinking issuing organisations are working towards this goal by taking advantage of advanced technology and online verification solutions, and incorporating them into the token distribution process, to increase transparency, meet eventual compliance mandates, and open up

new channels of investment. These solutions are capable of verifying an investor’s identity when they make a transaction, in order to understand their profile, business and account activity. They can also identify any adverse information relating to a potential investor and evaluate the risk before the transaction takes place – helping to meet the requirements of KYC and AML regulations. Such verification usually means incorporating protocols into the ICO transaction process to validate an ID document, such as a passport or driver’s licence, followed by biometric facial recognition and liveness detection to verify that the person in question is present at the transaction. Supporting documentation, such as the investor’s bank statement, can also be captured in order to provide an

Gordon Harrison is an ICO Specialist & Business Development Manager, EMEA, Jumio

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Donâ&#x20AC;&#x2122;t

leave it to

robots

Users of industrial robots are unprepared for the risk of a hacking attack Ross Thomson

International Finance Jan - Mar 2018

technology

sers of industrial robots from manufacturing to healthcare are unprepared for the real risk of a hacking attack. With the worldwide number of robots in smart factories now topping a million, a lack of awareness is the reason most operators haven’t tackled the threat. Many firms believe hackers only want personal or financial data, but there is a credible risk to industrial robots. The risk is growing as robots, like other devices, are increasingly connected to wider networks and the internet. That gives hackers more ways in, and the consequences are potentially disastrous. In one example, attackers locked up a robotic assembly plant in Mexico and demanded a ransom from the operators. Human factory operatives face a safety risk if a robot were to be hacked. Lack of awareness and preparedness for a cyber attack extends to robot makers. In one experiment, researchers hacked a robotic arm and forced it to misperform, compelling its manufacturer to plug the security hole. Nightmare scenarios The threat might come from disgruntled employees, criminals, recreational hackers or nation states. One kind of attack would inject faults or defects in the production process, or lock it down completely as in the Mexican incident, leading to loss of production and revenue. If defective

products make it to market, they can cause reputational damage, a potential advantage that could motivate an attack by unscrupulous competitors. By manipulating safety protocols, hackers could cause the robot to injure human operators, or to damage itself or the factory environment. Alternatively, attackers might attempt to steal sensitive data from the machines themselves or the wider company network through remote access. How easy is it to hack a robot? Ease of access to the software varies, making an inside job more likely in some scenarios. Firmware may be freely available online or retrievable from used robot CPUs, and some manufacturers allow programmers to access code in a simulation environment, creating a potential practice ground for would-be robot hackers. Hackers have other ways to infiltrate, other than via the internet. They may attack from within the factory, for example connecting to the robot directly through a USB port, or physically accessing its computer controller directly or via remote service. Once they have penetrated the system, they can potentially alter the controller’s parameters, tamper with calibration programmes or production logic and alter the robot’s perceived state, for example to show it is idle when it is not, or its actual state causing loss of control. How big a risk? The scale of the threat

could be enormous. It’s estimated there will be 1.3 million robots in factories worldwide by 2018 and that 12 per cent of jobs will have been taken over by automated systems within a decade and a half. Robots are operating across almost all industrial sectors from car manufacturing to aviation and food processing. The UK’s National Cyber Security Centre has highlighted hacking of robotic, unmanned and autonomous systems as a subject for attention, both by itself and by the intelligence organisation GCHQ. A survey of robotic engineers by Italian academics found threequarters had never properly checked cybersecurity in their infrastructure, a third of robots were internet accessible and half of respondents didn’t see a realistic cyber security threat. To make matters worse, industrial robots often have weak authentication protocols and outdated software running on vulnerable operating systems Operators need to take the necessary precautions. It is important for operators of industrial robots to conduct a professional review of cybersecurity risks, have an incident response plan in place in case of a security breach and ensure that software is regularly updated, especially with security patches. The security review should look at what data robots hold and how they are potentially

connected to sensitive data elsewhere on the network. Considering the risk to production, people and facilities, it must be taken seriously from board level to operational level. An internet-connected robot should be treated with the same security precautions as any computer on the network, including setting long, complex passwords rather than relying on manufacturers’ default. There is a temptation to neglect updates because they may cause production downtime, but it needs to be given a higher priority. Operators need to make security a key factor when sourcing new industrial robots, selecting a manufacturer that shows commitment to the issue and provides frequent software updates with security patches. Limiting who has access to robots and segmenting machines from networks where possible can also reduce risk. Ultimately, one of the most effective precautions is also one of the most prosaic, and may comfort those who fear their jobs will be stolen by robots: It’s hard to imagine a time when we dare leave robots to get on with it. So until and unless that day comes, we need humans to keep watch on robots at work. IFM editor@ifinancemag.com

Ross Thomson is Principal Consultant at Amethyst Risk Management

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A seamless experience should be the target How financial organisations can enhance onboarding and consumer confidence Chris Boaz

International Finance Jan - Mar 2018

technology

day-to-day lives, and ensuring that customers have the fastest, most efficient and secure experience is important to financial institutions. Digital banking has rapidly disrupted the sector, and now as many as 63% of customers do their banking online. Here are three ways financial organisations can enhance onboarding (and customer confidence) in today’s digital world: 1. Go mobile Almost half of UK millennials handle their bank transactions digitally, a figure which is set to rise in the coming years. Customers have more choices than ever before, and it’s crucial that financial institutions stay ahead of their competitions. To stay at the forefront of the industry, banks need to build new strategies for onboarding, analysing each step of the process to determine levels of customer abandonment. Offerings need to be optimised to fit into the mobile, omnichannel world of customers. When financial institutions begin to improve existing ways of collecting digital data, it will result in more deposit accounts opened, more credit cards issues, and ultimately more satisfied customers.

raditional banking has all been upended by digital models as customers have shifted the way they manage their financial information. This year, the majority of the UK population will be digital banking users and almost 50% will access their bank, credit card, or brokerage accounts at least once a month via mobile device. Technology has changed customer expectations to adapt to their busy

2. Prioritise security The rapid digitisation of consumers’ financial lives exposes them to more danger. With cyber crime costing businesses over £1 billion in the past year alone, it’s imperative large banks, federal agencies, and big retailers evaluate all the modern day risks to ensure the utmost customer confidence and satisfaction. One of the ways organisations can prevent fraudulent activities is to implement tools that streamline the onboarding process, such as a managed address verification service that ensures all data is kept up to date. Address verification works via an application processing interface (API), which can be customised to suit internal systems use or on customer facing websites.

3. Cater to your customers Major banks are starting to realise the importance of prioritising the online user experience, and one of the ways they can do this is through address verification technology. The ability to verify customer addresses on the spot streamlines the process, saving time and greatly reducing the margin for error. The overall performance of online banking systems is key, and potential issues like load speed and latency need to be taken into account and managed. Ensuring that these backend issues are able to deliver is critical to driving customer engagement. As financial organisations increase their numbers of mobile users, they should seek out new approaches to enhancing their infrastructure for customers to transact regardless of the device used. Banks should make every effort to review their customer touchpoints and see where they can add value, whether it’s new account registration, change of address or fraud detection or to check for opportunities to confirm user details. Data capture is equally important, and if companies want to maintain effective data capture strategy they mustn’t cut corners. It’s vital to have the right customer information first hand to avoid conflicts further down the line. Customer centricity is no longer a buzzword. Today’s consumer is informed, has a voice, and knows what they want. As such, being able to deliver a seamless experience, regardless of the device should be every business’s top priority. IFM editor@ifinancemag.com

Chris Boaz is Head of Marketing at PCA Predict

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CALENDAR INTERVIEW

02 May 2018 Houstan Offshore Finance Forum (Finance)

Calendar

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Vienna, Austria

08-09 May 2018 IFINTEC Finance Technologies Conference and Exhibition (Fintech)

Sydney, Australia

MARK YOUR

Home Exchange Vienna (Trade Show)

02 May 2018

FST Banking Summit (Banking)

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10-11 May 2018

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Engine Leasing Trading and Finance Europe Conference (ELTFE-2014) (Trade)

PayExpo Americas (Trade) Mexico

London, UK

02-04 May 2018

Financial Information Management (FIMA) (Finance)

112

05 May 2018

10-12 May 2018 International Conference on Multidimensional Finance Insurance and Investment (ICMFII) (Finance)

Boston, USA

Chania, Greece

20 February -21 February 2018 Customer Experience Exchange BFSI UK (Banking) London, UK

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02-04 May 2018

13-15 March 2018 InterGrowth (Conference)

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International Finance Jan - Mar 2018

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OUT OF OFFICE

â&#x20AC;&#x2DC;Investing is my hobby and my professionâ&#x20AC;&#x2122; Apart from that, Nilesh Shah, MD & CEO of Envision Capital, is a big fan of Bollywood movies

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How do you successfully juggle your life between your hectic work schedule and personal life? Have you missed any important family event? I have tried to spend as much time as possible for personal and family life. Obviously, I wish I had more time for myself and the family. I am fortunate not to skip any important family event so far. What is your favourite sport? Cricket, though I have not been able to keep up with the sport for many years.

Given an option to pursue one of your hobbies as a profession, what will you choose? Investing is my hobby and my profession. Outside of investing, I am interested in Bollywood music and movies. What is your concept of ideal leisure time, especially after office and on weekends? I look forward to the weekend, especially for new Bollywood movies. Do you have a passion for the latest gadgets? Which was the last gadget you bought? Is the purchase

related to work or for personal use? I do have a liking for gadgets, especially if they have a lot of functional value. My latest purchase was an iPhone 5S, which is handy for both work and personal use. What is the last book you read? The Unusual Billionaires by Saurabh Mukherjea. How often do you holiday with your family and friends? By far, which has been your best holiday destination? Almost once a year. Australia and Switzerland have been the best holiday destinations. Cooking or enjoying a good meal? Which one defines you more? Enjoying a good meal. What is your favourite cuisine? Which cuisines have you tried so far? I have tried Indian, South Indian, Italian, Mexican, Oriental. Italian is my favourite cuisine. Is there any social cause you are passionate about? How much involved are you in the same? I strongly believe in education for all. I am involved in this cause in a very small way, but intend to increase my involvement significantly.

As told to Madhurima Roy International Finance Jan - Mar 2018

Jan - Mar 2018 International Finance For all magazine stories, visit www.internationalfinance.com/magazine/all-ifm-issues/