Treasury management plays an important role in a corporation’s globalisation efforts especially in the areas of cash management, banking, foreign exchange risk, and investments. Treasury must address challenges with managing liquidity distributed across markets, currencies, and businesses, especially the need to keep up with regional liquidity nuances and regulatory issues.
As an outgrowth of globalisation, four key external forces impact opportunities and challenges for corporate growth and expansion: economic uncertainty, geopolitical climate, regulatory environment, and technology evolution.
Eight years on from the 2008–2009 financial crises, global economic growth remains sluggish, hovering between 3.1% and 3.4% since 2012. There are numerous examples of geopolitical events exacerbating volatility, uncertainty, and risks arising from the increasing interconnectedness of regions caused by globalization. New regulations impact treasury organizations in many ways, including in-house banking, intercompany transactions, and transfer pricing documentation.
Corporate treasury organizations continue to lean on technology to facilitate change and mitigate complexity arising from global expansion. Cloud-based treasury management systems (TMS) provide an opportunity to implement specific modules on a subscription pricing basis. Governmental agencies, banks, and fintechs are collaborating to evolve complex corporate treasury services.
As discussed in the new Celent report “Globalisation: External Forces Driving Corporate Growth and Expansion," although firms are in different stages of their globalisation journeys, they can benefit from working with their banking partners to adopt strategies and tactics that address the external factors affecting corporate growth and expansion. Universal banks understand geographic differences and nuances, and are in a unique position to advise firms seeking to expand their businesses globally. This report is the sixth in an ongoing series of reports commissioned by HSBC and written by Celent as part of the HSBC Corporate Insights program.
No one downloads a banking app from their store of choice for fun, nor do they open it up to amuse themselves. Instead, bank apps are used to accomplish specific tasks – check a balance, pay a bill, send money to a friend. Despite the undeniable utility of these apps, institutions struggle to persuade their customers to use them; adoption rates, depending on the specific measure, hover around 50% and have been stuck for a while at that plateau. Furthermore, while it’s undeniable that many customers want a better customer experience, and at least some of those customers would like more and better features, digital executives struggle to find the ROI of investment in their apps. Of course, there’s the argument that it’s analogous to malls that put up Christmas and other holiday decorations – consumers just expect it, and there’s not an explicit ROI – but that’s the subject of another post.
What if consumers could perform their basic banking tasks without ever having to open up their banking app? They could say, “Siri, what’s my bank balance?” or “Alexa, pay the water bill out of my main checking account.” While we’re not there yet, consumer desire for convenience (aka “seamlessness” or the “frictionless customer experience”) knows no bounds. My experimentation with Siri and Alexa, together with my preliminary research into Artificial Intelligence in banking, have led me to hypothesize that this scenario is a lot closer than many bankers might imagine. In the obligatory Uber example, the payment is invisible; what happens when the consumer makes this happen in all other sorts of interactions?
How are you prepared to offer your customers this new level of service? Do you have APIs that will let this happen? And is there a strategy to go beyond simply fulfilling a request and offering more insight, advice, or perspective than simply what being asked for? Like European banks facing the challenge of PSD2, all retail institutions can look at this as a moment where they’ll be relegated to the background or one where they can revamp their service models to build better, stronger, and deeper customer relationships.
This is a copy from my guest post for Finnovista that I wanted to share with you here as well.
A few years ago when we started collaborating in creating the Latin American Fintech community there were no Fintech associations, no Fintech conferences and for sure there was no mapping of Fintech start-ups at all. It has been quite a journey for all of us involved. Kuddos to the Finnovista team for being a key element and catalyser for these achievements!
What exciting moment to be in financial services! Many things going on. Banks are being unbundled; and its happening everywhere. Want to take a look? Check what’s going on in the US, Europe and in more near places across Latin America like Mexico, Brazil, Colombia, Argentina and Chile.
It’s making no distinctions, affecting personal and business banking equally. Consequently, the nature of competition is changing; and pressure is not expected to come from other financial institutions. In a recent Celent survey, to SME banking representatives from Latin American banks, most believe that fundamental changes that are expected to occur in the banking industry won’t come from other financial institutions; instead they are looking mainly to new entrants and adjacent industries.
In last year’s survey to retail banks in Latin America, Stanford University found that 47% of the banks see Fintechs as a threat. The same survey indicates that only 28% of the banks meet the needs of their digital customers. Not a position where you want to be.
Customer expectations, pressure on revenue and cost, and increased regulation don’t make the life easier for banks either. Fintech start-ups may advantage banks on responding to customer expectations and being leaner has Fintechs better positioned to pressure on costs; but they have to play under the same regulation and at some point earn revenues in excess of cost (a.k.a. be profitable).
FCA, the U.K. financial regulator, has opened its sandbox for applications from financial firms and tech companies that support financial services. Successful applicants can test new ideas for three to six months with real consumers under loosened regulations. This is something we haven’t see yet in Latin America, though regulators are increasingly open to the benefits of Fintech and innovation, particularly if it is related to financial inclusion: we have seen the support of regulators to mobile wallets across the region in the last couple of years. Mexico appointed this year an officer for Fintech development in what I see as the leading case in the region to facilitate the adoption of services provided by Fintechs under the umbrella – and supervision – of the regulator. Most lately, the Argentinean regulator has introduced changes enabling digital onboarding, and in payments facilitating competition and adoption; though no sandbox yet, but maybe a digital/branchless bank in the way? Will it be a disrupting incumbent or a new player? By themselves or in cooperation with Fintechs?
Indeed, there has been a lot of debate regarding the nature of the (best) relationship between banks and Fintechs; be it competition, cooperation or coopetition, banks need to play a different game. The ecosystem has changed incorporating a myriad of players and increased complexity. Banks must reconstruct their business models around three areas, recognizing that they are part of a broader and new financial ecosystem:
- Channels: How the bank serves customers
- Architecture: How the bank organizes to deliver value
- Innovation: How the bank delivers new ideas, products and services around both channels and architecture
Banks can innovate on their own, or partner with Fintechs or other 3rd parties; at the end of the day banks need to select and execute on the best innovation models. There is no single answer that fits all; each institution will have to discover the best combination of innovation models aligned with risk appetite, organizational culture and the target customers you want to reach.
A few weeks ago I attended Finovate Fall 2016 with a few different colleagues of mine in New York. For those who’ve never been, Finovate hosts three main events (New York, San Francisco, and London) where more than 70 fintech companies are able to present new concepts, services, or products in a rapid 7-minute format. Traditionally, the San Francisco event has catered to more of the pure start-ups, while the New York event gives larger, more established vendors the opportunity to show off their newest ideas, although typically there’s a bit of a mix between each.
As a temperature gauge for the industry, I don't think there’s a better event. The ideas generally reflect where the industry is at in its thinking, and what the major trends are for fintech. For example, 2-3 years ago the hot topic was PFM, big data, and mobile wallets. Last year, mobile onboarding, customer acquisition schemes, and AI were the most prevalent. Parsing through the hype and the reality is typically one of the more fun aspects of attending. This year I noticed a few things that caught my attention:
- Chatbots, Natural Language Processing (NLP), and general communication solutions were common: Companies like TokBox, Personetics, Kore, and Clinc were some of the more compelling examples here. These solutions were prominent in 2015, but the biggest change was the maturity of their capabilities. Last year, what stood out to most attendees were the many demos that fell flat. A handful of presentations completely bombed on-stage, and even those that made it through the process were often shaky and the inputs looked too rigid. These technologies have advanced quite a bit in the last year, and the proposition for banks is becoming much more attractive.
- PFM was hidden behind data analytics: PFM hasn't been a discussion topic in the industry for quite some time. The initial round of PFM deployments were troubled by poor execution and unmet expectations by financial institutions that piloted them. Many financial institutions we’ve spoken to become immediately sceptical of a vendor solution that even uses the term. Celent has been talking for some time about PFM merging with online banking and essentially becoming the landing page. What was traditional PFM (spending breakdowns, budgeting, savings goals, etc.) is now just digital banking. New methods of financial management demoed at Finovate, however, show PFM under disguise as platforms that leverage data analytics. MapD was one that stood out. Clean data has always been the holy grail for PFM, and it’s always been one of the biggest issues. More solutions focused on getting the data analytics right, creating financial value for the consumer, and cleverly disguising what should have been PFM from the beginning: insights unpinned by advanced analytics.
- Not many payments products or solutions leveraging blockchain: Surprising to me were the lack of payments startups as well as any startup leveraging blockchain. My thinking is that many of the solutions around blockchain are still in their early days, and probably not ready for prime time. Also, while I know of a number of startups leveraging the technology, they are more bleeding edge, and may have been attracted to the spring Finovate, which focuses much more on early-stage fintech companies. The lack of payments schemes was also a surprise, but it could be that Apple Pay has taken some of the wind out of the sails of fintech companies trying to solve very similar issues. Mobile wallets and payment products typically require a lot of industry leverage to make work. You have to satisfy the merchants, the banks, and the consumers, and most have failed to reach sufficient scale. Many in the industry said it would have had to be a larger more established firm, and indeed the launch of Apple Pay confirmed that prediction.
Finovate continues to offer great insight into where the industry is at and where it’s heading. We’ll continue to attend these events and provide some more analysis. Feel free to comment on your perceptions, if any, from the event.
At Celent we’ve long said that banks must become better at partnering. And Fintechs have come around to the realization that it’s going to be the rare beast that can compete head-on with incumbent financial institutions – most will fare better by figuring a way to cooperate with them instead.
Eastern Bank, Celent’s 2016 Model Bank of the Year, took this idea one step farther by building Eastern Labs within the bank – an in-house Fintech. While most institutions won’t be able to replicate this (it’s really hard!), there are nevertheless some lessons for banks as they consider best how to engage with smaller, nimbler firms. The diagram below shows the complementary strengths and weaknesses that banks and fintechs bring to a joint endeavor.
When they get together, some weaknesses of fintechs are mitigated (e.g., they now have access to data and a brand), while many of the disadvantages of a bank persist (e.g., slowness and risk aversion). Additionally, new complications arise: goals diverge, information may not be completely shared, the cultures are wildly different, and handoffs can be agonizingly slow.
So what are the lessons when a financial institution engages with a fintech? We’d suggest concentrating on four key challenges.
- Focus on individual goals to ensure that they’re compatible, even though they’ll be different
- Be as transparent as possible and build that transparency into processes from the beginning
- Recognize cultural differences and address them at the outset; be realistic about the challenges
- Set expectations about achievable timelines
Although other complications will undoubtedly arise, partnering is a muscle that banks haven’t exercised much. With practice and training, that muscle will get stronger, and with enough dedication, it will play a vital role in propelling the bank to the next level.
Banks have worked hard to manage the different risks across their institutions. It has been and will remain costly, time consuming and a top priority. Celent profiles two award-winning banks who have modelled excellence in their use of risk management technologies across their banks.
- Degree of innovation
- Degree of difficulty
- Measurable, quantitative business results achieved
ALFA-BANK: SETS THE STANDARDS FOR BASEL COMPLIANCE IN RUSSIA
Alfa-Bank built a centralized and robust credit risk platform to implement Basel II and III standards, simultaneously, under very tight local regulatory deadlines. The bank decided to centralize all corporate credit-risk information onto a single platform that connected to front office systems and processes. Using Misys FusionRisk, Alfa-Bank was able to implement a central default system with a risk rating and risk-weighted asset calculations engine. The initiative is seen as one of the most important initiatives in the bank’s history. The successful completion of the project has placed Alfa-Bank at the forefront for setting standards and best practice methodologies for capital management regulations for the Russian banking industry and Central Bank.
USAA: SECURITY SELFIE, NATIVE FINGERPRINT, AND VOICE SIGNATURE
The game-changer for USAA is to deliver flawless, contextual customer application services that are secured through less intrusive authentication options. The use of biometrics (fingerprint, facial and vocal) to access its mobile banking application positions USAA to be able to compete with Fintechs across the digital banking ecosystem and offer exceptional service to its military and family members.
USAA worked with Daon Inc. to provide biometric solutions paired with its “Quick Logon” dynamic security token technology, which is embedded in the USAA Mobile App for trusted mobile devices. Biometric and token validation focus on who the user is and who the verifiers are and it addresses increasing concerns around the high level of compromise of static user names, passwords, and predictable security questions from sophisticated phishing attacks, external data breaches, and off-the-shelf credential-stealing malware.
For more information on these initiatives, please see the case study abstract on our website.
I'm a big fan of the old movie classics. The TMC channel was a loyal companion during my graduate school days at the University of Illinois, offering a comforting black and white backdrop to frequent all-day programming sessions, and today I frequently call on TMC to get me through my daily hour-long treadmill sessions.
This weekend TMC offered up Jimmy Stewart as railroad detective Grant McLaine in 1957's Night Passage. A classic Western, McLaine was fired in disgrace over a railroad robbery carried out by his estranged brother, only to be offered a second chance to prove his loyalty to the railroad by being the courier for a large cash payroll being sent to the workers at the rail head.
Grant's companion during the critical train ride to the rail head was young Joey. Riding with Grant on a flatbed car as the train twisted and turned through the Rocky Mountains, Joey asked Grant how the railroad builders knew the best route through the harsh terrain. This question gives Jimmy Stewart the rare opportunity to showcase his singing and accordion-playing skills as he responds by singing a song called "Follow The River". The song ends with the chorus:
"Follow the river,
Wherever you may be,
Follow the river back to me."
Just as the railroad builders used the river to guide the design and layout of the early railroads, bankers have used technology to guide how banking services are designed and built. In an interesting bit of historical irony, the first use of machine-based bank processing was being rolled out by the Bank of America just as Night Passage was hitting the movie theaters.
The system was called ERMA (Electronic Recording Method of Accounting), a machine-driven approach to electronically reading checks and processing the bank's accounts. ERMA was co-developed by Bank of America and the Stanford Research Institute, launched in 1958, and was able to process 50,000 accounts per day. While ERMA's initial capacity was small by today's standards, in those days, it represented an outlandish number in comparison with 10,000 accounts per month that BOA estimated it could process using existing paper-based manual methods.
ERMA ushered in the era of Big Iron in banking (a term also used to describe railroad locomotives), as improvements in the speed and capacity of what we today call the mainframe computer facilitated the rapid growth of the large banks during the 1960s and 70s. Mainframe computers running programs powered by Rear Admiral Grace Hopper's newly developed Common Business Oriented Language (COBOL) became the river that banks followed when planning and building new banking systems like Electronic Payments (EFT), Electronic Tellers (ATM), and others to meet emerging customer demands.
Mainframe computers are interesting from operational processing perspective in that data (specifically customer accounts and daily transaction data) takes a while to load, but once loaded accounts can be processed at a lightning-fast rate. While ERMA could process only 50,000 accounts in a day, modern mainframes can process millions of accounts in a matter of a few hours. COBOL itself as a programming language was scorned nearly from Day One by the computer science cognoscenti as a crude and unstructured way to build an enterprise system.
In 1975, a respected Dutch computer scientist named Edsger Dijkstra made the famous comment that: "With respect to COBOL you can really do only one of two things: fight the disease or pretend that it does not exist, " before concluding, "the use of COBOL cripples the mind; its teaching should therefore be regarded as a criminal offense." Despite the withering criticism from academia, mainframe vendors and banks moved forward on the basis that the systems simply worked. Throughput is the key to understanding how high-volume banking systems and today's railroad system works.
A case in point is the Canadian National railroad's purchase in 2007 of the Elgin, Joliet & Eastern Line (EJE) to facilitate its rail connection of parts east and west through Chicago. While the distrance from Gary, Indiana to Waukegan, Illinois is only 70 miles by car, CN now connects these points using EJE's 198 miles of track. This makes no apparent sense until you consider that CN is now able to route cross-country trains around the busy hub of Chicago, where previously CN endured a variety of operational restrictions and traffic jams arising from the many at-grade crossings through the congested urban core. To CN, routing traffic around Chicago rather than through Chicago resulted in more throughput and fewer train delays, more than compensating for the additional mileage.
And so it has gone for the banking processing. The use of oft-criticized COBOL and the unique operating characteristics of mainframe computers was tolerated as there were no other alternatives for banks requiring reliable processing at very high scale. That is, until recently.
Just as the river in Night Passage twisted and turned through the Rockies, the path of technological progress has twisted in an unexpected way to many bankers, as cloud services are now challenging the hegemony of mainframe-based banking systems. While a top of the line mainframe computer can be purchased with more than a 100 lightning fast processors, a bank can "rent" thousands, even tens of thousands, processors for 10 minutes, 10 days, or 10 years. Using software that is tuned to manage the distributed processing of bank accounts across thousands of virtual machines, banks can now meet and exceed the enormous throughput of their mainframe computers at a fraction of the cost.
The king of mainframe computing, IBM, clearly understands and has responded to the changing role of the mainframe in banking. During the 50th Anniversary celebration of the mainframe in 2014, IBM rolled out its new vision of the mainframe as an uber-sized cloud server, allowing for the hosting of several thousand virtual machines at one time. Last summer, IBM upped the ante with the annoucement of IBM LinuxONE Emperor, a z13-based server allowing for up to 8,000 virtual machines to be hosted on a single machine.
While banks have experimented with cloud services to varying degrees, most of the innovation has taken place at the channel services level, with new online and (particularly) mobile banking applications getting a technology refresh through the unique benefits of cloud services. While each bank will need to build its own business case for the gradual porting of COBOL-based account processing systems to modern programming languges that are "cloud-ready", it is clear that cloud-based account processing will allow the level of agility in product development that is increasingly called for as channel and payment systems continue to evolve.
Cloud-backed innovation in back office systems has been slow to develop, with many banks citing security and the fear of regulatory issues as inhibitors to adoption. As the recent two-part Celent report Banking in the Cloud: Between Rogues and Regulators establishes, regulators in fact do not have any objections to banks hosting their banking services in the cloud, provided that banks follow the same standard of care (including encryption, access controls, data masking, etc.) that they manage for in their own data center.
In time, I expect that the banking railroad will continue to follow the river of innovation that is now leading us directly into the age of cloud services. The proven yet inflexible COBOL-based systems that have served the industry reliably for 50 years will be replaced with agile and cloud ready account processing platforms that will over time both reduce costs and the drive service quality improvements that banks will need to compete and survive in the increasingly competitive world of financial services.
Digital is the new reality in Latin America. In a recent Celent survey 100% of the participants recognized that a scenario where all financial products get digitized needs to be addressed sometime in the next 7 years and 59% of them believe it needs to be addressed immediately. There is also a general consensus that most banks are entering into Digital late, despite some are already moving in that direction. Threat of fintechs is also a reality. Over 80 fintechs in Brazil and 60 in Colombia are a good sense that the industry is already being challenged beyond incumbents.
In other geographies Banks have responded to this threat by becoming extremely digital and also neo-banks have been launched to attract those customers seeking for a more friendly and digital relationship with its financial institution. Atom Bank in the UK, Fidor Bank in Germany, and mBank in Poland are only a few to mention. In Latin America the major milestones in Digital development we had seen were Nubank (Brazil – Market Cap $500M) and Bankaool (Mexico – ~$142M in assets), until March of 2016 when Banco Original (~$1,67Bn in assets) launched in Brazil.
While Nubank is focused entirely in offering a credit card with a customer friendly personalized real-time view of expenses and modern contact channels (email, call or chat), Bankaool is mainly focused in a checking account with a debit card, SME loans and investment vehicles.
Banco Original is the 3rd step in this digital only bank strategy in the region, becoming the 1st universal digital only bank in Latin America. As part of its strategy to position the bank as different and innovative they launched this advertising campaign featuring Usain Bolt. As part of a strategic definition in 2013 the bank started a ~$152M investment over the period of 3 years to become a digital bank. They launched in March of this year . The bank has no branches and the interaction is 100% through digital channels and a call center. This move was central to its strategy of becoming a universal bank moving away of being solely focused in agribusiness.
While most of neo-banks and fintechs looking to change the customer experience in financial services have adopted in-house development to support their digital strategy, this is not the case of Banco Original which relied in a 3rd party Open API solution. Commercially available solutions that can support a digital only bank means that as an industry we are ready to take off. There is no reason now why other banks should not follow, and software vendors will do their part pushing their offering into banks of all sizes.
I believe that we are in a tipping point were banks in Latin America will need to re-think their investments and strategies towards digital: the threat is now real.
Two upcoming reports will be covering Digital and a couple of disruptive scenarios in the banking industry in Latin America, so expect to have more information soon if you are a Celent customer. If you would like to become a Celent customer please contact Fabio Sarrico (email@example.com).
- Constraints on capital and liquidity
- Cost of compliance
- Changing client expectations
- Competition from new entrants