2020 has been a year of challenging moments in wealth management. From a pandemic to a recession, and Brexit. For investors, these challenging moments are represented in asset price volatility, ultra-low interest rates and an uncertain financial market.
As we approach and sail past these various milestones, how are investors expected to fare over the next couple of years? Although markets seem to be coming back on track, both private banks and wealth managers globally still have big questions around what they can do to ensure performance in investment portfolios.
Christophe Lapaire, Head Advanced Tax Services, Swiss Stock Exchange
With that in mind, many private banks and wealth managers are starting to carry out the act of utilising tax optimisation. Helping them to stay prepared for any more upcoming uncertainty.
The impact of unexpected changes in our ecosystem on tax optimisation
Many private banks, investor clients or wealth managers may be aware of the benefits that it brings, however, not all have the capability to utilise it. Outdated technologies and manual processing within their infrastructure are not ideal for delivering tax optimisation services.
That said, due to regulatory changes that have cropped up around unexpected situations such as the pandemic and the following recession, some businesses have been pushed to update their technologies, now putting them in a better position to deal with current and potential uncertainties.
The private banks and wealth management firms that have been utilising tax optimisation view it as integral to the overall investment offered as it helps to reduce tax charges to a minimum by using the advantages of the law, without violating tax laws, whilst reclaiming all foreign withholding taxes.
Effective tax optimisation
Although tax optimisation benefits all, it is not necessary for every country as many provide capital gains exemptions. However, the tax performance of those countries that do not, will suffer, impacting any and all portfolio’s that are not optimising effectively.
Effective tax optimisation is essential if you want to manage and reinvest funds easily, whilst not being impacted by the worst of any tax leakage. Taxation requirements are not always uniform within countries and this lack of expertise can also lead to incurring tax that should have been avoided or mitigated.
Tax optimisation should be seen as integral and those who do not jump on-board sooner rather than later risk falling behind to the private banks and private managers that do.
There’s no ‘one size fits all’ answer
Nonetheless, tax optimisation is not always the answer for every private bank or wealth management firm. They all have different systems and infrastructures and there is no ‘one size fits all’. Without those up to date systems in place, some of these processes would have to be done manually, and this can end up being incredibly labour intensive.
Wealth management providers that offer tax optimisation services must make sure that they have the appropriate setup to report their clients’ tax information. Fortunately, it’s not the end of the road for those who don’t have the right software for maximum efficiency as they still have the option of using tax reclaim services – such as the Swiss Stock Exchange’s advanced tax service. This will help them to be sustainable and create savings without increasing labour levels, generally at an affordable cost that brings value to their clients.
Within our current climate, investors are continuously seeking out innovative solutions for tax optimisation and the private banks and wealth management firms that have the capability to offer it will be the ones that investors go to. Unfortunately for the providers without these services, the risk of falling behind and losing clients to companies that do provide them is great.
Increasing clients per advisor and better advisory to each client – striking two birds with one stone
Industry at a leapfrog moment.
In 2019, the average wealth-per-adult reached a new record high of USD 70,850. About 1% of global adults are millionaires; they collectively hold 44% of global wealth. The number of affluent individuals (with assets of $250,000 to $1 million) is also increasing steadily; about 4 million new individuals are joining this group each year.
Wind in the sails.
An increase in the number of wealthy individuals is driving growth in the total investible assets around the world. Amidst these tailwinds, the wealth advisory departments continue to be a lucrative business for financial institutions. In 2018, the revenues were a record high of $694,000 per advisor in the USA. The fact that the biggest wealth management departments (by assets managed) happen to be closely related (if not subsidiaries & internal departments) to financial institutions with a long operational history. It seems like the incumbent financial institutions continue to be the trusted financial advisors and wealth managers for the global wealthy. However, their trust and continued patronage are likely to be put to test in the near future.
Abhra Roy, Product Head – Wealth Management, Infosys Finacle
Rise of the new-age customers & competition.
In addition to the growing numbers in the ultra-high net-worth individuals (UHNWI) group, the great wealth transfer – the anticipated passing-on of $30 trillion in wealth from the elders to their younger heirs over the next few years, is poised to be a watershed moment for financial planners and wealth managers. The new-age investors tend to be generally tech-savvy, data driven, and well-informed about economic scenarios and opportunities. They are known to demand full-transparency, faster service, access to a full spectrum of products, and greater personalization of advisory and services.
While addressing the renewed customer expectation in the new decade, the incumbents must also compete with the new-age specialist investment firms. These FinTechs, with their digital-only propositions, are offering their platform and services (nearly) free of cost. While one may doubt their long-term profitability and viability, their ability to disrupt the established order of business cannot be ignored.
Wearing the strategic hat of versatility
It is obvious that each investor comes with a different set of needs and expectations. And, profitability-at-scale can be achieved only when the advisors and relationship managers can increase the number of clients and further grow the total asset under management (AUM). So, the question is ‘how to add new clients, whilst ensuring deeper engagement with each one of them at the same time.’
To address this conundrum, the forward-looking financial institutions are leveraging technology to create a digital platform capable of delivering omnichannel experiences for customers, data-driven insights for advisors, and automation of back-office operations. Such a platform will be vital to scaling the client-base, offer a broad set of products (across asset classes) and deliver on the promise of speed and convenience.
Improving customer experience (CX).
It is widely acknowledged that CX innovation helps in engaging and retaining customers. It is also a valuable differentiator between the financial institutions to earn customer loyalty. The CX reimagination usually includes a channel (often, a mobile app) for clients to monitor their portfolio of banking accounts, investment portfolios, and real-time valuations of their assets and liabilities.
Boosting advisor productivity.
Financial institutions must strive to empower their financial advisors with digital tools to understand their clients better, anticipate their needs, and offer quality-advice quickly. The platform must also unburden them of the repetitive and administrative tasks, so they can focus on advisory services. The digital dashboard (usually, an application accessible from a tablet or a laptop) must help advisors to manage and interact with their clients better. It must support common tasks such as risk-evaluation, client onboarding, portfolio monitoring, performance alerts, deviation notifications, portfolio rebalancing and reporting. The dashboard must also facilitate easy communication and collaboration between advisors and their clients, facilitate document management, schedule meetings, take notes and accelerate the process of approval management.
Streamlining front to back office operations.
Businesses today run at a fast pace. Financial institutions must embrace digitization and automation to step-up the overall efficiency of their wealth management offerings. The effective digitization of key back-office tasks like order management, transaction reconciliation, product cataloging, and commission calculation is key to providing a seamless CX for the clients.
Making the smart moves. While technology can unlock new possibilities and accelerate the business transformation, the vision and strategy to drive it will differentiate the industry-leaders from the laggards. Various institutions are pursuing innovative initiatives to defend their clientele and growing their revenues further.
A popular strategy is to expand to an emerging customer-segment. Speaking about this trend at a recently organized webinar, Mr. Anthony Jaganathan, Senior Vice President, Head of Operations, Wealth Management at Emirates NBD opined that, “the wealth management offerings traditionally catered to the UHNWI and HNWI segments. However, over the last few years, the mass-affluent individuals and households are also demanding access to asset-classes and services that were hitherto unpopular in this category”. This democratization of access to wealth management services seems to be a universal demand and it’ll serve the incumbent institutions well to explore this opportunity expeditiously.
Another growth-hack is to bundle wealth products with premium banking services so that customers get an integrated experience. Axis Bank, a leading private bank in India, has found emphatic success with this go-to-market approach. In the context of entry of new-age competition, Mr. Satheesh Krishnamurthy, Executive Vice President EVP & Head – Private Banking, Premium & Third Party Products, Axis Bank said, “we believe the entry of new players will expand the market for everyone and it’s good for everyone in the ecosystem. Also, each institution can carve their own niche by leveraging big-data analytics and upskilling advisors to engage better with their clients”.
In the face of the changing business landscape and emerging opportunities, it needs to be seen how soon and how well the incumbent financial institutions adapt to the new-normal or concede ground to the new-age and specialist players. Either way, exciting times lie ahead.
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An article by Abhra Roy, Product Head – Wealth Management, Infosys Finacle
By Jason Harrell, Executive Director, Technology Risk Management, Head of Business and Government Cybersecurity Partnerships at DTCC
Jason Harrell, Executive Director, Technology Risk Management, Head of Business and Government Cybersecurity Partnerships at DTCC
2020 has been filled with many significant events. Brexit, the upcoming US elections, and the ongoing COVID-19 pandemic have dominated headlines and have driven market behaviour. The financial sector closely monitors these current events with a focus on continually enhancing its ability to be resilient to the increased and ongoing cyber activity that often results from them.
Resilience, or the ability to prevent, adapt, respond to and recover from events that affect a firm’s operations, requires a comprehensive strategy. As a result, market participants, working alongside supervisory authorities, vendors and their peers, must consider how they can continue to bolster the preparedness and response of the collective global financial system in the face of disruptive events.
This on-going assessment has revealed three areas which can continue to be improved: workforce displacement, third party/supply chain risk, and incident reporting.
Workforce displacement
The coronavirus pandemic shifted the workforce from largely centralized office locations to countless home networks. This sudden shift has increased the pressures on millions of families to adjust to a new work-life approach. For financial institutions, this displacement created a greater reliance on its employees to protect their home networks from compromise while increasing vigilance around the current safeguards to protect the organization from this new threat vector. For individuals, the shift from office to home can potentially lower an employee’s focus and ability to identify phishing and business email compromise attacks. Cybercriminals have sought to capitalize on this area with numerous attempts to lure individuals to click on malicious links related to the pandemic. COVID-19 heat maps, information sites, donations, and other emails are constantly being used to entice individuals. Financial institutions must continue to be vigilant in providing their workforce with the tools and information needed to fully understand these attacks and protect themselves, their home networks and ultimately their organization from compromise.
Third-party/supply chain Firms are increasingly leveraging third-party providers to accelerate innovation and reduce costs by outsourcing operational services. While this approach has advantages, it is important that financial institutions understand the operational impacts of a third-party supply chain disruption during times of stress or volatility. This presents a strategic challenge, as it can be difficult for firms to fully understand the resilience capabilities of third-party vendors. These third parties may also use vendors and other service providers which increases the difficulty for financial institutions to understand the complexity of their supply chain. An expanded supply chain also increases the surface area for potential threat actors to disrupt a firm’s activities and overall financial market stability.
While industry discussion around third-party risk and resilience are ongoing, two clear themes are emerging. One, third-party risk is a growing area of interest among global supervisors looking to ensure their regulated entities have business models and operating structures in place that manage these potential risk exposures. Two, there is a shared responsibility between financial institutions, supervisory authorities, and critical service providers to affirm sector resilience from third-party service disruptions and address any cybersecurity gaps that may be created by expanding supply chains.
Incident reporting
Financial Institutions that provide multiple financial products or operate in several jurisdictions may be subject to examination by numerous supervisory authorities. These same authorities must be notified of material operational events that impact the delivery of financial services to the market. These notifications may differ around the amount of time given to report an incident, the information required in the notification, and how these reports are submitted (e.g., email, web form). These deviations make it challenging to comply with regulatory obligations while simultaneously managing the resources necessary to effectively respond to an incident. Therefore, any opportunity to better align incident reporting across regulatory authorities and reduce the resources required to report an incident could increase the resilience of the financial sector and should be considered. Harmonization around incident reporting may also provide greater insights into operational incidents across the financial services sector, which could be used by financial institutions to focus on potential weaknesses or changes in the threat landscape.
Since 2013, cybersecurity has consistently claimed the top spot on DTCC’s annual Risk Forecast since the survey launched. The survey that will inform the 2021 forecast is currently underway, and while the pandemic and geopolitical factors are likely to rank high on the list, it is expected that cybersecurity will remain a chief concern and a continued threat to resiliency. By working to better address areas such as workplace displacement, third party/supply chain risk, and incident reporting, institutions can help to ensure the resilience of an increasingly digitized and interconnected financial services industry, while cultivating trust that the markets will continue to operate smoothly.
Jason Harrell Executive Director, Technology Risk Management, Head of Business and Government Cybersecurity Partnerships DTCC
The Covid-19 pandemic, a sharp economic downturn, incoming regulations and emerging technologies all feature prominently on this year’s agenda – what does that mean for the treasury function? As treasurers look to safely navigate this formidable landscape, what do these new priorities mean for them in 2020 and beyond?
By Ole Matthiessen, Global Head of Cash Management, Deutsche Bank
These are uncertain times for treasurers. Just as many began 2020 believing that their strategies were locked in and ready to go, the
economic picture for the year changed dramatically. The Covid-19 pandemic spread globally at extraordinary speed, moving day-to-day work out of the office and into people’s homes. As treasury made this transition to a remote way of working, the focus of treasury was shifting in tandem – a reaction to the rapidly changing macro-economic environment.
So, as treasurers look to navigate these challenges, what are their concerns and priorities for the immediate future and longer-term? To answer this question and more, the Economist Intelligence Unit’s annual corporate treasury report, in collaboration with Deutsche Bank, surveyed 300 treasury professionals over April and May 2020. It found that this year’s treasury agenda is now driven by three core priorities: the economy, regulations and new technologies.
A changing economic landscape
Coronavirus is undoubtedly shaping a “new normal” for corporate finance – one that will require the treasury function to implement robust forms of risk management. This need is reflected in the results of the survey; 43% of participants cite pandemic risk as a key concern in the short term, and 27% believe it to be a medium-term concern. Global economic growth and inflation/deflation risk – both of which are impacted by Covid-19 – also ranked highly.
So how is treasury reacting to this sudden shock? At the start of the pandemic, long-term cash-flow forecasts were quickly discarded in favour of short-term forecasts, giving treasury departments a more accurate and ongoing picture of their cash and liquidity. Then, as uncertainty surrounding interest rates and inflationary trends become more acute, treasurers have increasingly looked to diversify their investment portfolios.
Incoming regulations
Amid the fog, ensuring regulatory readiness always factors highly in the treasury agenda. This year, the focus hones in on the replacement of the London Interbank Offered Rate (LIBOR) and other Interbank Offered Rates (IBORs) – with 38% of respondents citing these as their top regulatory focus. The clock is ticking on LIBOR’s era as a global benchmark for lending and borrowing and, by end-2021, firms in the US and UK are expected to have completed the transition to alternative risk-free rates (RFRs). But with a variety of potential replacements still in play, combined with complications to project work brought about by the crisis, treasurers lack clarity over what the future may hold.
Emerging technologies
In the wake of disruption, treasurers are relying on technology more than ever – accelerating the digital transformation of treasury. With lockdowns and social distancing in place, cloud-based applications, which give businesses access to their systems and data remotely, have played a key role in facilitating “business as usual”. As this digital transformation advances, treasuries are also prioritising the skill sets needed to realise the full benefits of this data and technology. This year, 30% of respondents are confident they have all the skills required to manage the widespread technological change – up from 22% in 2018.
Opportunities on the horizon
With fading prospects for any quick return to normality, treasurers must continue to expect choppy waters for some time. A range of complications, including the virus, struggling economies, incoming regulations and emerging technologies, must be factored in to any successful treasury strategy. But the industry is equal to the task. Treasuries have access to the essential skills and tools to help them protect company cash while also extending their insight and strategic counsel to support corporate growth. Treasury has proved to be incredibly resilient in 2020 and, with the right strategies and partners in place, it can weather the storm until better days return.
Gary Dolman, Co-Founder and former CFO of Monzo, in conversation with Capdesk
Ahead of a webinar hosted by equity management platform Capdesk on the lessons learned by ‘startup to scale-up CFOs’, the equity management platform sat down with Gary Dolman, one of the Co-Founders of Monzo, who served as Monzo’s CFO from its inception in 2015 until February 2019.
– How did you find going from a relative ‘lone wolf’ finance lead in Monzo to managing a bigger team? Did your previous corporate experience make it easier?
Being a CFO in a startup is never easy. Right at the beginning of my startup career I was told that every week would feel like the most important week in the life of the company. How true that proved to be. Without doubt my time at Monzo was the most challenging of my entire career. It was also the most enjoyable.
As a ‘lone wolf’ you often feel so far from your comfort zone that you need a telescope to see where you’ve come from. However, it’s incredibly energising to work with a massively talented team that has no fear of taking on new challenges to drive the business forward. Their support and encouragement was truly commendable.
At times my prior experience could hinder rather than help me at Monzo, as everyone was encouraged to think about how you would set things up if IT was not a limiting factor. This was a very different scenario to my prior life in the corporate world where IT resources were limited by the number of skilled people and maintenance of legacy systems.
That said, the problem-solving skills I acquired in the corporate world stood me in good stead, as did my ability to spot and resolve problems quickly. And as the team grew, my previously learnt managerial skills came to the fore.
– What are the major changes in culture between an early-stage startup to a scale-up growth business?
Gary Dolman, one of Monzo’s co-founders
In an early-stage startup, you can have ten people standing in a circle talking about their hopes and fears for the day ahead. You know everyone in the company by name and quite a bit of their history. People can rotate jobs and cover each others’ backs. People accept that all jobs need to be done and muck in.
At Monzo I folded up hundreds of letters with prepaid cards to send out to customers; I answered queries on the help desk. It was great fun and there was a real sense of teamwork. As the business scales and slowly becomes more departmentalised, that can’t continue. The challenge is to maintain the startup ethos of being willing to experiment – to try five different things to find the one that really works. As the customer base inevitably increases, experimentation is still possible, but it needs to be managed in a controlled way.
– What are the key challenges that a CFO faces during the startup and scale-up process?
A CFO needs to wear many hats. At the outset they might be a team of one or two that needs to be able to undertake many tasks, many of which they will be new to and, frankly, have little interest in. Running the payroll is a classic example of this. They may well utilise an outsourced accounting firm for core processes but certainly cannot abdicate responsibility. Like the rest of the organisation, finance needs to be lean and accept that ‘scrappy is happy’. Many finance professionals find this very challenging.
As the business expands the CFO must continually evaluate whether they have the people and the systems capability to keep in step with the business. Hiring good people takes time and effort and if they fall behind it can be hard to catch up. The CFO also needs to keep an eye on the technical debt that their department is building up and have a plan and timescale to rectify this. Wherever possible the CFO should look to use automation rather than people. However, this requires IT engineering time – for which there will be fierce competition.
I’d encourage all startup CFOs to find a mentor: someone who has been through it before, who can help them avoid the typical mistakes made in early-stage businesses.
– How can a company keep employees motivated and engaged as it transforms from a startup to a scale-up, eventually becoming a large enterprise?
Options, distributed as part of an employee share scheme, typically play a large part in motivating employees, especially when the company seeks to conserve cash and pay salaries below market value. As the business expands it will face upward wage pressure for a few reasons, including an org structure that requires hiring senior managers who have higher minimum cash requirements.
Strong communication between founders and management teams is necessary to make sure remuneration is allocated fairly between people. I’d recommend setting up an equity rewards scheme and having it regularly reviewed by finance and HR. The two departments need to be joined at the hip on this, because the fallout from a dysfunctional equity scheme can be huge.
One of the other challenges of moving beyond the startup phase is fitting staff to constantly evolving roles. There are some people who only feel comfortable in an early-stage startup and can feel displaced or resentful as company needs change. This is not a crime! It’s very helpful if this is discussed openly within the company. There’s no shame in saying “I’ve enjoyed this leg of the journey and I’d really like to repeat it elsewhere”.
Equally, if more senior people are brought in to deal with the demands of a bigger company, staff need to be reassured that this is not a reflection of their efforts or abilities but a natural part of the growth journey. When assessing employees, there are two questions: Is this person able to grow in pace with the company? Do they want to be part of a bigger (often by necessity more ‘formal’) business?
– What trends have you witnessed for startups over the last five years in terms of objectives and milestones, particularly with respect to balancing growth and profitability?
At the outset the objectives have remained the same: to gather together a strong team of co-founders, to identify a market problem and solution, and to obtain funding to deliver an MVP. Proof of product and market fit follows on from that and then it becomes all about de-risking the proposition by increasing your base of paying customers.
Four or five years ago the main objective at this point would have been growth in customer numbers. That shifted towards a focus on reaching positive customer economics whereby the marginal revenue from each new customer was in excess of the marginal cost. Scaling up the business would then mean that the fixed costs were covered in due course. More recently, there’s been an increased focus on the path to profitability as well as growth.
TODAY’S FUNDING ENVIRONMENT
– Do you believe Europe needs an angel investor revolution to become more like the US?
Based on my experience within the UK, I’d say the angel investor scene certainly needs improving. Some of this comes down to a need for stronger financial education at all age levels and the need to appreciate that angel investing has a part in anyone’s investment portfolio – no matter how small. Think of Crowdcube, where £10 can be the minimum stake.
I think attitudes towards failure in the UK need to change. If a business fails in the US, people view it as a learning experience for the entrepreneur. In the UK it is just seen as a failure. As a result, investors become paranoid about investing in a failed company – which speaks to the need for angel investors to take a portfolio view and also be mindful of the tax breaks that exist.
There are some very talented people who would be strong angel investors – both from a strategic and operational advising perspective – but are unwilling to enter the community without a warm introduction.
Finally, the regulation needs a major rethink. Currently we seem to operate in an environment in which a loss represents an opportunity to sue someone, despite the risk of loss being fully advertised. As an example, SIPP providers are totally against a person undertaking angel investing from their own pension assets for fear of subsequent legal reprisals. Given the long-term horizon of angel investing, pension assets should be a sensible source of angel investing – albeit as very much part of a person’s overall portfolio. Seemingly SIPP providers are unable to accept the statement that ‘I know what I am doing, I understand the risk of losing this money and want to proceed’. If this is the legal position, that puts us in a bad place.
– How do you think the funding environment has changed in the UK in recent years? Has it become easier to raise capital in general?
If we consider the years prior to COVID-19 I’d say that the position has improved, and that capital-raising has become more available and the channels to access it more diverse. I was fortunate enough to become a Venture Partner at Antler, a global early-stage venture capital firm that invests in the defining technology companies of tomorrow.
In the last two years, Antler has made 190 portfolio company investments across 30 industries and has opened offices in 14 cities across six continents. I was blown away by the quality of the people on the investment side and the entrepreneurs it backed. Antler is practically mining entrepreneurs out of the ground and turning them into the successful business leaders of the future.
– Do you think the government is doing enough to support the startup ecosystem?
Generally, I think the tax breaks and support for the startup ecosystem within the UK are strong. My personal gripe would be that being a startup bank has some unfavourable elements that need addressing, including:
SEIS and EIS are not available
EMI share options scheme is not available (the alternative CSOP scheme, in my view, is inferior)
VAT on costs can’t be reclaimed
Offsetting corporation tax losses is more difficult (a hangover from past sins of bankers in the 2008 financial crisis)
Bank levy (again, fallout from the 2008 financial crisis)
THE FUTURE OF FINTECH
– As the rest of the world catches up with the UK in terms of fintech innovation, do you think its crown is under threat?
I don’t think the UK has a divine right to wear a crown of fintech invincibility. That said, in the pre-coronavirus world if you wanted to hire world-class talent – which is what Monzo aims to do – London was where people wanted to work.
– Looking at Monzo as an outsider now, what do you think are its biggest challenges and opportunities?
Monzo is a fantastic company. It began life only five years ago yet has grown to a customer base of over four million people. One of the most admirable things about Monzo is its brand. It has a net promoter score of 75, putting it way above its competitors, and won nine awards in 2019 alone.
As with a number of businesses Monzo has suffered headwinds due to COVID-19 but it has a very strong management team with a plan to move forward. That plan will include the expansion of revenue-generating channels to move to profitability but also continuing growth. The market for current accounts that make money work for the consumer is huge and I see no reason why Monzo cannot make further headway both within the UK and overseas.
The ability of COVID-19 to dramatically change consumer buying behaviour continues to challenge the e-commerce world.
Lockdown restrictions, customer anxiety over physical spaces, and increased screen time across all demographics has created an e-commerce boom of unprecedented proportions. Online operations have been tested to the limits and even the most traditional businesses have found themselves forced to pivot and innovate to find new ways of engaging customers. For many retailers, e-commerce has gone from a secondary channel to becoming the primary connection to customers, which makes a strong, resilient online payment structure even more critical than ever to capture every possible transaction opportunity.
Amidst the chaos, many fledgling payment trends have accelerated and previously niche innovations have received a boost.
Consumers have been prompted to try out new or alternative mechanisms such as mobile wallets, payment services, person-to-person transactions and order-ahead apps as they adapt to the new, socially distanced ‘normal’. As much as we all want to see the back of this pandemic, it is unlikely we will see a full retreat from online retail and many of the new payment provisions that have swiftly gained popularity.
Now the ball is in the e-commerce court to catch up and keep customers spending online. It demands a reliable mechanism to minimise cart abandonment and incomplete transactions, the ability to take payments in more varied, innovative and flexible ways, and processes for collecting data to understand what has worked – or not – and why.
None of this is simple or straightforward. In fact, a relatively new term ‘payment orchestration’ is likening the need for management and integration of the many active parts and processes involved in transactions to the task of conducting an orchestral performance. It reflects the challenge of accommodating a growing array of customer payment preferences while also navigating the increasingly complex and fragmented integrations associated with needing to connect to different payment services.
In times of uncertainty, we look for what we can control. The same mentality is apparently behind the rush to stockpile toilet rolls in the early days of the pandemic. But through the lens of e-commerce, control – and resilience – are exactly what businesses need to shore up. With payment orchestration, vendors regain ownership of their payment platform and it puts the complexities of dealing with multiple payment service providers back under their control. E-commerce vendors can then achieve a much clearer, consolidated view of the whole payments infrastructure and support the speed, convenience, personalisation and trust that customers want from online retail.
In the ‘new normal’, these will be the most important influences on the ways in which people choose to shop and engage online and, ultimately, pivotal in the success of e-commerce operations.
Brian Coburn CEO Bridge
Bridge is a new payment orchestration layer for e-commerce enterprises that want to unlock the potential of existing and new digital payment services. Bridge has been created to put payment control in the hands of the merchant. Its single integration layer delivers more control over payment service providers, consolidates internal reporting, builds resilience and enhances the ability to test new payment innovations and opportunities at speed.
By Pim Koorn, Product Director, Business Banking at Backbase
Pim Koorn Backbase
With the fourth quarter quickly approaching, banks are increasingly tasked with the difficult project of evaluating how to best support their small and medium-sized enterprise (SME) customers, all of whom are working diligently to re-emerge from 2020’s challenges and adapt to the new normal that is taking shape.
Responding to today’s current demands means that flexibility, innovation and personalisation are key requirements of any technology partner. Banks are considering how to best provide the customisable solutions their clients need in today’s current environment. SMEs are increasingly seeking partners that can provide the specific working tools that meet their fluctuating requirements. No one SME is alike. Whether they are reaching for new digital invoicing tools or seeking real-time onboarding solutions, banking partners that can best support their customers at every turn in their digital journey will remain a trusted partner during the collective recovery period.
The coronavirus pandemic has also put a newfound strain on how SMEs are managing their day-to-day operations and has significantly shaped the way SMEs are looking at their technology. In a PwC study from April of 469 SMEs on how banks can help businesses manage the rocky waves of the pandemic, the majority of respondents noted that the ability of a banking partner to tailor its support was critical to retaining the SME as a client. More than half of respondents (61 per cent) said personalised customer experience was core to the banking relationship.
These survey results underscore how a customer-centric focus, instead of a product-centric one, is the key to banks being able to optimise client relationships. Banks are already working to better understand their SME customers’ specific ways of working, but being able to efficiently cater to these needs lies in embracing technology and innovation.
By digitising paper-based banking processes, SME’s will be able to reallocate their limited time toward more important business-critical tasks. SMEs spend 74 per cent of revenue on non-core activities like bookkeeping and legal and 26 per cent on core activities that make them money, according to McKinsey. Implementing slick and user-friendly platforms can help banks remove friction and provide a more seamless experience for their clients, creating the efficiencies these businesses require.
Another way banks can help support SME clients is by prioritising optimisation. Digital-first banking platforms help solve some of the day-to-day hurdles that SMEs currently face, with solutions such as digital onboarding, digitised loan applications and digital customer signing processes. By empowering SMEs with the digital tools they need to reduce processing times from days into minutes, banks can make themselves indispensable as value-add technology partners.
Every business is currently looking for ways to streamline their operations. But banks that operate within legacy systems run the risk of not meeting the expectations of modern SME owners. By offering digital-first platforms, banks can provide SMEs with the underlying technology infrastructure that helps take the stress out of their finances. Providing access to secure and seamless mobile money management tools, banks can make SME’s lives easier – from bill payments to invoicing, and payroll to card management.
Lastly, banks that integrate new processes around transparency and real-time data will be better placed to cement themselves as long-term partners. Accessible, actionable data is how SMEs stay up to date, and leveraging real-time liquidity management tools that are backed by reporting and analytics are key to the financial health of these businesses.
With Q4 upon us, banks are understandably focused on how to best support their clients during this pivotal time. And as SMEs turn to technology to help them navigate these challenging times, banks can put their best foot forward by continuing to prioritise digital-first, customer-first services.
Pim Koorn Product Director, Business Banking Backbase
On September 20, 2020, just four days after the Financial Crimes Enforcement Network (FinCEN) issued a much-anticipated Advance Notice of Proposed Rulemaking, the financial industry was shaken and their stock prices saw significant declines when the markets opened on Monday. So what caused this? Buzzfeed News in cooperation with the International Consortium of Investigative Journalists (ICIJ) released what is now being tagged the FinCEN files. These files and summarized reports describe over 200,000 transactions with a total over $2 trillion USD that has been reported to FinCEN as being suspicious in nature from the time periods 1999 to 2017. Buzzfeed obtained over 2,100 Suspicious Activity Reports (SARs) and over 2,600 confidential documents financial institutions had filed with FinCEN over that span of time.
Similar such leaks have occurred previously, such as the Panama Papers in 2016 where over 11 million documents containing personal financial information on over 200,000 entities that belonged to a Panamanian law firm. This was followed up a year and a half later by the Paradise Papers in 2017. This leak contained even more documents and contained the names of more than 120,000 persons and entities. There are three factors that make the FinCEN Files leak significantly different than those mentioned. First, they are highly confidential documents leaked from a government agency. Secondly, they weren’t leaked from a single source. The leaked documents came from nearly 90 financial institutions facilitating financial transactions in more than 150 countries. Lastly, some high-profile names were released in this leak; however, the focus of this leak centred more around the transactions themselves and the financial institutions involved, not necessarily the names of individuals involved.
FinCEN files and the impact
What does this mean for financial institutions? As mentioned above, many experienced a negative impact to their stocks. The next biggest impact is their reputation. Leaders of the highlighted institutions do not enjoy having potential shortcomings in their operations be exposed, nor do customers of those institutions appreciate seeing the institution managing their funds being published adversely in the media.
Where did the financial institutions go wrong? Based on the information, it is actually hard to say where they went wrong, or even ‘if’ they went wrong. Financial institutions are obligated to monitor transactional activity, both inbound and outbound, for suspicious or unusual behaviour, especially those that could appear to be illicit activities related to money laundering. If such behaviour is identified, the financial institution is required to complete a Suspicious Activity Report, or a SAR, and file it with FinCEN. The SAR contains all relevant information such as the parties involved, transaction(s), account(s), and details describing why the activity is deemed to be suspicious. In some cases, financial institutions will file a SAR if there is no direct suspicion; however, there also was not a logical explanation found either.
So what deems certain activities to be suspicious and how do financial institutions detect them? Most financial institutions have sophisticated solutions in place that monitor transactions over a period of time and determine typical behavioural patterns for that client, and that client compared to their peers. If any activity falls disproportionately beyond those norms, the financial institution is notified, and an investigation is conducted. Because of the nature of this detection, incorporating multiple transactions, and comparing it to historical “norms”, it is very difficult to stop a transaction related to money laundering real-time. It is not uncommon for a transaction or series of transactions to occur and later be identified as suspicious, and a SAR is filed after the transaction has been completed.
FinCEN files: who’s at fault? Going back to my original question, was there any wrongdoing? In this case, they were doing exactly what they were required to do. When suspicion was identified, SARs were filed. There are two things that are important to note. Suspicion does not equate to guilt, and individual financial institutions have a very limited view as to the overall flow of funds. They have visibility of where funds are coming from, or where they are going to; however, they don’t have an overall picture of the original source, or the final destination. The area where financial institutions may have fault is if multiple suspicions or probable guilt is found, but they fail to take appropriate action. According to Buzzfeed News, instances of transactions to or from sanctioned parties occurred, and known suspicious activity was allowed to continue after it was discovered.
Moving forward
How do we do better? First and foremost, FinCEN needs to identify the source of the leak and fix it immediately. This is very sensitive data. Even within a financial institution, this information is only exposed to individuals with a high-level clearance on a need-to-know basis. This leak may result in relationship strains with some of the banks’ customers. Some people already have a fear of being watched or tracked, and releasing publicly that all these reports are being filed from financial institutions to the federal government won’t make that any better – especially if their financial institution was highlighted as one of those filing the most reports. Next, there has been more discussion around real-time AML. Many experts are still working on defining what that truly means, especially when some activities deal with multiple transactions over a period of time; however, there is definitely a place for certain money laundering transactions to be held in real-time.
Lastly, the ability to share information between financial institutions more easily will go a long way in fighting financial crime overall. For those of you who are AML professionals, you may be thinking we already have such a mechanism in place with 314b. However, the feedback I have received is that it does not do an adequate job. It’s voluntary and getting responses to requests can be a challenge. Financial institutions need a consortium to effectively communicate with each other while being able to exchange critical data needed for financial institutions to see the complete picture of financial transactions and all associated activities. That, combined with some type of feedback loop from law enforcement indicating which SARs are “useful” versus which are either “inadequate” or “unnecessary” will allow institutions to focus on those where criminal activity is really occurring.
We will continue to post updates as we learn more.
Two recent news stories vividly illustrate how there is no such thing as internal and external comms.
by Jim Preen, Crisis Management Director, YUDU Sentinel
These days it’s all one, but consistent communication remains of critical importance to an organisation and its reputation. If anything, the pandemic is amplifying the mistakes.
Jim Preen, Crisis Management Director, YUDU Sentinel
Virtually no communication, if it’s deemed interesting, can be kept under wraps or targeted at just one group and be expected to remain there. Once the comms cat is out of the bag it likes to roam free.
Recently JPMorgan Chase sent some of their staff home after an employee tested positive for Covid-19. He was an equities trader working on the 5th floor of their Madison Avenue HQ. The firm sent a memo to all those working on that floor saying they had to go into quarantine.
Despite a UK government U-turn with workers now once again being asked to work from home, some hardy souls are making their way back to their offices. Inevitably a number of these staff will be nervous and will want to know if anyone in their building has contracted the disease.
Firms may desperately want some of their people to get back to the office, but staff safety has to be paramount. If companies are not forthcoming and honest with their staff, they will vote with their feet and march straight back home.
Perhaps JPMorgan justified their decision to keep the Covid diagnosis under wraps because they didn’t want to alarm staff, but knowledge is power, and employees need to be in possession of the facts so they can take informed decisions that might not only affect them but their whole family.
The Financial Times recently highlighted an instance where another major firm came a cropper.
A member of staff, who had worked at the company’s HQ throughout the pandemic, was idly scrolling through Twitter when something caught her eye.
A tweet indicated that the boss classes were so delighted with the productivity and can-do spirit of staff working from home that they were sent delightful gift hampers as a thank you for all their hard work. Unfortunately, the woman and other colleagues who had actually made it into the office at some potential cost to themselves received, you guessed it, zilch.
How rotten and unloved did those staff feel who had slogged through the pandemic back at the office? And what did the JPMorgan staff, who may have been agonising over whether or not to return to their HQ, feel when they uncovered the covered-up case of Coronavirus?
But I guess the big question is: did both firms not think they would be found out? Be open and honest, treat staff equally and don’t let them find stuff in the media that you don’t want them to see, because find it they will. You can’t trap the comms cat for long.
By Eli Rosner, Chief Product and Technology Officer, Finastra
Changes in regulation, customer expectations and technology have set many banks on a journey of digital transformation. As traditional structures and processes are dismantled and rebuilt across the whole banking sector, it has become increasingly clear that data, along with its safe harbour, exchangeability, timeliness, and accuracy will be key to the future shape of financial institutions.
For this reason, data is often described as the new oil – such is the power of data to enable personalisation, platform models and collaboration in the brave new world of banking. Some financial institutions have already embraced these, realising that collaboration and platform models can ease access to innovation and open a path to working more closely with FinTechs, ultimately to better serve customers.
However, unlike oil, data is not a finite commodity but continues to proliferate. It also inhabits the traditional, product-focused silos built over decades by banks within legacy technology systems.
So, what have the experiences of banks been so far with open banking? What are the lessons that can be learned from them, and how should institutions prepare for a future in which their position as trusted data custodians could be hugely different from the role that they play today? We set out to gather insights from the industry and our partners, to see what they think.
Eli Rosner, Chief Product and Technology Officer, Finastra
Cultural barriers and the not-invented-here syndrome
The first lesson learned is that legacy systems and thinking can create barriers, both because data needs to be exchanged between open networks and closed banking systems and because institutions have leaned towards caution and protectiveness in the past. This has sometimes had an impact on banks’ ability to attract the skills they need to transform their operations.
Ferenc Böle is Head of IT Project Management and the Transformation Directorate at OTP Bank, a Hungarian bank operating across 12 countries. OTP Bank has invested heavily in digitisation and innovation over the past three years but has had to work through some challenges along the way.
“People are living their lives online and we had to change significantly,” says Böle. “At first we found that connecting to our systems created technical bottlenecks. We also had concerns about which data could be used by us, or shared with which partners, and that constrained some activities.
“However, we found that asking permission to use client data and providing superior services in return for that permission removed the barrier. We are now finding that as long as the banking services work, people aren’t too interested in how it operates – just as they expect a light to come on without knowing how the electricity is generated.”
Banks too are embracing the concept of collaborating with FinTechs instead of seeing them as the competition. Joel Winteregg, co-Founder of Swiss FinTech NetGuardians, says: “The not-invented-here syndrome was definitely in place when we started out: no-one wanted to talk to us and it was difficult for large banks to work alongside a fast-moving start-up. There’s been a big change in the past couple of years, enabled by platforms and driven by regulation like PSD2.”
The commoditisation of banks’ traditional products and services is a further driver for change, simply because it has lowered the barriers to market entry for so many new players.
Juan Jiménez Zaballos, Head of Financial Industry Transformation, Santander Digital Platforms, comments: “Banks have been obsessed by products, but there has recently been a flight to vanilla that makes it difficult for banks to differentiate themselves from competitors: a loan is a loan wherever you get it from. Creating relevant and personalised services and experiences is vital, but the only way to respond is with the intelligent use of data.”
Think like a customer
The key to progress in open banking is to think back from the customer’s point of view and requirements, then fill in the gaps with systems and processes via open APIs within a strict governance and security framework using an open platform. Insights into data, both historical and real-time, will create opportunities to build personalised services and new revenue streams.
Eyal Sivan, Head of Open Banking at Axway, also known as Mr. Open Banking, says it is no secret that the big challenge with all of this is that banks have so much data to work through. “Banks have years of historical data about all of their customers. The race is on to get their arms around that data, use tools that deliver insights and think about how it can be shared.”
Collaboration will also bring change in the corporate banking sector, says Paul Le, Chapter Lead Trade, Data & Platforms, ING. “Physical documents in Trade are commonly used and in one single transaction 80% of information is duplicated,” he says. “What we really need is one digital version of the truth that everyone can use. Collaboration is needed to achieve this.”
New doesn’t always mean better
By its nature rapid innovation has led to many new ventures that tackle the inefficiencies of individual traditional processes. This dislocated approach does not always necessarily take into account the overall service that needs to be offered to clients, so we are now at the stage where banks can step into to unify best-of-breed services on a single platform, collaborating with competitors rather than trying to ‘own’ the whole process.
An example is the open, collaborative clearing platform that Kynec is developing: “In the old days clients would trade, clear and settle through one bank,” explains Robert McWilliam, CEO & Founder at Kynec. “Disruption driven by regulation broke down the trade lifecycle and customers were tempted by lower prices for different parts of the process.
“However, while new entrants offer cheaper alternatives, the disadvantage is that customers need to deal with lots of providers, not just one. That’s why we are building a platform connecting banks and funds that want to clear with multiple Clearing Houses and companies that provide clearing related services. A single connection to our platform will give fast and efficient access to the entire clearing marketplace.”
Looking forward to a new era
Eyal Sivan adds that a further impact of open banking, together with data protection regulation, is that customers regain ownership of their data. The role of banks is likely to shift as a result, from protectors of physical currencies to trusted data brokers and custodians.
“There will be a rediscovery of banks as we realise that the business they are actually in is trust,” he says. “When we are all sharing our data across the internet, we need organisations that can protect personal information on our behalf. Perhaps banks could provide a trusted facility that we can go into and adjust who sees what information.”
However the landscape changes in future, it is clear that we are moving towards a world in which banks will need to become confident in selling products and services that they haven’t manufactured themselves. This will mean having the platform that attracts the right developers and provides an ecosystem that creates the groundwork for entirely different business propositions.
And as Ferenc Böle concludes, many banks are still at the beginning of this road to transformation. “We have to be aware that there will be obstacles, and that there may be conflicts with existing projects that need to continue. Despite all of that we need to invest in technology today that will allow us to harvest benefits in the future.”
Going back to my original question, was there any wrongdoing? In this case, they were doing exactly what they were required to do. When suspicion was identified, SARs were filed. There are two things that are important to note. Suspicion does not equate to guilt, and individual financial institutions have a very limited view as to the overall flow of funds. They have visibility of where funds are coming from, or where they are going to; however, they don’t have an overall picture of the original source, or the final destination. The area where financial institutions may have fault is if multiple suspicions or probable guilt is found, but they fail to take appropriate action. According to Buzzfeed News, instances of transactions to or from sanctioned parties occurred, and known suspicious activity was allowed to continue after it was discovered.
