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By Andreas Hauser,Senior Business Product Manager, Real-time Reporting and Innovation Cash Clearing, Cash Management, Deutsche Bank   

If a client were to ask its bank why a payment had not been fulfilled, is it really acceptable for the answer to be: “We don’t know”? Real-time liquidity benefits are ready to seize in the here and now. With the right application and a consistent consumption of real-time account information, banks can have a clear view on their current liquidity situation. 

Flashback to the year 2008 and the height of the financial crisis. A counterparty has just defaulted on a sizeable payment to a large global bank. The bank is highly sensitive to changes in its intraday liquidity positions, so immediate action is required. Unfortunately, the bank lacks visibility over its intra-day payment flows and is therefore unable to respond to this situation quickly and decisively. Without the necessary liquidity the bank finds it hard to mitigate the negative impact on its own time-sensitive payment obligations and the situation begins to snowball – spreading from one bank to another before the end of the business day.

The potential for such scenarios was an obvious red flag for regulators. Something had to change and as a result, the Basel Committee on Banking Supervision (BCBS) proposed guidelines in 2008 and 2013, known as BCBS 144 and BCBS 248 respectively, recommending principles for banks to track their liquidity flows over the course of the business day. Returning to the present day, we find the regulatory emphasis on real-time visibility has even increased, with the incorporation of BCBS 248 into the Basel Framework. However, the mandate of real-time cash-balance monitoring and reporting has yet to materialise across the market.

It’s an issue that has receded from the limelight in recent years, but, in this day and age, if a client were to ask its bank why a payment had not been fulfilled, is it really acceptable for the answer to be: “We don’t know”? Banks should have a clear view over their intra-day cash positions – be it on their RTGS accounts or on accounts held with Nostro Agents. It’s the starting point not only in guarding against stress scenarios, but also to manage and optimise their payment flows. Put simply, banks that don’t capitalise on this opportunity are missing out on potentially huge efficiencies and controls.

Maximising efficiency and control

From medium-sized to more specialist players, there are a number of banks with significant cash positions in the main currencies. In any given 24-hour period these positions are likely to vary significantly. Though there is no one optimum pattern – as this depends on the bank’s business models, products and locations – the benefits of implementing the guidelines published by the Liquidity Implementation Task Force (LITF), in response to the former BCBS 248-paper, are clear.

These have been demonstrated in a recent Deutsche Bank study, which compared the daily real-time cash balances from start of day until end of day for four banks across a three-month period.  Figure 1 shows a bank that has not implemented a real-time cash-balance reporting strategy, while Figure 2 shows a bank that has.

Figure 1: Non-user of real-time reporting services

 

Figure 2: User of real-time reporting

At the bottom of Figure 1, the outlined box shows the points at which the account is under-funded. To avoid being short on the account and having time-sensitive payments queuing-up as a result, a liquidity deficit such as this might force the bank to rely on intra-day credit lines, incoming flows or liquidity transfers. In contrast, the box at the top of Figure 1 outlines where the account is being over-funded – meaning that the bank is holding onto surplus cash that could be better leveraged elsewhere. These inefficiencies, resulting from either over- or under-funding, can last for the majority of some business days.

Comparatively, the bank that has implemented real-time cash-balance reporting into its liquidity management strategy, as depicted in Figure 2, suffers shorter and less frequent instances of over- or under-funding and has a clearly defined daily pattern, reflecting a considered strategy.

Seize the opportunities

So why do these benefits remain off the radar for many participants in the correspondent banking network? For a considerable number of banks, industry-wide projects, such as the migration to the ISO 20022 payment messaging standard, are being addressed with a greater sense of urgency. In addition, the development of complementary technologies, including Application Programming Interface (APIs), Distributed Ledger Technology (DLT) and artificial intelligence (AI) and automation, are rising up the strategic agenda.

But history teaches us that the “next big thing” will always loom on the horizon, while real-time liquidity benefits are ready to seize in the here and now. With the right application and a consistent consumption of real-time account information, banks can have a clear view on their current liquidity situation. What’s more, in combination with SWIFT gpi, banks can enjoy improved visibility across all parties involved in cross-border payments, including the status of the payment at each embedded agent. These are upgrades that can be implemented today and pay for themselves long before the ISO 20022 migration has completed.

By Ramesh Narasimhan – CEO at Ingenico ePayments, India

Demonetisation was a watershed moment in the history of independent India. A decision geared to curb black money provided the platform and impetus to consumers to move to non-cash payment methods, and a slew of initiatives undertaken by the Government of India thereon has catalyzed the e-payment ecosystem in the country, expected to worth USD 135.2 billion by 2023, from USD 64.8 billion in 2019.

With India’s share in worldwide transaction value set to increase from 1.56% to 2.02% by 2023, the country’s e-payment sector is witnessing exciting trends, existing and evolving, which have the potential to catapult the nation as a dominant player in this segment.

Wearables as alternate payment channels

Internet of Things (IoT), which has the potential to bring a fundamental change in the way we interact with our surroundings has not only made objects smarter but has also enabled the seamless transfer of information between devices, organizations, and end-users.

Riding on the burgeoning growth of India’s wearable market, which registered a whopping 168.3% year-on-year growth in 2019, these inter-connected devices have evolved as alternate payment channels.

Last year, Mastercard announced its collaboration with token service provider Tappy Technologies to enable contactless payments through fashion wearables, starting with Timex Group’s analog watches.

Tappy Technologies in a similar collaboration with ExpressPay Card (a JV between China Union Pay and Bank of China) and Saga Watch offered cardholders a wearable payment option, acknowledged by merchants capable of accepting China UnionPay contactless payments.

Sound-based payment – the next big thing

Voice commands have revolutionized the home automation market and could soon sweep the digital payment space. The new frontier in this segment, the USP of sound-based payment system lies in its simplicity and convenience.

With nearly 668.3 million users projected to rely on soundwave technology by 2021, this mode of digital payment can radically change the dynamics of the digital payment sector.

Realizing the potential of soundwave technology, a few companies in the country are facilitating payments through soundwaves without the Internet. Encrypting data from one device to another using sound waves, all one needs to do is to program their device with the software developed by these companies, places the device within proximity of the POS terminal and the transaction is completed within seconds.

Near-field communication payments picking up pace

Also known as contactless payment and tap-and-go, near-field communication (NFC) payments truly came of age when the National Payments Corporation of India (NPCI) launched the National Payment Mobility Card last year, whereby users could make payments just by tapping the terminal, without the need to enter a PIN for transactions below Rs. 2,000.

Like QR codes, which are already quite popular among informal and small merchants, NFC-based payments give users complete control over transactions and the payment process. Following NPCI’s footsteps, many banks and financial institutions came up with NFC-enabled cards as one of their primary offerings.

The launch and success of applications like Google Pay make a strong case for NFC-enabled payment system, which I believe will gain significant traction in the coming days.

In conclusion

With technology taking center-stage of financial services, and the Government’s drive to a less-cash economy, the digital payment segment in India is expected to the breeding ground for innovation and newer opportunities in the coming days.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of  IBS Intelligence. Ingenico is a digital payments solution provider)

By Nitin Mathur, CEO & Founder of TAVAGA

When the world’s second-largest economy gets hit, the tremors are bound to be felt by both large economies such as the US and developing ones like our own.

The Coronavirus (COVID-19)epidemic, with its epicenter in Wuhan, the capital of the busy province of Hubei in China, has claimed more than 3,000 lives and infected over 90,000. It has spread to over 60 countries and sent shockwaves through financial markets. Beyond its pathological implications, lies its impact on the global economy.

The Indian angle

The trade between China and India is worth $87 billion, of which we import goods worth $70 billion from China. It includes everything from electric components and machines, medical instruments and pharma raw materials, vehicles and auto parts, iron and steel components to nuclear machinery.

While China takes 5.1 percent of our total exports, in the form of cotton, salt and organic chemicals, and mineral and metal ores among others, we get 13.7 percent of our total imports from China alone.

Needless to say then, when our second-largest trading partner hits the brakes on its factory output, companies in India break into a sweat.

We may have pushed for smartphone manufacturers to increase their domestic production, but they still depend on China for their components. Other electronic goods manufacturers would also be facing production issues.

A supply shortfall in consumer electrical and electronic goods in India (either due to coronavirus-led Chinese cuts or our economic slowdown) would also trouble online sales, as they form a sizable portion of e-commerce goods sales.

Pharma companies bring in key raw ingredients from China to make medicines. Automobile manufacturers, too, are heavily dependent on their components on their Chinese suppliers.

However, the Chinese New Year in January-February would have proved to be a greater boon than usual as companies would have stocked up by December last year, anticipating the Chinese holiday season.

Goods and services 

Goods and services across the world are suffering the aftermath of the quick spread of the Coronavirus (COVID-19). Global exports and imports and Chinese exports and imports are so intertwined that it is unavoidable.

The spillover of disruption has been the most acute in China’s neighbors as seen in their monetary policy responses.

 

Goods movement

Shipping has been heavily affected with curbs on movement to stem the spread of the Covid-19 virus.

Shipping companies have cut back on their ships sailing from China to the rest of the world, carrying goods, to prevent the virus from advancing to other areas.

It has a direct bearing on the world’s supply chain as 80 percent of global goods trade by volume is transported in ships and China itself houses seven of the world’s 10 busiest container sea-ports, says the United Nations Conference on Trade and Development. The contagious coronavirus is a threat to business infrastructure in adjoining countries as well, as Singapore and South Korea, too, have busy ports and have seen the disease escalate.

Global GDP

The global GDP will be compromised due to the economic fallout of the coronavirus. China accounts for around 18 percent of the global GDP (2019) compared to 4 percent when the Sars epidemic had broken out in 2003. Chinese businesses are now more ingrained in global supply chains.

Sars had robbed China of 1 percent of its economic growth in the eight months it had lasted. The coronavirus is expected to shave off 1-2 percentage points off China’s GDP growth in the first quarter of 2020.

Investor takeaway in times of epidemics

Contagious epidemics such as Coronavirus (COVID-19) bring uncertainty to the investing community worldwide, prompting them to move towards traditional assets such as golds and bonds that are perceived to be more stable, instead of the assets with systemic risk like equities.

That is where smart investment planning involving diversification and asset allocation comes in. It allows us to stay out of troubled waters and focus on our health, instead.

 

(Disclaimer: The views and opinions expressed in this article on Coronavirus are those of the author and do not necessarily reflect the views of  IBS Intelligence.)

1. Financial Services sector stability & profitability comes under pressure – stock valuations and prices come down.

2. Central banks bring down interest rates – if a significant part of the asset book is flexible rate, then interest margins are affected.

3. Lower business and consumer transactions – lower fee income.

4. Less liquidity from government as they need to finance deficits. And deferred spending – negative liquidity impact.

5. Number of corporate banking sectors negatively affected. Example – oil & gas, consumer durable, automotive. Increased number of work out accounts, likelihood of NPAs, and reduced income.

6. SME/Commercial clients under pressure for many sectors – reduced demand and delayed payments from customers. Larger number of NPAs, work out accounts, and reduced income and a smaller trade finance book.

7. Wealth Management not so wealthy any more. Portfolio values down. AUM down. Conversion to cash preserve capital. Resulting in fee income reduction. Also margin calls.

8. Retail book stressed. Less liquidity, and asset quality under threat. Part of mortgage book impacted. Reduced spends on cards, auto and personal loans. Loss of income also resulting in higher NPAs. Also limited growth.

9. Branch utilization drops off – fear of visit, fewer transactions.

10. Basically the full revenue & cost model affected – urgent need to transform, including job losses.

Potential winner – digital channels and digital banking ? Read the fixes and the suggestions for the best way forward out of this crisis in the next memo !

Regards

Chairman, IBS Intelligence

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By Gaurav Tiwari, FinTech Expert & Former Head Digital at Jio Payments Bank

During the Union Budget last year, India had introduced a Zero-MDR regime to boost digital transactions. According to the system, businesses (with turnover higher than INR 500 million) should provide customers with low-cost digital modes of payment and mandated banks to levy zero charges on the same. Most of the payment companies and banks are up in arms against Zero-MDR, fearing loss of revenue, and had been lobbying with the Government to defer it for some time.  With the outbreak of the COVID19 virus, the discussions around MDR have intensified further.

WHAT IS MDR?

First, let’s understand what MDR is and what is important for payment providers. MDR or Merchant Discount Rate is the money that is paid by a merchant to the payment ecosystem used in facilitating the transaction. All the parties involved in the value chain–acquirer, interchange, and issuer get their share from this MDR, including the third party technology or operations service providers used by these parties. MDR is typically a small percentage of transaction value, somewhere between 0.8 percent to 3 percent. Essentially what it means is that when you pay a merchant INR 100 using your credit card, the merchant gets only INR 97, while INR 3 gets divided between all others involved in facilitating this exchange.

WHAT IS THE DEBATE?

Why would a merchant agree to take a cut in his/her income to facilitate the transaction? After all, it is the merchant who drives the mode of transaction and not the other way around. How often have you refused to deal with a merchant because he did not accept your credit card? You find a way to pay that merchant agrees, and you continue with your purchase. Then what is the answer? In a credit card ecosystem, the card company facilitates the purchase by offering instant credit to the customer by taking a risk on the transaction. This risk taken by the issuer enables the purchase to go through, which may not have happened in case the credit was not issued at the time of the transaction. Now, here is something for the merchant to gain; he is winning a sale, which may not have happened otherwise. That is the reason the merchant doesn’t mind paying that MDR. Now issuer alone cannot support this massive ecosystem, and a part of it is distributed among other participants in the ecosystem.

If the MDR supported the technology and operational cost for running the ecosystem, it would have been a flat fee and not a percentage of the transaction amount because the cost of processing a transaction remains more or less the same irrespective of the transaction amount. So the primary reason a merchant agrees to pay MDR is that the issuer is taking a risk on the transaction by issuing an instant credit to facilitate the purchase. Larger the amount, more significant the risk for the issuer.

WHY ZERO-MDR IS NECESSARY?

Then came the debit cards for customers to access the funds parked in their savings and current accounts. Instead of reinventing the wheel, they decided to ride on the same infrastructure set-up for credit cards to facilitate debit card transactions as well. But then they got too lazy and even copied the same MDR based business model. In case of debit cards customer has already parked funds in banks and banks are making more money from that money and it is the responsibility of banks to facilitate access of funds in his/her bank account to its customer. Banks do not want customers to line up in the branches because that is the most expensive mode of transaction for banks, to save that cost banks have set up the digital infrastructure to provide easy access to customers, and this also includes POS/Payment Gateway infrastructure.

I am of the view that the MDR model is excellent for the credit card universe. However, it does not make any logical sense for debit card transactions, and issuer banks should bear the cost of these transactions instead of passing that cost to merchants or customers in any way. Issuer banks should pay interchange and acquirers on a fixed fee basis, and then acquirers should compensate their technology and operations partners from their share. Interchanges as the bodies at the center of all this should facilitate the working of a reasonable compensation mechanism for sustainable ecosystem growth.

The payments industry had been running on this illogical model for far too long, and everyone has accepted it as a norm. The zero MDR move by the Government should work as a catalyst to drive this change and implement a more logical and sustainable business model, not designed to unreasonably favor the banks. Banks should not be allowed to only benefit from this entire ecosystem, while other partners share the whole burden of cost. I hope NPCI, the umbrella body for all payment companies, leads the way with support from RBI and Finance Ministry to arrive at an agreeable solution that doesn’t ruin the payment facilitators and force them out of business. If that happens, the customer will be the biggest loser.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of  IBS Intelligence.) 

With digitization dotting the length and breadth of daily life, a huge amount of data gets whipped up by the hour. Every credit card transaction, every message sent, every web page opened – it adds up to 2.5 quintillion bytes of data produced daily across the globe.

This is as big an opportunity as it is an overwhelming statistic – an opportunity for even temperately clever businesses to lap up and capitalize on. Of all, Banking industry is sitting on a large piece of the pie since it generates a colossal volume of data inhouse.

The long and short of Banking digitization

It would not be a stretch to say that banking has picked up the gauntlet of digital revolution and responded with mobile and internet banking. It literally is ‘banking on the go’ with smart interfaces offering a host of banking conveniences. Some of these banks have gone a step further towards digitizing their mid and back office operations to build efficiencies and deliver seamless customer experiences. This spawn a set of scenarios:

• In their bid to go digital, front-end as well back-end, banks are throwing off data by the terabytes.

• This data, available on tap without any auxiliary effort remains largely unused and underutilized.

• Analytics – mining this data for authentic business insights leading to better decision making is still not a priority for a lot of banks.

• Digitisation to grow numbers and cut costs without insighting is taking banks only so far. To run along further, they need something more.

Data, the Differentiator

While from 1980s to early 2000s, it was IT systems that transformed the ways bank operated, today, data wields transformative potential. While it still presents itself as an untapped opportunity, it can be a critical differentiator, the one that will set the forerunners apart from the pack.

Data and Analytics holds potential in the following key areas:

• Enhancing productivity – Detailed analytics can help identify lag in processes and improve efficiencies therein. It can help teams take analytics-backed decisions and respond to problem situations faster and more accurately.
• Better risk assessment and management – Data analytics can help identify potential risks associated with money lending processes in banks. Based on market trends emerging from analytics, banks can variate interest rates for different individuals across various regions. Fraud detection algorithms can help identify customers with poor credit scores and erratic spending patterns to help banks take more informed decisions regarding extending loans. It may also help track dubious transactions that may be fuelling anti-social activities.
• Help meet compliance and reporting requirements – Data presented in a certain way can help meet compliance, audit and regulatory reporting needs and address issues arising therein. With a super dynamic and ever-changing regulatory climate, banks and financial institutions need a robust backing to be able to meet all requirements on time and with precision, and data and analytics can play a decisive role in this.
• Delivering an omnichannel banking experience – With customers interacting with banks through multiple channels, a seamless and consistent experience at all points in the chain is crucial and data analytics can help drive this with efficacy.
• Detailed nuanced understanding of customers – Analytics can enable a detailed profiling of customers based on inputs received from their spending trends, investment patterns, motivation to invest and personal or financial backgrounds. This opens opportunities to personalize banking solutions, integrate customer acquisition and retention strategies and cross-sell & upsell. It can also be a crucial input for risk assessment, loan screening, mortgage evaluation etc.

Realising the Data Dream

Data and Analytics can prove to be quite the enabler for banks that are ready to reinvent themselves. But the data dream can be as elusive as it is promising. A piecemeal approach that moves from one project to the next under can yield results below encouraging. It is important that the business leaders envision what problems they want to solve with data and analytics and get involved every step of the way. A great analytics approach starts at asking the right questions to guide the discovery process, before data is dived into for the sake of it.

By Kiran Kumar, Co-Founder and Executive Director of Profinch Solutions