Finacle Blog

Infosys and European Financial Marketing Association (EFMA) recently released the second edition of 'Innovation in Retail Banking'. Delving deep into various concerns and benefits of innovation for bankers in Europe, Middle East and Africa, the report articulates how focus on innovation has clearly risen. However, relatively few banks have made innovation a strategic priority or established  a clear link between their strategic priorities and the role of innovation.

That being said, what is evident is an increased emphasis on customer-focused innovation.  Banks have a particular interest in the question of how to deliver a better and more consistent customer experience. The report states that it is the combination of product, channel, process and customer relationship management innovation, together with other innovative changes to the business model, which will drive the improvement in customer experience. There are several cases in the report which illustrate this.

BBVA, Spain has set "innovation as the engine of progress" as 1 of its 7 corporate principles. There is a specific department for innovation and development which promotes and facilitates innovation within the group by helping all business units to incorporate innovation in their activities. They look at innovation from 3 angles: innovation in business; technological innovation; and innovation in the form of business models that exploit opportunities to increase customer loyalty or penetrate new segments.

"Focus on the continuity of technological innovation" forms a key pillar of the strategy at Garanti Bank, Turkey. The bank emphasises the importance of taking a customer-centric approach. Unusually for a bank, Garanti has invested heavily in its "research & development" activities. In 2009 the total was 59 new products, to reach a total of 373 products available by the end of the year.

First National Bank, South Africa has established innovation as a strategic priority and highlights the importance of the bank's culture of entrepreneurialism and innovation. FNB has begun to rollout a lower cost and more flexible branch model, EasyPlan, which will increase its branch presence and counter the threat from competitors. FNB also launched the highly flexible eWallet product in November 2009 enabling customers to instantly send money to any South African resident with a mobile phone.

Bankinter, Turkish Economy Bank, Capitec Bank, Equity Bank and Noor Islamic Bank are few other banks which have taken significant steps in institutionalizing innovation in their organizations.

You can access a free copy of the complete report on "Innovation in Retail Banking", 2010 here. The report  details the Infosys-EFMA survey findings and shares successful innovation case studies

Posted by Harini Babu at 5:22 AM | Permalink | Comments (0) | TrackBacks (0)

A treasurer and his team constantly walk the tightrope and a delicate balancing act is essential to measure and manage asset liability management process - invest in creditworthy assets, maintain sufficient liquidity and maximise returns. This triangular relationship between credit, liquidity and returns is of course not static. The elements constantly flex around - for example, in a stable market, precedence is given to returns, creditworthiness is usually easily determined as results  seem to be broadly predictable within the usual credit models, and liquidity is not an issue as the environment is free of major shocks. However, in a disturbed or chaotic market, the order is often reversed, the immediate worry is liquidity, this is of course closely tied to credit (which is typically deteriorating and perhaps in sudden and unexpected ways) and returns become almost an afterthought (though of course maintaining profitability is still a requirement but not always achievable in such circumstances).

In the past twenty years more and more credit decisions have been effectively "out sourced" by lending institutions to credit rating agencies. While this worked well during the long benign credit period prior to the collapse of sub-prime and the subsequent global banking crisis, the limitations of credit scoring and VaR based analysis were amply shown during the credit crunch. It is likely that we will see much more use of scenario planning and more sophisticated use of stress tests; not to substitute existing techniques, but to enhance and develop them further.

The risks in liquidity, on the other hand, usually come in two forms; market liquidity risk that arises when one cannot execute a large amount transaction at the expected market rate, and funding liquidity risk when it becomes impossible to borrow funds to cover cash flow requirements. Both are serious from a Treasurer's perspective, but examples like Northern Rock, Bear Stearns and Lehman Brothers demonstrate clearly that the latter can be fatal for banks and other financial institutions. Paradoxically investment benchmarks, index tracking, credit ratings and fixings may well be adding to liquidity risk issues, as risk averse investors seek to trade at known ratings and prices, and within certain agency defined asset groups. This can have the effect of bunching up supply and demand and may well be adding to market inefficiencies rather than mitigating them. This means conventional economic thinking regarding market bubbles and liquidity crises will not be sufficient.

Finally the subject of return should be straightforward - but whilst trying to maximise it there is the potential for failed credits and poor or even non-existent liquidity. In the past institutions have tried a mixture of hard rules and experience to judge adequate returns. Unfortunately returns are a function of macro-economic forces as well as individual lending or investment decisions. Typically in a credit boom lending margins are heavily squeezed and banks are faced with greater and greater competition; this is leading regulators to consider so called macro prudential rules to dampen such effects. Of course, experience and market knowledge will still be a vital human input into the risk assessment process.

At the end, there is no perfect answer to the Treasurer's Triangle (in fact if we over fit for perfection we actually increase the chances of future problems) but here is my checklist of the issues and challenges that I feel could be coming into view in the coming years:
• New risk techniques will be imported from other industries - scenario planning, complex stress tests and modelling the cascading of risk through different asset classes, markets and instruments
• Further work will be done on measures to counter pro-cyclicality in regulatory rules i.e. the tendency for banking risk models to all signal red at the same time - which can cause unforeseen correlations and market dislocations
• Banking clients are going to demand higher standards of flexibility in their risk systems. Financial IT companies will respond and address this through more modular and scalable products
• Increased and more complex regulation will put a greater burden on banks, and further investment in processes and people to meet these demands will be a constant feature in the next few years
• Bubbles and crashes cannot be entirely eliminated in free markets - but treasurers will be armed with more tools to create buffers and fire breaks that can contain their potential risks

I am writing a 4 paper series which will present an in depth view on a Treasurers' challenges. Click here to access Part 1 - The Treasurers' Triangle

Posted by Milind G Kolhatkar at 5:33 AM | Permalink | Comments (0) | TrackBacks (0)

Asia Pacific, although impacted temporarily by the new global economic environment, is definitely on the growth path. Consistent increase in domestic consumption and low levels of individual debt is accelerating demand for retail financial services. And banks are innovating to stay ahead of the pack. In fact, according to a recent research conducted across South Asia, Southeast Asia (including Australia) and North Asia, 63% of bankers surveyed said that their banks increased investments in innovation last year, and the focus is unwavering on innovation in channel network distribution and products.

Executives in North Asia, including Hong Kong, Taiwan, South Korea and China, expressed the highest level of innovation among all regions. An Innovation Index shows that on a scale from 1 to 5, banks in the Asia Pacific region regard their innovativeness as 2.6. This number goes up to 2.9 in North Asia, followed by Southeast Asia at 2.5. South Asia is the least innovative sub-region, with banks rating their innovativeness at 2.4.

The research goes on to state that banks whose activities in the area of products, channels, operational processes and customer relationship management were not only innovative but also successful, make a significant contribution to the bottom line in a sustainable manner. Retail executives have come to think of innovation either as process re-engineering, added on products and service applications, or network distribution enhancements. In Asia Pacific, the majority of innovations are driven by unit or product heads who drive new ideas and changes with a minimum of innovation infrastructure and resources behind them such as monetary, structural, organizational or intellectual capital.

At the end the prime goal of innovation remains to be high quality revenue growth. Clearly, there is no better measure of a successful innovation than above market average revenue growth and a sustainable increase in wallet and market share. In fact, the most powerful innovative products banks have introduced in the last 10 years continue to deliver above average market growth and revenue and this is still the case today.

Recently, prototyping is increasingly being seen as an important and useful element for building institutional knowledge to manage innovation; banks often go through multiple rounds of incremental improvements before they have a more significant impact on the competitive position. Most banks follow a tactical innovation approach, meaning the approach is needs-based, reactive and considerably smaller in scope than strategic innovation, which is found to be concentrated on international banks or in small niche markets.

Get your copy of the detailed report on the survey findings here.

Posted by Harini Babu at 11:02 AM | Permalink | Comments (0) | TrackBacks (0)