Commentaries and insightful analyses on the world of finance, technology and IT.

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September 25, 2014

The mortgage regulatory landscape - The way forward

The mortgage regulatory landscape - The way forward

It definitely appears like the mortgage industry is catching up with technology advancements and innovation. In the previous years, the mortgage divisions of the banks have engaged their resources to comply with the Qualified Mortgage standards (QM), Ability to Repay (ATR) regulations from Consumer Finance Protection Bureau (CFPB) in US and Mortgage Market Review (MMR) regulations in UK. But we can still notice a cautious optimism and enthusiasm in the mortgage players, lying in wait to innovate. The optimism can be attributed to the stabilized default rates along with the steady improvement in the housing index and the rising housing prices.

In UK market, the MMR regulation seems to have an impact on the cycle time taken to close the loan from the time of origination. While MMR mandates the transition from non-advised to the advised sales, there has been some delay in taking this change forward. This is in the terms of engaging sufficient number of mortgage advisors either in the branches or call centers. There has been a study in the market which says that the mortgage sales interview time has increased by a factor of two. If the sales activities are consuming significant pie of the time to offer, it is necessary to optimize the offer process to reduce to save time.The firms have to increase the number of mortgage advisors by optimizing their back office operations and deploying the, thus available personnel in the customer facing advisory roles. If process optimization, platform rationalization, automation of activities and outsourcing certain operations are a part of strategic roadmap, it is the right time for firms to progress towards these goals.

The banks will have to look at making the processes lean to get to the optimum cycle time that would in turn provide customer satisfaction. I recently worked with a large UK bank to optimize their mortgage sales and offer processes. Though the aim of the program was regulatory, we coupled additional features and optimized existing processes to reduce operational costs and bring significant business benefits to the bank. This is in line with the division's strategic roadmap of reducing the cost to income ratio. The consumer self-service is yet to take off in the UK market with the branches, call centers and intermediaries taking the precedence. With technological advancements, the banks should look at migrating their customers to a self-service model of operation. Most of the customers find the mortgage process to be daunting because of the complexities in understanding the terms, nuances of the product, the structure of the product, fees associated with it and the terminology. Most banks have put in features on their online websites to simplify these overwhelming tasks to the customers in the form of mortgage calculators, pre-qualification, e-documentation, mobile document capture to name a few.

According to a recent survey, most firms claim that 90% of the single-family mortgages fall under the category of qualified mortgages. Most of the firms expect to tweak their credit policies and tighten credit standards. But the same firms claim that they are reducing the repurchase risk with quality control activities and credit policy revision. Mortgage loans which have limited points and fees along with certain restrictive features are considered Qualified Mortgages, which may be acknowledged to comply with these new rules. Also, because of increased regulatory requirements, many lenders are looking at strengthening their quality control (QC) reviews. This is to enhance the mortgage quality, prevent fraud and reduce repurchase risk from the investors. Most banks expect their operational costs to increase as a result of QM rules.The banks have to offset the increase in operational costs with solutions that can cater to the need. This can be a BPM solution - a workflow solution along with an independent business rules engine that can make the division react to regulatory and policy changes with less turnaround time and cost. Banks have started embracing the confluence of big data, analytics and social media to improve the efficiency of customer scoring during underwriting. Credit scoring is undergoing changes with these advancements and the results of the ongoing analysis. Several start-ups are relying majorly on social network data to score customers based on their credit quality. This is an apt recommendation for mortgage and other lending divisions to bank on.

Most young buyers remain pessimistic about their ability to get a mortgage in contrast to that, younger home owners have grown more optimistic. Down payment and credit score are considered top obstacles for buyers in getting a mortgage. Better educational resources on credit, personal finance management, gamified tools and features can help existing customers of the bank, make more informed decisions about their housing and plan their finances early and efficiently in order to fulfill their goals.


September 18, 2014

Next Generation Trends in Trade & Supply Chain

Next Generation Trends in Trade & Supply Chain

The trade instrument, Letter of Credit has not changed much ever since it's been first used during the 13th Century AD. Trade finance has basically been the business of financing international trade, predominantly through the use of letters of credit, though perhaps the processes and regulations that have increased over time have tightened much more to curb frauds and uncertainties. However, the spread of digital technologies is now transforming all types of global trade flows in terms of goods, services, financial, people and data & communication. The pace of digitization for trade transactions was a bit slow until the past decade but now it has acquired the right momentum especially in the method of communication between partners, product innovation and in the area of mobility. The world is moving towards paperless trade and accepting global standards to communicate in a unique and consistent way. Banks cannot shy away from this deliberate attempt to achieve digitization, perhaps they should be aggressive to fuel their further growth and stay relevant in the market.

Let us understand some of the remarkable innovations that have changed the face of trade and supply chain industry in the past few years, which would revolutionize the business in the near future as well:

1. Introduction of Bank Payment Obligation TSU - BPO; an automated alternative to Letter of Credit

Bank payment obligation (BPO) works like automated Letter of credit where no manual  intervention is involved. The trade transactions are electronically matched through a  trade service utility (TSU) which is primarily a centralized matching and workflow engine. What this means is that the TSU helps banks and customers interact on a  single  platform and helps banks  create irrevocable payment obligations which can be an alternative for  Letter  of Credit transactions. As TSU platforms are SWIFT enabled, end-to-end transactions and related communications can be electronically controlled  and managed. This mechanism helps banks and customers achieve paperless trade,  faster  turnaround time and a seamless  automated transaction flow. Global banks like CITI, JP Morgan are the frontrunners in implementing this instrument, but now many other tier1 banks across the globe are also  implementing BPO aggressively.

2. MT 798 - The Envelope Message Standard from SWIFT

SWIFT has come up with another initiative - automating the current transaction flows through envelope messages (MT79).This message type handles the entire LCs, Guarantees, Standby LCs and Common Group messages by effectively linking importers, banks and exporters - end-to-end connection. The result is again - improved process capabilities, paperless trade and reduction of process hassles without compromising on security.

3. Exchange for Receivables - A market place for Hedging Trade Instruments  

Receivables exchange is an electronic platform to auction receivables. Companies, especially small and medium segment enterprises can improve their working capital by auctioning invoice(s) to a global network of institutional investors/ buyers who compete to buy invoice(s) in real-time via electronic marketplace. By connecting businesses with factoring agents, financing  companies and a community of banks considering to purchase outstanding invoices, the  receivables can be liquidated in as little as 24 hours for very marginal discounts. Sellers can use the exchange platform as often or as little as they wish. This online market place offers a lucrative solution for companies starving for adequate working capital. 

4. Next Generation Portals, Dashboards and Mobile Banking Revolutions

With the advent of digitization, banks are taking a cautious but aggressive approach towards digitization. Next Generation Portals are offering a collaborative way of managing trade transactions. The new dashboards help customers analyze their positions, predict cash flows, interact with bank SMEs and track and monitor transaction flows online. Mobile banking capabilities are offered with payment facilities, transaction authorization and dashboard views.

Trade Finance has traditionally been an agreement to hold business. The short term nature of trade finance has often made it difficult to liquidate receivables due to excessive documentation and related processes. At this juncture, the need of the hour is to evolve new models of trade with the help of technology and innovation. There is also a growing need to source additional funding for trade flows as studies show that world trade is growing at double the rate of global GDP and soon there would be a liquidity crisis. As a solution to this problem, banks are starting to look towards non-traditional sources to ensure flexibility and consistency in their liquidity. Also from a technology standpoint, we foresee a deeper involvement of analytics, big data and mobility that would play significant role in demystifying the complexity of trade and supply chain transactions.

Technology has improved significantly and many commercial banks now have long term strategy in place to upgrade their trade finance capabilities to stay relevant in the constant dynamics of the market. This technology driven transformation is both an opportunity and threat at the same time, as early birds will have a higher chance of survival whereas those resting on past laurels may face the risk of extinction. Trade & Supply Chain Finance is undergoing a massive makeover, and it will surely catch the attention of many new players, unlike in the past!!!

September 16, 2014

Why it's not bad to be Gob-SMAC-ked!

- co-authored by Amit Lohani, Principal Consultant, Financial Services, Infosys

CIOs of banks face several challenges. On the one hand, they have to meet the requirements of the business and finance departments, which contend with wafer-thin margins and stagnant topline growth after the global financial crisis. On the other, they must address a rapidly changing technology landscape, which can make a dinosaur of the IT architecture, if it is not upgraded. Instinct suggests implementing the latest technology, but the numbers do not stack up. So what is the middle path - a solution that ensures the IT ecosystem is ahead of the curve and delivers optimal business results quickly and at low cost?

The answer lies in Social, Mobile, Analytics, and Cloud (SMAC).

A majority of financial institutions has adopted SMAC, but invariably, the SMAC strategy is an incremental or supplemental activity to Business As Usual (BAU) operations. The marketing department of banks often perceive social and mobile as channels to push their products, and analytics as a source of business intelligence to market products with a high degree of accuracy. The cloud is perceived as a technology that may or may not have a long-term impact on business. Such an approach needs to change fast. Retail financial institutions share customers with online retailers such as If the rules of the game have changed due to emerging technologies, will the customer do business in the traditional way with financial institutions? Factors that have contributed to the success of online retailing are similar to the success of digital financial enterprises - convenience, speed and customization at a lower cost compared to the traditional business model.

Financial institutions should leverage the social channel not just for soft launch of products and build brands, but to deliver customized variations of the same product. Social networking channels provide institutions with a platform to connect customers at an individual level. Significantly, the platform increases the customer universe through referrals. Customer feedback and course correction can be prompt. Social media channels can mitigate risk and prevent fraudulent activities. The trends on social media platforms provide insights into customer behavior such as the tendency of willful defaulting, thereby providing an efficient risk management tool. Financial institutions should explore risk models that evaluate the 'social score' of potential customers before extending credit. Social networks can be used as crowdsourcing platforms to generate ideas for new products. The Moven mobile app integrates purchase behavior of customers with their social timeline and offers tools to better manage finances. Money managers can provide an app to create a more relevant financial plan for customers. On online platform Lenddo community members can use their reputation on social networks such as Facebook, LinkedIn, Twitter and Yahoo! to obtain life-improving loans, to use for education, healthcare, home improvement or a small business.

Similarly mobility needs to be looked at not just as a channel but also a way to increase the customer base. Internet on smart phones is going to change the Financial Inclusion paradigm. With Google announcing the launch of its new mobile OS Android One (launching on handsets in India this fall), specifically targeted at cheaper smart phone manufacturers, the way that banks need to look at Financial Inclusion changes. Till now an oft quoted statistic was that there are more mobiles in the developing world than there are bank accounts. Within the next decade it will change to "more-smart-phones-than-bank-accounts". The lowering tariffs of mobile internet, coming up of hot-spots across towns and cities and improving speeds with each subsequent generation of technology is going to make it possible. Banks and their vendors will accordingly need to adjust their offerings for the BOP customer. Banks will have to think about their BOP offerings also in terms of visual literacy in order to be relevant to an even bigger segment of customers and encouraging them to bank. The success of Square, which provides a credit card reader for the smartphone, illustrates how a smartphone can transcend a sales channel.

Analytics is leveraged by financial institutions to drive revenue growth and mitigate risks. Analytical tools can be used for customer acquisition and retention, risk management, marketing, customer service, and cross-selling services. We have barely scratched the surface of analytics. More data has been generated in the last two years than in the entire history of humankind. As the Internet of Things and wearable technology become more commonplace, there will be more data to manage. Financial institutions need to prepare themselves to address the tsunami of data.The proliferation of cloud technologies and improved bandwidth make it easier to set up branch outlets. Financial institutions should explore operating paperless service centers using minimal infrastructure with a majority of IT systems in the cloud. It will free up physical infrastructure during non-banking hours. A branch operating IT systems in the cloud, with appropriate security measures, can be used as a customer contact center to serve customers during non-banking hours. In Los Angeles, bank branches are let out as movie sets during non-banking hours, thereby freeing up physical infrastructure for alternative use.

Financial institutions should increasingly use social, mobility, analytics, and cloud technologies to remain competitive. They must explore new technologies to innovate their business models and not as sales or service delivery channels.

Has your financial enterprise been SMAC-ked yet?

September 11, 2014

Digital natives of the banking industry

Do you know of the digital natives in the banking industry? The online only banks that do not have any physical branches! Yes, there are such banks. Banks like Simple, Moven, GoBank, and Fidor Bank are attempting to disrupt the banking industry and are vying for the position of digital natives of the banking industry. When we mention this, people wonder how this is possible. Many of these banks have established a partnership with a larger or a parent bank to manage all the banking operations and focus primarily on providing a niche customer experience. They own product management and the customer channels and leave the backend operations to other banks.

These banks are re-defining banking with a singular focus on the customers banking experience. Simple is known for its focus on simplifying financial planning and management, no-frills added fees and giving terms and conditions in plain English. Moven, founded by the author of the popular book Bank 2.0 has its focus on guiding customers on better money management. It helps customers track their expenses, provides real time feedback on purchases, and also encourages budgeting and monitoring. GoBank allows users to choose their fees and makes revenue from merchants for debit card transactions. The Germany based Fidor Bank has its focus on community - that the bank and its customers are a community. Unlike others in this group, Fidor has a banking license. An interesting feature is that Fidor's interest rates for overdrafts are based on the number of 'like' clicks on Facebook.

The business model of these new age banks are different from the traditional players in a number of ways. 

  1. Customer engagement and banking operations are getting split, leading to value chain disaggregation. These banks predominantly provide checking accounts in partnership with other government regulated banks. The funds are held by the partner banks. In some cases, these are subsidiary of a larger bank.
  2. The new age banks see financial education and Personal Finance Management (PFM) as core activities of a bank and a main reason for customers to bank with them. The PFM tools are integrated into the banking screens and dashboards. They are not isolated tools as in the traditional banks.
  3. The digital only banks are trying to build a business model around savings of their customers and interchange fees. They encourage customers to save more, which leads to revenue for the bank from the interest of the customers deposits.
  4. Partnerships with third party players helps them to bring out more products faster and cheaper. For example, partnerships to provide ATM access and foreign exchange services.
  5. The digital banks are driven by a technology mind set.  IT is considered not just as an important division. The banks staffing plan includes experts in user experience design, IT engineers, and experienced banking professionals. IT and business are often co-located leading to better collaboration.

 Innovation is a key differentiator for these banks. The small size, close collaboration between IT and business, and their primary focus on providing a new banking experience for their customers enables them to sustain their innovativeness. The high positive ratings and feedback from their early customers has given a fillip to these banks. These digital banks seem to have 'fans' and not 'customers'! Only time can tell how long they can hold on this early success and cause a disruption in the banking industry. In a way, BBVA's acquisition of Simple gives an indication of the direction this disruption will take.