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

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April 21, 2016

Bionic Advisors: A Human & Technology Mash Up!

It's April - a new financial year; a time when terms like 'higher taxable income,' 'investments,' and 'Sections 80C, 80D, 80E,' keep buzzing in my head. Now, although tax planning is certainly on my cards, the 'when, where, and how' of investing is still unclear, thus driving me to seek financial advice. To avoid the hassles associated with traditional financial advisors, I initially thought of using automated advisors that are popularly known as robo-advisors; but, then I realized that these models will not provide personalized advice in important matters. That's when I found the perfect answer to my investment woes - 'bionic-advisors.' Yes, you read it right; not 'robo,' but 'bionic'.

'Bionic-advisors' make use of technology to enhance client relationships. They use a specialized, automated advice software to create reports that are used as a base for all client interactions, which happen either via web portals or mobile devices. Additionally, these advisors use automation in various areas, such as creating customized client reports, paperless onboarding processes, and rationalizing KYC processes. As a result, bionic-advisors save time and increase efficiency, allowing them to focus better on client interactions. Although bionic-advisors are very similar to robo-advisors -- especially in terms of cost effectiveness and transparency -- they still score over robo-advisors, thanks to the human element in the bionic model.

Individuals like me, who have certain financial goals, but still require personalized advice; will prefer bionic-advisors. They provide automated portfolios and reports that investors can use at any point of time and, most importantly, they give us access to  interact with financial advisors when we feel the need for them. Interestingly, more than low-net-worth individuals, it is the high-net-worth individuals (HNIs) who seem to benefit the most from bionic-advisors. Most HNIs want their preferences to be incorporated into their huge portfolios, and demand customized financial advice for their complex investments. Consequently, they prefer a bionic mix over other advisory models.

Off late, 'financial advice' has been going beyond the realm of investing and instead, has taken the shape of financial planning. The mere presence of automated advisors will not completely quench the evolving financial needs of today's investors - a fact that only strengthens the case for bionic-advisors. Firms like AdviseSure are already making headlines. Launched in 2015 in India, AdviceSure is a bionic-advisor, providing advisory services across multiple product categories, such as mutual funds, capital market, shares and stocks, systematic investment plans (SIPs), tax-saving schemes, national pension system (NPS), etc. And now, they are in talks with venture capitalists to raise funds worth US$5-8 million, which will be used for marketing their service and improving their technology in the future.

The bionic-advisory model is a lot like hot chocolate fudge sundae. Everybody loves vanilla ice cream, just as they love chocolate sauce; but it's when the two come together that the final product becomes truly delightful. The bionic-advisory model's USP is that it integrates automation with human interaction, thus ensuring the best advisory solutions for investors. In the end, it is the measure of delight that bionic-advisors will offer their investors, which will decide the model's sustainability in the long run.

April 13, 2016

Don't ignore SME Lending: Alternative Lenders are here

-by Kiran Kalmadi and Durga Prasad Balmuri

The next focus in the David Fintechs Vs Goliath Banks series is on SME lending. In 2014, 28 million small and medium-sized enterprises (SMEs) in America contributed to over 50% of the U.S. non-farm GDP. Yet, most of them find it very challenging to secure the capital required to either run their daily operations, or invest in business expansion; as small business lending is largely neglected in many countries.

At the same time, many banks have also seen a dip in their share of lending to small businesses over the past few years. For example, loans issued by the top, 10, U.S. banks dipped to US$44.7 billion in 2014 vis-à-vis US$72.5 billion in 2006. This could be attributed to the fact that banks find it unviable to cater to this segment due to a number of factors such as the small loan size, strict regulations, heavy paperwork, etc. These factors make lending expensive, considering the relatively low returns that they generate. In addition, banks also expect borrowers to perform well on three parameters - credit scores, collaterals, and cash flows - before extending loans; and not all SMEs can meet these criteria.

Luckily, every cloud has a silver lining and these challenges have catalyzed the growth of a new type of online non-bank lender or tech-based alternative lender. They disburse loans via online platforms using advanced, underwriting algorithms and new credit appraisal methodologies. Unlike traditional banks, these lenders refuse to depend on just the three parameters, and analyze additional parameters like bank transaction history, tax filings, credit card history, invoice volumes, etc., before disbursing loans. The insights gained from these additional data points greatly improve the chances of granting loans to SMEs. This way, platform-based companies can quickly underwrite loans of small-ticket sizes that banks find trouble servicing.

What's more, by leveraging technology, online platforms, and innovative risk assessment methodologies; most alternative lenders take only a few minutes to assess if an applicant qualifies for a loan. In other words, approval mostly happens on the same day and is ideal for most businesses that need regular financing and cannot wait for weeks every time they need funds.

Such customer-centric processes make alternative lenders like OnDeck, Kabbage, Fundation, Funding Circle, and many others; rockstars in the SME lending ecosystem. Stars who take on a lot of risks including unclear regulations and a higher probability of loans defaults. Under these circumstances, alternate lenders are reducing risks by charging higher interest rates that could reduce in the near future once they become more mainstream, secure funds at cheaper rates by partnering with banks, and establish firm roots in the lending space.

The bottom line remains that alternative lenders may turn out to be more favorable to SMEs than traditional banks. By offering a life-line to small business owners, they might soon start gnawing at the balance sheets of banks; implying that banks must come out of their comfort zone and act upon their inherent challenges faster than ever before.

April 5, 2016

Robotic Process Automation (RPA) in Financial Services (FS) - A Game changer?

-by Souna Uthappa and Naveen PV

Over the years, robotics has become a key driver of growth and efficiency across various industries such as manufacturing and hi-tech. The financial services (FS) sector, however, remained a step behind being cautious of automation, but thankfully, only for a while! It has recently taken baby steps and adopted robotic process Automation (RPA) to overcome the challenges of complex regulations, sluggish macro-economic factors, and the emergence of disruptive technologies.

Interestingly, the recent familiarization has unveiled more opportunities for RPA to have far-reaching impact on the FS sector -- beyond traditional process automation that focuses on automating individual tasks! The spotlight has now turned to a fundamental tenant of RPA called artificial intelligence (AI) that is being extensively used to capture, interpret, and analyze complex financial transactions and real-time interactions between various platforms and software applications.

The fact that new-age AI applications can carry out complex tasks, unassisted, by leveraging inherent problem-solving capabilities, is setting the stage for ground-breaking solutions in FS. Some areas where RPA can have tremendous impact include:

• Exception management
• Tasks involving high volumes of data
• Cross-system manual processing
• Data gathering and reporting
• Reconciliation activities
• Monthly account closure
• Bulk data updates
• Regulatory reporting
• Balance sheet reconciliation
• Capital markets
• Affidavit creation (loans)
• Audit trail creation
• Template maintenance
• Customer services
At this very moment, many firms are utilizing RPA to achieve short-term benefits such as cost reduction, agility, efficiency, accuracy, speed, greater performance, and quality. That's not all, many enterprises are also realizing long-term benefits such as re-deployment of resources for more strategic, value-added initiatives, while creating more agile organizations that can improve customer experience.

Yes, leaders are driving the RPA trend!

MasterCard, Visa, Lloyds Banking Group, Deutsche Bank, Merrill Lynch Wealth Management, ANZ Banking Group, and Barclays are some of the frontrunners in RPA adoption. For instance, when ANZ implemented RPA to fix time-consuming errors which occurred daily in one area of payments, they were able to reduce resources from 40 to 2 and redeployed them to other areas where they could make an impact.
Barclays also implemented RPA across a wide range of processes including accounts receivables, fraudulent account closure, loan application opening, 'right of setoff', etc. Consequently, they were able to save around 120 FTEs and reduce their bad debt provision by £175 million per annum.

The bottom line is that businesses have high expectations from RPA-related initiatives, especially where cost reduction through effective staff utilization and the right sizing of resources are major focus areas. Even though RPA adoption comes with inherent challenges such as misplaced expectations and resistance from employee unions, it is emerging as a major game changer, helping the industry to become more agile, smart and lean.

Credit Scoring: Ripe for Disruption

-by Kiran Kalmadi and Durga Prasad Balmuri

Continuing with our David Fintechs Vs Goliath Banks series, this blog focuses on another important disruption, i.e. Credit Scoring. With each passing day, the probability of our mailboxes being inundated with emails from various credit scoring start-ups is on the rise. E-mails advertising, 'Get a free credit check-up online', 'Get your credit score and analysis online'; and 'Unlock your credit potential' clog inboxes compelling us to activate spam filters! Having said that, these e-mails are also indicative of the rise of credit scoring start-ups. A new generation of Fintech start-ups like Credit Karma, Credithood, Kreditech, and Aire have begun to challenge industry behemoths like FICO, Experian, Equifax, etc.

Now, why credit scores? Credit scores are essential in many countries. No score or an insufficient credit score can affect a person's ability to buy a car (auto loan), purchase a home (home loan), rent a house (landlords check credit scores), or even gain romantic alliances (read the Federal Reserve study of Credit Scores and Committed Relationship)! This problem affects migrants, recent graduates (students), new entrepreneurs, etc. and it is widely estimated that there are 53 million Americans with no credit scores. Likewise, in many countries a good number of population do not have credit scores. Over the years, there have been many attempts to provide credit scores, but the issue continues as most of the solutions are based on historical transaction data of loans, credit cards, and mortgage payments. Thankfully, traditional credit scoring companies have also started calculating credit scores on few more additional metrics such as utilities payments, rent payments data, etc. However, there is also a strong need to better assess credit risk by creating accurate customers profiles and assessing their eligibility using multiple factors -- educational background, job profile, social profile, and more.

New-age scorers

The onset of on-demand services ushers in a requirement to assess an individual within few minutes. This assessment must determine if he/she should receive credit and at what rate. It's therefore predictable that new-age scorers are leveraging big data algorithms, automated processes, cloud computing, and analytics (consumer behavior analytics) to generate scores for those who have been ignored all these years. What's more, to calculate credit scores, these firms are also analyzing new and modern data sources such as education history (course studied, university name, postgraduate income, etc.), mobile phone statistics, monthly cash flows, cable bills, property records, employment background, online behavior and preferences (how active the user is online, sites visited frequently, product categories looked at), and history of bill payments. The bottom line is that this is an ongoing effort and new-age Fintech firms that have started on a clean slate are finding innovative ways to provide people accurate credit scores. For instance, Social Finance (SoFi) a lending startup, said that it is moving away from FICO scores and called this strategy a 'FICO Free Zone.'In the process, fintech firms  are bringing a lot of unbanked population to the mainstream. Simultaneously, the existing credit scoring systems in developing countries could transform as empowered customers and lenders will demand faster and more innovative scoring methodologies, thereby disrupting the market. Only time will tell if this is just a one-off case or whether it will evolve into a trend!

Stay tuned for more action.

P.S: For those interested in knowing what happened to our inbox inundation, our next task is to set up our spam filter!

April 4, 2016

Banks and fintechs: Conflict, confrontation and collaboration

-by Kuljit Singh and Varun Narang

Mahatma Gandhi once famously said, "First they ignore you, then they laugh at you, then they fight you, then you win." Who would have thought that these wise words from the hero of the Indian freedom struggle would reflect the attitude of banks towards fintechs? Having passed the first two stages of ignoring and mocking fintechs, they are now realizing that indeed, fintechs are a threat worth taking seriously, especially, when you consider the billions of dollars banks stand to lose if they continue turning a Nelson's eye to the challenge. According to a report by Goldman Sachs, financial services are at a risk of losing USD 4.7 trillion in revenue to these new tech-enabled or fintech entrants.

Now that the realization has dawned on banks about how real and present the threat is, they are beginning to buckle up to take the fight to not only defending their bastion, but also taking a more aggressive posture to beat fintechs in their own game. To this end, banks such as ABN, BBVA, Citigroup, Barclays, Deutsche Bank, and others are attempting to rewrite the rules of business by setting up innovation labs, accelerated programs, and venture capital funds to stimulate the technological experiment and match the customer services offered by fintechs.

Few cases in point are: Citibank is establishing a new fintech unit and is also testing an eye-scanning ATM. Goldman Sachs has formed a new venture for enterprise mobile technology. Morgan Stanley is investing in data warehouse solutions, mobile apps, BI and analytics tools, application development tools, PaaS, etc. ABN AMRO Bank is letting prospective customers sign up for a new account with their smartphone and face recognition. Barclays has signed deals with Blockchain startups and Deutsche Bank has launched a computerized investment advisory service called 'AnlageFinder'.

Though these are innovative approaches, they have some serious cons as well, which could make it hard to justify the energy and money put into them. This struggle could make many 'follow the herd' attitude banks to abandon their approach of innovation and nurture more practical and sustainable approaches.

Of all the approaches being adopted by banks, in our opinion, the most pragmatic and sustainable one is that of collaboration. It would be wise to follow the dictum, 'if you can't fight them, join them'. This is especially true in cases where the cost of innovation is prohibitive. This type of collaboration is happening not only between banks and fintechs but also among banks. An example of the former is investment by almost all major banks in start-ups and tie-ups with Apple, Android, and Samsung, etc. An example of the latter is the R3 where consortium which was formed when over 40 banks joined hands to encourage the development of blockchain usage in the financial system.

In conclusion, we are reminded of a famous quote by Mark Twain who said, "You can't depend on your eyes when your imagination is out of focus". Banks need to get their focus on the most critical component of this entire tussle with fintechs, i.e., customer services. Once that focus and goal becomes clear, their eyes will begin seeing the path that is most appropriate to reach the goal.