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


July 20, 2015

Design considerations when using crypto currencies and distributed ledgers

Crypto currencies and distributed ledgers are the latest buzz in the financial services industry. Surprised! - Did not Bitcoin originate as a radical innovation and soon got dumped in to the dark side of underworld transactions? Central banks were concerned about how to control Bitcoin usage and warned of its risks, slowing down its adoption by mainstream. Nevertheless, researchers and innovators continued to build on Bitcoin and its technologies. Quietly, new innovations based on the utility of Blockchain and solutions to inherent issues in Bitcoin emerged. The technology has evolved from Bitcoin to Alt-coins to new technology layers on top of Blockchain to new peer to peer distributed ledgers very different from Bitcoin. Now, the world sees Bitcoin as an important nascent step in the evolution of crypto currencies and distributed ledgers.

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January 19, 2015

Banks - Don't Let Your Concerns Cloud Your Cloud Vision!

 - Anjani Kumar

Today, most banks endeavor to leverage IT for delivering bespoke, anytime, anywhere services and products underpinned by real-time analytical insights. Unsurprisingly then, at an average ~15% of total costs, banks' IT spending is the highest among all industries.

Understandably, banks are looking for impactful ways to bring down this cost.  Cloud Computing is a superlative means to achieve this goal, and can play a key role in helping banks transform their operating models. The Cloud enables secure deployment options, effective collaboration, new customer experiences, and shorter time-to-market for new launches. Cost savings and flexibility (through minimal capital investment and a pay-per-use billing model), enhanced business agility and continuity (through robust upkeep of the Cloud environment), and Green IT (by reducing both carbon footprint and energy consumption) are just some of the benefits of Cloud Computing.

It is estimated that by 2020, around 40% of the information in the digital universe will be Cloud-enabled. Further, research estimates that in about 18 months, more than 60% of banks worldwide will process high volumes of transactions over the Cloud.

Following are some of the functions that proactive banks have successfully migrated to the Cloud:

Mortgage/Lending Origination: Private / Community Cloud-based integrated collaboration lending platform -enabling customers to apply for loans and complete processes electronically

• Enhancement of customer relationships through consistent cross-channel experience
• Channel management (kiosk, ATM, online, mobile, call center) and content management using Private Cloud

Payments: Modernization and standardization of transaction processing

Micro Banking: Micro banking business execution

Analytics: Customer data integration across banking platforms for providing near real-time insights

Desktop Management: Centralized management of employees' desktops for greater remote management flexibility

•Access to bank's systems for branch employees via a secure Cloud
•Enablement of all customer engagement dimensions

Enhanced Business Services: Enablement of third-party services to extend banking ecosystem

New Service R&D: Research and development of new services


In spite of Cloud Computing's huge potential, many banks, beset with the following concerns are reluctant to leverage it:

Security: This remains a key concern. Many banks believe that the security and confidentiality of personal and commercial data is at risk in the Cloud.
Regulatory requirements: Many countries require banks to maintain their financial and customer data within the national boundaries.  Consequently, banks are concerned about the exact location of their data in the Cloud.

Operating control dilution and higher risk: Banks are concerned about an increase in operational risk, and its potential adverse impact on business and reputation should services over the Cloud be hampered.

Uncertainty over long term cost impact: Banks are concerned that a major strategic decision, such as switching to a Cloud-based model, is not easily reversed. They are also concerned about a potential lock-in with the Cloud service provider and unsure of how to bring the services back in-house later, if needed.  They are concerned of the huge cost and risk implications if IT systems need to be brought back in-house at a later point in time. They are also not certain of the long term cost implications of moving to the Cloud.

Concern over Cloud service providers: Banks are worried about a relative lack of standards for integrating Cloud service providers' services with their own servicing needs. They are also concerned that the solutions of many Cloud providers (across functional, operational, technical and commercial models) lack maturity. Many Cloud service providers lack proven credentials and a successful track record. Banks are also concerned that if the Cloud service provider suffers a major outage; it can have huge adverse implication for banks. Not even big Cloud service providers like Amazon Web Services have been totally immune to major outages.

That being said, success stories of banks' migration to the Cloud abound. Here are just two examples. Bankinter, the 6th largest bank in Spain, has crashed the time taken for credit risk simulation from 23 hours to just 20 minutes using the Amazon Cloud.  Commonwealth Bank of Australia cut its costs by half by moving its storage to the Cloud, and also achieved huge cost savings in app development and testing.
So what should banks, unsure of how to go about Cloud migration do, to reap immense business benefits? My next blog will provide actionable recommendations. Stay tuned...

October 10, 2014

Emerging person to person payments business landscape

A WSJ report states that in US, each year the person to person payments are roughly about $900 billion that includes payments by cash, check, online, and mobile payments.  Online and mobile money transfers are standard features of most of the banks and payment providers like PayPal. In addition, money transfer operators like MoneyGram and Western Union are major players in both domestic and international person to person payments business. The incumbents - banks and money transfer operators have well established networks and systems in place to cater to a large global customer base. However, the person to person payments market is seeing increasingly new disruptive players. Convenience and lower fees are the two important levers used by these new players to take on the incumbents. The incumbents are under threat from three emerging groups of players in the person to person payments market.

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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.

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June 26, 2014

Is digitization new to banking?

'Digitization' is the latest hot topic of interest among the executives of most of the banks. It has emerged as the key business trend in the banking industry, inspired by the success of the digital natives like Google, Amazon, and Netflix. Every bank wants to be a digital bank and IT is expected to drive the change. But, is not IT the digital arm of a bank? Infact, IT has been driving the business for many decades now. Banks and financial services companies are recognized as the early pioneers in the adoption of IT. Customers have been using online banking services for more than a decade now. Services like bill payments and money transfers are very common for quite some time. This raises the question - Is digitization new to banking?

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August 24, 2012

To Help Prevent the Next Market Disaster, Raise the Bar on Testing Standards

We have yet to learn all the details behind the US stock market's 45 minutes of terror on August 1, during which Knight Capital's automated trading systems spewed out erroneous orders on the New York Stock Exchange.  In the meantime, we can draw a preliminary conclusion from what we do know.  Knight's acknowledgement of a bug in software released the night before the event points directly to the need for higher testing standards.

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