Keith Pearson, Head of Financial Services EMEA at ServiceNow, explains how banks can ride this wave of changes and emerge more resilient and productive than ever before.

At the start of this crisis, much of the banking industry was in a different position from many businesses. The 2008 recession spurred a need for improvements and, combined with the emergence of tech-savvy fintechs, the industry has seen a major shift as customer expectations have adapted. The pandemic has forced organisations to accelerate innovation already part-underway in the banking industry.

As banking experienced its first wave of transformation, institutions focused on customer engagement, uniting physical and digital channels for an improved customer experience. Banks invested heavily in front office digital technology, creating visually appealing mobile apps, engaging online banking experiences and technologies for bankers to personalise customer engagement.

However, this digital engagement layer is not enough. Regulations like PSD2 reinforce the necessity to remain compliant, adding additional pressure to the digital transformation process which in turn has been accelerated by COVID-19. Banking is therefore in the midst of its second wave of transformation, where financial institutions are creating and seeking out critical infrastructure to better connect underlying middle and back office operations with the front office, and ultimately, with customers.

A Disconnected Operation

Many financial organisations are still struggling because they have yet to streamline, automate and connect the underlying processes that are enabling customer experiences. Which poses the question: why is connecting operations so difficult?

In most cases, multiple systems are still glued together by email and spreadsheets to track end-to-end status. Around 80% of a middle office employee’s time is spent gathering data from systems to make a decision, with only 20% spent actually analysing and making the decision.

In most cases, multiple systems are still glued together by email and spreadsheets to track end-to-end status.

The disconnect negatively impacts customers. For many, experiences like opening a bank account or getting a mortgage involve clunky, manual processes riddled with paperwork and delays. When front and back office employees lack the ability to seamlessly work together, customers can be asked for the same data multiple times, elevating frustration.

Customers have little patience and can be inclined to publicly broadcast problems when left unresolved. In a world of social media and online reviews, this could be detrimental to a company’s reputation.

With digitally native, non-traditional financial services players gaining market traction by offering a seamless customer experience, maintaining satisfaction is crucial for traditional banks to ensure that customers don’t switch. Banks must focus on making it easy for customers to do business with them by offering faster cycle times with more streamlined operations.

The Fintech Effect

Fintechs and challenger banks like Starling have shown what connected operations can do, having been built with digitised processes from day one. Modern consumers expect round-the-clock service from their bank. As financial institutions look to the future, developing a model of operational resilience that is capable of withstanding unforeseen issues, like power outages or cyberattacks, is critical to minimising service disruption. Having connected internal communications between front and back office staff means customers can be notified about any problems, how they can be fixed and when they might be resolved, as well as receiving continuous progress updates instantaneously.

Automation can go a step beyond this. Today, customers expect companies to not only do more and do it faster but to prevent problems from arising in the first place. With connected operations and Customer Service Management (CSM), banks can proactively fix things before they happen and resolve issues fast, enabling frictionless customer service and replicating the ‘fintech effect’.

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What About Compliance?

In the European Union and the UK, PSD2 and the Open Banking initiative are giving more control to the customer over personal account data. Digital banks such as Fidor and lenders like Klarna are seeking to reinvent banking by offering customer-centric services. But the process of streamlining underlying operations is not simply about providing customers with a fintech-esque experience. More than 50% of a financial institution’s business processes are also impacted by regulation.

Financial services leaders are focusing on streamlining and taking cost out of business operations while also placing importance on resilience. Regulators are pushing banks to have a firmwide view of the risk to delivering their critical business services.

Banks must invest in digitising processes to intuitively embed risk and compliance policies, which are generally managed separately and often manually from the business process, leading to excessive compliance costs and risk of non-compliance. With the right workflow tools for monitoring and business continuity management, banks can minimise disruption by gaining access to real-time, actionable information about non-compliance and high risk areas, encompassing cybersecurity, data privacy and audit management.

Increasing openness of financial institutions to RegTech solutions, or managing regulatory processes in the industry through technology, will prove key during this second wave of transformation. Banks will increasingly move away from people and spreadsheets and toward regulatory solutions that provide a real-time view of compliance and provide an end-to-end audit trail for Heads of Compliance, Chief Risk Officers and regulators.

With a unified data environment aided by technology, financial institutions can drive a culture of risk management and compliance to improve business decisions.

Increasing openness of financial institutions to RegTech solutions, or managing regulatory processes in the industry through technology, will prove key during this second wave of transformation.

Riding the Wave

The banking industry is still in the midst of its second transformation, and the pandemic hasn’t made it any easier. But riding this wave and successfully digitising processes to connect back and front office employees will present a profound difference to customer service.

The bank of the future will be frictionless, digital, cloud-enabled, and efficient; interwoven into the fabric of people’s lives. It will continue to be compliant and controlled but will deliver those outcomes differently, with risk management digitally embedded within its operations.

Demonstrating the operational resilience of its key services will not only drive customer confidence but will also provide a greater indicator of control to regulators and the market, adjusting overall risk ratings and freeing up capital reserves to drive more revenue and increase profitability.

The institutions that will thrive in this increasingly digital and connected world are the ones that are actively transforming themselves and the way they do business now, by taking lessons from fintechs, following regulations and paving the way in defining the future of financial services.

Challenger banks such as Monzo, Starling and Revolut are built to scale, evolve and improve their offerings easily and quickly, and are doing great extending their customer base. According to Ian Bradbury, CTO for Financial Services at Fujitsu UK & Ireland, they are also now beginning to slowly move towards becoming a full service bank for their customers, as well as branching out their offerings to SMEs.

The way banks make their money is by keeping administration costs low, managing the lending risk and investing wisely to receive good returns. Other income avenues include offering “added-value” services, such as payments, for which they take a handling fee (particularly useful when market returns are under performing, for example in the case of low interest rates).

Four digital-led factors to disrupt banking

Four interrelated digital-led factors are fundamentally transforming traditional financial services: new distribution models; cloud native computing; data enrichment in a hyper-connected world; and exponential increase in the rate of change. These four factors create new ways for banks to operate, to do business and to enhance their offerings for consumers - but they have not fundamentally changed their money-driven banking business model – yet!

Regulators have recognised the value that can be bought by these four factors to banking customers, and have sought ways to encourage the uptake of them – often also encouraging new digital-native entrants into the marketplace. Regulators have also sought to ensure that high-margin services can be “unbundled’, allowing new competition to compete in these areas.

In theory, it should not be difficult for banks to not only survive the arrival of these four digital-led factors – in fact with their financial backing, existing customer base, technology assets and regulatory status they should be able to thrive in this competitive landscape.

This is especially true as other potential non-banking competitors have to overcome complex regulatory challenges – besides not being set up to offer the basic banking business model.

Legacy problems

In reality, traditional banks are struggling to keep up with how the market is moving. The reason for this can be summarised in one word – legacy. Legacy culture, legacy skills, legacy controls, legacy distribution models, legacy systems.

Slowly, this is changing, but until these legacy bottlenecks are removed, banks will struggle to keep up. Those that do not move quickly enough to deal with this challenge are unlikely to survive.

Assuming that traditional banks can overcome these legacy challenges and become the truly agile, low-cost, open-driven, customer-obsessed, data-powered, highly automated businesses promised by the digital-native challenger banks then their traditional banking business model may well also change.

The banks of the future

Banks currently operate a fairly simple two-sided marketplace – they take money from depositors and give it out to borrowers, generating trust in the process. But what they really do is provide a two-sided marketplace for ‘value’ – which is currently focused on money.

Digital transformation potentially allows for other ways to exploit this value-based marketplace, with the data-insights and enrichment coupled with new distribution models creating potentially new services.

Besides this, the notion of value is changing in the digital age, with areas such as data, identity, reputation, authenticity and even perhaps social purpose falling within it. These types of values can potentially be digitally stored, secured, exchanged and exploited in a marketplace - just like money. Maybe for example the banks of the future will become the custodians of your valuable data, both protecting it and helping you generate benefits from it.

Handling financial transactions also comes with its own risks, such as online fraud, that can have serious financial implications on day-to-day bank operations. The good news is, blockchain technology could turn the traditional banking industry on its head by making banking services seamless, transparent and more secure for customers. So far,
33% of commercial banks are expected to adopt blockchain technology in 2019.

Blockchain technology is set to disrupt the banking industry in a number of ways:

1. Reduced Payment Costs

Technological innovations have enabled more people to work online and even receive payments for their work-from-home jobs through their smartphones or computers. With banks adopting blockchain technology, the cost of sending payments is expected to reduce drastically. This will help eliminate the verification requirements from third parties during bank transfers. The processing time for payments will also be reduced, and the additional fees that banks charge eliminated. For instance, Bitcoin and Ethereum can take 30 minutes or a few hours to settle a customer's financial transaction compared to bank transfers that can take up to three days.

2. Direct Clearance and Settlement of Transactions

Traditional banks use a centralized SWIFT protocol to transfer money between two parties, with the actual cash being processed by intermediaries. The processing of SWIFT payments can take approximately 30 minutes if both parties screen and approve the transaction. However, if the corresponding banks don’t reconcile their ledgers in time, the transaction fails. With blockchain technology, the clearance and settlement of transactions are instant. Blockchain allows banks to track and keep their decentralized ledgers in their public network rather than relying on custodial services and correspondent banks. According to Goldman Sachs, banks would save at least $6 billion in settlement fees and related costs annually by adopting blockchain technology.

3. Lower Security Exchange Fees

The purchasing and selling of securities in the current financial market are done through brokers, central security depositories, custodian banks, and clearing houses before processing is complete. The manual process is tedious, sometimes inaccurate and prone to deception as it passes through several parties during the exchange. Blockchain technology will help eliminate intermediaries and brokers who are present during the transfer of stocks and assets, saving $17 to $24 billion in processing costs. Through blockchain technology, clients can transfer their securities and assets via cryptographic digital tokens like Bitcoin and Ethereum much faster and with lower exchange fees. Big banks such as JP Morgan and CitiBank, who are large custodians of assets worth over $15 trillion, are already adopting blockchain technology to lower security exchange fees.

Blockchain technology has immense potential in revolutionizing the banking and finance industry. Many financial institutions are expected to adopt it in 2019 and beyond to enjoy the benefits it offers.

New entrants to the banking market — including challenger banks, non-bank payments institutions, and big tech companies — are amassing up to one-third of new revenue, which is challenging the competitiveness of traditional banks, according to new research from Accenture (NYSE: ACN).

Accenture analysed more than 20,000 banking and payments institutions across seven markets to quantify the level of change and disruption in the global banking industry. The study found that the number of banking and payments institutions decreased by nearly 20% over a 12-year period – from 24,000 in 2005 to less than 19,300 in 2017. However, nearly one in six (17%) of current participants are what Accenture considers new entrants — i.e., they entered the market after 2005. While few of these new players have raised alarm bells among traditional banks, the threat of reduced future revenue growth opportunities is real and growing.

In the UK, where open banking regulation is aimed at increasing competition in financial services, 63% of banking and payments players are new entrants – eclipsing other markets and the global average. However these new entrants have only captured 14% of total banking revenues (at £24bn), with the majority going to non-bank payments institutions. The report suggests incumbent banks will likely start to see a significant impact on revenues as leading challenger banks are surpassing the 1 million customer threshold and 15 fintechs have been granted full banking licenses.

“Ten years after the financial crisis, the banking industry is experiencing a level of competitive intensity and disruption that’s much greater than what’s been seen before,” said Julian Skan, senior managing director for Banking and Capital Markets, Accenture Strategy. “With challenger banks and platform players reducing traditional banks’ competitiveness and the threat of a power shift looming, incumbent players can no longer rest on their laurels. Banks are mobilizing to take advantage of industry changes, leveraging digital technologies and ecosystem business models to cement their relevance with customers and regain revenue growth.”

In Europe (including the UK), 20% of the banking and payments institutions are new entrants and have captured nearly 7% of total banking revenue — and one-third (33%) of all new revenue since 2005 at €54B. In the US, 19% of financial institutions are new entrants and they have captured 3.5% of total banking and payments revenues.

Over the past dozen years, the number of financial institutions in the US has decreased by nearly one-quarter, largely due to the financial crisis and subsequent regulatory hurdles imposed to obtain a banking license. These factors have made the US a difficult market for new entrants and a stable environment for incumbents. More than half of new current accounts opened in the US have been captured by three large banks that are making material investments in digital, while regional banks focus on cost reduction and struggle to grow their balance sheets.

The research appears in two new reports: “Beyond North Star Gazing,” which discusses how industry change is shaping the strategic priorities for banks, and “Star Shifting: Rapid Evolution Required,” which shares what banks can do to take advantage of changes.

The reports found that many incumbent banks continue to dismiss the threat of new entrants, with the incumbents claiming that (1) new entrants are not creating new innovations, but rather dressing up traditional banking products; (2) significant revenue is not moving to new entrants; and (3) new entrants are not generating profits. To the contrary, the reports analyze where revenue is shifting to new entrants and identifies examples of true innovation happening around the world that can no longer be dismissed. Accenture predicts that the shift in revenue to new entrants will continue and will start to have a material impact on incumbent banks’ profits.

“Most banks are struggling to find the right mix of investments in traditional and digital capabilities as they balance meeting the needs of digital customers with maintaining legacy systems that protect customer data,” said Alan McIntyre, head of Accenture’s global Banking practice. “Banks can’t simply digitally enable their business as usual and expect to be successful. So far, the conservative approach to digital investment has hindered banks’ ability to build new sources of growth, which is crucial to escaping the tightening squeeze of competition from digital attackers and deteriorating returns.”

“As the banking industry experiences radical change, driven by regulation, new entrants and demanding consumers, banks will need to reassess their assets, strengths and capabilities to determine if they are taking their business in the right direction,” McIntyre said. “The future belongs to banks that can build new sources of growth, including finding opportunities beyond traditional financial services. They can’t afford to blindly follow the path they originally set out at the beginning of their digital journey. However, as the report clearly shows, there is no single answer and each bank needs to truly understand the market it is operating in before charting a path forward.”

Trust, context, the story, the relationship; these and many more are the strategy picks of today’s challenger banks, and the weapons of choice in today’s battle for the high street consumer. Below Finance Monthly hears from Yelena Gaufman, strategy partner at Fold7, who explores the current banking landscape and the increasing dominance of social good.

There is an undeniable disruption currently occurring in the world of banking. Innovative and cost-effective fintech and 'neobank' startups such as Revolut, Monzo, Tandem, Starling and Monese, are offering a fresh spin on an old formula and winning customers across the UK and beyond as a result. These are digital-first banking brands boasting features borne from bold, utility-first strategies and, more recently, a drive towards social good, and it's predominantly these features that have won them such good press and such good custom.

There is still a catch, though. This disruption might be well-documented, but it's not a foregone conclusion. Even if they are the “banks of the future,” these challenger banks could still learn a thing or two from their brick’n’mortar forebears when it comes to building trust, and they should start by asking one simple question: What is it that makes a person commit to one brand over another? Something so powerful it can transcend convenience and commodity? Emotional connection.

These challenger brands might offer a convenient, forward-thinking service, and they certainly represent significant value, but they often struggle to communicate their value proposition to consumers, particularly outside their traditional audience of urbanite early adopters. They also might offer a compelling vision of a different kind of banking, but what they really need to develop if they want to sow the seeds of genuine, lasting displacement, is an emotional connection with consumers.

A foundation of trust

The most obvious hurdle facing our fresh-faced fintech brands is the legacy and authority established by the incumbents. Consumers are far more likely to place their trust in the hands of an institution with a proven history, especially when it comes to parting with their hard earned bucks.

Building trust takes time, of course. But fresh-faced fintech brands do have a pair of aces up their sleeves. They are still figuring out what they want to be, and, perhaps more pertinently, whom they want to be trusted by. The clay is still wet, and willing to be mold into a prism through which all future brand decisions can be made and understood. When building their brands, however, and forging an emotional bond with their consumer, they should take two things into serious consideration:-

• Consistency – upcoming fintech brands must find a way to rationalise their services via purpose-led initiatives, establishing exactly what the company is for, over what it can do. It must also do this in a useful and powerful way for a number of different audiences. Not just millennials who live by and for their phones.
• Authenticity – while most traditional banking brands will have effectively reverse-engineered a brand to suit the services they offer, fintechs have the flexibility to establish a brand first and then create services that reflect and empower that brand. This will help them achieve an authenticity that traditional banking brands could only dream of.

Growth, storytelling and worth

In order for new banking and fintech brands to truly demonstrate their worth, a compelling brand story and a brand purpose is an absolute necessity. It all starts with understanding the context of what you're offering and how it plays into the lives of your intended audience. Being a feature-led, innovative company is great, but what is it that defines your work beside it being new and convenient?

Making a brand feel like it's actually worth something is no mean feat though. One way of doing this is to underline the role that your brand's innovations can fulfil in our daily lives, effectively tying the business and its services together with a wider sense of purpose. This is a method ably demonstrated by one of our recent campaigns for Gumtree.

Aptly titled “Turning Points,” the campaign visualises, in a very bold and unique way, how the app can help users to seize opportunity from change. We see a young couple moving through various stages of their life together, with Gumtree a facilitator of the natural changes that affect a lot of us at “that stage in our lives.” The app is used to swap a bike for a crib and then that crib for a bunk bed, before the crib is finally shown being sold on to another young couple, ready to begin their own adventure. It's a snappy, visually striking idea that reinforces the power of using familiar emotions to bridge a brand to its potential customers.

We currently sit at an intriguing juncture in banking for both disruptors and incumbents, with the industry forcing older brands to think about how they operate and vice versa. If the startups of today can organically forge and nourish emotional relationships with their customers and build lasting legacies of their own, the banking landscape of the near future could look very different indeed.

If everyone is one step ahead of the competition, how is it possible for anyone to be one step ahead? The FinTech sector is currently facing a complex situation where start-ups are one-upping tech giants, and vice versa, on a daily basis. So how is it possible to maintain an edge in the industry? Finance Monthly hears from Frederic Nze, CEO & Founder of Oakam, on this matter.

The financial services industry has entered the Age of the Customer -- in this era, the singular goal is to delight. With offerings that are faster, better and cheaper, new fintech entrants have the edge over traditional institutions who struggle to keep pace with consumers’ rising expectations around service. Yet this is not the first or last stage in the industry’s evolution. Just as telephone banking was once viewed as peak disruption, so too will today’s innovation eventually become the standard in financial services.

What will become of today’s new entrants as they scale and mature? The answer largely depends on why a particular fintech company is winning with customers today -- a hyper focus on problem-solving.

If customer review site Trustpilot is used as the litmus test for customer satisfaction, then clearly banks and other traditional financial firms are falling short of the mark. Looking at the UK’s Trustpilot rankings in the Money category, not a single bank appears in the top 100, and their ratings range from average to poor. Fintech entrants like Transferwise, Funding Circle and Zopa, on the other hand rank highly in their respective categories.

So how is it that such young companies have elicited such positive responses from consumers, beating out institutions with decades of experience and customer insight?

The advantage fintechs have over banks is that their products are more narrowly focused and are supported by modern infrastructure, new delivery mechanisms and powerful data analytics that drive continuous user-centric improvement and refinement. Still, they’ve had to clear the high barriers of onerous regulatory and capital requirements, and win market share from competitors with entrenched customer bases.

The halo effect of innovation and enthusiasm of early adopters, hopeful for the promise of something better, has buoyed the success of new entrants and spurred the proliferation of new apps aimed at addressing any number of unmet financial needs. This of course cannot continue unabated and we’re already approaching a saturation point that will spark the reintegration or rebundling of digital financial services.

In fact, a finding from a World Economic Forum report, Beyond Fintech: A Pragmatic Assessment Of Disruptive Potential In Financial Services, in August this year stated that: “Platforms that offer the ability to engage with different financial institutions from a single channel will become the dominant model for the delivery of financial services.”

Whether a particular app or digital offering will be rolled up into a bank once again or survive as a standalone in this future world of financial services, will depend on the nature of the product or service they provide. This can be shown by separating businesses into two different groups.

Firstly, you have the optimizers. These nice-to-haves like PFM (personal financial management) apps certainly make life easier for consumers, but don’t have competitive moats wide enough to prevent banks from replicating on their own platforms in fairly short-order.

For the second group, a different fate is in store. These are offerings that are winning either on the basis of extreme cost efficiency (the cheaper-better-fasters) or by solving one incredibly difficult problem. Oakam belongs to this second category: we’re making fair credit accessible to a subset of consumers who historically have been almost virtually excluded from formal financial services

The likely outcome for the cheaper-better-fasters, like Transferwise in the remittances world, is acquisition by an established player. They’ve worked out the kinks and inefficiencies of an existing system and presented their customers with a simpler, cheaper method of performing a specific task. However, their single-solution focus and ease of integration with other platforms make them an obvious target for banks, who lack the technology expertise but have the balance sheets to acquire and fold outside offerings into their own.

Integration into banks is harder to pull off with the problem-solvers because of the complexity of the challenges they are solving for. In Oakam’s case we’re using new data sources and methods of credit scoring that the industry’s existing infrastructure isn’t setup to handle. In other words, how could a bank or another established player integrate our technology, which relies on vastly different decision-making inputs and an entirely new mode of interacting with customers, into their system without practically having to overhaul it?

For businesses who succeed at cracking these difficult problems, the reward is to earn the trust of their customers and the credibility among peers to become the integrators for other offerings. Instead of being rebundled into more traditional financial firms, these companies have the potential to become convenient digital money management platforms, enabling access to a range of products and services outside of their own offering.

Self-described “digital banking alternative,” Revolut was first launched to help consumers with their very specific needs around managing travel spending, but today has offerings ranging from current accounts to cell phone insurance. While some of their products are proprietary, they’ve embraced partnership in other areas, like insurance which it provides via Simplesurance. This sort of collaboration offers an early look at the shape of things to come in finance’s digital future

One might ask how the digital bundling of products and services differs from a traditional bank, with the expectation that the quality and customer experience will diminish as new offerings are added. A key difference is PSD2 and the rise of open banking, which will enable closer collaboration and the ability to benefit from the rapid innovation of others. What this means is that an integrator can remain focused on its own area of expertise, while offering its customers access to other high quality products and services

At Oakam, this future model of integrated digital consumer finance represents a way to unlock financial inclusion on a wide, global scale. Today, we serve as our customers’ first entry, or re-entry, point into formal financial services. The prospect of catering to their other financial needs in a more connected, holistic way is what motivates us to work towards resolving an immediate, yet complicated challenge of unlocking access to fair credit.

Keith Bedell-Pearce, Chairman of 4D Data Centres, here looks at what’s hot in savings and investment FinTech and makes six forecasts for the future.

Financial technology, an ugly duckling with modest beginnings in the back offices of fund management and insurance companies, has now emerged as the black swan called FinTech.

Covering everything financial from pay-as-you-drive insurance (and, scarier, pay-how-you-drive) to crypto-currencies, FinTech is now one of the hottest properties for VCs from Silicon Valley to Shoreditch’s Tech City.

FinTech is not just a single disruptive technology but an entire range of digital processes that are set to transform the historically staid world of financial services.

There are three aspects of FinTech that promise to be disruptive game changers in the UK savings and investment market. Here’s an overview of what that market looks like:

Because of regulation that somewhat ironically came in on the heels of the deregulation of UK financial markets known as Big Bang 30 years ago, there are now high barriers to entry into the UK savings and investment market in terms of increasingly tough and rigorous regulation of the conduct of financial services businesses. This is coupled with equally rigorous capital adequacy requirements.

Big Bang brought about enormous change in how business in the City was done but in an area where God has always been on the side of the big battalions, after some innovation in the late 80s and early 90s, in the last 20 years there has been little real innovation. Product-driven marketing is still the rule in practice despite every provider protesting that the customer comes first. All this is now going to change.

Big players collaborate with FinTech start-ups

The first driver for change is the realisation of incumbent players that almost everything in their store cupboards is past its sell-by date. The nearly complete adoption of digital technology by everyone who has money to save and invest (and lots of people who don't but would like to) means that if the incumbents don't adopt a new approach, they will lose their share of the most profitable sector of the UK economy. The next generation of savers, today’s Millennials, don't have the money to save but when they do, they will expect to manage their money on a hand-held device and will naturally gravitate to the providers who will give them the app to do this.

Although they wouldn’t admit it publicly, many of the big players in the savings and investment market now recognise that they have neither the in-house culture nor the expertise to drive the revolution in the way they run their businesses required to continue to be a market leader in the FinTech digital age.

The answer for the more innovative of these big players is to enter into collaborative arrangements with FinTech start-ups and specialist FinTech consultancies that do have the vision of innovative, low operational cost, customer-focused offerings. Examples are BNP Paribas linking its own Luxembourg-based incubator with ecosystem players Partech Shaker and Paris-based NUMA. Deutsche Bank has a partnership with startupbootcamp FinTech in New York. This is a trend with growing momentum. There seems to be more start-up link-ups and partnerships involving product providers in continental Europe and the US than here in the UK even though many of the start-ups and specialist FinTech consultancies involved are based in the UK.

For the start-up, such partnerships offer a slice of the main action which would be out of reach because of a lack of capital and regulatory know-how.

Blockchain morphs into DLT

The second major driver for change is the almost universal attempts of the world's major banks to harness the huge potential of blockchain technology. Except they no longer call it “blockchain” (presumably because of its association with crypto-currencies) but the much more respectable name of “Distributed Ledger Technology” or “DLT”. Such is the interest in the revolutionary potential of DLT, a global consortium of major banks has been formed in what is called the R3 DLT initiative.

Leaving on one side bitcoin, the original key application for DLT in FinTech was seen as so-called “smart contracts” focused on the front end of transactions in securities markets but it soon became clear that DLT could have relevance to the entire delivery chain of both conventional banking and the savings and investment market. For example, slow and inefficient back office functionality could be replaced by DLT- based processes resulting in major reductions in cost. This applies to fund management businesses as well as banks.

The defining characteristic of DLT is its inherent security of its self-reconciling, immutable distributed databases which also counters targeted cyberattacks and fraud on centralised digital ledgers. Another plus point is it operates in near-real time.

As well as the R3 DLT initiative, most of the major banks in the developed economies have major DLT projects. Some are now moving from the proof of concept phase to practical implementation. Examples are Calastone, a global funds transaction network, with its first phase proof of concept completed in June 2017 and BBVA who claims “first real life implementation” of Ripple’s DLT system.

DLT has the potential to bring about a revolution in the savings and investment market and many other areas of commercial activity as significant as the invention of the world wide web.

Open API the engine of change

The third FinTech driver for change is the Linux-based open Application Programming Interface, generally known as “Open API”, which enables third-party access to banks’ customer data. For the banks, this could be an opportunity to monetise their customer data although there is resistance from some banks, particularly in the US, on the grounds of security and confidentiality.

The technology will enable potential customers to access third-party services within the banking ecosystem. There would also be an opportunity for banks to provide white label offerings to third-party product providers and distributors to access the banks’ customer data.

A UK Open Banking Working Group has been created to facilitate open API. The Treasury is apparently supportive of this innovation and said it would legislate “if necessary”. The working group states “Open Banking will mean reliable, personalised financial advice, tailored to your particular circumstances, delivered securely and confidentially”. At present, giving advice with these characteristics involves long (and therefore costly) fact-finds and this process in practice is a major barrier in the UK to the seamless delivery of online savings, investment and pensions products. If Open Banking delivers what it promises, the effect on both product design and delivery will be as far reaching as the impact of Big Bang on the City 30 years ago.

These are already some implemented examples of open API such as (perhaps not surprisingly) Silicon Valley Bank’s open banking platform “Banking as a Service” and the German online bank, Fidor. There are a lot more known to be in the pipeline and for once, this a technology where Europe might have the edge on the US.

Six forecasts for the future

Our forecasts about the impact of FinTech on the savings and investment market are:

1. Core savings products for asset accumulation and income streaming will continue to evolve slowly until Open ABI goes mainstream.
2. Platforms will continue to play key role in selection of products and client retention with DLT progressively, enhancing speed and security.
3. Advice is key bottleneck in digital delivery; chatbots and robo-advice is likely to appeal to Millennials but they are not yet in the savings groove. Once they are in the groove, the killer app will be on a hand-held device.
4. Technological innovation with most front-end impact will be Open ABI but full implementation is probably at least 5 years away.
5. Open ABI once implemented will be a major catalyst for savings’ product innovation.
6. DLT will have very significant impact on back office costs, security and customer experience and be at a bank or fund manager near to you soon.

One final bit of advice, for those who are involved in savings and investments products, marketing or distribution, now is the time to start networking with the FinTech geeks. They hold the key to the future of this fundamentally important part of the UK economy.

Oracle and the MIT Technology Review recently released a new study that highlights the importance of collaboration between finance and human resources (HR) teams with a unified cloud. The study, Finance and HR: The Cloud’s New Power Partnership, outlines how a holistic view into finance and HR information, delivered via cloud technology, empowers organizations to better manage continuous change.

Based on a global survey of 700 C-level executives and finance, HR, and IT managers, the study found that a shared finance and HR cloud system is a critical component of successful cloud transformation initiatives. Among the benefits of integrating enterprise resource planning (ERP) and human capital management (HCM) systems is easier tracking and forecasting of employee costs for budgeting purposes. Additionally, integrated HCM and ERP cloud systems improve collaboration between departments, with 37 percent of respondents noting that they use the cloud to improve the way data is shared.

The report also reveals the human factors behind a successful cloud implementation, with employees’ ability to adapt to change standing out as critical. Among organizations that have fully deployed the cloud, almost half (46 percent) say they have seen their ability to reshape or resize the organization improve significantly – as do 47 percent of C-level respondents.

The productivity benefits have also been significant. Nearly one-third of respondents (31 percent) say they spend less time doing manual work within their department as a result of moving to the cloud and that the automation of processes has freed up time to work toward larger strategic priorities.

“As finance and HR increasingly lead strategic organizational transformation, ROI comes not only with financial savings for the organization, but also from the new insights and visibility into the business HR and finance gain with the cloud. People are at the heart of any company’s success and this is why we are seeing finance and HR executives lead cloud transformation initiatives,” said Dee Houchen, Senior Director of ERP Solutions at Oracle. “In addition, improved collaboration between departments enables organizations to manage the changes ahead and sets the blueprint for the rest of the organization’s cloud shift.”

The survey also reveals there is a blurring of lines between functions and individual roles as the cloud increasingly ties back office systems together:

• Increased Collaboration: 46 percent of finance and HR professionals say a full cloud deployment has led to significantly improved collaboration between departments, and nearly half expect a significant improvement in the next two years.
  • This extends to IT as well. 52 percent of C-level respondents said the relationship between IT, HR and finance is even better than expected following their cloud implementation
• Cross-Corporate Intermingling: With the new roles of HR and finance professionals requiring them to work more closely with data and the cloud, 43 percent of businesses plan to bring IT people into these departments to help employees take advantage of new technologies.
• New Skillsets: Desired skills respondents want to improve upon include:
  • Time management, with 40 percent saying this is currently an issue
  • Active learning
  • Problem solving, mathematical reasoning and analytical skills
  • The IT function also changes. Post-deployment, 56 percent of C-level respondents report that IT has significantly improved when it comes to producing innovations.

Andy Campbell, HCM Strategy Director at Oracle added: “As organizations navigate technological changes, it’s critical for the C-suite to empower its employees to evolve their individual business acumen. Many businesses understand this and it’s encouraging to see 42 percent planning to provide their teams with management skills training to help them break out of their traditional back-office roles. The learnings from the move of finance and HR to the cloud will ultimately spread across the organization as, together, they conceptualize the shape of the next disruption.”

(Source: Oracle)

Lack of trust and transparency as a result of ideological and military conflicts are undermining the international supply chains linking the world, according to the Q1 2017 CIPS Risk Index, powered by Dun & Bradstreet. Prolonged conflict is creating supply chain no-go areas, cutting off local businesses and consumers from global markets and potentially causing a scarcity of goods.

Military conflict

The conflict between Ukraine and separatist rebels in the east of the country continued to hinder both physical and digital supply chains this quarter. A power cut in Kiev in December 2016 is now widely believed to have been the result of a cyber-attack, while in March, Ukraine suspended all cargo from entering separatist-held territory. Despite this, Eastern Europe and Central Asia only contributed 7.6% of global supply chain risk this quarter, down from 8.5% in Q4 2016. The change is the result of an update to the trade weightings used in the Index as the fall in commodity prices has reduced the importance of the region's trade flows in global supply chains. Businesses have been busy re-routing supply chains away from the conflict area, while sanctions have discouraged businesses from dealing with Russia. This process has accelerated as a result of persistently low commodity prices which have seen the value of the region's exports fall.

Civil wars in Iraq, Libya, Syria and Yemen are also disrupting traditional land-based supply chains across the Middle East, curtailing the flow of goods from Jordan and Lebanon through Syria and Iraq, and in North Africa between Egypt, Tunisia and Algeria. The conflicts look likely to continue disrupting supply chains beyond 2017. As with Eastern Europe, international supply chains have largely insulated themselves from the Middle East. The region's trade weighting has been updated following the collapse in oil prices which reduced the value of trade flows from the Middle East, lessening its importance in the global supply chain. The region therefore contributed just 7.9% of global supply chain risk in Q1 2017, down from 9% last quarter.

Ideological conflict

Q1 2017 has also seen an escalation in the ideological conflict between globalisation and economic nationalism, with the British Prime Minister, Theresa May's, visit to the White House in January 2017 symbolic of the shift in emphasis from multilateral to bilateral trade deals. Despite President Donald Trump's decision not to pull out of the North American Free Trade Agreement (NAFTA) in April 2017, the future trading relationship between Canada, Mexico and the USA remains uncertain. As a result, North America's contribution to global supply chain risk rose from 8.1% in Q4 2016 to 8.6% in Q1 2017.

In France, Marine Le Pen's advance to the second round of the presidential election raised serious concerns for businesses with supply chains in the region. The failed candidate had promised to close French borders immediately, abandon free-trade deals, tax businesses with foreign employees and leave the European Union. Collectively these measures could have significantly hindered businesses that rely on French suppliers. The election of President Emmanuel Macron should dissipate these fears.

Elsewhere in Europe, the ideal of a borderless Europe looks increasingly secure. Whether Chancellor Angela Merkel, or her opponent Martin Schulz succeeds in Germany's parliamentary elections, the German government looks likely to retain a pro-EU outlook. Although temporary border controls have been extended in Germany and Sweden, they look likely to be abolished by the end of the year, helping to reduce delays at these crucial supply chain interchanges.

In China, meanwhile, exchange controls implemented in November 2016 have prevented foreign businesses from transferring cash outside of the country. The rules prevent overseas acquisitions of more than USD10bn and require banks to keep net cross-border Renminbi transfers balanced. The controls make routine activity such as royalty payments difficult and pose a significant risk to businesses with supply chains in the region.

National disruption

Localised conflicts have affected local supply chains in Q1 2017. In Chile a six week strike ending on 24^th March at La Escondida copper mine reduced global copper capacity by 5%. Terrorism also remains a risk for businesses working with suppliers in Chile. Fires destroying 238,000 hectares of forest are widely thought to have been caused deliberately, while a spate of bombings have continued in the capital, Santiago. Latin America's contribution to global supply chain risk has dropped however, from 7.5% in Q4 2016 to 7.15% in Q1 2017. The reduction is the result of falling commodity prices which have considerably reduced the value of the region's exports to the rest of the world.

The Indian Government's unexpected decision to withdraw 86% of the country's cash as part of a crackdown on the use of counterfeit money has left businesses struggling to pay suppliers and workers. Combined with prolonged congestion at major Indian ports, India has helped to push global supply chain risk upwards. Asia Pacific contributed 37.4% of supply chain risk in Q1 2017, up from 33% at the end of 2016. In the long-term, however, progress continues to be made to create a nationwide Indian customs union which would see local tariffs abolished and encourage investment in supply chain infrastructure across the country.

John Glen, CIPS Economist and Director of the Centre for Customised Executive Development at The Cranfield School of Management, said: "Supply chains are a shared resource between consumers, businesses and governments, with procurement and supply chain managers acting as the guardians. When these links are effective, businesses can benefit from lower prices, consumers from better choice and society from greater knowledge sharing. It is therefore crucial they are protected, made resilient and as effective as possible, particularly when faced with a barrage of challenges."

"Supply chain infrastructure can only function normally and efficiently when there is trust and collaboration between all nationalities and sections of society. Whether through military confrontation in the Middle East or political schism in Britain, supply chain infrastructure is one of the first casualties of conflict and the results can be devastating."

Bodhi Ganguli, Lead Economist, Dun & Bradstreet: "The improvement in the Global Risk Index (GRI) affirms that after a rather torrid start to the year, the global economy is settling down. The growth outlook is brightening, headwinds are diminishing, and forecasts generally point to better outcomes than we had expected a year ago. Yet, underlying this feel-good momentum, the global economy continues to face risks, both systemic and exogenous, that could flare up. From the fanning of protectionist inclinations by the rise of right-wing populism, to a one-off hit to supply chains from North Korean aggression, global supply chains and cross-border business strategies must remain cognisant of these risks, while utilising data and insights to take advantage of the opportunities created by the rising tide of global growth."

(Source: Dun & Bradstreet)

As Article 50 has finally been triggered, Michelle McGrade, Chief Investment Officer at TD Direct Investing, talks Finance Monthly through the key areas investors should consider, and answer a question many investors are thinking: ‘What are the investment opportunities open to me in a post-Brexit world?’

Following the UK’s vote to Brexit, our customers over at TD Direct Investing told us their biggest concern was how the UK Government would manage to implement its plans to trigger Article 50. And, more recently, we have seen increased uncertainty about what Brexit will actually mean, with approx. 40% saying they don’t know what impact it will have on their investments.

Here I’ve focused on six key areas I believe you should consider – and bring you 50 Investment Opportunities for Article 50.

In addition to our Best of British Fund Managers list, which highlights the 25 funds that have consistently performed over the past decade, we focused on some key topic areas: Disruption, European Recovery, Global Income, Small Caps, Contrarian and Sustainability.

Sector opportunity #1: Disruption

Politics are certainly disrupting the status quo around the world right now, but the wider theme of disruption is having a more profound impact on every aspect of our lives. Central to this is technology; a constant driver of new, and often simplified, ways in which we live.  According to a recent poll we conducted on our dedicated Article 50 hub, 57% of the 324 respondents believe that Britain has the ability to stand alone as a hub of innovation.

Sector opportunity #2: European recovery

65% of people who responded to a recent TD poll believed Europe has been wounded by the populist movement. However, I think the European economy is actually on a positive road to recovery with a selection of investment opportunities. What we’ve learnt from Brexit is that no one knows how key political events are going to turn out, and what the stock markets’ reaction to those events will be. As investors, it is better to stick to what you do know and focus on a long-term investment horizon.

Sector opportunity #3: Global Income

Article 50 has been triggered, but does that mean we should start looking abroad for investment opportunities? In another one of our surveys, 57% of respondents agree with my belief that independent trade deals between Britain and other areas around the world are highly likely – therefore, looking beyond our own shores, there are a number opportunities from around the world.

Sector opportunity #4: Small Cap Recovery

The quicker a company can grow its earnings in a sustainable way the more attractive it is to investors. UK smaller company shares have delivered better total returns than larger companies over more than 60 years.  You can think of small-cap investing in the same way as parenting. When the companies are at a very early stage, they are problematic. Likewise, any parent will tell you the ‘terrible twos’ is a difficult time. And once companies get too big, they are then teenagers, becoming potentially hard to manage. But in between these two phases is potentially a sweet-spot for parents and investors alike.

Sector opportunity #5: Sustainability

With events such as the UK’s vote to leave the European Union taking centre stage and leading to market uncertainty and volatility, it is worth noting there are still long-term, structural themes which can benefit investors. Sustainability is one such theme. It is becoming ever more important not just because of its significance in environmental terms, but because companies which adopt a sustainable business model are also outperforming those which don’t.

Sector opportunity #6: Contrarian

Sometimes opportunities arise in the basic act of going against the prevailing sentiment – when a fund is unloved or has, let’s say been out of fashion.

Other opportunities: Best of British Fund Managers

A lot has happened in the markets over the last 10 years; the global financial crisis, the price of Brent crude oil falling to its lowest point since 2003, and more recently the EU referendum and the drop in sterling.

Despite the volatile market conditions - and headlines – some fund managers have truly earned their stripes. Our Best of British research, now in its third year, identifies the top 25 UK fund managers who have consistently outperformed their benchmark and sector average over the last decade.

There is some crossover between Britain’s Top 25 fund managers and the above categories, including MFM Slater, Royal London UK Equity Income and Kames Ethical Equity, who would all appear in both lists - double the credit for their potential.

What is the disruption gap? How does technology and communication affect your end of year figures? How can you oversee all processes without a digital transformation? This week, Finance Monthly heard from Matt Fisher, VP of Marketing at Snow Software, who gives us all the answers and then some.

With digital transformation becoming ever more crucial to business success, the way organisations procure IT is changing. “In 2016, just 17% of IT spending is controlled outside of the IT organization. That represents a significant decline from 38% in 2012. By 2020, Gartner predicts that large enterprises with a strong digital business focus or aspiration will see business unit IT increase to 50% of enterprise IT spending.” [1] Technology budgets are moving away from a central technology department towards being the responsibility of the business unit using it. From HR procuring its own payroll software to business development choosing the best sales programme, a visibility gap is forming between what exists in the technology estate and what CIOs can measure. This gap is called the disruption gap.

However, the CIO is not the only C-suite member the disruption gap will affect. If not handled correctly, it could prove troublesome for the CFO too. The reasons for this are three-fold:

Digital transformation

Digital transformation is now key for any CFO tasked with ensuring their business is future proof. It is defined as the application of digital technologies to fundamentally change and update all aspects of business and society. The benefits of digital transformation include lower costs and improved accountability with the replacement of physical or analogue processes and interaction with digital equivalents to save time. By empowering business units to identify their own digital needs, organisations will be able to maintain agility and competitive advantage. Crucially for CFOs, this also means the ability to make one thing: profit.

Losing financial control

While the role of the CIO is changing with digital transformation, a key role of the CFO remains the same: to guard against over-spend. However, with IT budgets moving towards individual teams, a gap is forming between the knowledge of how much a budget is and what it is being spent on. Gartner [2] estimates that “by 2019, annual spending on enterprise software licenses will decrease by 30% as a result of software license optimization.”. This is with IT controlling 83 per cent of the spend. Imagine what it will be like when 50 per cent of IT spend rests not with a handful of budget holders, but potentially hundreds.

Lack of visibility

With software spend disseminated throughout an organisation, it will become increasingly difficult for IT teams to establish a clear view over what software is deployed where and how many licenses are needed compared to those held.

This loss of visibility will, in turn, increase the likelihood of unexpected and unbudgeted costs hitting the financial team, either through unplanned technology acquisitions or financial penalties issued by software and infrastructure providers for over-use of applications and cloud resources.

On the flip side, by empowering IT teams to achieve 100% visibility of all IT consumption across all platforms, the finance and IT teams can collaborate to identify significant cost and efficiency savings which can have a tangible impact on the organisation’s bottom line.

Either way, it’s in the CFO’s best interest to find a way to manage the disruption gap now and avoid unnecessary costs later.

Take action today

Bridging the disruption gap has to be a high priority for IT and finance leaders.  As leading industry analyst firm Gartner^[1] advises: “the focus of the software asset management discipline needs to shift from compliance to cost containment, as reduced customer bargaining power produces escalating prices at SaaS contract renewal.”

To achieve this visibility, IT teams need specialist solutions that provide full visibility of software and hardware assets (both on the network and in the cloud, physical and virtual) and how they are being used. Traditional IT Asset Management and Systems Management tools will not suffice. These teams need access to the latest breed of inventory and optimization technologies designed for organizations heavily invested in Digital Transformation.

[1] Gartner, Metrics and Planning Assumptions Required to Drive Business Unit IT Strategies. Published: 21 April 2016, Kurt Potter, Stewart Buchanan

[2] Gartner, Cut Software Spending Safely With SAM. Published: 16 March 2016 ID: G00301780

Analyst(s): Hank Marquis, Gary Spivak, Victoria Barber

[3] Gartner, Software Asset Management Reaches a Tipping Point: SaaS Cost Management Eclipses License Compliance, 06 January 2017 ID: G00315121, Stephen White | Victoria Barber