Year: 2019

The economics of Korean reunification

Posted on by Helen

Considering North and South Korea are still officially at war – the armistice signed in 1953 brought an end to hostilities but did not deliver peace – relations between the two countries have been surprisingly cordial of late. Since April 2018, three inter-Korea summits have been held involving the South’s president, Moon Jae-in, and the North’s supreme leader, Kim Jong-un.

Most significantly, the April summit saw the two heads of state sign the Panmunjom Declaration, which called on both leaders “to jointly endeavour to strengthen the positive momentum towards continuous advancement of inter-Korean relations as well as peace, prosperity and unification of the Korean Peninsula”. It no longer seems as outlandish as it once did that the two Koreas could become one in the foreseeable future.

Except, nothing is straightforward when North Korea is involved. Although the three 2018 summits were promising, in May of this year Kim oversaw new ballistic missile tests that some have adjudged to be an act of provocation. With such a leader in charge, it will remain difficult to predict unification with much certainty.

Putting political obstacles to one side, the economic difficulties of uniting North and South Korea remain significant

Putting political obstacles to one side, the economic difficulties of uniting North and South Korea remain significant. Disparities in wealth and productivity are substantial and bridging them is likely to be burdensome, chaotic or both. Equally, the enduring economic benefits that would become available to the Korean peninsula may make such short-term pain worthwhile. So far, the pros and cons of unification are merely hypothetical talking points, but they may not stay that way forever.

When two become one
Ever since the Cold War split Korea in two, people have been making noises about how it might be put back together again. Those noises have been getting louder of late; back in April, President Moon declared that he was ready for a fourth summit with Kim.

The talks would primarily focus on curtailing the North’s nuclear weapons programme, but Moon also declared his hope that they would become “a stepping stone for an even bigger opportunity and a more significant outcome”. Such ambitions are to be applauded, but they do not necessarily mean unification is just around the corner.

“I think in the near term, the likelihood of unification is very low,” Troy Stangarone, Senior Director at the Korea Economic Institute, told World Finance. “Essentially there are three different ways unification could come about: one would be through the collapse of the North Korean regime; another would be through a gradual, consensual process that would take place over time; and the third would be if war was to break out.”

Currently, both collapse and war appear unlikely, although reports of food shortages and Kim’s volatile personality mean that neither can be completely ruled out. However, if the dialogue between the two countries continues to strengthen, economic engagement could be ramped up and, eventually, a move towards a unitary state may not seem so far-fetched. It is likely to be a decades-long process, but it is one that is arguably already underway.

One of the positive developments to come from recent summits is a commitment by both Korean states to revamp the North’s ramshackle transport infrastructure. In late November, a train carrying a railway inspection team travelled from Dorasan station, just 650m from the Korean Demilitarised Zone, into North Korea in order to begin a joint survey of around 1,600 miles of the North’s railways. It was the first train journey between the two countries for a decade, and will hopefully act as a prelude to reconnecting transport links between the states.

A few weeks later, an official groundbreaking ceremony took place at Kaesong, North Korea, to mark the start of greater infrastructural engagement across the Korean Peninsula. But for now, that’s as far as the two countries can go: UN and US sanctions mean the actual reconstruction work that railways in the North desperately need is prohibited.

Economic alignment
The economic ramifications of Korean unification would depend heavily on how, and how quickly, the North and South were reunited. Ideally, the process would be a gradual one that is underpinned by bringing the two countries’ respective economies into closer alignment.

Although economic data for North Korea is scant, estimates by Trading Economics put the country’s GDP at $16.12bn in 2015, significantly smaller than the South’s $1.38trn in the same year (see Fig 1a and 1b). Structural differences in the two nations’ economies may be even more challenging to overcome: while South Korea boasts a market-based economy governed by internationally recognised standards, North Korea has multiple economies.

There are informal markets known as jangmadang that developed during the famine of the 1990s; according to the Institute for Korean Integration of Society, they account for approximately 60 percent of the North’s economy. Alongside these is an authorised state economy that largely consists of exporting raw materials, like seafood, coal and iron ore, to China. This part of the economy has been hit hardest by economic sanctions: last year, North Korea’s exports to China fell 88 percent, while total exports dropped by 63 percent in 2017 (see Fig 2).

The two North Korean economies, however, are not entirely distinct from one another. A lot of resources used by the jangmadang are informally lent from state-owned businesses in exchange for a portion of the profits. According to a recent paper by Hwang Jin-hoon of the Korea Development Bank in Seoul, “state power and the up-and-coming capitalists have formed a symbiotic relationship” that has blurred the line between private enterprise and the centrally planned economy. Still, more needs to be done if North Korea is to complete a formal transition to a market economy. This must occur before any unification efforts can proceed, and South Korea may need to lend a helping hand.

The South certainly has a great deal of knowledge concerning economic development. When the Korean peninsula split in the 1950s, both the North and South had similarly sized economies. Today, as well as being home to world-famous businesses like Samsung, South Korea has the 11th-largest economy in the world. It would surely take a hands-on role in preparing the North for economic reintegration.

“The hope would be that unification would take place over time, and the South would invest in things like upgrading the rail network, repairing the roads and rebuilding the energy infrastructure,” explained Stangarone. “Of course, alongside South Korea, the US, China, Japan and others may also contribute. Regulatory issues need to be addressed to start opening the economy up, and South Korea could provide the capital and advice needed.”

Previous South Korean leaders have shown themselves to be more than willing to offer assistance to North Korea’s ailing economy: Lee Myung-bak, South Korea’s president between 2008 and 2013, had ambitions to raise the North’s per-capita income to $3,000 a month and, going further back, President Kim Dae-jung’s Sunshine Policy was aimed specifically at reducing the economic gap between the two nations. More initiatives like these will need to be implemented by Moon and his successors if there is to be any hope of creating a single Korean state.

If the dialogue between the two countries continues to strengthen, economic engagement could be
ramped up

Better together
While it would undoubtedly create difficulties in the short term, a united Korea would eventually become a major player on the world stage. A 2009 Goldman Sachs report predicted that the GDP of a unified Korea would exceed that of all the current G7 nations except for the US within 30 to 40 years. Despite the economic chaos that currently exists in the North, its supply of cheap labour and raw materials would provide a growth boon when added to the existing infrastructure present in the South.

“South Korea would be able to provide capital investment and managerial know-how to the North,” Stangarone said. “From the perspective of the South, the North brings a few different things to the table that would be advantageous. One would obviously be a lower-wage workforce that would help to deal with rising wage pressures. Also, a lot of the natural resources on the Korean peninsula are actually on the northern half, so whether it is coal, iron ore, rare earth minerals – essentially all of those minerals are in the North.”

In the years that follow reunification, it is highly likely that North Korean wages would rise substantially, creating a larger consumer market on the Korean peninsula. Collectively, the population of a combined Korea, based on current demography, would total roughly 75 million, creating a sizable domestic market for private businesses to target.

The restructuring of both states’ economies would also help remove a number of structural inefficiencies. Military spending could be significantly reduced, as well as diplomatic expenditure. A large number of citizens would be freed from relatively low-productivity jobs in the armed forces and released to take up employment that contributes more heavily to the national income and tax receipts.

Today, growth appears to be the number one goal for most economists and government ministers. Despite the South’s many successes, a slowdown is predicted in the near future, driven primarily by low productivity and an ageing population. In the North, moves to modernise the economy have had only limited impact – unification would certainly be one way of delivering growth for the entire peninsula.

Sharing the spoils
It’s easy to get carried away with headline-grabbing GDP figures, particularly when they do not tell the full story. While reunification would provide a boost to the Korean peninsula as a whole, individual Koreans will not necessarily benefit.

How the economic spoils will be shared is sure to depend on how unification is handled politically, but if the free movement of labour is allowed – or if South Korea’s chaebols are able to relocate to the North – then low-wage South Koreans will suddenly face a lot of added competition. This would create significant downward wage pressures that businesses would benefit from, but employees might not. These challenges would also have wider ramifications.

“Unification would place a significant economic strain on the South Korean state and would occur at the same time as the country’s population gets older,” Stangarone said. “South Korea, similar to Japan but to a lesser degree, is going through its own demographic changes. It’s going to be a super-aged society in the near future and it also has the highest level of old-age poverty in the OECD, with 45 percent of South Koreans over the age of 65 living below the poverty line. Taking care of the elderly is going to cause a lot of strain in the next few decades. So, there is going to be a potential resource conflict over how you take care of older South Koreans while investing in the North at the same time.”

Numerous studies have been authored looking at how North Korea’s economy can be brought closer in line with its partner to the south. Often a 60 percent per-capita income target is deemed to be an appropriate goal, but even this would require significant financial expenditure on the part of South Korea – upwards of $1trn. Alternatively, if income convergence were to be achieved purely by labour migration, three quarters of all North Koreans would have to move south of the border.

How exactly the government of a united Korea handles this strain will be vital. It could choose to reduce government spending by cutting back on welfare programmes, or at least restructuring them, but there is no guarantee that either method would alleviate the predicted social problems. Politicians should prepare for a backlash from those set to lose out as a result of unification.

The balance of power
Uniting the Korean peninsula would have impacts that stretch far beyond its geographic vicinity. It would remove a buffer state from the Chinese border and raise questions about what a unified Korean state would look like in terms of its foreign and security policies. It also poses questions for Japan, which has historically had a tense relationship with Korea.

Beyond China and Japan, Russia, the US and many other states would also have a stake in what sort of country a united Korea would be. This would not only have an impact on what kinds of economic priorities a united Korea would hold – it would also affect who the country is able to trade with.

If income convergence were to be achieved purely by labour migration, three quarters of all North Koreans would have to move south of the border

“From a geoeconomic standpoint, a unified Korea starts to change things,” Stangarone noted. “Firstly, Russia, which has long looked to be able to sell a lot of its resources from the Russian Far East, would now have the ability to do so. At a recent summit, [Russian President Vladimir] Putin and Kim talked about this – running a pipeline down to South Korea and eventually exporting to Japan as well. So, you would create new energy link-ups. There’s also been talk about an East Asia energy grid that connects the entire region – so you could mix in not only fossil fuels but renewable energy as well.”

Taking an even broader look, a unified Korea would have vastly increased potential in terms of imports and exports. Connecting the peninsula by rail would allow goods to be shipped all the way from Busan to Rotterdam unimpeded. Equally, such a move would open up what other countries could ship to the region and enable North Korea to become integrated within regional supply chains. Unification would recalibrate the entire economic architecture in the Asia-Pacific region.

Speculate to accumulate
Understanding how a united Korea would fare is an impossible task with so many variables to consider. To give it their best shot, many analysts have looked at how previous unification efforts from around the world have unfolded, including Germany and Vietnam. Such comparisons, however, are only of limited utility.

Relations between the two Koreas are far more acrimonious than they ever were between the Federal Republic of Germany and the German Democratic Republic. There was no German civil war and, although tensions between the two parties did abound, East Germany was far less economically isolated than North Korea is today. What’s more, in relative terms, North Korea’s economy is much worse off than East Germany’s was in 1990.

“I think the comparisons are useful in the sense of getting a general idea of the sort of things that the two Koreas should be considering,” said Stangarone. “If unification was to occur, [would] North Koreans effectively be second-class citizens in their own state or will the South try to make them as equal as they can as quickly as possible, at least in terms of benefits, access to capital and things like that? There is also the question of how to deal with state-owned enterprises. What sort of things do you want to do to reform the markets and integrate them into the broader economy? Comparisons with Germany are useful for identifying the kinds of challenges that are likely to arise, even if they don’t tell the whole story.”

Instead of looking at Germany, Eastern European states that have transitioned from communist, state-run economies to market economies may work better as proxies for what North Korea is likely to go through. North Korea is essentially a post-industrialised or deindustrialised state: a significant part of the population (about 60 percent) is actually living in urban centres. This is why comparisons with Vietnam often fall short.

Vietnam was a rural economy at the time when its northern and southern halves were reconnected. In fact, Vietnam is still more rural than North Korea. Other than the fact that both were Asian, communist states, the similarities start to fall away after a little probing beneath the surface. Every country faces its own unique challenges, which is exactly why the Eastern European economies provide such useful test cases for North Korea. They also went their own way, to an extent, and some proved more adept at transitioning to a market economy than others. Each provides a case study worth considering.

Perhaps the biggest hurdle to unification is the Kim regime and its volatile figurehead, although another is that, while many Koreans are sympathetic to reunification, it is not a priority for everyone. For the young, who have always known a divided peninsula, it is far less important than tackling unemployment figures or living costs. In fact, according to surveys by the Asan Institute, around a quarter of South Koreans in their 20s have little interest in unification.

Nevertheless, those in power do. For South Korean President Moon, any progress he makes towards reunification would cement his place in his country’s history. More than that, if he or any of his successors do manage to bring the two Koreas together, they will have a huge impact on the millions of North Koreans currently living in poverty, the families on either side of the border that thought they would never be reunited, and the economic landscape across the Korean Peninsula – and, indeed, the entirety of Asia.

Why GDP is no longer the most effective measure of economic success

Posted on by Helen

At the World Economic Forum’s 49th annual meeting in Davos, New Zealand Prime Minister Jacinda Ardern revealed that she would create the world’s first ‘wellbeing budget’ in order to prioritise the health and welfare of her country’s citizens. She said: “We need to address the societal wellbeing of our nation, not just the economic wellbeing.”

Economic growth – and, by proxy, wellbeing – is currently measured by gross domestic product (GDP). As the framework upon which governments build countless policies, GDP aims to track the production of all goods and services bought and sold in an economy each year.

The measure has become a critical tool used by economists, politicians and academics to understand society. It has been labelled “the most powerful statistical figure in human history” by author and lecturer Philipp Lepenies, and named “one of the great inventions of the 20th century” by the Federal Reserve Bank of St Louis. Today, however, GDP’s purpose is being called into question.

GDP is not the precise and flawless figure that many believe it to be – it is
merely an estimate

Coming up short
Having become such a familiar macroeconomic metric, it is easy to forget that GDP is a relatively modern invention. The framework for monitoring economic growth was created for the US Government by Russian-born economist Simon Kuznets in the aftermath of the Great Depression, before modifications made by British economist John Maynard Keynes turned it into the indicator we know today.

In an independent review of the UK’s economic statistics published in 2016, Sir Charles Bean wrote that GDP is often viewed as a “summary statistic” for the health of the economy. This means it is frequently conflated with wealth or welfare, though it only measures income. “Importantly, GDP… does not reflect economic inequality or sustainability (environmental, financial or [otherwise]),” Bean wrote. What’s more, GDP is not the precise and flawless figure that many believe it to be – it is merely an estimate. “This uncertainty surrounding official measures of GDP is inadequately recognised in public discourse, with commentators frequently attributing spurious precision to the estimates,” Bean continued.

Sarah Arnold, Senior Economist at the New Economics Foundation (NEF), told World Finance that GDP as a measure of economic activity is simply a means to an end: “It has become so synonymous with national success that the rationale for pursuing economic growth in the first place seems to have been long forgotten.”

Putting the flaws highlighted by Bean and Arnold aside, GDP is still an inaccurate measure of prosperity, as it fails to convey much of the value created in the modern world. GDP was developed during the manufacturing age and, as David Pilling, Africa Editor of the Financial Times, wrote in his book The Growth Delusion: Wealth, Poverty and the Wellbeing of Nations: “[GDP] is not bad at accounting for production of bricks, steel bars and bicycles.” Where it struggles, though, is with the service economy, a segment that accounts for a growing proportion of high-income countries’ economies (see Fig 1). “[Try GDP] out on haircuts, psychoanalysis sessions or music downloads and it becomes distinctly fuzzy,” Pilling wrote.

GDP’s preference for tangible goods also means it is insufficient at capturing the value of technology. Where disruptive innovations have made life easier for consumers – allowing them to book their own flights rather than paying a travel agent, for instance – GDP only sees a shrinking economy. “Lots of what tech is doing is destroying what wasn’t needed,” Will Page, Director of Economics at Spotify, told Pilling. “The end result is you’re going to have less of an economy, but higher welfare.”

Countless free online services have moved outside the realm of economic activity measured by GDP, including Google, YouTube and Wikipedia. In the eyes of GDP, innovation – even if it means a better quality of service – is often a detractor of economic growth. Elsewhere, valuable areas of work have always existed outside of the GDP framework, including housework, caring for sick family members or friends, and volunteering. The impact of this work is unaccounted for simply because no money changes hands.

In a 2014 speech, Andrew Haldane, Chief Economist of the Bank of England, said the economic value of volunteering could exceed £50bn ($63.7bn) per year – and that is before tallying up the impact on the volunteers’ wellbeing, which includes reducing stress, improving physical health and learning new skills.

The bigger picture
In 1968, Robert Kennedy, the brother of US President John F Kennedy, criticised gross national product – a similar measure to GDP – by saying it “measures everything, in short, except that which makes life worthwhile”. Arnold believes this observation is still true today: “GDP is not a particularly useful measure in and of itself because it doesn’t tell us much about the direction of our economic activity or help us to determine how to govern it.”

The NEF believes there are five indicators that GDP doesn’t take into account that could help measure national success more accurately: job quality, wellbeing, carbon emissions, inequality, and physical health. “We know what a good economy that allows people to flourish should be,” Arnold said. “A good economy meets everyone’s basic needs; it means people are healthy and happy, and it does not stoke potential long-term trouble, such as extreme inequality.”

The World Bank has also created a more robust measure of economic growth: comprehensive wealth. Comprehensive wealth, it argues, takes into account both income and associated costs in a number of areas, providing a fuller picture of economic wellbeing and a more sustainable pathway for growth. “Used alone, GDP may provide misleading signals about the health of an economy,” the World Bank’s The Changing Wealth of Nations 2018 report read. “It does not reflect depreciation and depletion of assets, whether investment and accumulation of wealth are keeping pace with population growth, or whether the mix of assets is consistent with a country’s development goals.”

For GDP, which does not distinguish between good and bad production, bigger is always better. “GDP includes activities that are detrimental to our economy and society in the long term, such as deforestation, strip mining, overfishing and so on,” Arnold said. Wars and natural disasters, too, can be a boon to GDP as a result of the associated increase in spending. Comprehensive wealth, on the other hand, accounts for all of a country’s assets, including: produced capital, such as factories and machinery; natural capital, like forests and fossil fuels; human capital, including the value of future earnings for the labour force; and net foreign assets.

GDP’s neglect of natural capital in particular has received more attention in recent years. Natural assets, such as forests, fisheries and the atmosphere, are often regarded as self-sustaining, fixed assets. In actual fact, all of these resources can be – and are being – depleted by humans. Since the 1990s, economists have looked into the possibility of putting a price tag on natural resources to ensure their value is taken seriously. Ecological economist Robert Costanza published a paper entitled The Value of the World’s Ecosystem Services and Natural Capital in Nature in 1997 that valued the whole of the natural world at $33trn. While Costanza’s research was highly controversial, the idea of accounting for natural depletion within the landscape of economic growth is becoming more common. As Pilling wrote: “If you don’t put a monetary value on something, people tend not to value it at all.”

The price of happiness
Experts are working to pin down a number of intangible qualities that contribute to the health of an economy, such as happiness and knowledge. Several indicators have been developed to provide a means for countries to monitor their progress in these areas. One such example is the UN’s Human Development Index (HDI), which evaluates a nation’s citizens in terms of their health, knowledge and standard of living. To do this, it tracks achievements in areas such as life expectancy at birth, years of schooling and gross national income per capita.

The UN admitted its index only provides a window into human development and fails to account for aspects such as inequality, poverty, human security or empowerment. But since its development in 1990, the UN has also introduced other composite indices, including the Inequality-adjusted HDI, the Gender Inequality Index and the Gender Development Index. Other surveys and indices, meanwhile, aim to measure the even more subjective quality of happiness: Lord Richard Layard, a professor at the London School of Economics, has been a pioneer in this area, and believes the government should prioritise policies that boost happiness over growth. His research has gone on to influence international efforts to track happiness, such as the UN’s World Happiness Report, which provides an annual snapshot of how happy people around the world perceive themselves to be.

New Zealand’s wellbeing budget is not perfect, but it is a clear step away from a purely growth-driven view of success

Arthur Grimes, a professor of wellbeing and public policy at Victoria University of Wellington and a former chair of the Reserve Bank of New Zealand, pointed out that these lists still show some correlation between GDP and happiness: “It’s very rare to find a country that, overall, has higher wellbeing that isn’t rich.”

According to the 2019 World Happiness Report, the top five happiest countries in the world are Finland, Denmark, Norway, Iceland and the Netherlands. South Sudan, the Central African Republic, Afghanistan, Tanzania and Rwanda, meanwhile, sit at the bottom of the list. Grimes told World Finance that the top-ranking countries on happiness lists tend to be wealthy nations with a welfare state, adding: “Unfortunately, we’re all in that situation where you do have to keep up on things like GDP. But you shouldn’t focus on that solely.”

While GDP does have a part to play, other aspects that contribute to the World Happiness Report’s ranking include social support, healthy life expectancy, the freedom to make life choices, perceptions of corruption, and generosity. These traits provide pockets of insight often missed by other metrics, helping to explain why the US and the UK, which rank among the top five richest countries by GDP, sit 15th and 19th on the list in terms of happiness, or why Costa Rica, which ranks somewhere in the 70s in terms of GDP, wound up in 12th place.

“There are some rich countries that aren’t quite as happy as the others,” Grimes said. “They’re still in the top 20 in the world, [but] that measure is a really useful one because it does say, in countries like the US and the UK, there is something going a bit wrong there – they should be happier than they are.”

A New (Zealand) approach
While countries such as the UK, France and Australia have long been driving the conversation on welfare, New Zealand’s wellbeing budget – the specifics of which were unveiled in May 2019 – has been recognised as one of the first attempts to explicitly zero in on wellbeing across different parts of society.

For example, the budget set aside NZD 1.9bn ($1.25bn) for mental health initiatives in a bid to address New Zealand’s youth suicide rate, which is among the highest in the world. Spread over five years, the funding will establish a universal frontline mental health service aimed at helping the more than 300,000 people with moderate mental health and addiction needs in the country. “Mental health is no longer on the periphery of our health system,” Grant Robertson, New Zealand’s Minister of Finance, said at the budget’s unveiling. “It is front and centre of all of our wellbeing.”

In terms of mental health, Grimes said the budget has delivered above expectations. It also performed well in areas such as family violence and sexual violence – other categories New Zealand has typically struggled with in comparison to other developed countries. A record sum of NZD 320m ($210.6m) was announced for reducing domestic violence, while NZD 1bn ($656.3m) was earmarked to help vulnerable children.

Despite these positive steps, Grimes criticised the budget’s lack of concrete targets, with the exception of child poverty: “We have some major new expenditure initiatives, but they lack a corresponding set of outcome targets, making it difficult to evaluate whether the programmes are effective or not.”

New Zealand’s wellbeing budget is not perfect, but it is a clear step away from a purely growth-driven view of success. In order to accurately measure an economy’s health and wellbeing, and to change the way we think about prosperity, a range of robust indicators is needed. As Arnold said: “We pay attention to what we measure. Headline indicators that are widely reported shape the way we think about what it means to be successful.”

While GDP provides important insight into a country’s economic position, it is far from the whole picture. Armed with a clearer understanding of where true economic value is created, policymakers and business leaders will be able to determine new pathways to success.

Top 5 financial services that are ripe for automation

Posted on by Helen

Barely a day goes by without the launch of a new report extolling the potential benefits of artificial intelligence (AI) and automation in the financial services industry. These reports often refer to the potential for cost reduction, increased operational efficiency, improved customer experience and, ultimately, bottom-line growth. Indeed, analysts predict that AI will deliver a 22 percent reduction in operating costs (a saving of more than $1trn) across the global financial services industry by 2030 as business leaders look to transform both front and back-office functions.

Demand for AI is coming from both ends of the market: established banks are recognising the need to respond to huge sector-wide disruption and to develop more agile operations in order to compete, while smaller fintech firms are looking to AI and automation as a way to scale quickly while keeping costs down.

The scale of the opportunity is so vast that it can sometimes be a challenge for banks and insurance firms to know where to start or how to identify the process automations that will deliver most value. With that in mind, here are five processes within the financial services sector that are ripe for automation.

AI will become the catalyst for innovation, growth and genuine differentiation in the market: that’s where the real value of the technology lies

 

1 – Anti-money-laundering analysis
Currently, banks spend huge amounts of money resourcing teams of anti-money-laundering analysts to investigate post-transaction alerts. One bank Thoughtonomy recently spoke to had an anti-money-laundering bill of £1.2bn ($1.5bn) per annum. It employed more than 1,500 analysts and investigated 60,000 transaction alerts every month.

The challenge for analysts is that much of their time (up to 50 percent, according to our research) is taken up collating data on suspicious transactions rather than actually investigating them. Often, an analyst will need to collate data from five or six different systems before they can begin conducting any kind of analysis. This is hugely time-consuming, costly and tedious. In addition, banks have a significantly high turnover of analysts – up to 25 percent per annum, in some instances. This compounds the existing cost with an additional cost of hiring and training.

Using a virtual workforce, banks can substantially reduce the time taken to investigate transactions. Virtual workers have the capacity to collate the various pieces of required information at machine speed, meaning analysts can focus on value-adding activity and, ultimately, process many more transactions. Given that virtual workers work 24 hours a day and up to five times quicker than a traditional worker, we estimate 15-fold productivity gains in this area.

 

2 – Know Your Customer checks
As with anti-money-laundering analysis, financial firms have to conduct lengthy background checks on their clients. These are currently completed by large teams of Know Your Customer (KYC) analysts and are often structured and repetitive in nature – for example, checking sanctions reports, government databases and other key regulatory sources. Just like anti-money-laundering checking, banks have historically thrown people at the KYC problem, but as the regulatory grip begins to loosen, they now have the opportunity to review the efficiency of these processes.

Using a multi-skilled virtual workforce, banks can automate a large percentage of the KYC process. Virtual workers are able to access systems and applications in the same way as humans do, reading documents and data sources and making rules-based decisions accordingly. Banks are able to set rules so that if certain criteria are not met or a case seems sensitive or unusual, virtual workers can flag this to a second-line KYC analyst to review in more detail. What’s more, banks can drastically increase the frequency with which they conduct repeat KYC checks, allowing virtual workers to execute on a periodic, out-of-hours basis.

 

3 – Claims processing
Typically, insurers will have teams of people reviewing claims and making subjective decisions on whether or not to pay out. As the process is typically manual, the time to complete trend analysis against previous, similar claims is often exhaustive, and therefore rarely gets completed. This increases the possibility of fraud and ultimately damages insurers’ bottom lines.

By employing a virtual workforce, insurers can significantly increase the number of claims they are able to process, while also identifying fraud at a much more granular level. Virtual workers are able to extract information from claimant documents and compare this data with previously submitted claims. They are then able to identify any irregular activity and flag anomalies to relevant parties where appropriate. When the claim is a valid one, virtual workers can cross-reference against procurement contracts in order to prioritise the order of payment based on the agreed rebates.

 

4 – Policy quote generation
If a customer is looking to get a quote for car, home or phone insurance, they typically need to fill out multiple forms in order to provide information to their chosen insurance prospect. This takes time and effort, and often customers will drop out half way through the process – a lost sales opportunity for the insurer.

One of our clients is using virtual workers to make the process a much simpler one. Instead of re-typing information from their policy document into a quoting system, our client allows customers to send existing policy documents directly to a team of virtual workers, which can then extract the relevant information and process a quote. If the quote is more competitive than the existing policy, a new policy is generated immediately, seizing the opportunity while the client is still paying attention. If the quote is more expensive, the information is directed to an internal marketing intelligence team. The result is a much smoother and more painless customer experience, a lower cost to serve and a greater level of insight into market competitiveness.   

 

5 – Shared services
Finally, when virtual workers aren’t interacting with the end clients or ensuring that regulatory compliance is upheld, they keep themselves busy with the tedious back-office tasks that are such a drain on staff productivity and morale. Basic processes such as financial reconciliations, employee on-boarding, periodic screening, reporting, data re-entry and mid-term adjustments are just a few of the processes that virtual workers manage across the back office.

What’s more, because virtual workers are multi-skilled and agnostic to the processes they execute, they can work across the entire business, completely breaking down the siloed functions that still exist in many financial organisations.

What’s really causing the slump in US gun sales?

Posted on by Helen

Barack Obama was once deemed to be the best gun salesman in the US. Under his presidency, firearms purchases reached record highs as Americans became increasingly concerned that he would push through legislation restricting gun ownership. Such legislation never came to fruition, but it certainly was mooted – enough to cause a surge in sales, anyway.

Under President Donald Trump, the industry has a very different complexion. Last year, gun sales fell by 6.1 percent – the second straight year of decline. While it would be easy to interpret this as a sign of an industry in crisis, in reality, it is likely to be little more than an overdue market correction.

The political climate in the US has always had a huge bearing on the firearms market, but that doesn’t mean firearms suppliers have reacted with complacency to the recent downturn. Attempts to broaden the customer base have largely proven effective, particularly regarding female buyers. In fact, in spite of lower sales figures, the firearms industry has demonstrated remarkable resilience over the past few years: it remains a $28bn industry, and it doesn’t look to be going anywhere just yet.

Another way of viewing falling firearms sales is simply as a form of normalisation after years of politically motivated growth

The Trump slump
Given that gun culture in the US stands apart from that of the rest of the world, it is tempting to view any drop in sales as evidence of the country finally falling in line with everyone else. Whenever mass shootings occur – which they do with lamentable regularity – an outpouring of support for stricter gun controls usually follows. At such times, it seems inevitable that the US will lay down its arms – or some of them, at least – sooner rather than later.

Certainly, some businesses have moved in that direction. In response to the February 2018 shooting at Marjory Stoneman Douglas High School in Parkland, Florida, Dick’s Sporting Goods announced that it would no longer sell assault-style rifles and would stop selling guns to anyone under the age of 21. Other organisations, including cybersecurity firm Symantec and airline Delta, announced that they would cut ties with the National Rifle Association (NRA) in the aftermath of the tragedy.

In reality, though, these approaches are likely to have little effect. In fact, they may cause pro-gun citizens to double down, making additional firearm purchases and boycotting the brands that have spoken out. In any case, the long-term impact on sales is likely to be minimal. “We are definitely in a business cycle,” Jurgen Brauer, Chief Economist of Small Arms Analytics, told The New York Times. “For those who have been around for 30 years, this [sales dip] is old hat, and you just deal with it.”

Rather than being indicative of a long-term sea change in attitudes towards gun ownership, recent sales trends are more likely being driven by the current occupant of the White House. Donald Trump, like many Republican presidents before him, is viewed as being sympathetic to the rights of gun owners, so demand naturally tapers. “You have organic growth and then, historically, the industry has always had peaks and valleys that are driven by political pressures going on domestically,” Larry Keane, Senior Vice President and General Counsel of the National Shooting Sports Foundation (NSSF), told World Finance.

“Leading into the election of 2016, there was quite a bit of concern among consumers that if [Hillary] Clinton won, they would be facing significant additional gun control legislation. Whenever there is concern among [consumers] that their Second Amendment rights are likely to be restricted or impinged upon, the market responds. It has occurred in the past, so what we saw in 2016 was far from unique.”

Another way of viewing falling sales, therefore, is simply as a form of normalisation after years of politically motivated growth. When the industry is analysed over a prolonged period of time, its performance leaves little to be worried about.

Bulletproof industry
More than anything else, Keane believes the recent dip in sales should be viewed as a market correction: “Long term, the growth of the industry is very healthy. The market now is down, relative to the peak leading into the 2016 presidential election, but it is levelling out at about where sales were in around 2014. So, if you look at the long-term growth of the industry in sales, you’ll see that it has substantially increased over the past 10 or 15 years. The long-term trends are very positive. Everybody understood that the peak levels observed a few years ago were not sustainable [in the] long term.”

And while there are certainly good arguments for curtailing gun ownership in the US – the country has by far the highest rate of gun-related violence among developed economies – the industry does provide economic benefits. “The impact that firearm and ammunition companies have on the US economy is huge,” explained Amy Robbins, CEO and co-founder of Alexo Athletica, a US-based ‘carrywear’ brand. “Not only was it responsible for about $52bn in total economic activity in 2018, but it even has a broader impact on business seemingly unrelated to firearms. From job creation to tax, the firearms industry’s impact is huge – providing good jobs and paying significant amounts in state and federal taxes [see Fig 1].”

Even if sales are lower than they have been of late, the economic impact of the US firearms market has continued to grow: in fact, according to the NSSF’s Firearms and Ammunition Industry Economic Impact Report 2019, it has risen from $19.1bn in 2008 to $52.1bn in 2018. Between 2017 and 2018, total industry-related jobs grew from 310,908 to 311,991. These are often well-paid jobs too, averaging $50,400 in wages and benefits. Aside from direct sales, the firearms industry also supports supplier firms and a number of other ancillary organisations. What’s more, by providing a number of jobs – from California to New York – it indirectly generates business for industries far removed from the firearms market.

Shifting targets
One of the ways in which the US firearms industry has been able to maintain its economic impact even in the face of downward market pressure is by diversifying its customer base. Traditionally, the firearms market has centred on men, but this is something that the industry has been working hard to change.

According to a Harvard-Northeastern study, the percentage of women owning guns rose from nine percent in 1994 to 12 percent in 2015, with handguns proving particularly popular – in fact, 43 percent of those who only own handguns are female. A cultural shift appears to have occurred – one where women feel more comfortable using firearms for protection. Between 2012 and 2014, the percentage of women who believed that owning a gun was more likely to protect someone from crime than endanger them rose 11 percentage points.

In addition, the way that firearms manufacturers and related brands have marketed their wares has changed. Not so long ago, women had to make do with youth-model guns; now, companies are creating firearms and accessories that are specifically targeted towards the female customer, whether they want a gun for recreational target-shooting, hunting or self-protection.

“Based on our research, we have tapped into a market by connecting to a deeper message that supports women’s right to choose how they want to defend and protect themselves,” Robbins said. “As more women are deciding that a firearm is the ultimate equaliser and tool of choice for themselves, they are looking for brands to provide functional options that make it easier to live this lifestyle. We were the first company to do this in the activewear space by creating a lifestyle brand of carrywear for the modern woman.”

Women in the US are looking for good carry options that ensure they don’t have to sacrifice their current lifestyles. They are flocking to brands that make carrying a firearm comfortable and convenient, as well as stylish and safe. Concealed carry is a very personal choice for women and more brands are beginning to reflect this, with organisations that make it easier for women to carry a firearm in a variety of different situations experiencing a significant uptake from consumers.

A cultural shift appears to have occurred – one where women feel more comfortable using firearms for protection

Keane is eager to point out that the stereotype that only white, middle-aged men living in rural America are still purchasing firearms is not reflected in the customer data: “We are witnessing the changing face of the consumer – the demographics are shifting and you are seeing a more ethnically diverse customer base. We are also seeing more urban purchases.”

Programmes like the NSSF’s First Shots initiative have proved hugely effective in getting new customers interested in firearms. It’s an approach that will have to continue if the industry wants to maintain its long-term growth.

A long shot
For the US firearms market, the priority is finding a way to continue generating the kind of organic growth that can insulate businesses from the inevitable dips in demand arising from political developments.

“There will always be spikes in demand that are driven by external factors – that is the reality of the market,” Keane said. “The product is not merely a consumer item – it is protected by the Second Amendment of the US Constitution and so the market is fairly unique in that regard. There aren’t many products that are constitutionally protected. It makes it challenging for the industry to manage sales peaks and troughs, which are generally unpredictable.”

Organisations like the NRA and the NSSF should continue to structure their marketing activities in such a way that ensures the industry appeals to as broad a spectrum of customers as possible. This has proven effective at changing the image of the typical gun owner, particularly among female customers. American Outdoor, a firearms and outdoor sports brand, spent $56m on marketing and PR in 2018 – approximately 78 percent more than it did five years ago. Marketing helps to prop up sales when times are tough.

Approximately three in 10 Americans own a firearm – down from historic peaks – so it seems that more guns now reside in the hands of fewer individuals. What’s more, it is not completely out of the question that further restrictions on gun ownership will one day be implemented (legislative differences already exist at state level), and while these may cause a short-term sales boost, they will dent revenue in the long term. According to the Pew Research Centre, almost 60 percent of US citizens believe that gun laws should be stricter: these are things that firearms firms will have to keep in mind.

For now, though, the industry’s long-term growth looks promising, driven by a diversified customer base that, to some extent, reflects changing demographics in the US population as a whole. As the country starts preparations for the 2020 presidential election, sales may well fluctuate again, making the industry’s most recently acquired customers of particular importance: they will be needed to maintain the firearms industry’s momentum, regardless of whether the next president is a Republican or a Democrat.

Why the race to a new digital taxation model is endangering the marketplace

Posted on by Helen

The fast-growing, highly adaptive global digital economy (GDE) is like an elephant. The way policymakers, legislators, economists, business leaders, consumers and other stakeholders are approaching the inevitable taxation of the GDE calls to mind the ancient parable about the elephant and the blind men.

After their very first experience touching an elephant, each blind man comprehends the large mammal in starkly different ways: the man who touches the flanks describes an animal as powerful as a wall; the man who grasps a leg believes the elephant resembles a massive cow; the man who touches the trunk describes a snake; and so on. Given the speed at which the massive GDE is changing and the long-term need for new digital taxation models, it would be wise for global tax policymakers to consider a constructive pause before proceeding with additional proposals and laws, regardless of whether they are unilateral or multilateral in nature.

The looming – and natural – decline of the currently extended supercycle also supports the idea of having digital taxation stakeholders work towards a more unified perception of the GDE – and, as a result, a more sustainable and beneficial approach to digital taxation and alternative business models.

As society advances with developments in public finance and countries modernise their revenue streams, governments need to redesign tax policies in response

Trunks, tails, tusks and taxes
The story of the blind men and the elephant is said to have originated in India, although other countries have claimed it as their own and different versions exist. In one telling, the blind men become so angry at their counterparts’ ‘dishonest’ accounts that they argue heatedly and exchange blows. This makes the story an even better fit for the GDE, as none of us have witnessed the likes of it before and it has been sparking increasingly heated arguments regarding the taxation of digital transactions since its appearance.

The GDE is often misinterpreted by policymakers, lawyers and even economists. Although online transactions have been increasing for over a quarter of a century, many economists are only just beginning to understand the intricate mechanisms of the phenomenon and its interconnectivity to global operations. As explained in the IMF’s 2018 Measuring the Digital Economy staff report, the GDE and its disparate implications, behaviour and multiplied functions complicate fiscal policy and global tax regulation.

We’ve only recently begun to map, correlate and quantify the intricate networks created by the extraordinary rate of innovation and market penetration that has, at times, caused speculative valuations of digital goods and services. Additional complexity stems from the impact of digital transactions on numerous microeconomic sectors, as well as how these are impacted by additional circumstances. For example, instead of the orthodox, linear, trade-based economy of past centuries, the GDE has created a vastly complex and interactive network of economic actors and network agents that enhances and monetises value at various levels of the economic and business activity chains, both vertically and horizontally. This adds to the complexity for fiscal policymakers as they decide how much, where and when to tax certain virtual business activity. Thus, when we ask what is ‘value creation’ and where is it created for purposes of discerning taxing rights and profit allocation to the ‘proper’ jurisdiction, errors and miscalculations may occur and result in policy and economic distortions.

As the IMF report explained, we already know that the complexity of the GDE makes economic forecasting extremely challenging. These interactions create additional secular trend activity that eventually affects the GDE. Accordingly, the long-term implications of flawed fiscal policy being ratified too early will produce disruptive and economic outcomes to a still-infant economy, long after seasonal effects and the ebb and flow of business cycles have passed. These echo effects will undoubtedly produce unintended and unforeseeable consequences, as well as incongruent aftershocks throughout the global marketplace.

A matter of when, not if
Many global tax authorities prefer not to wait to understand and evaluate the GDE’s longer-lasting impacts before overhauling traditional taxation systems. Last year, the EU attempted to establish a digital services tax (DST), and this year, the Organisation for Economic Cooperation and Development (OECD) – together with a growing number of individual countries – is forging ahead with its own proposals for digital taxation. The UK, which was the first country to unilaterally propose a DST, has yet to enact official legislation, pending the adoption of a precise international standard. The OECD expects to finalise a new digital tax regime next year.

Not content to wait for the OECD, earlier this year, France introduced a new DST of three percent that will apply to companies with over €750m ($839.4m) in annual revenue. The government also indicated that it intends to eliminate this tax when the OECD finalises its own. In April, the French Parliament voted to approve the new tax – however, at the time of World Finance going to print, only the lower house of the French Parliament had voted in favour of the proposal. The UK’s digital tax rule is also set to take effect next year, while Germany – among other EU member states – is considering similar moves.

It is clear that French Finance Minister Bruno Le Maire views the GDE differently to other global stakeholders. Earlier this year, Le Maire told The Wall Street Journal: “These [technology] giants use your personal data and make significant profit from it, without paying their fair share of tax.” US Government officials, for example, see the GDE as being broader than the handful of massive technology companies headquartered in its country: when France proposed its new DST, Chip Harter, Deputy Assistant Secretary for International Tax Affairs at the US Treasury, indicated that his team was researching whether the “discriminatory impact” of France’s digital tax ran counter to World Trade Organisation rules.

Before policymakers create and advance digital tax proposals, they should consider whether their proposals are timely and judicious

That’s not to say that a new approach to digital taxation is unnecessary. As society advances with developments in public finance and countries modernise their revenue streams, governments need to redesign tax policies in response. As such, we need new approaches to taxation and matching tax types that not only impose levies on a transaction’s event, timing, place and value exchange, but upon emergent technologies, digital applications and direct-use advertising and promotional value.

Successfully replacing long-standing fiscal policy attitudes and inefficient international tax standards is a complex undertaking. It requires replacing traditional forms of economic thinking with a more adaptive approach better suited to the 21st-century GDE. To accomplish this, it is essential to shift our energies towards understanding the behaviour of dynamic economic systems and adapting to their intricate, separate parts.

Tortoises, not hares
It takes time to replace outdated methods of taxation with regimes that effectively avoid – or at least limit – market and economy-wide distortions and other negative externalities. Before policymakers create and advance digital tax proposals, they should consider whether their proposals are timely and judicious. On this count, the OECD deserves credit for taking its time, while seeking input from many stakeholders, to design what will be a complicated and disruptive tax proposal.

Unfortunately, it appears that the race to unilaterally tax the digital marketplace is on. This pace limits the amount of systemic consideration that should be devoted to the minimisation of government intervention as the GDE expands. This flawed market intervention may become another trade barrier: though unilateral digital taxation rules are intended to preserve tax bases while sustaining regional economies, they may have the opposite effect.

Many country-specific DSTs could result in an inefficient imposition of tax, regardless of whether they are levied against revenue, income or profits, because they only address tax compliance requirements while neglecting potential social costs. Additionally, there’s the inconsistent and unilateral assessment of transactional cost, and the slippage (or cost differences and spread) between jurisdictions. To avoid additional errors and distortions impacting certain sectors, a precise fiscal policy balance must be fostered between all market participants.

Double (or triple) taxation also represents a major risk. The mechanics and effect of adverse differential taxation could create a consolidated tax situation in which a taxpayer is subjected to tax twice or more on the delivery of the same digital goods and services in different jurisdictions.

This is not to say that a multilateral, globally uniform digital taxation standard will be easy to design and implement. The OECD’s recommendation for an aligned international standard could accomplish this, although developing nations may be best served by assessing and adopting the UN’s own proposals first. Either approach requires extensive wrangling among different tax authorities, and the outcome could feature at least some of the negative impacts that unilateral approaches are more certain to inflict.

As the increasingly unilateral moves to adopt new forms of taxation in the past year confirm, digital taxation is no longer a matter of if, but when. Given the risks involved in getting digital taxation right, all stakeholders should consider the benefits of delaying that looming ‘when’ until we can reach a shared agreement of what the GDE looks like today – and how we want to see it thriving in the future.

For more information:
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Mario Singh on Fullerton Markets’ innovative partnership programmes

Posted on by World Finance

The foreign exchange market moves faster than any other financial market in the world – so how do brokerage firms make sure they’re offering their clients and partners the best solutions? Mario Singh, founder and CEO of Fullerton Markets, explains his approach.

World Finance: Mario, what innovative programmes and solutions are you bringing to your partners?

Mario Singh: Thanks so much for asking that question Paul – here’s the key thing I find, you know, for us to really advance all over Asia. We really have got to take care of our partners. So I’ll split partners in about three different categories.

Category one is what I would term as the traders and the investors. They are at the forefront of what we do.

What do these clients really want? Every single day we are asking ourselves, how could we better our product offerings for all our clients? Well, traders essentially want a couple of things. They want fast news at their fingertips. They want to be able to access webinars, videos, training programmes. So we have that for traders.

Now, what about investors? Investors don’t really want to spend the time to go and learn how to read charts, how to put the indicators on the platform. So they are fairly hands-free. Now, for the investors, Paul, we’ve got an innovative product, which we term as CopyPip. Basically a system where we rank different top expert traders within Fullerton Markets, and the investors can then pick and choose all these expert traders that are able to manage the money for them.

Now the second category would be the IEBs – essentially the introducing brokers or agents who bring clients to us.

How do we help our IEBs to advance and increase their reach throughout the entire ecosystem? We’ve got a programme – we term it as PipBox. So PipBox is basically an affiliate tool, Paul: they’re able to automatically send out content tools from Monday, Tuesday, Wednesday, Thursday, Friday and the weekend. We will be the ones giving them this content, Paul: and all they’ve got to do is to syndicate the content worldwide, and anybody who opens an account then will be tagged automatically to our IEBs.

And the third group are what I would term as the white labels – partners that would want to launch their own branding, and we power the white labels from behind.

For our white labels, because they run their own brokerage platforms, management of data and analytics is so important. So we’ve got something called the Fullerton Suite that is able to help customise the different analytics for our white labels.

World Finance: But as you’ve said before, the FX market moves more rapidly than any other in the world – how are you making sure you’re hearing what your customers and your partners are asking for, and continuing to adapt and evolve what you’re offering into the future?

Mario Singh: You know, we have four core values in the company: passion, excellence, commitment and sustainability. And within those four core values, Paul, we really want to hear from the ground as much as possible.

And this can come in a variety of ways, you know. Number one, they’re able to live chat through the entire company to find out and give us that feedback. We’ve got so many staff all over the ground in 10 countries worldwide that are able to meet them and have that personal connection. In fact even for myself, Paul: I go down to the ground as well. I started as a trader. I love this game. I understand it totally, I understand there are wins, there are challenges. And I think this is something our clients and partners can really identify with.

So we really want to be there with them. We truly believe, and we expound on that, in terms of how to provide personalised service to all our partners worldwide.

World Finance: Mario, thank you very much.

Mario Singh: Thank you for having me, Paul.

Fullerton Markets CEO Mario Singh explains move to St Vincent & Grenadines

Posted on by World Finance

In September 2018, New Zealand’s Fullerton Markets announced its move to St Vincent and the Grenadines. Mario Singh, Fullerton’s founder and CEO, explains why.

World Finance: Mario, why the move?

Mario Singh: Well Paul it’s a great question – I get that question a lot. Many people will be saying: Mario, you’re one of the forefront in leading the entire brokerage industry. Why would you move from a regulated environment to a less regulated environment? Which is essentially what St Vincent and the Grenadines is.

And here’s the real answer, Paul. The key thing is that the entire financial world is moving in lightning seconds every single day. To some extent I do find that regulation – while it has its place – has become what I would term as fairly restrictive and fairly reactive. So I wanted to take a proactive stance in how we would engage the markets.

So by moving to a little bit more relaxed jurisdiction, it allowed the business to keep our competitive edge, for us to be fairly nimble in how we move, and provide more innovative solutions for all our clients worldwide. But at the same time Paul, with our Fullerton Shield, we’re able to raise the standards of fund safety.

World Finance: I understand it also gives you a good platform to do more work in Asia – where World Finance has recognised you as Best FX Broker, 2019. Tell me about the potential in that market.

Mario Singh: Paul, absolutely immense. Asia today commands about 4.5bn in terms of population. Now that is easily 60-70 percent of the entire world population.

And Asia is slightly different in the sense that in all the countries within Asia, different people speak different languages. So I think getting the local culture right is absolutely of paramount importance. So a lot of things that we do, Paul – we tend to localise them. That’s including hiring local trainers, it includes translating all our materials. It includes even our support team that are able to type in the local language.

This is where it gets a little bit complicated, but anyone who is able to pay the price in terms of engaging local knowledge and local culture will win the game. And we are absolutely at the forefront of doing that in Asia.

World Finance: So how are you going to be approaching that challenge – what does the next five years look like in terms of your footprint in Asia?

Mario Singh: So, one of the key things I think, is really to identify in terms of how the area itself is currently growing.

People in Asia, they’re very driven. They’re very hard working, they’re very ambitious. They definitely want to get to the next level. So, trying to design innovative products that’s going to allow our clients to basically increase their financial knowledge is of paramount importance – number one.

Number two, I feel that many of them in Asia today are having high disposable income. So at the same time Paul, having personalised service in ensuring that we can cater to give them certain solutions of how they are able to park their disposable income. This two-pronged approach I think is absolutely necessary for us to win the game over the next five years.

World Finance: We’ll catch up in five years – Mario, thank you very much.

Mario Singh: Thank you Paul for having me.

How the Fullerton Shield offers triple-secured forex fund safety

Posted on by World Finance

Foreign exchange may be the world’s largest and most liquid market, but it also seems to be the one most plagued by corporate scandal and criminal prosecution. Mario Singh, founder and CEO of Fullerton Markets, explains why he thinks this is the case, and the lengths Fullerton has gone to in order to protect its own clients’ funds.

World Finance: Mario, why is the forex industry so susceptible to scandal?

Mario Singh: Well Paul, you hit the nail right on the head; I mean precisely the reason is essentially because of its size.

The forex market today trades essentially over $5trn in one day. And because it is the world’s largest money market, that’s part of the reason why there are so many scams that come into the financial sector.

That sounds I know a little bit negative, Paul, but – one of the key things that I find has been very good industry-wide has been something called the FX Working Group. Which is essentially a committee that is born out of the BIS – the Bank of International Settlements. And they have a code of conduct that basically says, these are some of the industry’s best practices.

So with that, I do hope as an industry practitioner as well, that we will be seeing lesser and lesser of such forex scandals and scams throughout the world.

World Finance: Fullerton Markets has really committed to fund safety and transparency; tell me about your Fullerton Shield.

Mario Singh: So the Fullerton Shield is basically our triple-level fund safety programme.

Level one is that we have a segregation of bank accounts between the corporate fund and the client fund. So that there’s a clear segregation, that means the directors of the company will not be able to put their hands into the coffers, and to start pilfering off client funds.

Level two Paul is what I term as a third party fund administrator. Once we segregate the funds out, we then appoint a third party custodian that actually helps in the administration of withdrawals and deposits of the client funds.

And if that is still not enough Paul, we have the third level – now this is unparalleled fund safety. So the third level, we actually have an insurance policy that is taken on the custodian, in two areas. Number one, what we term as professional indemnity – in the event that some of the employees or directors of the custodian were to encourage in wrongful or criminal acts – and number two, we took the policy on cyber-crime.

World Finance: How does this commitment set you apart in what is really a ruthlessly competitive market?

Mario Singh: I would zero that in on basically one word. It’s what I would term as a proactive stance. Now this is what I mean – and don’t get me wrong, I feel regulation is a good thing. But having said that, I do find that regulation can be a little bit reactive – reactive meaning to say, it’s only when problems happen that the regulators step in. And by and large, at that moment, the client funds have already disappeared.

So by taking a proactive stance in ensuring that on day one, the client funds are not even sitting in the brokerage firm, we have raised that benchmark.

World Finance: What do you see as the future for this conversation in the industry? Do you see your competitors, or even the regulators, adopting a more proactive stance?

Mario Singh: Well I would love to see that, quite honestly. I think at this moment there needs to be a balance from the regulatory perspective, on how they would massage that one-two step between a reactive stance and a proactive stance.

So I would dare say that we are one of those that’s actually leading the industry, by taking such a bold, proactive stance, in ensuring that client funds are segregated on day one itself.

World Finance: Mario, thank you very much.

Mario Singh: Thank you Paul for having me.

A glimpse into the future of banking in Brunei

Posted on by Helen

As one of the largest banks in Brunei and a key player in the global banking industry, Baiduri Bank has enjoyed several years of growth. Not content with resting on its laurels, though, the firm is now looking to build on its successes via investment in new technologies. From contactless payments to digital wallets, technology is rapidly changing the banking landscape. Furthermore, as customers are increasingly embracing mobile and internet banking, banks are pressured to adapt to their customers’ evolving needs. As a consequence, institutions are turning towards new technologies.

“With Brunei having one of the highest internet penetration rates in the region, the young, tech-savvy generation expects on-the-go services as their default option. This also applies to how they perform their banking,” Ti Eng Hui, CEO of Baiduri Bank, told World Finance. He added that while the brick-and-mortar branches are still generating continuous traffic, there is an upsurge in the amount of time that customers are spending on online and mobile banking platforms. “Though certain services still require a personalised touch through face-to-face interaction, we have seen a significant increase in the amount of transactions taking place online.”

Digital drive
As a result of this trend, Baiduri Bank is also actively engaging its audience through social media. Today, the bank uses various social media platforms to enter into conversations with its customers and potential clients, swiftly responding to any queries and posting regular, informative content. “For Brunei’s young generation, traditional banking services no longer fully meet their evolving financial needs for a multitude of reasons, such as time constraints or other lifestyle factors. Convenience is now the main differentiator, with the youth expecting a comprehensive banking experience from their smartphone or laptop as an option.”

Brunei plans to diversify its economy away from the oil and gas sector by placing greater emphasis on the development of local businesses

Touching on the bank’s digital banking initiatives, Ti said: “Today, with the internet and the smartphone being a daily necessity for many Bruneians, Baiduri Bank has developed a comprehensive and user-friendly mobile banking app in keeping with the digital banking trend. We will also continue to further develop our electronic payment capabilities and e-banking services.” Initially released in 2013, Baiduri’s mobile banking app, Personal i-Banking, has undergone two major enhancements in recent years, with new features and a more intuitive user interface in keeping with customers’ evolving needs. Meanwhile, Baiduri Finance – a subsidiary of the bank – has also recently launched a mobile app. The Baiduri Finance mobile app is further proof of the bank’s efforts to provide the highest level of convenience for its customers.

Baiduri Bank was also the first – and, to date, the only – bank in Brunei to provide MerchantSuite, an online platform for merchants that facilitates card payments without the need to have a dedicated (and often costly) website. This eliminates a major barrier for sole proprietors and microenterprises, which often do not have their own websites but do have access to social media. It also makes their businesses more accessible to a wider audience. “This feature allows for quick and efficient transactions, and provides a convenient alternative for our customers who prefer to make online purchases,” Ti added.
Furthermore, Baiduri Bank also has a dedicated internet banking platform, known as Business i-Banking, which provides a modern, user-friendly and secure channel for businesses to manage and conduct their banking efficiently.

Among the bank’s other digital innovations was the introduction of Brunei’s first online securities trading platform. “Through our subsidiary Baiduri Capital, we provide the opportunity for our customers to invest in major stock markets, including Singapore, Hong Kong, Malaysia, the US and China,” Ti explained. “Our secure online trading portal also allows our customers to obtain quotes, place orders and review their account status and balance at their convenience.”

Finding the right tools
Being a local bank, Baiduri’s primary focus has always been on the Brunei market. Starting out as a commercial bank that catered to corporate and private banking clients, Baiduri Bank’s core business now includes retail banking, corporate banking and consumer financing. Baiduri Bank also offers a wide range of financing products for local businesses to aid in their cash-flow management and to support their growth. Other products designed to serve micro, small and medium-sized enterprises (MSMEs) include financial advice and corporate credit cards. This coincides with the country’s current economic plans: with its long-term development programme, Wawasan Brunei 2035, in place, Brunei plans to diversify its economy away from the oil and gas sector by placing greater emphasis on the development of local businesses.

In 2015, Baiduri Bank also set up its Business Hub, which serves to complement the corporate banking department by tapping into non-borrowing and small-borrowing accounts. “We set up the Business Hub to act as a focal point for our current and future business customers. The purpose of the Business Hub is to provide information and advise our businesses on the types of services and offerings that are suitable for their unique needs,” Ti told World Finance.

“In line with Wawasan Brunei 2035, we have taken a proactive stance to help local businesses by providing the tools that will help them achieve their goals,” Ti added. To cater to the wide variety of businesses in Brunei, Baiduri Bank also launched a micro account, which caters to smaller businesses that do not meet the requirements of a normal business account. The micro account also enables MSMEs to subscribe to the MerchantSuite service and enjoy the associated benefits.

Furthermore, Baiduri Bank has partnered with Brunei Shell Petroleum (BSP) to offer financing to local businesses under the BSP Credit Facility Programme. “This programme allows us to fast track the reviewing process of BSP contractors and make swift decisions on their respective credit applications,” Ti explained.

More recently, as a result of the government’s diversification efforts, Brunei has seen a sharp increase in the number of MSMEs being created. “With better tools and education at their disposal, there has been an upward trend among the Bruneian youth to venture into entrepreneurship,” said Ti.

Among the myriad ways that Baiduri Bank contributes to this cause is through the Junior Achievement Brunei programme. This after-school initiative sees Baiduri Bank staff take on the mantle of facilitator and mentor for schoolchildren, helping them start and run their own microenterprises. “We have collaborated with the Ministry of Education to run this programme for the past five years. This first-hand exposure to running a business and all that comes with it will help open the doors to more growth opportunities in the future,” Ti told World Finance.

Awareness and inclusion
A vital factor for Baiduri Bank to consider in order to remain competitive in a rapidly changing and progressive society is the increasing importance placed on financial planning. “Baiduri Bank provides a variety of tools and services to help educate our individual customers on understanding their options and how best to take control of their finances,” said Ti.

Beyond the regulatory rules to control individuals’ indebtedness, Baiduri Bank has a number of safeguards in place to ensure customers are not over-indebted. These include comprehensive guidelines on clients’ eligibility with regards to various financing products.

Ti also noted that financial planning should be brought to light at all levels of society. He said: “As part of our commitment to educating the general public on financial planning, Baiduri regularly holds talks on the subject for schools, various government departments and private organisations. We also conduct mandatory risk-profile assessments on our customers before they sign up for any of our wealth management products. This allows us to recommend the most suitable product that is both within their means and best matches their attitude towards investments.”

He continued: “At all of our branches, as well as at our dedicated Wealth Management Centre, we provide complimentary financial planning consultations. We firmly believe in the old adage that preparation is the key to success.”

In addition, both Baiduri Bank and Baiduri Capital regularly host investment seminars in a bid to educate their customers on the latest market trends. “We partner with various experts from across the region,” Ti told World Finance. “This is part of our continual efforts to keep our customers well-informed and to facilitate them in strategising their investments.”

With the growth of financial awareness and inclusion in Brunei coupled with the increasing demand for digital alternatives to banking, Ti feels that Baiduri Bank is able to make a significant difference to banking in Brunei. “In today’s highly educated and tech-savvy society with a heavy reliance on mobile services, there is a growing need to develop or adopt new technologies.”

Permanent player
Baiduri Bank has positioned itself as the leading conventional bank in Brunei. With high liquidity and a strong credit rating of BBB+/A-2 from Standard and Poor’s, Baiduri Bank has recently purchased HSBC Brunei’s retail and commercial banking portfolio. This comes in addition to the recent acquisition of United Overseas Bank’s retail portfolio. “These strategic moves have helped us secure a competitive position in the economy,” Ti explained.

Speaking about the digital transformation currently being witnessed by the banking industry, Ti said: “Baiduri Bank has taken steps to not only accommodate the current needs of our customers, but to also anticipate their future needs. That’s why the bank has invested heavily in data security and newer technologies to provide an enhanced banking experience.”

There will undoubtedly be obstacles and challenges to overcome in this constantly evolving marketplace. But with a focus on developing the local economy and its three main core businesses already doing well, Baiduri Bank has secured its place as an integral part of Brunei’s financial landscape.

The World Bank reaches a crossroads

Posted on by Helen

In his first interview as the new president of the World Bank, David Malpass tried to strike a conciliatory tone, alleviating concerns over his previously polemical attitude. And yet, he couldn’t resist making remarks that in different times would cause uproar. He told CNBC: “There are challenges facing the world in terms of how you have transparent projects that are high quality [and] where the debt is transparent. China moved so fast that in some parts of the world, there is just too much debt.”

It was because of comments like these that consternation was expressed across the international development community when Malpass was elected president of the bank in April. Similarly to other Donald Trump appointees, the former chief economist of Bear Stearns holds a deep distrust of the organisation he leads: as undersecretary of the Treasury’s Office of International Affairs, he expressed doubts over the relevance of multilateral institutions, stating that “globalism and multilateralism have gone substantially too far, to the point that they are hurting US and global growth”. Christopher Kilby, a professor of economics and an expert in development aid at Villanova University, told World Finance: “Growth alone is the wrong metric to assess the merits of an organisation like the World Bank. If Malpass does take this as the sole objective, his agenda will be very different from that of previous World Bank presidents – and from the major European stakeholders.”

A divergence of objectives between the US and European stakeholders will make the new president’s work more difficult, according to Kilby. “That is likely to accelerate a trend towards special purpose ‘trust funds’ at the World Bank, where individual donors give funds for specific purposes rather than contributing to the general budget,” he told World Finance. “This tends to undermine multilateralism, in the sense of shared decision-making, and also makes administration more difficult. Overall, funding levels might not change that much, but the leadership role of the World Bank is likely to suffer.”

Although the World Bank president is not responsible for everyday operations, critics claim that the narrow selection process sends a message about the bank’s priorities

A new path
The appointment of Malpass marks a new era for the World Bank Group and its five subsidiaries – the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes. As a group, this international financial institution underwrites loans to developing and middle-income countries, and is an integral part of the Bretton Woods system, which was set up by the victors of the Second World War to monitor the global financial system and intervene when necessary. With a firm critic of multilateralism at the helm of the World Bank, the basic tenets of the system are at risk of falling prey to the wave of populism dominating domestic politics on both sides of the Atlantic. “A smaller World Bank is in line with the anti-globalist point of view,” Kilby said.

Malpass is not alone in his criticism of the system: many US officials who espouse the ‘America first’ doctrine oppose engagement with multilateral organisations. Mark Sobel, US chairman of the think tank OMFIF and former US representative at the IMF, told World Finance: “The US now has a choice – to turn its back on the international financial institutions and not recognise the changing landscape, or to accept the reality of change and work to modernise them. The former path will lead to greater regionalism, [will cause] emerging markets [to drift] away from the multilateral system, and [will] ultimately hurt US interests.”

During his first days at the helm of the World Bank, Malpass tried to address concerns over his agenda, claiming that his past criticism focused on problems that have been solved by the bank’s previous leadership. Optimists also point to his credentials as a pragmatist who knows when to compromise. For example, as a US Treasury official, Malpass participated in talks that concluded in a surprising $13bn capital increase for the bank in exchange for reforms in recruitment and policy.

His predecessor, Jim Yong Kim, was equally controversial. An Obama appointee, Kim spearheaded an unpopular and eventually botched internal reorganisation of the bank that aimed to reduce red tape and curb costs. In an unprecedented move, the World Bank’s staff association demanded an international search for a new president in 2016, but Kim easily won a second five-year term. When he abruptly resigned in January 2019, a considerable portion of the international development community breathed a sigh of relief. Kim’s unpopularity makes the current president’s job easier, said a former World Bank official: “He has the added advantages of having generated relatively low expectations of any drastic change, and of following a president who launched a messy and still incomplete and painful reorganisation, so he will want to settle staff rather than shake up on balance.”

A game of thrones
If the ideological armour of the new president has come under scrutiny, the selection process that led to his appointment is even more controversial: Malpass ran without facing any competition as a result of an informal gentlemen’s agreement between the US and European stakeholders that dates back to the 1950s. According to this, the IMF managing director must always be European, while the World Bank president is an American. Former World Bank senior officials Joseph Stiglitz, François Bourguignon and Nicholas Stern argued in a 2012 Financial Times op-ed that the agreement is “not only hypocritical, it also destroys the trust and spirit of collaboration needed to manage the profound problems facing the world”. The appointment of presidents with questionable credentials – such as Paul Wolfowitz, one of the neo-conservative architects of the Iraq War, and Kim, a public health expert with little experience of international development – has given impetus to voices calling for the end of the arrangement.

When Kim resigned last January, more than 150 non-governmental organisations and academics urged the bank’s board to honour its commitment to an “open, transparent and merit-based” process. Many expressed hope that this election would be different when Lebanon nominated Ziad Hayek as a candidate in February. However, Hayek soon withdrew, with the Lebanese Government citing pressure from other governments as the reason. For his part, Malpass defended the legitimacy of his election: “I feel like there was a long, open and transparent process.”

One way for the World Bank to stay relevant in the 21st century is to broaden its agenda, particularly by focusing on global problems such as financial inclusion, biodiversity, pandemics and refugee crises

Ironically enough, the arrangement contradicts the bank’s own calls for good governance, representation and diversity in the developing world. In 2018, the bank launched its $12m Open Governance Partnership Multi-Donor Trust Fund, aiming “to increase government transparency, improve accountability, and strengthen citizen engagement as well as government responsiveness”. Scott Morris, a senior fellow at the US think tank Centre for Global Development, said: “Nobody can think it was a sign of progress that the US candidate for World Bank president had no challengers. This was largely a failure on the part of European governments, who made it clear enough that they weren’t interested in a competitive election at the World Bank – both because they didn’t want to directly challenge an unpredictable and belligerent White House, but also because they continue to want to protect their ability to pick the IMF managing director.”

Complaints about the president’s nationality are a thin disguise for a more important issue: how the bank is run. Many international development experts believe that borrowing countries should be leading the design and implementation of World Bank programmes. Although the president is not responsible for everyday operations, critics claim that the narrow selection process sends a message about the bank’s priorities. Frustration with this imbalance of power has pushed developing countries – such as the g7+ group of fragile states – to seek alternative solutions.

The power struggle within the ranks of the World Bank is reflected in the institution’s decision-making procedures. Currently, countries with around 12 percent of the world’s population hold 50 percent of the votes. Many developing countries are willing to contribute more capital, but the US has repeatedly blocked such moves to maintain its 17 percent shareholding and veto power. The veto itself is limited, since the US cannot block any projects, but its importance should not be understated, Morris said: “The US won’t allow itself to be diluted below the 15 percent threshold and is unlikely even to inch closer to that threshold. The veto does protect the ability of the US to stand in the way of any major changes at the institution – those that would require a change to the bank’s articles of agreement. Protecting the veto does create a problem for raising capital in the institution.”

Some hope that China could be a counterweight to American influence. Kilby told World Finance: “It seems likely that China earns some influence at the World Bank by being a great customer. However, this influence has clearly been far less than US influence. As an institution with one very influential member (the US), World Bank management would actually benefit from having a counterweight. So the World Bank doesn’t yet run the risk of being captured by China, but World Bank management might be able to use China as a counterweight to US influence.”

The China syndrome
When the World Bank was established, its mission was relatively neutral: reduce poverty by lending to developing nations. The picture has dramatically changed over the past few decades, as some of the biggest loan recipients have achieved high levels of growth and often compete directly with developed ones. Many experts express doubts over whether the group should keep lending to middle-income countries, such as China (see Fig 1). David Dollar, former World Bank official, US Treasury emissary to China and currently a senior fellow at the Brookings Institution, said: “The poorest countries should be the focus, but if the bank stops helping middle-income countries then it is no longer a global development institution.”

Despite its recent economic development, China is still one of the bank’s biggest loan recipients and is currently at the heart of this debate. Sobel said: “Critics are right to point to China’s growing income and huge reserve stockpile as reasons to ask if the bank should be lending to China. Surely, sustaining lending to China to support the bank’s income and balance sheet would be an inappropriate use of resources.” One of the harshest critics of the bank’s engagement with China is its current president: during a congressional testimony in November 2018, Malpass claimed that multilateral development banks are vulnerable to China’s geopolitical influence. More recently, he pushed for the World Bank to cut its lending to other BRICS countries, such as Brazil and China. After his appointment, Malpass confirmed that lending to China will be reduced according to the terms of the US-led $13bn capital increase.

However, reducing lending to China may not be the best option for the World Bank, or even for US taxpayers. According to Kilby, Malpass – and the Trump administration more generally – has called for a dramatic cut in World Bank lending to middle-income countries, especially China. Kilby said: “If this happens, ‘profits’ from IBRD loans [to middle-income countries] will shrink. To continue to make zero-interest loans to very poor countries, the World Bank would have to push donors like the US to increase their contributions. So this aspect of the policies advocated by Malpass will cost US taxpayers – or will force the World Bank to dramatically reduce the aid it gives to poor countries.”

Most controversial of all is the bank’s involvement in China’s ambitious Belt and Road Initiative, a development strategy including infrastructure investment that, according to many analysts, aims to consolidate the country’s geopolitical clout in Asia and beyond. Despite calls to boycott the project, the World Bank engaged with China to ensure its sustainability. Dollar said: “China’s Belt and Road Initiative is financing infrastructure in many core clients of the World Bank. If the bank does not coordinate with these activities, then there will be disjointed projects and financing, and poor outcomes for developing countries. Developing countries do not want to choose between working with China and working with US-dominated institutions such as the [World Bank].”

New players
Another potential source of concern for the bank is the rise of alternative multilateral development banks. Examples include the China-led Asian Infrastructure Investment Bank (AIIB) and the New Development Bank, which was established by the BRICS countries. Dollar said: “The emergence of new development banks provides healthy competition for the World Bank. The new banks have majority ownership by developing countries so their policies are likely to reflect the preferences of those countries. It will be a challenge for the World Bank to remain relevant while still satisfying its owners, [which] are mostly rich countries.” Their activity may benefit the World Bank in the long term, a former World Bank official told World Finance: “‘Cherry-picking’ by the likes of the AIIB of relatively easy and rewarding project finance in a booming region would tend to push the World Bank into doing some harder things, such as funding more complex regional and global public goods, but that evolution is not a bad thing.”

Although World Bank lending peaked at a record $64bn in 2018 (see Fig 2), in relative terms it is decreasing for most developing countries, as these nations increasingly have access to other sources of finance, such as bond markets and Chinese overseas lending. Bilateral lending by China through state-owned companies and banks is, according to some estimates, several times bigger than World Bank loans. But it’s not just loans that developing countries are interested in, Morris said: “Perhaps the surprising result of all this is that the World Bank is still clearly in demand. We might expect that countries would have lost interest in the bank by now, given other options. But demand for World Bank lending has never been higher. Countries, including large-economy countries like China, clearly value their engagement with the bank and are eager to continue borrowing to tap [into World Bank] expertise, even if they don’t ‘need’ the money.”

The World Bank is involved in China’s Belt and Road Initiative, a controversial development strategy that aims to consolidate the country’s geopolitical clout in Asia and beyond

A modern agenda
One way for the bank to stay relevant in the 21st century is to broaden its agenda, particularly by focusing on global problems such as financial inclusion, biodiversity, pandemics and refugee crises. Many experts have called for the bank to take a more active role in the integration of services into global markets – particularly financial markets through capital market development and regulation.

Through its financial inclusion programmes, the bank aims to reduce the number of people without access to financial services. According to the bank’s Global Findex database, there were 1.7 billion adults in the world without a bank account of any type in 2017, with nearly half of these people living in just seven countries (see Fig 3). Critics say the bank can do more to address this issue. Morris noted: “I think development of domestic capital markets and deepening access to external markets ought to remain a high priority for the institution. But it’s a tough agenda, and it’s not clear the bank has a hugely successful track record.”

Climate change is gradually becoming a top priority for the World Bank, but its room for action is constrained due to the lack of a broader political consensus and, more recently, the dogged resistance of the US. The institution also lacks a cohesive approach to climate finance, according to Kilby: “The trend towards more special purpose trust funds managed by the World Bank is likely to continue. With active US opposition, much of the World Bank’s climate change activity may be confined to operations funded from these sources. That points to a piecemeal approach rather than broad policies. This would be unfortunate and inefficient.”

In the past, Malpass has criticised the bank’s emphasis on climate finance and was a key player in pulling the US back from climate finance agreements. However, in his first days at the helm of the institution, he acknowledged that climate change is a “key problem” facing the world and confirmed that it will be a priority for the bank. This reflects the view of the US Government, Morris said: “As bad as the Trump administration has been on climate change generally, it has tended to look the other way when it comes to the World Bank’s climate agenda. The White House’s worst tendencies on multilateralism tend to be focused on the UN, so the UN-led climate agenda will continue to be difficult to carry forward with the US playing an obstructionist role. But these dynamics also suggest that the World Bank can more quietly make significant progress on the agenda outside the limelight.”

Digital disruption could make or break the banking sector

Posted on by Helen

The process of digitalisation has been challenging banks and financial institutions for more than two decades. Some of the biggest changes they face today include the unification of digital systems, the automation of processes and the establishment of efficient means to comply with regulations. Consequently, banking technology providers are now at the core of the market structure, helping banks and their clients cope and become part of the digital banking revolution, while taking advantage of the many opportunities that come with it.

Digital platforms are now a crucial mechanism for engaging with both existing and potential customers. As such, social networks have become important tools for sales, marketing and communication. Digital platforms also facilitate banks’ and financial institutions’ global operations, regardless of their geographic location, via cutting-edge software and automation systems.

In light of these industry-wide changes, World Finance spoke with Wael Malkawi, Executive Director at ICS Financial Systems (ICSFS), about how clients are future-proofing themselves as this evolution continues.

What has caused the recent evolution in the banking industry?
Banks have been chasing digital transformation ever since the creation of fintech, when tech giants started imposing changes and creating new platforms for doing business. Today, banks are obliged to embrace digital technologies and fully leverage these changes in order to facilitate the demands of customers and proactively roll out new products. This enables them to both nurture and strengthen a customer-centric approach. As such, digital banking has become the key pillar of any bank’s strategic evolution in today’s highly competitive environment.

Banks must face the growing competition from fintech start-ups, multinational organisations and tech giants through continued disruptive innovation

How are banks coping with fintech, regtech and tech giants?
ICSFS believes that in order to be truly digital, a bank must re-engineer the way it does business by creating a new strategy of digitalisation in its business model. Essentially, banks must face the growing competition from fintech start-ups, multinational organisations and tech giants through continued disruptive innovation.

We can help clients with this, as ICSFS has the foresight needed to capitalise on the future of digital banking. It is also recognised by many official independent bodies for its excellence, progressiveness and innovation within the banking and financial sector.

What impact have disruptive digital technologies had on the industry?
The banking sector has realised that it has to adopt digital technology into its processes and applications as fast as possible, as it will enrich the customer experience in many areas. It can help banks venture into new markets and increase both their market share and profitability.

Digital technologies will also increase consumer confidence and engagement, which will enable banks to know their customers better and provide guidance on which services are best suited to them. Finally, they can reduce banks’ operational costs while also complying with and satisfying increasingly complex regulations.

What market advantages do you offer to your customers?
The key to any successful transformation is choosing the right partner with whom to drive innovation, generate new opportunities and create market advantages over competitors in the field. This is where our innovation lies – in flexibility, simplicity and efficiency. With decades of experience, ICSFS is recognised for its success in all of its operational regions, as it has a great understanding of international trends, as well as local requirements, regulations and culture.

By implementing the ICS BANKS Digital Banking software platform, banks and financial institutions can generate new opportunities at a lower cost in order to enhance their market advantage. They can also exploit the software’s key benefits to help create a better customer experience and journey.

What are some of the other key benefits of the ICS BANKS Digital Banking software suite?
Thanks to our secured and agile open banking integration, rich functionalities are accompanied by cutting-edge technologies and fully integrated digital banking touchpoints. This means that banks can offer their customers a truly virtual digital journey which, in turn, drives financial inclusion.

Our main strength is that our digital banking platform is embedded in the DNA of our universal banking applications (ICS BANKS and ICS BANKS ISLAMIC). Therefore, agility is seamlessly reflected in all the universal banking applications’ products across all touchpoints, without the need for complexity or interfaces.

Our software suite offers banking customers a truly omnichannel experience by providing the latest possible technological advances. The suite’s proven omnichannel capabilities provide a full cycle of banking functions that are executed digitally – from customer onboarding and Know Your Customer processes to product execution and customer relationship management. It also offers flexible credit scoring, with a strong rules-based engine and back-office processes that are powered by an embedded BMP engine. The ICSFS digital platform is recognised for its advanced technological deployments, such as blockchain, smart contracts, open application programming interfaces and artificial intelligence, which all provide a real boost to the customer experience.

Many digital banking software providers offer a multichannel banking experience, instead of an omnichannel one. The difference is that when a bank uses a multichannel process, its touchpoints are not seamlessly connected – this means its customers will not enjoy consistency and real-time access between any channel, anytime, anywhere.

ICS BANKS Digital Banking is available on cloud platforms like the Oracle Cloud Marketplace, thereby providing a one-stop shop for customers seeking trusted business applications and service providers. Banks using ICS BANKS Digital Banking on the cloud can leverage global automation of communications and transactions with greater flexibility, agility and security.

How is the platform future-proofed?
ICSFS continually reinvests in its software suites by implementing the latest technology to launch new products, create agile integration and keep pace with new standards and regulations worldwide. The ICS BANKS Digital Banking software suite future-proofs banks by offering a broad range of features and capabilities, which then provides greater agility and flexibility to enrich the customer experience. What’s more, personal customer analytics are provided through embedded analytics for activity-based reporting and customer performance, which thereby improves the trust and confidentiality between the customer and their bank.

The suite also encompasses an ecosystem of third-party services, because banks that want to survive and stay ahead of their competitors in this age of digital disruption must be prepared to collaborate with fintech firms. Fortunately, the suite controls how fintech digital business applications and services are delivered to banks’ customers, allowing them to maintain a competitive edge and improve customer satisfaction with minimal cost and time needed for integration.

What do you suggest to banks and financial institutions hoping to eliminate market share loss?
Banks should accelerate now to protect and expand their market share in this era of digital disruption. The speed of transaction is aligned with the speed of innovation, and banks must not turn a blind eye – they must embrace this revolution by first realising that innovation is not something they can do alone, and instead obtain the help of software providers that are up to speed with ongoing digital changes. This will ensure any business is future-proofed.

How do you see the industry evolving in the short to medium term?
The whole world is interconnected. Today, governments are promoting financial inclusion and seeking to create a centralised database for citizens, including payments, transfers, personal data and more. Banks can benefit immensely from this amount of trusted data, as well as from other data sources, like social media, big data and apps. In turn, this information can be used to improve machine learning to create better results when using digital banking. This will result in the creation of more revenue sources. The data can also be used to make operations more efficient and increase market share for financial institutions.

Taking a step forward is fundamental for those who want to be part of the digital banking revolution – taking services off the shelf is the only logical step for evolving in the new market. Opportunities in emerging markets are opening up; being cloud-available enables the global automation of transaction and delivery channels and communications. Therefore, choosing the right partner to guide this transformation is a top priority for those looking to succeed. ICSFS is setting the pace for what the new era of banking should look like. Professionalism, experience and market understanding make the company a key player in the regional banking software solutions market. It is now set to keep revolutionising the way banking is done, because this revolution is just the beginning.

As the digital transformation continues, what advantages can your customers look forward to?
ICSFS emphasises three main principles a bank must adopt: first, applying the latest technologies and making them available to customers. Second, enabling consumer firms to maximise their performance by increasing mobility, cost efficiency, efficacy and flexibility, and by filling the gap between strategy and execution. Finally, banks must provide innovation and tailored solutions for specific
clients and countries.

Guaranty Trust Bank’s sharpened focus is a boon to its digitalisation drive

Posted on by Helen

Not too long ago, ‘banking’ was something of a dirty word. The 2008 financial crisis damaged trust in financial institutions the world over and, as a result, they became synonymous with greed and risky speculation. The fact that this stereotype is now being eroded is down to the hard work of the banks that have been keen to show off the important work they do empowering businesses and individuals. In fact, the 2019 Edelman Trust Barometer report for financial services found that trust in the sector is at its highest level since 2012.

There are a few organisations driving this improvement, one of which is Nigeria’s Guaranty Trust Bank (GTBank). After commencing operations in 1991, the bank quickly became one of the most respected organisations in the country, winning the Nigerian Stock Exchange President’s Merit Award on no less than seven occasions during the first decade of the 21st century.

“If you look at our history, we have always put a premium on building trust and improving operational efficiency – not just to keep costs down, but to create processes that are scalable, and that add the most value to all of our stakeholders [see Fig 1],” said Segun Agbaje, Managing Director and CEO of GTBank. “We have always been at the forefront of leveraging new technologies to grow our retail base and, most importantly, to serve customers in the best possible way.”

Until recently, strict regulation and the sheer weight of capital required to enter the banking industry has protected it against new entrants

Under Agbaje’s stewardship, GTBank has placed financial inclusion, digital technologies and good governance among its top priorities. Before each new policy or service is introduced, the bank is careful to consider the needs of its customers. It believes that innovation should not be for innovation’s sake – it must be delivered with a clear purpose and vision.

Self-disruption
There has been much talk of how digital technologies have caused disruption since they first appeared – particularly for industries that have been in existence for decades. Banking, of course, has lived a charmed life for most of its history; until recently, strict regulation and the sheer weight of capital required to enter the industry has protected it against new entrants.

Today, however, the industry is a much more welcoming place for new players. Established banks have found themselves challenged not only by up-and-coming firms in the financial services space, but also by technology platforms with little industry experience. In the face of this new challenge, banks are left with a stark choice – innovate, or risk being overtaken.

In the developed world in particular, physical bank branches are on the decline, with many individuals rejecting the inconvenience of having to organise their financial needs around the set opening hours of brick-and-mortar banks. With its many e-branches, GTBank has already pre-empted this trend by giving customers the flexibility they are craving – and that’s not the only way the bank is adapting.

“We have decided to disrupt ourselves and not live in denial,” Agbaje said. “At one time, when we did competitor analysis, we only used to look at other banks. Today, we look at fintech businesses, telecommunications firms, and even betting companies – essentially, anyone who offers any form of payment service. And one thing that we have learned is that although people will always need banking services, they may not always need banks.”

As Agbaje emphasised, fintech firms are one of the primary driving forces behind change in the finance sector. These businesses have embraced new developments, including blockchain and cloud-based solutions, to deliver services that are more agile and able to better meet customer expectations. Unsurprisingly, investors are getting excited about these new players: in 2018, fintech funding reached $111.8bn, according to KPMG. This was an increase of 120 percent compared with the previous year.

“We are responding to blurring industry lines by completely redefining ourselves,” Agbaje told World Finance. “We are becoming a single trusted, integrated digital platform, building and leveraging partnerships and collaborations to offer more essential products and services than a traditional bank can.”

Industry lines could become further blurred if recent rumours regarding the well-known technology giants turn out to be true: analysts have speculated that the likes of Amazon, Facebook and Google could one day offer fully fledged banking services. Many already provide peer-to-peer payment solutions and have a huge customer base to call upon. They are also viewed increasingly positively in terms of trust and reliability: a 2018 survey by MuleSoft found that 52 percent of all 18-to-34-year-olds would consider banking with one of today’s tech giants.

The expectations placed upon banks are now changing. If they do not react to this shift, then it is possible that conventional financial organisations will become synonymous with inefficiency and stagnation. Agbaje, however, is determined that this won’t turn out to be the case at his company.

Staying on top
With industry competition growing all the time, GTBank has acted quickly to ensure it stays ahead of the curve. In November 2018, the bank launched its Habari platform to broaden its ecosystem. Rather than being a bank where customers simply come to make deposits and withdrawals, Agbaje wants GTBank to become the payment engine behind a range of services.

Habari’s unveiling showed just how much banking has already changed. Known as Nigeria’s largest platform for music, shopping, lifestyle content and more, the mobile application has been built around people’s needs rather than simply being a generic suite of banking solutions.

“We see GTBank creating value no longer as just a bank, but more like a tech platform offering a wide range of services that cut across people’s everyday needs,” Agbaje told World Finance. “I believe that in the future, most banks will exist in this way: becoming more platform-driven, asset-light and focused on leveraging new technologies to deliver benefits beyond banking. The only thing that will remain constant in the future is that the customer will always expect services to be faster, simpler and more easily accessible. Hence, whoever will dominate the future of banking must always excel in these areas, and that is exactly what we are trying to do.”

Although the transformation currently sweeping the banking sector might be daunting for some companies, GTBank has plenty of experience when it comes to pioneering new services. One such example concerns the field of unstructured supplementary service data (USSD) technology – a global mobile communication system that allows financial organisations to share information with their customers more easily.

“We led the way for banking with ATMs, we are a leader in online and mobile banking services, the industry is still playing catch-up with us in USSD banking, and now we are going after the future of banking with Habari,” Agbaje said. “However, the most important thing we do is continually ask ourselves what is the best way of remaining relevant to our customers when their needs and expectations are always evolving. This is what births and guides our innovations, and is the reason why we have been so successful in delivering best-in-class services and growing our customer base.”

While music, videos and shopping are not the kinds of services that usually spring to mind when people think about banking, the sector – like all others – must evolve to meet changing demand. Organisations like GTBank understand this better than most.

Collaborate to innovate
It must be noted that even with all the talk of disruptive firms threatening to upset established banks, not every new entrant is necessarily a threat. In fact, a number of financial institutions have decided to partner up with fintech start-ups instead of competing with them. Around the world, a number of traditional banks have begun to work alongside neobanks to establish more efficient online tools. For example, Boston-based Radius Bank sought the assistance of fintech firm Aspiration when designing a revamp of its customer sign-up site. Such collaborations are becoming increasingly commonplace.

“By focusing on partnerships, GTBank is diversifying its products and services to meet the evolving needs of customers,” said Agbaje. “I think we have got to admit that we can’t give our customers everything, but we can give them access to everything. That is what we get from our alliances with service providers across all sectors that are relevant to our customers.”

Earlier this year, GTBank confirmed that it was working with digital content firm Publiseer to help African writers and musicians distribute and monetise their works. The collaboration is just the latest in a long line for the bank: last year, GTBank also teamed up with New Works and the Nigeria Immigration Service to streamline the process by which Nigerians apply for international passports.

“Our partnerships inform how we design our products; we ensure that no matter how broad they seem, they always revolve around payments and credit,” Agbaje explained. “So, the only way to diversify our product offering is through partnerships, and underlying this is our focus on building a platform that brings together everything and everyone to meet customers’ changing needs and expectations.”

Banks have access to a broad customer base and a great deal of capital, but they cannot be expected to have all the necessary internal expertise as they begin to offer more diverse services. This is why collaborations are proving to be so important and mutually beneficial to both banks and the firms they’re working with.

A platform for enriching lives
GTBank’s Habari platform offers so many opportunities to collaborate that innovating has become second nature to the bank. After all, it is a financial services firm that lets users listen to music, watch videos, read, shop and more. In fact, the challenge now is ensuring that it continues to remain focused and only introduces new features when they are relevant. In order to ensure that each new deployment meets this aim, GTBank remains in constant conversation with its customers, taking all feedback on board.

“In a nutshell, Habari is everything we have talked about regarding our changing business landscape and what banking will look like in the future,” Agbaje said. “We believe that the bank of the future is a trusted, integrated digital platform that plugs in seamlessly with every aspect of the customer’s life. Habari is our first step towards building such a platform.

“Basically, when you look at the impact of digital technologies in our lives, you see that people are increasingly leveraging mobile and internet services to enable virtually every aspect of their lives, from how they keep the lights on at home to how they get around town.”

With Habari, GTBank’s goal is to leverage the ubiquity of digital technologies to ensure that it can effectively serve its customers’ needs in every instance of their daily lives. The bank is also promoting enterprise in the SME sector by building free business platforms such as the GTBank Food and Drink Festival and the GTBank Fashion Weekend – two events that are having a tremendous impact in terms of uplifting small businesses.

Agbaje told World Finance: “With Habari, as with our free business platforms, we are bringing together service providers and end-consumers in order to create more value for everyone, thereby playing a deeper role in the lives and businesses of all our customers. The impact of these events has been very positive. We have managed to increase the number of retailers and attendees every year since we created these platforms four years ago. This year, we actually doubled the number of participating small businesses at the Food and Drink Festival, increased the number of days that the event was being held across, and had twice the number of food experts in attendance compared with previous years. By the end of the festival, more than 250,000 guests had walked through our gates, leaving all participating small businesses with new best records in sales.”

One thing the industry has learned is that although people will always need banking services, they may not always need banks

Whether it is promoting fashion or food, GTBank is keen to show that it is interested in more than just interest rates and balance sheets. Nurturing the next generation of Nigerian entrepreneurs is also a key objective. The bank’s Habari platform and its free business platforms demonstrate financial institutions’ perhaps surprising ability to inspire and touch people’s lives.

Giving back
Beyond simply creating value for GTBank’s stakeholders, Agbaje is determined to contribute to the real economy and boost economic growth in Nigeria. “If you look at most countries, especially developing ones, the heartbeat of the economy is its small-to-medium-sized enterprises [SMEs],” he said.

In fact, the role that financial institutions play in fostering business activity can often be overlooked – they provide loans, financial advice and, in the long term, help create social stability. Conscientious banks realise that they are not like other businesses – they have a responsibility to the wider economy.

“What we have started to do in different ways and forms is to create virtual and physical business platforms to help SMEs grow sustainably,” Agbaje said. “We started with a free online marketplace to give small businesses greater access to consumers online, after which we launched the GTBank Food and Drink Festival and GTBank Fashion Weekend to grow their sales and exposure. And as much as these initiatives are about promoting enterprise in the SME sector, they also form a fundamental part of our social responsibility with regards to how we drive economic growth that empowers communities and enriches lives.”

At GTBank, corporate social responsibility (CSR) is taken extremely seriously. The bank has a clearly defined CSR policy that encourages it to intervene in education, community development, the arts and to protect the environment – four areas that it considers to be major pillars in any thriving society. Among the bank’s flagship CSR initiatives are its advocacy for people living with autism and its sponsorship of people in rural communities to design and execute developmental projects for the benefit of their communities. The bank also organises some of the largest grassroots football tournaments in Africa and has been at the forefront of improving educational outcomes via its investment in public schools across Nigeria.

“At the heart of these initiatives is a social imperative: to help people and communities thrive,” Agbaje explained. “In the same vein, we are trying to develop SME sectors that are critical to economic growth, such as food and fashion. Essentially, what we have seen with most of our customers is that spending is often limited to taking care of basic needs – what to eat and what to wear, for example. If we focused on promoting enterprise in food and fashion, we could create a lot of strong and sustainable growth for our local entrepreneurs, thereby growing our economy.”

Although the business platforms provided by GTBank have already had a significant impact on the Nigerian economy, there is a feeling that this is just the beginning. Agbaje said: “These are more or less our first steps to preparing for a world of platforms where things are offered for free, in order to build out more value in the long run.”

The current initiatives are helping the bank better understand how it can create more value for its small-business customers. New products are being developed all the time based on customer feedback and detailed economic research. For example, recently launched bespoke credit facilities for entrepreneurs in the food and fashion sectors have successfully built upon the positive impact already being delivered by its events programme by providing them with single-digit interest rate loans – the lowest ever in Nigeria.

Risk and reward
Of course, undergoing a digital transformation is not the sort of process that can be carried out on the cheap. Legacy architecture will have to be replaced, data will need to be migrated safely, and additional expertise – perhaps from outside the company – may need to be sought.

For banks, the need to innovate comes at a time of fragility. Low interest rates around the world have hit bank profitability hard and left some with little appetite to invest in an uncertain future. However, maintaining the status quo is simply not an option. If investing in new services will require substantial capital now, it will also provide significant rewards in the future.

“At GTBank, we are not overly concerned about the inherent risk involved with our investments in digital technologies, because we are not profligate about how we invest,” Agbaje said. “We work tightly within our budget and we are very measured about how we spend. Our reputation for operational efficiency precedes us and so, for our investments in digital technologies, as with all our investments over the years, we will always ensure maximum value for money.”

Nevertheless, no investment is without risk. Across 2018, retail banks around the world planned to spend $9.7bn on revamping their digital capabilities, according to Ovum’s ICT Spending Predictor (see Fig 2). In particular, banks need to focus on how new innovations can be used to cross-sell and improve customer loyalty.

According to Deloitte’s 2018 Global Digital Banking Consumer Survey, banks are viewed less favourably than many of their customers’ favourite brands, with only 49 percent of respondents believing that their bank knows what they need (see Fig 3). Innovation can help improve this figure, but only if it is carefully considered. Too often, the digital channels being explored by banks are far from cutting edge, focusing purely on transactional activities.

GTBank understands that a digitalisation strategy has to be more than just a token gesture – it is the key method through which the customer experience is optimised. The bank offers a wealth of e-banking services, including online bill payments, international money transfers and a customer referral reward scheme – and, of course, its Habari platform.

A vision of the future
GTBank may be a trendsetter when it comes to digital financial solutions, but other organisations will undoubtedly start to adopt a similar approach soon. Today, growth strategies in the finance sector are predominantly based on the deployment of new digital technologies. In the near future, more organisations in the finance sector are likely to join GTBank in diversifying their products and services as a way of sustaining their profits. By offering entertainment services or SME advice, banks can secure longer-lasting customer engagement and create revenue streams that are not subject to fluctuations in national interest rates.

Banks may decide to expand out from their core businesses, as GTBank has done with Habari. Alternatively, they may adopt more flexible e-services or begin to monetise customer data. Whatever approach they take, they will surely find that they are not alone in doing so. Nevertheless, GTBank has one particular asset that is difficult to replicate: its people.

“We have great and motivated people who are determined to make a difference and build a first-rate African institution that can compete anywhere in the world,” Agbaje explained. “I always say that if you want to know why an institution is performing strongly, you have to look at the ethics and passion of its people, as well as its leadership.”

Certainly, Agbaje has played a pivotal role in GTBank’s success. Coming from a family that was well acquainted with the financial trade – his father worked for the Bank of British West Africa – he decided to leave behind a comfortable accountancy job in San Francisco to join GTBank in 1991. Rather than staying in the US and working as part of a large organisation where he would likely have little impact, Agbaje instead chose to join a relatively new bank where he could have real influence. It turned out to be the right decision.

“At GTBank, we have a great team of people who share a passion for the organisation – who are very focused on doing the right thing and achieving their goals. We have been blessed with great leadership,” Agbaje said. “I’m the company’s third CEO, and the first two were also excellent people. Corporate governance is strong and what you will find is that there is a positive relationship between good corporate governance and strong profitability. That’s what you see with GTBank: a simple, clear vision delivered in a very ethical way.”

In the past year alone, this vision has paid off in a multitude of ways, not least of all through the launch of the bank’s Quick Credit initiative. The product gives customers instant access to personal loans at a monthly interest rate of just 1.75 percent. It is a product that has proven hugely popular: in just four months, it matched its predicted performance for the entire year. It hasn’t only been successful with customers, though: for banking staff, Quick Credit has introduced a host of new efficiencies. By automating the scoring process for the loan, it now takes less than two minutes for customers to request and receive the approved amount.

The success of recent deployments gives Agbaje confidence that he is steering the bank in the right direction. Still, having been CEO for more than half a decade, he is well aware that now is not the time to rest on his laurels.

“My key leadership principle is simply this: focus,” Agbaje said. “As CEO, you must have clarity as to what you are trying to achieve. There will be a lot of noise, but you must have strength of character and moral grounding to remain focused and always play by the rules.”

This noise is only going to get louder as established banks are joined by fintech firms, neobanks and other organisations keen to engage with a more open financial services sector. GTBank knows what it is like to be a new player in the industry, having only received its banking licence in the early 1990s. In a relatively short period of time, the bank has grown to become one of Nigeria’s most respected institutions. By continuing to adopt a forward-thinking approach, it now looks set to become one of Africa’s foremost financial brands.

How EVO Banco combines fintech innovation with good banking management

Posted on by World Finance

Carlos Oliveira is the Executive Customer Lab Director at EVO Banco – one of the key challenger banks disrupting Spain’s banking industry. In May 2018, EVO Banco made headlines by launching the first Spanish language banking voice assistant; one year into the project, Carlos tells World Finance how the EVO Assistant was received, what the bank has learned about its customers and their priorities, and EVO Banco’s position as a disruptive force among Spain’s large legacy banks.

World Finance: So first Carlos – one year into the project, how has the EVO Assistant been received, and what have you learned?

Carlos Oliveira: Well, we received it with very great engagement by customers, because at the end if you analyse, almost in one month 10 percent of the customers are using it – and also they spend around two minutes using it. So for us it’s a very surprising number, because, you know to spend two minutes talking to a machine, it’s not so easy.

It’s around 70 percent of the customers are using it now, and they do basic things like transfers of money, or review the amount of money that they have in their accounts; to more sophisticated things. Also they ask the assistant, ‘Tell me, what is the right thing to do to invest my money?’ and these kinds of things.

What we learn is that the people love it. Because at the end, it’s natural language: it’s what normal people do, it’s talking. So if finally you find someone or something that is understanding you and answering your questions, you are taken in the right key.

World Finance: How far has the rest of the Spanish banking industry come in the digitisation journey that we’re seeing all over?

Carlos Oliveira: Well I think that we have to divide in two big groups. One of those are the legacy banks, you know, the traditional banks. To be honest they are doing great effort to change their reality. But also there’s a lot of legacy to change, no? So at the end they are really really investing harder, but I think they are not so agile, in terms of changing the arena.

So, I think that we are in a pretty advantageous position, these banks like EVO. Because innovation, it’s more a question of attitude. Of how you’re going to put the customer in the centre of everything that you do as a bank. And I think in EVO, we really have a vision of being useful for the customers. For us it’s an obsession. We don’t do innovative things just to be fancy, okay? We need to do things that make sense for the customers, and that are making their life easier. Okay? Our obsession is to be easy for them, and to create something that makes sense.

World Finance: So, how are you making sure that the innovations you’re creating are useful to your customers?

Carlos Oliveira: Well first of all, the ideas and also the priorities are not defined by me – they’re defined by customers.

So we have a lot of data, you know? At the bank we have a lot of information of the customer, we have all the transactions of the customers. So we try to analyse with the big data department, what are the real insights, what are the real trends that we have with our customers? Then we develop some products, we test them with our beta testers: a thousand customers are using our products one month in advance. So, they are analysing how it’s working, how it’s not working; and see if it’s performing or not.

I’ve always said that we are not a bank: we’ve said that we are a BankTech. A bank traditionally, they have… they know how to manage a P&L, they know how to manage customers. But they’re not really good on user experience and these kinds of technologies – these kinds of things.

On the other hand you have the fintechs. They’re really good in some aspects of user experience, but on the other hand they don’t know how to manage P&Ls. We’re in between. We’re like a start-up bank that combines the two things. And I think that this is the secret of our success.

World Finance: Finally, what is next for EVO Banco? What are the opportunities you see in your future?

Carlos Oliveira: Well there is a lot of opportunities. The secret is to choose the right ones. It’s not so easy; with the big data and the insight… to choose the right insight is the critical thing.

We are stimulating our brains with ideas from other industries. I mean, we want to be useful for you. We want to go beyond the traditional banking system, and the traditional banking products. To touch with you in your life on a very day-to-day basis. So we really want to be on the first screen of your phone. We don’t want to be a normal bank. We don’t want to do the typical things that the banks do. We want to be someone who understands you, someone who really adds value to you, on a real basis. This is exactly what we really want to do.

World Finance: Carlos, thank you very much.

Carlos Oliveira: You’re welcome.

The Spanish banking sector has been disrupted by digital services

Posted on by Helen

Emerging technologies offer seemingly limitless opportunities across the marketplace. From factories to medical practices, agriculture to finance, advances in artificial intelligence (AI), robotics, cognitive analysis and biometric recognition have immense practical applications.

Spain’s banking and financial services sectors are currently undergoing a particularly striking digital transformation. While major traditional players are beginning to channel significant investment into new technologies, a variety of online-only neobanks, start-ups and fintech companies have hit the market and subsequently taken off.

Newly established disruptors offer exciting prospects for collaboration. In fact, a number of institutions have already merged or formed strategic partnerships in order to pursue novel digital opportunities. This promises to improve customer satisfaction, as well as boost a firm’s reputation. Enrique Tellado, Managing Director of online bank EVO Banco, spoke to World Finance about the opportunities for disruptive innovation in Spain’s evolving banking sector.

EVO Banco’s commitment to digitalisation and customer experience has resulted in a business that looks nothing like a traditional bank

What makes EVO Banco stand out in the Spanish banking sector?
EVO Banco represents a new generation of financial entity that challenges the traditional banking industry by using technology to help customers manage their money more effectively. We aim to make life easier for each client based on what they need, and we do it quickly, cheaply, easily and across all channels.

Our commitment to digitalisation and customer experience has resulted in a business that looks nothing like a traditional bank. Rather than being a bank that implements disruptive technologies, we consider ourselves to be a disruptive technology firm that happens to work in the banking sector.

We want to occupy a new space in the market that combines the trust of the banking sector with the innovation and customer experience found in the fintech sector. Our philosophy is to build a platform of financial and non-financial services that makes life easier for our customers, while also enabling us to adapt rapidly to any changes in the market.

At EVO, we also understand that customer satisfaction can be a source of profitability. By listening to the client and creating collaborative environments to guide the business towards what really matters, we make our company as accessible as possible.

What is your strategy for innovation?
Digitalisation and enhancing the customer experience are in our DNA. This is why we have managed to be pioneers of recent technological advances in the banking sector.

Our innovation strategy is structured within the cloud and built on the pillars of stability, scalability and security. We aim to improve the ease and enjoyment of advanced financial services by ensuring users have the highest-quality experience possible. For instance, our mobile app is powered by disruptive AI technology. By running customer data through AI algorithms, our product can offer hyper-personalised solutions in real time.

In order to maintain an agile and efficient service that allows for constant disruptive innovation, we also use short software development cycles. This has enabled us to continually provide an attractive user experience.

Within this framework, last year we proudly presented our latest launch: EVO Assistant, the first ever ‘voice bank’ in the Spanish language. This pioneering AI technology offers integral assistance to all customers. Customised queries, banking operations and financial advice are all available through voice-to-text channels.

By predicting and responding to our customers’ needs, we have also led change in various other areas of the banking sector, including partnerships with fintech firms and companies outside our traditional sector.

How are you enhancing the customer experience through digital platforms?
With our entire business now digitalised, all of our initiatives are directed towards improving the customer experience through both internal renovation and fintech development. We also prioritise collaborations with other fintech platforms.

One way we put the client at the centre of our products is by making changes based on customer feedback. For example, using a beta testing programme harnesses the thoughts and feedback of our customers to fix bugs and implement better-functioning models on our mobile app and other services.

Our big data and machine learning architecture also allow us to address each client in a unique and hyper-personalised way. We invented a ‘liquid customer journey’ concept, through which millions of customer journeys are triggered by machine learning techniques, thereby generating real-time services and sales. This allows us to constantly increase customer satisfaction.

Could you tell us about the process of launching EVO Assistant?
EVO Banco is proud to be the first bank to develop an integrated assistant in the Spanish language within its main banking application. Our virtual assistant is much more advanced than the chatbots currently available through most financial entities.

EVO Banco’s virtual assistant is an AI engine that allows clients to develop their bank activity through natural conversations, thus redefining the relationship between banks and clients. Through EVO Assistant, clients can ask any question or perform any operation with their products using their voice alone. The service is available 24 hours a day, seven days a week.

EVO Assistant is made up of three main blocks: the speech recognition system that translates the client’s voice into text; the natural language processing engine, which processes text and triggers the most appropriate action; and the speech synthesizer, which transforms the answer into a human-like vocal response. The key features of the EVO Assistant are its ability to facilitate a natural conversation, its response time and its accuracy. The whole project was internally developed within EVO’s innovation and digital development departments.

EVO Assistant was released to all customers in 2018 through the EVO Banco mobile app. Within the first month, 10 percent of customers used the tool regularly and spent up to 50 percent more time on the app. EVO Assistant can also be connected through third-party virtual assistants like Google Assistant and Siri.

What are EVO Banco’s key areas of focus for the next 12 months?
Over the next year, we aim to establish the company as one of the most innovative financial institutions in the Spanish market. To achieve this, we will consolidate the bank’s digital acceleration strategy, which has allowed us to offer high-value financial and non-financial services.

EVO will continue to focus on creating alliances with fintech companies, such as wealth management start-up Finizens, or collaborative models such as Booking.com and Rentalcars.com. We will also focus on developing our own technologies that improve the lives of our users by simplifying their relationship with money. In the medium term, EVO seeks to consolidate its strategic position as a new-generation bank in the emerging digital economy. This position connects the security of banking with the innovation of new fintech models.

Our objective is to continue to lead the charge and become a benchmark in the financial sector, as we have with EVO Assistant. To do this, it’s key to have a first-rate team that is very focused on innovation, and to be open to collaboration with third parties in the fintech space in order to improve our services.

In economic terms, EVO’s digital inversion represents 25 percent of the total general expenses of the bank. This investment plan has allowed us to renew and strengthen the technological infrastructure of the entity. It has also enabled us to launch new products, services and alliances, and to create one of the best mobile banking applications on the market. Regarding specific customer-experience projects, EVO has more than doubled its budget compared with last year.

How do you envision the banking sector’s future digital transformation?
I believe data consolidation and AI have brought with them the Fourth Industrial Revolution; this is producing the greatest transformation humanity has ever seen. For the first time in history, machine intelligence could overcome human intelligence, uncovering an extensive spectrum of opportunities. However, it is important that we define technology’s role in our future. For instance, we must examine its interaction with current social structures to ensure and define how this non-human intelligence will contribute to creating increasingly prosperous and equal societies in the future.

Virtual assistants such as Alexa, Cortana, Google Assistant and Siri have advanced impressively – the speed of adoption of these devices has already outpaced that of smartphones when they first entered the market. Over the short term, they will continue to develop even more uses.

As companies, we are presented with the ongoing challenge of predicting and meeting our clients’ needs in advance. We must be able to offer useful solutions that integrate our services into customers’ daily lives. This is our approach at EVO Banco: today, it has materialised in our Spanish-language voice assistant, which solves queries, performs banking transactions and offers personalised advice about a customer’s financial health. Through this technology, we have strengthened our core values of utility, transparency and intelligence. Ultimately, it is a clear, practical example of how a company can relate the most disruptive technologies back to meeting their customers’ needs.

A closer look at long-term incentive plans

Posted on by Helen

High-paid executives come under frequent criticism for the size of their pay packages. Headlines bemoan the super-rich, and campaign groups censure the wage gap disparities emerging with lower-paid workers.

In 2017, the CEOs of the 350 largest companies in the US were paid an average of $18.9m; a nearly 18 percent upswing on the previous year, according to the Economic Policy Institute (see Fig 1). As executive pay heads higher, remuneration committees must ask whether the growing price tag reflects stronger financial performance.

The tool that was supposed to ensure CEO pay matched with stable financial growth was the long-term incentive plan (LTIP), a metric first thought up in the 1970s. LTIPs are used on the basis that they align the interests of executives and company shareholders by paying CEOs in stock options or shares awarded on performance targets. But although LTIPs have been widely adopted, critics now say they have failed to work as intended.

Long shot
While the biggest CEO pay cheques go to American companies, Xavier Baeten, a professor in reward and sustainability at Vlerick Business School in Belgium, told World Finance that British and German firms boast the highest levels of executive pay in Europe.

Pushing pay higher and higher crowds out any intrinsic motivations a CEO has for doing their job

A growing proportion of the pay packages of top UK CEOs are represented by LTIPs. CIPD’s 2018 Executive Pay report on pay levels at the UK’s 100 biggest companies found a base salary represented just 16 percent of the total mean remuneration. This was even lower than the previous year, largely due to an increase in LTIPs, which represented 56 percent of total pay. “The inflation in executive pay is partly a consequence of paying people with very long-term instruments,” Alexander Pepper, a professor of management practice at the London School of Economics, told World Finance.

Baeten argued that LTIPs are flawed because they are awarded over too short a period of time. After looking through his database of 850 listed firms in several European countries, Baeten found that just one percent of companies granted stock without performance conditions and with a vesting and holding period of more than three years total.

“A performance share plan with a vesting period of three years, in which vesting is dependent on [total shareholder return] or [earnings per share], will not focus the top executives on the true long term and/or sustainability,” he said. “Above all, I think that the real thing should be to change the design of [LTIPs] in order to make them really long-term orientated.”

In the money
Pepper, on the other hand, believes LTIPs are inherently flawed: “This approach to executive pay that’s fundamentally based on neoclassical economics – the problem is it doesn’t properly take account of behavioural considerations.”

From his research with PwC, published in the company’s Making Executive Pay Work report, Pepper found a number of explanations for why LTIPs do not correlate with better financial performance in practice. For instance, the research showed that senior executives are more wary of uncertainty and risk around pay than previously thought: the vast majority would choose a fixed pay packet over a bonus of a higher value.

Similarly, executives discounted deferred pay at a very high rate, signalling that the longer they would have to wait, the less the money was worth. “If you’re choosing between £100 [$127] today and £100 in three years’ time… you’d want a lot more than £100 in three years’ time to compensate you for the fact that you’re having to wait,” Pepper said. Executives already know all of this themselves. According to PwC’s research, fewer than half believed their LTIP was an effective incentive.

These findings explain one reason why executive pay has increased in recent years. Rising pay packages can create even more problems, Pepper said: pushing pay higher and higher ‘crowds out’ any intrinsic motivations a CEO has for doing their job. “The classic instance of this is in the banking industry, where pay has got to such astronomical levels that people are only motivated by money,” Pepper said. “And to some extent, this is also, we believe, representative of what’s happened in corporations more generally.”

Yet higher pay does not appear to translate to better financial performance: Pepper and Baeten both found that the metric with the strongest correlation with executive pay was the size of a company. For every one percent increase in market value, Baeten found CEO pay rose 0.4 percent. “I have rarely seen statistical analyses with such clear outcomes,” he said.

In fact, the CEOs of companies that reported a better performance over seven years than the wider industry were paid relatively less, with a lower proportion of variable pay, Baeten said. “In other words: firms with a better performance [in] the long term are characterised by modesty,” he told World Finance.

Charles Towers-Clark, CEO of Pod Group, an Internet of Things provider, said that beyond the recruitment stage, “financial incentives should be, and generally are, the least important motivator for employees, including executives”. For example, respondents to PwC’s Making Executive Pay Work survey would take a 28 percent pay cut on average to work in their ideal job.

Shifting the balance
Pay is still a significant incentive, however. The best way to get results from CEOs without inflating pay, according to Pepper, would be to shift a larger proportion of remuneration to an executive’s salary and short-term bonus. Alongside a generous salary and a cash bonus, companies should require executives to invest a certain amount of their own money into stocks in order to align their long-term interests with those of shareholders, he said. “My belief is that, actually, in total, you would need to pay people a lot less than you do at the moment if you restructured the way that you remunerate them,” Pepper said.

But challenges still emerge when employing this logic in the real world. The industry has an aversion to big changes when it comes to rewards, Baeten said, partly because companies look to one another as benchmarks. Pepper described a phenomenon he called the ‘remuneration committee’s dilemma’; a riff on the prisoner’s dilemma in game theory. In this situation, remuneration committee chairs who are in competition with one another for the best talent tend to pay over the odds in the hope of attracting a CEO from the top tier and reducing the risk they will get one from the bottom 10 percent.

From the shareholder’s standpoint, there is a collective action problem, Pepper said. Each shareholder only has a small percentage of the total share capital, and this means it is not in their best interest to sort out executive pay problems. “In practice, there’s a kind of reversion to the status quo, as it were,” Pepper said. “It’s difficult to see how the problem of executive pay will be solved if governments don’t intervene in some way.”

Lifting the veil
One local government in Portland, Oregon, has taken high CEO pay into its own hands. The city introduced a tax in 2018 whereby any company whose CEO makes 100 to 250 times more than the median worker must pay a 10 percent tax. CEOs with pay 250 times over will be forced to pay a 25 percent surcharge. The city has estimated the measure will bring in up to $3.5m in its first year.

But despite Portland’s good intentions, there are some fundamental issues with the tax. First, it is relatively easy for companies to manipulate their pay ratios: these can be decreased by simply outsourcing the lowest-paid jobs. At large multinationals, this can include cleaners, caterers and security services.

Secondly, the tax penalises companies with a large amount of lower-paid workers rather than companies that pay their CEOs excessively. “The trouble is, [Portland’s method] is more likely to hit a retailer than it is to hit an investment bank with lots of very highly paid people,” Pepper said.

Although Pepper said more research must be done on possible government interventions, the simplest thing to do would be to increase marginal rates of income tax. He added: “I would argue that increases in the… top rates of marginal income tax are a necessary part of any government attempt to intervene and solve the executive pay problem.”

While Baeten believes disclosing pay ratios is not at all beneficial for companies, Towers-Clark thinks transparency can be a powerful tool on an employee level. “If employees are to make their own decisions about any aspect of their working lives – i.e. starting new projects, choosing suppliers, investing in emerging technologies – then they must have all the relevant financial information available, the most important piece of which is salaries,” Towers-Clark said.

While some questions remain around how to implement an effective pay scheme, it is clear that LTIPs as they currently stand miss the mark. Developing a new approach to reining in inflated levels of pay and enhancing executives’ intrinsic motivations could pay dividends.