Germany is a tough market. On the one hand, Germans consider themselves as innovative and technology driven. The internet and mobile phone technology is commonly used in the population.
On the other hand, internet banking and online transactions are primarily used by the younger generation and are not generally accepted across all generations. The percentage of internet banking users in Germany may be higher than some of their neighbors (e.g. Belgium and Poland), but compared to countries like the UK, the USA or South Korea the customer behavior is still pretty conservative.
This may change with the iPhone.
71% of the Germans who have internet access also possess a web-enabled mobile phone. This is an increase of 14% in comparison with last year. The main driver behind this development is the iPhone. Even though a standard for representing online information already existed for about 10 years it was considered slow, inflexible, not user friendly, and costly. The market launch of the iPhone in 2007 brought relief by introducing the first intuitive usable mobile browser. In addition, the other barriers were removed, i.e. the telephone companies increased the data throughput significantly and developed affordable call charge models.
The introduction of the iPhone came along with a variety of applications in the iTunes store to enhance the functionality. Other vendors, like Google and Nokia, followed lately with similar smart phone concepts, broadening the spectrum. According to an article I read recently every fifth sold mobile phone in Germany is already a smart phone.
Anyhow, so far the mobile banking business did not capitalize on this development. In 2009 – referring to results of a recent survey from Steria Mummert Consulting – only 11% of the mobile internet users handled their banking transactions via mobile phones. The demand, however, is much higher. One out of three would like to use this kind of service but only a few financial institutions can fulfill their needs.
That does not mean that the financial services organizations will not jump on the bandwagon. The survey (conducted with banking executives) “Branchenkompass Kreditinstitute 2009” from Steria Mummert indicates that 42% of all German banks plan to invest in mobile banking (M-Banking) in the near future. 15% of the banks already provide some sort of mobile application but those applications are still very simple. They provide customers with guidance to the nearest branch office or a dictionary of contact persons.
While these applications may be useful, they do not use the potential of mobile intelligence. Why should a bank point their customers to the next branch when instead they can manage their transactions online? There are many M-Banking applications economically reasonable which can simplify the life of customers but also give banks an ideal vehicle to interact with them.
· Monthly Financial Statement (for free). The customer can check the settlement of his accounts
· Portfolio Analysis (maybe for free or for a fee). Customers will get a daily/weekly view of their investment portfolios
· Multi-Banking (chargeable offering). Management of multiple accounts of the customer,
including those outside of his house bank. This functionality could be very attractive to customers with multiple accounts in different banks, especially with those that do not offer smart phone apps yet. The only requirement: each bank need to support the HBCI-protocol for online banking.
· Marketing Campaigns. The bank can include actual product information as part of new applications, as long as the customer does not suppress this feature. This will not only improve customer loyalty but can also serve as sales vehicle.
These applications are already available in the market. Other M-Banking features that customers could benefit from and are accustomed to using online banking, have not reached market maturity yet, e.g.
· Management of Standing Orders
· Portfolio Management
· Personalized Stock Information Services
· Live News Ticker
The disposability of these applications will enable customers to react quicker and to use otherwise unproductive time more efficiently. By offering these apps the bank will generate added value for their customer base and will benefit through increased customer satisfaction and retention.
The developments in the mobile phone industry will continue. While the various applications mentioned above can be realized with current technology, the next level of smart phone innovations is already in the making, mobile phones as means of cashless payment.
The next generation of smart phones will – according to industry observers – contain a Radio Frequency Identification chip, short: RFID-chip. This technology allows a wireless data transmission on short distances, thus making the mobile phone a functional currency.
By now this technology is only implemented in a few mobile phones and rarely used. In contrast, being part of an iPhone and using the hype around it could mean a breakthrough for the technology. The debut of the next iPhone generation is expected in summer 2010. If the prevalence rate of the next iPhone is similar to prior generations or the current run on the iPad, banks have to be quick, reacting to these new market conditions in order to keep their customer base.
Because one thing is clear, not only banks and credit card companies target this market. New players will arise with attractive product packages, trying to get a piece of the pie. It is therefore mandatory for the financial services industry to be prepared if they do not want to lose their customers or at least a capital drain.
The main counter-argument of those banks not planning to invest yet in M-Banking: it is a low margin business. The usage of internet banking has a higher net value added (due to the required development effort for M-Banking) and even that technology is not widely used by the customers – as mentioned earlier.
However, business intelligence software like MicroStrategy already incorporates mobile functionality. In addition, more and more effort will be spend on enhancing the smart phone capabilities and providing banks with the right toolset for their business. As a consequence the development costs for the banks can be limited and furthermore, banks will be able to sell these new offerings to their customers (smart phone users are used to pay for qualitative apps), hence reducing their investment and maybe even build new attractive revenue streams.
Mobile banking services will be one of the keys to success of financial institutions and their customer relations in the future. Addressing customer needs is therefore one of the main objectives of mobile banking applications. That is not to say that there is no use for internal apps as well, the typical audience is just smaller. Here are some examples of possible mobile apps in financial services:
· Executive Dashboards. All relevant KPIs for the management available at a glance.
· 360 Degree Customer View. All relevant information of a customer (including product suggestions) directly send to the mobile device of the customer service field representative
· Wealth Management Dashboards. Actual information to manage the portfolio of wealthy customers.
· Risk Dashboard. The most important risk indicators (for the C-level management) to run the business.
· Internal News Updates. Possibility to communicate company news to the workforce.
To sum up, I can say that mobile banking will become more and more important to the financial services organizations, externally to communicate and interact with their customers, internally as a reporting vehicle to their management and employees. Even though I used Germany as an example these deliberations can be applied to the financial services industry as a whole.
Wednesday, May 5, 2010
Monday, May 3, 2010
Government Bonds – The inherent risks in the balance sheets
European banks and insurance companies hold to a great extend consols (government bonds) from shaky candidates like Portugal, Ireland, Italy, Greece, and Spain. Since these five countries have a history of uncertainty, they are known in the financial market as “Piigs”.
The rate of these bonds as well as their solvency decreased significantly especially due to the downgrade of Greece (and later of Portugal and Spain) by the rating agencies and the following disturbances of the markets. According to the newspapers, a 10-years Greece bond of Greece which was noted in March 2010 with almost its denomination value, can at the end of April only find a purchaser with 82% of its repayment values.
Banks that were heavily involved in the government financing business own lots of these consols, like the now government owned Hypo Real Estate in Germany with 39 billion Euro. However, that does not mean that it has an immediate impact on the balance sheets of the banks (i.e. exposure of their equity ratio). It depends on a complex set of rules.
Is the bond part of the trading portfolio of the bank (those consols that are supposed to be traded on a short-term basis) then the volatility of the stock price will have an immediate effect on the profit and loss statement.
Financial services organizations also need to have a foundation of liquid assets. Since government bonds are usually considered to be sound investments – even from the PIIGS countries – they can often be found in the liquidity reserve to serve short-term payment obligations of the organization. The problem here is the same as with the trading portfolio, changes directly impact the P/L.
As a counter measure, to avoid the effect and to reduce the risk of negative impacts on the balance sheet, banks often moved these consols positions into different portfolios, as asset investments. With this trick the investments are labeled as long-term positions with the consequence that the bank can wait with adjustments of their financial statement till the government of the bond is unable to pay the interest or – as a measure of debt refunding – is reducing the repayment value of its debts (called haircut). But that scenario is not likely as the countries of the European Union are willing to help Greece with around 110 Billion Euro of instant loans.
The solvability and Basel II rules demand from financial institutions to hedge their security portfolio with equity in their balance sheet. If the securities rating are going from bad to worse, more and more equity is required as a safeguard. However, government bonds underlie special regulations. As long as the European banks follow the standard principles of capital adequacy, i.e. accessing only external ratings, they do not have to allocate any equity for consols coming from countries of the European Union!
While bonds issued by a company with the same rating as Greece at the moment would result in a requirement to reserve 8% equity on the balance sheet of the holding financial institution, none of this applies to the Greek bonds, under the premises of using standard external ratings. Larger banks, though, do not fully rely on external ratings; they consult in addition their own rating models and hence have to comply with different rules.
Some institutions have therefore most likely added more equity as a risk provisioning due to the lowering creditworthiness of Greece. Most others however, did not follow that path and appeal to the fact that companies that follow their own rating guidance in general can still assess parts of their portfolio according to external ratings. Allianz, the German insurance heavy-weight for example, has heavily invested in Piigs-bonds but still does not see a reason for depreciation, since none of them has defaulted yet.
What does that mean for the industry?
The European governments are trying to get voluntary support from the private banks to take on parts of the credit burden. The financial institutions have a lot of risk hidden in their balance sheets that is not hedged by equity reserves. That is why they may be willing to help the EU to some extent, but I doubt that they will accept taking on a large portion of the additional credit risk, they will leave that to the politicians.
Even though most financial services and insurance companies used the accounting standards to their advantage, avoiding additional equity reserves as risk mitigation for the unsafe consols, they are aware of the risk involved. This leads to additional reporting needs:
· Companies always differentiate between external and internal reporting to cater to the various stakeholders’ needs. The authorities are interested in a public view of the business according to the accounting standards, while the internal view gives the management a different overview based on other criteria.
· The principles for external reporting follow tax law and other regulations, like Basel II compliance. External reporting is therefore strict and formalized. The accounting tricks mentioned above are reflected in the external reporting.
· Internal reporting on the other hand is more flexible. Here the management can use the reporting for strategic purposes, for different views of the business (e.g. using an organizational structure to-be) and is not limited in the usage by regulations. The added risk of government bonds is taken into account and separately shown in the balance sheet. In addition, it is very likely that the executives want to see specific dashboards qualifying the impact of government bonds in terms of value at risk.
The rate of these bonds as well as their solvency decreased significantly especially due to the downgrade of Greece (and later of Portugal and Spain) by the rating agencies and the following disturbances of the markets. According to the newspapers, a 10-years Greece bond of Greece which was noted in March 2010 with almost its denomination value, can at the end of April only find a purchaser with 82% of its repayment values.
Banks that were heavily involved in the government financing business own lots of these consols, like the now government owned Hypo Real Estate in Germany with 39 billion Euro. However, that does not mean that it has an immediate impact on the balance sheets of the banks (i.e. exposure of their equity ratio). It depends on a complex set of rules.
Is the bond part of the trading portfolio of the bank (those consols that are supposed to be traded on a short-term basis) then the volatility of the stock price will have an immediate effect on the profit and loss statement.
Financial services organizations also need to have a foundation of liquid assets. Since government bonds are usually considered to be sound investments – even from the PIIGS countries – they can often be found in the liquidity reserve to serve short-term payment obligations of the organization. The problem here is the same as with the trading portfolio, changes directly impact the P/L.
As a counter measure, to avoid the effect and to reduce the risk of negative impacts on the balance sheet, banks often moved these consols positions into different portfolios, as asset investments. With this trick the investments are labeled as long-term positions with the consequence that the bank can wait with adjustments of their financial statement till the government of the bond is unable to pay the interest or – as a measure of debt refunding – is reducing the repayment value of its debts (called haircut). But that scenario is not likely as the countries of the European Union are willing to help Greece with around 110 Billion Euro of instant loans.
The solvability and Basel II rules demand from financial institutions to hedge their security portfolio with equity in their balance sheet. If the securities rating are going from bad to worse, more and more equity is required as a safeguard. However, government bonds underlie special regulations. As long as the European banks follow the standard principles of capital adequacy, i.e. accessing only external ratings, they do not have to allocate any equity for consols coming from countries of the European Union!
While bonds issued by a company with the same rating as Greece at the moment would result in a requirement to reserve 8% equity on the balance sheet of the holding financial institution, none of this applies to the Greek bonds, under the premises of using standard external ratings. Larger banks, though, do not fully rely on external ratings; they consult in addition their own rating models and hence have to comply with different rules.
Some institutions have therefore most likely added more equity as a risk provisioning due to the lowering creditworthiness of Greece. Most others however, did not follow that path and appeal to the fact that companies that follow their own rating guidance in general can still assess parts of their portfolio according to external ratings. Allianz, the German insurance heavy-weight for example, has heavily invested in Piigs-bonds but still does not see a reason for depreciation, since none of them has defaulted yet.
What does that mean for the industry?
The European governments are trying to get voluntary support from the private banks to take on parts of the credit burden. The financial institutions have a lot of risk hidden in their balance sheets that is not hedged by equity reserves. That is why they may be willing to help the EU to some extent, but I doubt that they will accept taking on a large portion of the additional credit risk, they will leave that to the politicians.
Even though most financial services and insurance companies used the accounting standards to their advantage, avoiding additional equity reserves as risk mitigation for the unsafe consols, they are aware of the risk involved. This leads to additional reporting needs:
· Companies always differentiate between external and internal reporting to cater to the various stakeholders’ needs. The authorities are interested in a public view of the business according to the accounting standards, while the internal view gives the management a different overview based on other criteria.
· The principles for external reporting follow tax law and other regulations, like Basel II compliance. External reporting is therefore strict and formalized. The accounting tricks mentioned above are reflected in the external reporting.
· Internal reporting on the other hand is more flexible. Here the management can use the reporting for strategic purposes, for different views of the business (e.g. using an organizational structure to-be) and is not limited in the usage by regulations. The added risk of government bonds is taken into account and separately shown in the balance sheet. In addition, it is very likely that the executives want to see specific dashboards qualifying the impact of government bonds in terms of value at risk.
Tuesday, February 16, 2010
Interactive Bubble Charts – a technical gimmick or an important reporting feature?
The market for business intelligence differentiates 5 styles of BI:
· Reporting
· Advanced Analysis & Ad hoc Reporting
· OLAP Analysis
· Scorecards & Dashboards
· Alerting & Proactive notification
While reporting, the classic discipline of BI, i.e. predefined operational reports with perfect layouts and ideal for printing, is widely used in financial services and also the ad hoc analysis, advanced analysis (including data mining) and OLAP reporting is getting more and more popular, dashboards still represent a relatively new discipline in financial services. This has partly to do with the fondness for Excel in the various departments, but is also contributed to the fact that users have not fully grasped the possibilities a dashboard can provide, which a standard report is not capable of.
A standard report / grid can provide information in a two dimensional fashion. With OLAP reporting you have the ability to drill down by multiple dimensions but you can still see only a limit amount of information in one screen. With dashboards, this limitation is not longer a problem.
Now, if we build the same scenario as an interactive bubble chart into a dashboard, we can easily incorporate all the desired functional at once.
· Reporting
· Advanced Analysis & Ad hoc Reporting
· OLAP Analysis
· Scorecards & Dashboards
· Alerting & Proactive notification
While reporting, the classic discipline of BI, i.e. predefined operational reports with perfect layouts and ideal for printing, is widely used in financial services and also the ad hoc analysis, advanced analysis (including data mining) and OLAP reporting is getting more and more popular, dashboards still represent a relatively new discipline in financial services. This has partly to do with the fondness for Excel in the various departments, but is also contributed to the fact that users have not fully grasped the possibilities a dashboard can provide, which a standard report is not capable of.
However, the demand for dashboards is significantly picking up lately!
What are the reasons for this change in perception?
The idea of dashboards followed the study of decision support systems in the 1970s. With the propagation of the web in the late 1990s, the dashboards as we know them today began appearing.
In management information systems, a dashboard is an executive information system user interface that is designed to be easy to read. Dashboards may be laid out to track the flows inherent in the business processes that they monitor. Graphically, users may see the high-level processes and then drill down into lower level data. This level of detail is often buried deep within the corporate enterprise and otherwise unavailable to the senior executives. Dashboards are therefore business driven. Dashboards give a visual representation of performance measures. They give the ability to make more informed decisions based on collected business intelligence and align strategies and organizational goals (e.g. to visualize balanced scorecards).
These are all important factors and business users saw the value dashboards could add and really liked them. Nevertheless they often hesitated to implement them and stick to their two dimensional standard reports.
These are all important factors and business users saw the value dashboards could add and really liked them. Nevertheless they often hesitated to implement them and stick to their two dimensional standard reports.
The financial crisis however made financial institutions rethink their current reporting strategy. Business as usual was just not good enough anymore. In the past the organizations invested heavily in risky financial instruments, always looking for the biggest return, regardless the inherent risk. Now, with the dramatic changes in the economy, financial services institutions are starting to think more strategically. They want to be cost efficient, want to streamline their business processes and are therefore willing to invest in best practices in order to be well positioned for the future.
That also includes dashboards because they come not only with the advantages mentioned above; they offer an additional important benefit: they save time over running multiple reports!
A standard report / grid can provide information in a two dimensional fashion. With OLAP reporting you have the ability to drill down by multiple dimensions but you can still see only a limit amount of information in one screen. With dashboards, this limitation is not longer a problem.
Let us assume a bank wants to get insight into their business segment performance. The key metrics they want to see over time for all their segments are:
· Operating Margin
· Return on Equity (ROE)
· Net Income
In a two-dimensional standard report we would build this as a grid, with periods in the column and the KPIs in the rows. We would then build a filter into this report so that we can select a segment. A comparison of all segments at the same time is not easily possible. We can also not easily identify trends over time, especially if we have more data (multiple segments with lots of periods) to analyze.
· Operating Margin
· Return on Equity (ROE)
· Net Income
In a two-dimensional standard report we would build this as a grid, with periods in the column and the KPIs in the rows. We would then build a filter into this report so that we can select a segment. A comparison of all segments at the same time is not easily possible. We can also not easily identify trends over time, especially if we have more data (multiple segments with lots of periods) to analyze.
Of course we can improve this report by adding sums, variances, and even traffic lights to indicate trends but it is still not intuitive and takes time to consume.
Another option would be to build an OLAP report where the segment is a dimension that we can show on the report. With nesting, i.e. the visualization of multiple dimensions in the rows, we could get more information on the report. But it would be difficult for the business to digest the information and comparisons between segments over time.
Now, if we build the same scenario as an interactive bubble chart into a dashboard, we can easily incorporate all the desired functional at once.Each bubble represents a different segment (differentiated by its color); its size outlines the net margin of the segment. The position of the bubble in the graph is determined by the x-axis (ROE in %) and the operating margin (in %) on the y-axis. This is easy to understand but it gets even better. With the interactivity of the bubble chart you can see how the size and position of each bubble is changing over time.
This resonates very well with the business users. They save a lot of time they had to spend on finding the information and can instead concentrate on their real job, analyzing the information and making informed decisions based on the findings.
Now, that the business has seen the potential and the wide range of use cases for dashboards they are asking for more. They would like to generate dashboards that incorporate all their relevant information they need to perform their daily business. With well defined dashboards that are concentrating on the information that is really relevant, the answer is simple.
MicroStrategy for example offers for this purpose a dashboard book, i.e. a set of dashboards that are contained in one file, available for distribution (via email or on a mobile devise). The business already loves it.
Release Management in Banking
Organizations buy software to help them solve their business problems. The software comes usually packaged with a maintenance contract which allows the companies to get support when needed and to update to the latest releases of the software.
In general companies are trying to be up to date with the software releases as much as possible in order to utilize new functionality and to get the latest bug fixes. This is especially true for business intelligence software that gives the organization a competitive advantage by delivering invaluable insight into the business. Those companies are therefore pretty open when it comes to install new service packs, hot fixes or patches.
This is different for most of the larger financial services organizations.
I am not talking about mayor releases here, i.e. a totally new version with new functionality, enhancements and maybe a better GUI (Graphical User interface). Those migrations usually need very extensive preparation time but for most software companies these mayor releases only occur every 2-3 years.
Larger banks require even for minor releases or service packs a long preparation phase and intensive testing before an upgrade can be implemented. This has to do with the restrict risk & compliance rules, the sensitivity of the data, the business model of financial institutions and with the fact that banks have often outsourced the IT service handling the migration.
They are installing the software typically in a sandbox environment; test the software thoroughly until the results for all their test scenarios are satisfactory and then they plan the technical steps for the upgrade. Part of the testing on the IT side includes carry out random installations in their machines and test for no compatibility issues with other standard applications at the bank.
This process usually takes 3-4 months.
The duration of the implementation – after the completion of the testing and planning mentioned before – is then dependent on the changes to the software and the internal process. The usual setup includes a development, a test and a production environment and proper procedures to move between those environments. As a rule of thumb such an implementation takes another 2 months. On average a migration to new software versions takes therefore in total ~ 6 months.
While there is software in the market that requires a much longer migration cycle, this is a pretty good estimate for most BI software migrations in financial services organizations.
However, some financial services institutions exceed this time by far and are looking for tools and external support to streamline their processes.
The procedures are especially inefficient when it comes to hotfixes and patches that are supposed to solve immediate issues. In case of a not foreseeable real issue that could be a threat for the daily business even banks are very open to implement patches quickly. This patch still needs to follow certain test procedures in the sandbox but this is much faster (can be done in two days till a week). Nevertheless, the companies try to avoid this as much as possible due to the extensive test scripts.
The required effort also depends on who owns the responsibility for the BI resources. As a rule of thumb, if the BI department is the owner of all the resources, it is usually less problematic and the processes are more promptly. Otherwise you could run into delays since you do not have all the resources at your disposal.
In summary, release management is becoming a very important topic for the financial services industry as it ties up budget, resources for a longer time period. As a consequence, those software vendors that offer a single, integrated tool based on a unified platform architecture – usually those that remained independent without the hassle of product integration issues due to newly acquired software – with a simple migration path for their customer base, will have a huge competitive advantage in the market space.
In general companies are trying to be up to date with the software releases as much as possible in order to utilize new functionality and to get the latest bug fixes. This is especially true for business intelligence software that gives the organization a competitive advantage by delivering invaluable insight into the business. Those companies are therefore pretty open when it comes to install new service packs, hot fixes or patches.
This is different for most of the larger financial services organizations.
I am not talking about mayor releases here, i.e. a totally new version with new functionality, enhancements and maybe a better GUI (Graphical User interface). Those migrations usually need very extensive preparation time but for most software companies these mayor releases only occur every 2-3 years.
Larger banks require even for minor releases or service packs a long preparation phase and intensive testing before an upgrade can be implemented. This has to do with the restrict risk & compliance rules, the sensitivity of the data, the business model of financial institutions and with the fact that banks have often outsourced the IT service handling the migration.
They are installing the software typically in a sandbox environment; test the software thoroughly until the results for all their test scenarios are satisfactory and then they plan the technical steps for the upgrade. Part of the testing on the IT side includes carry out random installations in their machines and test for no compatibility issues with other standard applications at the bank.
This process usually takes 3-4 months.
The duration of the implementation – after the completion of the testing and planning mentioned before – is then dependent on the changes to the software and the internal process. The usual setup includes a development, a test and a production environment and proper procedures to move between those environments. As a rule of thumb such an implementation takes another 2 months. On average a migration to new software versions takes therefore in total ~ 6 months.
While there is software in the market that requires a much longer migration cycle, this is a pretty good estimate for most BI software migrations in financial services organizations.
However, some financial services institutions exceed this time by far and are looking for tools and external support to streamline their processes.
The procedures are especially inefficient when it comes to hotfixes and patches that are supposed to solve immediate issues. In case of a not foreseeable real issue that could be a threat for the daily business even banks are very open to implement patches quickly. This patch still needs to follow certain test procedures in the sandbox but this is much faster (can be done in two days till a week). Nevertheless, the companies try to avoid this as much as possible due to the extensive test scripts.
The required effort also depends on who owns the responsibility for the BI resources. As a rule of thumb, if the BI department is the owner of all the resources, it is usually less problematic and the processes are more promptly. Otherwise you could run into delays since you do not have all the resources at your disposal.
In summary, release management is becoming a very important topic for the financial services industry as it ties up budget, resources for a longer time period. As a consequence, those software vendors that offer a single, integrated tool based on a unified platform architecture – usually those that remained independent without the hassle of product integration issues due to newly acquired software – with a simple migration path for their customer base, will have a huge competitive advantage in the market space.
Saturday, January 2, 2010
Microcredit – An Opportunity for Financial Institutions
Microcredit is an extension of very small loans (microloans) to those in poverty designed to spur entrepreneurship. These individuals lack collateral, i.e. (in lending agreements) a borrower’s pledge of specific property to a lender, to secure repayment of a loan. Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor. The financial innovation of microcredit has originated – at least that is the general consensus – with the Grameen Bank in Bangladesh. In that country, it has successfully enabled extremely impoverished people to engage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty.
The system of the Grameen Bank is based on the idea that the poor have skills that are under-utilized. A group-based credit approach is applied which utilizes the peer-pressure within the group to ensure the borrowers follow through and use caution in conducting their financial affairs with strict discipline, ensuring repayment eventually and allowing the borrowers to develop good credit standing. The bank also accepts deposits, provides other services, and runs several development-oriented businesses including fabric, telephone and energy companies. Another distinctive feature of the bank's credit program is that a significant majority of its borrowers are women.
Professor Muhammad Yunus, who launched a research project to examine the possibility of designing a credit delivery system targeted to the rural poor, can be seen as the founder of the Grameen Bank.
Due to the success of microcredit, many in the traditional banking industry have begun to realize that these microcredit borrowers should more correctly be categorized as pre-bankable; thus, microcredit is increasingly gaining credibility in the financial services sector. Many large finance organizations are now considering microcredit projects as a source of future growth, which is interesting, given that almost everyone in larger development organizations speculated on the likelihood of failure of microcredit when it was begun.
The United Nations declared 2005 the International Year of Microcredit and in 2006 received Professor Muhammad Yunus – in recognition of his efforts – jointly with the then independent Grameen Bank organization the Nobel Piece Price.
In the course of the financial crisis many small companies and entrepreneurs around the globe had problems to get access to a loan. This is especially true in Spain where the real estate market collapsed. La Caixa, the biggest savings bank in Spain, who founded in 2007 with Microbank the first European bank, specialized on microcredit, is very well positioned to help those in need of a small credit. The bank also proved that it can be a very profitable business. In their first two years of existence they financed 48813 projects with a volume of 331.8 million Euro (~ 480 million USD). Of course the financial crisis caused reluctance in new investments and company foundations. Nevertheless, the business of the bank is steadily growing. Microbank, also called “the social bank of La Caixa” generated a net income of 5.2 million Euro (~ 7.5 million USD). Half of the money went to families to overcome their current financial shortages, the other half was put into company projects.
According to a study by Esade, a Spanish management firm, 84% of the company projects financed by microcredit from the Microbank proceed successful. Furthermore, every fifth company hired 3 or more additional heads for their workforce.
I believe that – as a direct consequence of these successes –financial institutions and governments will become more and more interested in this concept to open up new revenue generating possibilities and respectively overcome problems with high unemployment. Needless to say that this will go hand in hand with new process and reporting requirements for the microcredit business.
The system of the Grameen Bank is based on the idea that the poor have skills that are under-utilized. A group-based credit approach is applied which utilizes the peer-pressure within the group to ensure the borrowers follow through and use caution in conducting their financial affairs with strict discipline, ensuring repayment eventually and allowing the borrowers to develop good credit standing. The bank also accepts deposits, provides other services, and runs several development-oriented businesses including fabric, telephone and energy companies. Another distinctive feature of the bank's credit program is that a significant majority of its borrowers are women.
Professor Muhammad Yunus, who launched a research project to examine the possibility of designing a credit delivery system targeted to the rural poor, can be seen as the founder of the Grameen Bank.
Due to the success of microcredit, many in the traditional banking industry have begun to realize that these microcredit borrowers should more correctly be categorized as pre-bankable; thus, microcredit is increasingly gaining credibility in the financial services sector. Many large finance organizations are now considering microcredit projects as a source of future growth, which is interesting, given that almost everyone in larger development organizations speculated on the likelihood of failure of microcredit when it was begun.
The United Nations declared 2005 the International Year of Microcredit and in 2006 received Professor Muhammad Yunus – in recognition of his efforts – jointly with the then independent Grameen Bank organization the Nobel Piece Price.
In the course of the financial crisis many small companies and entrepreneurs around the globe had problems to get access to a loan. This is especially true in Spain where the real estate market collapsed. La Caixa, the biggest savings bank in Spain, who founded in 2007 with Microbank the first European bank, specialized on microcredit, is very well positioned to help those in need of a small credit. The bank also proved that it can be a very profitable business. In their first two years of existence they financed 48813 projects with a volume of 331.8 million Euro (~ 480 million USD). Of course the financial crisis caused reluctance in new investments and company foundations. Nevertheless, the business of the bank is steadily growing. Microbank, also called “the social bank of La Caixa” generated a net income of 5.2 million Euro (~ 7.5 million USD). Half of the money went to families to overcome their current financial shortages, the other half was put into company projects.
According to a study by Esade, a Spanish management firm, 84% of the company projects financed by microcredit from the Microbank proceed successful. Furthermore, every fifth company hired 3 or more additional heads for their workforce.
I believe that – as a direct consequence of these successes –financial institutions and governments will become more and more interested in this concept to open up new revenue generating possibilities and respectively overcome problems with high unemployment. Needless to say that this will go hand in hand with new process and reporting requirements for the microcredit business.
Thursday, November 12, 2009
SEPA – New regulations for financial transactions
Since the beginning of November 2009 new regulations for banking transactions in Europe are in place – as a consequence of SEPA efforts.
What is SEPA? As the European Payments Council states, the Single Euro Payments Area or SEPA will be “the area where citizens, companies and other economic participants make and receive payments in euro, whether between or within national boundaries, under the same basic conditions, rights and obligations. In the long-term, the uniform SEPA payment instruments are expected to replace national euro payment systems now being operated in Europe“.
SEPA currently consists of the 27 EU Member States, Iceland, Liechtenstein, Monaco, Norway and Switzerland. SEPA is an EU-wide policy-maker-driven integration initiative in the area of payments designed to achieve the completion of the EU internal market and monetary union. Following the introduction of euro notes and coins in 2002, the political drivers of the SEPA initiative - EU governments, the European Commission and the European Central Bank - focused on harmonizing the euro payments market. Integrating the multitude of national payment systems existing today is a natural step towards making the euro a truly single and fully functioning currency. SEPA will become a reality when a critical mass of euro payments has migrated from legacy payment instruments to the new SEPA payment instruments.
The main benefits expected are the creation of conditions for enhanced competition in providing payment services as well as more efficient payment systems through harmonization. Once the SEPA is established it will be possible to exchange euro payments between any accounts in SEPA as easily as it is possible today only within national borders. Common standards, faster settlement and simplified processing will improve cash flow, reduce costs and facilitate the access to new markets. Moreover, users will benefit from the development of innovative products offered by payment sector suppliers.
According to a recent study conducted by CapGemini Consulting at the request of the European Commission, the replacement of existing national payments systems by SEPA holds a market potential of up to €123 billion in benefits, cumulative over six years and benefitting the users of payments services.
While this potential is extremely interesting and important to financial institutions, it also means that the banking processes, reporting requirements etc. need to be adjusted and the terms and conditions for the customers are changing.
What is SEPA? As the European Payments Council states, the Single Euro Payments Area or SEPA will be “the area where citizens, companies and other economic participants make and receive payments in euro, whether between or within national boundaries, under the same basic conditions, rights and obligations. In the long-term, the uniform SEPA payment instruments are expected to replace national euro payment systems now being operated in Europe“.
SEPA currently consists of the 27 EU Member States, Iceland, Liechtenstein, Monaco, Norway and Switzerland. SEPA is an EU-wide policy-maker-driven integration initiative in the area of payments designed to achieve the completion of the EU internal market and monetary union. Following the introduction of euro notes and coins in 2002, the political drivers of the SEPA initiative - EU governments, the European Commission and the European Central Bank - focused on harmonizing the euro payments market. Integrating the multitude of national payment systems existing today is a natural step towards making the euro a truly single and fully functioning currency. SEPA will become a reality when a critical mass of euro payments has migrated from legacy payment instruments to the new SEPA payment instruments.
The main benefits expected are the creation of conditions for enhanced competition in providing payment services as well as more efficient payment systems through harmonization. Once the SEPA is established it will be possible to exchange euro payments between any accounts in SEPA as easily as it is possible today only within national borders. Common standards, faster settlement and simplified processing will improve cash flow, reduce costs and facilitate the access to new markets. Moreover, users will benefit from the development of innovative products offered by payment sector suppliers.
According to a recent study conducted by CapGemini Consulting at the request of the European Commission, the replacement of existing national payments systems by SEPA holds a market potential of up to €123 billion in benefits, cumulative over six years and benefitting the users of payments services.
While this potential is extremely interesting and important to financial institutions, it also means that the banking processes, reporting requirements etc. need to be adjusted and the terms and conditions for the customers are changing.
The personal risk of consumers when making a bank transfer or when losing their debit card has heightened. The main changes for customers are:
- From now on a bank transfer becomes irrevocable on receipt by the bank, i.e. if the customer makes a mistake filling out the transfer of payment, he cannot reclaim the transfer himself, even if the bank has not executed the transfer yet.
- Furthermore, banks are not longer obliged to verify that the name of the recipient of the transfer is in accordance with the bank account number. In the past – at least in Germany – courts did not consider the account number as sufficient.
- It is now the responsibility of the customer himself to get his wrongly wired money back, not longer a task of the bank.
- Another new rule is related to the “EC-card” or debit card. Customers have to pay up to €150 when their debit card was used abusively due to the fact that it got lost. The liability of the customer starts with losing the card and ends with the bank inactivating the card. This is a shift in accountability. In the past the consumers were only liable when they acted carelessly.
- With the implementation of the new EU-rules a debit advice can be made European wide, i.e. across countries, not just within the country of the customer.
SEPA forces financial institutions to implement the new European instruments and processes and to tie their payment transactions with the electronic mass transaction systems of the central banks, e.g. SWIFTNet (the system of the German Central Bank). In addition, a more detailed customer administration and engagement with the customer is needed; adjustments to the master data as well as a more sophisticated debitor analysis are also required.
In order to make these changes for the financial institutions and their customer base as smoothly and transparent as possible business intelligence plays an integral part.
For the customers it is important to mitigate their risk by getting all relevant information about the transactions quickly at a glance, e.g. showing the name of the recipient and the account number. Exception reports can also help identifying suspicious transactions.
For the banks the process is now more standardized, which means the reporting requirements to the authorities are also more restrict. In addition, they need to anticipate the possible issues with customers and their transactions and should prepare for it with the right level of detailed reporting.
Tuesday, October 13, 2009
CRM or CMR?
Is the change from the traditional and well known Customer Relationship Management (CRM) towards Customer Managed Relationships just a nice idea or really an interesting concept for the future? Customer orientation and improvements of the value to the customer is something all financial services institutions have on their radar but the realization of these goals is not simple. In any case, the customer becomes more and more the key factor for the success of a company.
The market condition has changed significantly with the internet. The possibilities are immense and the transparency of the market increased a lot. While it was difficult in the past to compare the simple facts of financial products like interests and fees with each other, it is now much easier for the consumer to get this information online. As long as we are not talking about structured products like asset backed securities – which even bank clerks have difficulties to fully comprehend – the market is pretty visible for the investors and provides an unlimited amount of data.
As a consequence, the loyalty of the customers towards their bank has declined. Just take the tough competition around interest rate as an example. It tempts the consumer to switch quickly.
The answer for the financial services industry lies therefore in even more data and better information and analysis about their target customer groups. The traditional CRM is here sometimes not comprehensive enough as it only analyzes existing contracts of their customers. The problem with CRM is that it looks at the customer from the perspective of the company, not from the customer angle. CRM tries to identify new sales & service opportunities for their clients based on the processes of the bank.
CMR – or "Customer Managed Relationships" is using a different approach. The concept of “CMR” started to be spoken about maybe two years ago but still gets not much attention. “Self service” is a term that is more broadly used and understood but misses the power of what customers really want. It looks at the saving from a company’s point of view, not the empowerment from the customer’s perspective.
CMR means three things
1. The ability to question and reshape your organization and its knowledge in a way that it is at the disposal of your customers
2. Internet enabled management tools which customers use to get what they want
3. The ability to react to the information being generated and used by customers in order to increase profitability.
CMR generates - if executed well – the following major benefits over CRM:
1. It is easier to implement because the customer is doing the more complex work
2. It creates more binding of your customers since customers having invested their data with the financial services institute will not move easily
3. It allows financial services organizations to move faster than their competitor since they are in a trusted relationship with their customer
Companies need to understand CMR and then change accordingly. With the words of business strategist Gary Hamel – you need a well developed view of the future, whether or not it is true. You have to invest in the competencies to make that future come true. You need to experiment and learn to see which parts of your view are developing.
“Customer managed” – a simple thought but with major impacts
The consequence for the company is a loss of control. Customers will be in the driving seat, not the financial institution. They have to start thinking and behaving differently.
It may be hard to envision but it is nevertheless absolutely feasible – with internet enabled platforms and the right business intelligence –to imagine how whole industry processes can be reconstructed putting the customer in charge of their own needs by giving them the internet based management tools and data they require. This is what a customer managed relationship is about.
The industry is currently not designed to serve customers that way. Almost every financial services institute puts the customer and the improvement of the relation to its customer base in their mission statement and strategy as a top priority. The mindset is clear. If they can establish a good relationship with their customers it will (hopefully) result in cross sell opportunities and more profit.
However, the customers usually do not care so much about a relationship with their bank. They want results. If a customer asks for a loan a simple yes over the phone would do! In other words, the customer decides when a relationship with his bank is useful.
Customers need to answer the question “How much money do I get and what shall I do with it?” all the time. Presenting this dynamic problem to a financial institution will be difficult to handle for them. Their CRM systems would not answer the question.
With CMR you present the customer with the tools to manage his relationship with his bank. This can be a portal that provides the ability to key in (safely) the individual information about customers’ savings, pensions, investments, insurance information, salary etc. The customer then can decide to take a look at his portfolio from different angles, using dashboards. Benchmark information as well as learning algorithms based on the data provided and external market data will help the customer improving in managing his own finances. Only when he needs to contact a clerk or a bank analyst he can do so by triggering an action, an email alert etc.
This flexibility and self-control from the customers’ point of view may be too farfetched right now but it will most likely be the next evolution of customer relations in the financial services industry in an effort to retain their customer base.
The market condition has changed significantly with the internet. The possibilities are immense and the transparency of the market increased a lot. While it was difficult in the past to compare the simple facts of financial products like interests and fees with each other, it is now much easier for the consumer to get this information online. As long as we are not talking about structured products like asset backed securities – which even bank clerks have difficulties to fully comprehend – the market is pretty visible for the investors and provides an unlimited amount of data.
As a consequence, the loyalty of the customers towards their bank has declined. Just take the tough competition around interest rate as an example. It tempts the consumer to switch quickly.
The answer for the financial services industry lies therefore in even more data and better information and analysis about their target customer groups. The traditional CRM is here sometimes not comprehensive enough as it only analyzes existing contracts of their customers. The problem with CRM is that it looks at the customer from the perspective of the company, not from the customer angle. CRM tries to identify new sales & service opportunities for their clients based on the processes of the bank.
CMR – or "Customer Managed Relationships" is using a different approach. The concept of “CMR” started to be spoken about maybe two years ago but still gets not much attention. “Self service” is a term that is more broadly used and understood but misses the power of what customers really want. It looks at the saving from a company’s point of view, not the empowerment from the customer’s perspective.
CMR means three things
1. The ability to question and reshape your organization and its knowledge in a way that it is at the disposal of your customers
2. Internet enabled management tools which customers use to get what they want
3. The ability to react to the information being generated and used by customers in order to increase profitability.
CMR generates - if executed well – the following major benefits over CRM:
1. It is easier to implement because the customer is doing the more complex work
2. It creates more binding of your customers since customers having invested their data with the financial services institute will not move easily
3. It allows financial services organizations to move faster than their competitor since they are in a trusted relationship with their customer
Companies need to understand CMR and then change accordingly. With the words of business strategist Gary Hamel – you need a well developed view of the future, whether or not it is true. You have to invest in the competencies to make that future come true. You need to experiment and learn to see which parts of your view are developing.
“Customer managed” – a simple thought but with major impacts
The consequence for the company is a loss of control. Customers will be in the driving seat, not the financial institution. They have to start thinking and behaving differently.
It may be hard to envision but it is nevertheless absolutely feasible – with internet enabled platforms and the right business intelligence –to imagine how whole industry processes can be reconstructed putting the customer in charge of their own needs by giving them the internet based management tools and data they require. This is what a customer managed relationship is about.
The industry is currently not designed to serve customers that way. Almost every financial services institute puts the customer and the improvement of the relation to its customer base in their mission statement and strategy as a top priority. The mindset is clear. If they can establish a good relationship with their customers it will (hopefully) result in cross sell opportunities and more profit.
However, the customers usually do not care so much about a relationship with their bank. They want results. If a customer asks for a loan a simple yes over the phone would do! In other words, the customer decides when a relationship with his bank is useful.
Customers need to answer the question “How much money do I get and what shall I do with it?” all the time. Presenting this dynamic problem to a financial institution will be difficult to handle for them. Their CRM systems would not answer the question.
With CMR you present the customer with the tools to manage his relationship with his bank. This can be a portal that provides the ability to key in (safely) the individual information about customers’ savings, pensions, investments, insurance information, salary etc. The customer then can decide to take a look at his portfolio from different angles, using dashboards. Benchmark information as well as learning algorithms based on the data provided and external market data will help the customer improving in managing his own finances. Only when he needs to contact a clerk or a bank analyst he can do so by triggering an action, an email alert etc.
This flexibility and self-control from the customers’ point of view may be too farfetched right now but it will most likely be the next evolution of customer relations in the financial services industry in an effort to retain their customer base.
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