Interview MasterCard’s Garry Lyons on how to maintain competitive advantage

Special ReportPerspectives from thought leaders on post-crisis recovery in the eurozone

Efma Journal No. 234September/October 2012

THE PAYMENTS ISSUE: STRATEgIES foR SUccESS IN AN EvER-EvolvINg lANdScAPE

Plus: cheque processing across the globe – Roundtable on innovation – Social media adoption – and much more...

Journal

1

A time of transformation Welcome to the all-new Efma Journal.

As you can see, we’ve been working hard to transform the journal into something much more modern and magazine-like, increasing its frequency to six issues a year, creating more interesting and digestible articles, and including more imagery and social media content. At the same time we’ve done our best to maintain the best bits of the original format such as the high level thought leadership and the interesting cover story articles.

On page 17, for example, you’ll find our cover story, which in this issue is focussed on payments. A key theme here is the move towards new forms of payments such as mobile and NFC, and their adoption in different markets. We also have a sneak preview of the latest World Payments Report from Capgemini and RBS, and we hear from Sandra Alzetta about the payments innovations that are happening at Visa.

Also in this issue we have a special feature on post crisis recovery in the eurozone which you’ll find on page 62, a roundtable article on page 46 which brings together opinion on innovation in financial services, and an interview with Garry Lyons on page 40 about the new MasterCard Innovation Centre in Singapore. There’s also a roundup of all the latest news, the usual coverage of our recent councils and conferences, and much much more.

We hope you appreciate our efforts in making the journal much more interesting and informative for our members.

PhilippeWallez Editorial Board Chairman, Efma General Manager Marketing, ING Belgium

foreword

for efma Sarl:

PublisherPatrick Desmarès

ContributorsPhil Allcock, Karine Coutinho, Boris Plantier, Christiane Rollin

for Tudor rose:

EditorLindsay James

EditoralteamRebecca Lambert, Amber Stokes

GraphicDesignPaul Robinson

ProjectManagerStuart Fairbrother

PublishingDirectorToby Ingleton EDitorialboarDChairmanPhilippe Wallez General Manager Marketing iNGbelgiumChristian Cassebaum Member of Board of Management allianzberatungs-undVertriebs-aGDriss Maghraoui Directeur Distribution Produits et Marchés attijariwafabankDamien De Ponthaud Head of Customer Experience aXaGroupMateo Rodriguez-Braun Director of Practices bancoSantanderTobbias Schloemer Director, Global Marketing & Communications DeutschebankJan Hendrik Kraus General Manager, Group Strategy EmiratesNbDMarkus Diemayer Head of Retail Board Office ErsteGroupbankFrancois Duchesne Directeur Principal, Intelligence d’Affaires et Distribution FédérationdesCaissesDesjardinsduQuébecMurat Atalay Retail Banking Marketing Division Head isbankPatrick Kindt General Manager Marketing KbCbankMarc Alaurent Senior VP Payments laSerTorben Laustsen Deputy Head of Banking Denmark NordeabankPhilippe Cheyssial Directeur du Marketing Clients Particuliers SociétéGénéraleDiviesh Vithlani Head of Channel Management Swedbank

illustrationsBruno David PrintedbyGroupe Corlet imprimeur 14110 Condé-sur-Noireau ISSN: 1771-4230

Efma Journal is published by Tudor Rose on behalf of EfmaEfma Tudor Rose8, rue Bayen, 75017 Paris, France Tudor House, 6 Friar Lane, Leicester LE1 5RA, UK Tel: +33 1 47 42 52 72, Fax: +33 1 47 42 56 76 Tel: +44 116 222 9900, Fax: +44 116 222 9901 info@efma.com, www.efma.com info@tudor-rose.co.uk, www.tudor-rose.co.uk

© 2012 Efma. All rights reserved. No part of this publication may be stored or transmitted or reproduced in any form or by any means, including whether by photocopying, scanning, downloading onto computer or otherwise without the prior written permission from Efma.

The names of actual companies and products mentioned herein may be the trademarks of their respective owners. Views expressed in this magazine are not necessarily those of Efma. Acceptance of advertisements does not imply official endorsement of the products or services concerned. While every care has been taken to ensure accuracy of content, no responsibility can be taken for any errors and/or omissions. Readers should take appropriate professional advice before acting on any issue raised herein.

No. 234 September/October 2012

3EfmaJournal No. 234

coNTeNTS

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62

40

04

70

When two worlds collide 18 Sandra Alzetta, Visa

Going global 21 Jean Lassignardie, Capgemini and Simon Newstead, RBS

Floating from hubs to the cloud 24 Bernard Ramé, Sopra

Getting value from electronic payments 26 Akira Yamagami, NTTData Institute of Management Consulting

Understanding the game 28 Amir Tabakovic, Mobey Forum

It’s time to get smart 30 Andres Wolberg-Stok, Citi

Going mobile 32 George Held, Etisalat

Smarter, faster and more secure 34 Soner Canko, BKM

The reality of supply chain finance 36 Michiel Steeman, Nyenrode Business University

Aligning strategy and opportunity 38 James Sherwin-Smith, Oliver Wyman

News 04A roundup of the latest goings on in retail financial services

Banker’s view 12Benjami Puigdevall discusses the importance of technological innovation

Pavlin Bonev highlights the 14need for better customer focus

Interview 40Garry Lyons tells us about MasterCard’s plight to stay one step ahead

Christian König explains the new 44developments in credit agreements related to mortgage lending

Roundtable 46Kenneth Cline speaks to an international Panel of bankers to hear about their views on innovations

Cheque processing 53We find out how different regions are tackling the evolution of cheques

Post-crisis recovery in the eurozone 62The current challenges facing eurozone countries, and strategies for success

Case study 70Tinkoff Credit Systems

Case study 72Caixa Seguros

Council update 74A summary of the most recent Efma Council meetings

Conferences 76 Highlights from the latest Efma Conferences

Sign out 88Richard Hartung discusses social media adoption in financial services

cover Story

Efma Journal No. 234

News

5

Bank of America is now rolling out chip technology across many of its consumer credit cards. The new chip

technology will increase acceptance and security of the cards for international travellers.

Credit cards with chip technology, which is also known as EMV (EuroPayMastercard Visa), are embedded with a microprocessor chip that encrypts and stores the account information. Many countries outside the US have already converted from magnetic stripe to EMV chip technology.

The bank’s new chip-enabled credit cards will continue to prompt customers to sign for transactions just as they would today. The cards also include the traditional magnetic stripe, which is used by US merchants.

“The new chip-enabled cards will improve convenience and security of customers’ transactions when travelling abroad,” said the bank’s

consumer and small business products executive Susan Faulkner. “We want our customers to have the best possible experience while making purchases with their credit cards anywhere in the world.”

The bank will include the chip technology in all newly issued Merrill Lynch credit cards, US Trust Accolades, BankAmericard Travel Rewards, BankAmericard Privileges and Virgin Atlantic travel credit cards.

In addition, the chip will be an optional feature that cardholders can request for the following credit card programmes: BankAmericard Cash Rewards, BankAmericard Power Rewards, BankAmericard, AAA Members Rewards, NEA, Asiana Airlines, Alaska Airlines, Hawaiian Airlines, Royal Caribbean and Norwegian Cruise Lines.

The bank also will upgrade existing customers in these card programmes who have been identified as international travellers. Customers will

be able to request the chip card

options at the banking centre or via phone straight away and online later this year.

In line with this announcement, US organisation the Smart Card Alliance has formed an independent, cross-industry organisation called the EMV Migration Forum to help support EMV implementations across the US. The new organisation will support global payment networks, regional payment networks, issuers, processors, merchants, and consumers to successfully move from magnetic stripe technology to secure EMV contact and contactless technology in a coordinated fashion.

FNB is making waves in the South African markets with the opening of its first dotFNB store at Nicolway Shopping Centre in Bryanston, as well as the launch of its banking through Facebook application.

The dot FNB store is the first of its kind in the South African banking industry, and gives customers a virtual environment in which to experience online solutions, video-conferencing with financial experts for more complex solutions, and unique interactive mechanisms. FNB has also applied augmented reality technology to this remarkable branch.

“With the gathering momentum of digital self-service banking, customer experience has become an even more important element in our business,” said Barry de Witt, CEO of FNB banking channels. “We are seeing a movement across our branches away from transactional banking towards pure service and product delivery. While our traditional branches are here to stay, dotFNB is a view of future banking.”

In addition to this, FNB has tied its mobile banking application to

Facebook, enabling users to run the application from within the social media site. Here they can check their balances, purchase prepaid products including airtime, SMS and BlackBerry bundles, and view Lotto and PowerBall results.

Of the 4.7 million active Facebook users in South Africa, 150,000 are FNB Facebook fans.

“As a bank, we average around 15,000 conversations monthly via social media, with existing and potential customers,” said Ravesh Ramlakan, CEO of FNB Cellphone Banking. “It is without a doubt that social media banking is the next frontier – to us this is a channel that will provide our customers with more choice and convenience to do their banking.”

“ It is without a doubt that social media banking is the next frontier”

FNB makes its mark in south Africa Quoted...

The customer experience is at the heart of dotFNB stores

“The implementation of EMV technology enables the industry

to create a truly interoperable chip-based consumer

payment infrastructure”

Patricia Partelow, chair of the EMVCo Executive Committee

“We have seen in other markets around the world that

cooperation and alignment of all participants’ activities are

necessary to ensure that the migration to EMV-enabled cards, devices, and terminals is efficient, timely, and effective”

Randy Vanderhoof, executive director of the Smart Card Alliance

“Use of standard data formats and protocols within the payment

ecosystem will make it easier for retailers to change payment

process, thus creating competition that can have a positive influence on service fees. EMV and mobile payments will require modification to the payment ecosystem, and retailers would be wise to define the standards and promote adoption”

Richard Mader, executive director, Association for Retail Technology Standards

Region eMVCards AdoptionRate eMVterminals AdoptionRateCanada, Latin America and the Caribbean 318,779,062 41.1% 4,443,000 76.7%

Asia Pacific 366,229,237 28.2% 4,551,000 51.4%

Africa & the Middle east 31,573,578 20.6% 462,000 75.9%

europe Zone 1 759,760,119 84.4% 11,920,000 94.4%

europe Zone 2 37,104,467 14.5% 610,500 68.1%

totals 1,513,446,463 44.7% 21,986,500 76.4%

WoRldWideeMVdeployMentAndAdoption

Figures reported in Q4 2011 and represent the latest statistics from American Express, JCB, MasterCard and Visa, as reported by their member financial institutions globally.

BankofAmericarollsoutchipcreditcards

Efma Journal No. 234

News

7

NewMembers

KasikornbankKasikornbank operates 824 branches, comprising 288 Bangkok Metropolitan branches and 536 upcountry branches. The bank has eight overseas offices, which greatly facilitate international trade and financial service transactions between Thailand and trade partners worldwide.www.kasikornbank.com

MCBBanklimitedMCB is one of the leading banks in Pakistan with a deposit base of PKR462 billion and total assets of PKR605 billion. The bank is versed as one of the oldest and most responsible banks in Pakistan and has played pivotal role in representing the country on global platforms.www.mcb.com.pk

BankMandiriBank Mandiri employs 28,000 employees and operates 1,548 branches across Indonesia. The bank is well supported by its six subsidiaries operating in shariah banking, capital market, consumer finance, life insurance, general insurance and micro lending.www.bankmandiri.co.id

indGroupThe remarkable growth that IND Group has made over the past years marks a true success story in the International financial IT market. It provides proficiency and state-of-the-art technology in more than 15 countries on three continents.www.indgroup.eu

Organisations that have joined Efma over the last two months

DBS Bank is stepping up its commitment to the growth of social entrepreneurship in Singapore and the surrounding region.

While the bank has been supporting social entrepreneurship in previous years, it will now more actively champion this cause with plans to roll out a slew of initiatives over the next six months. This includes raising the awareness of social enterprises, helping promising ones succeed through seed funding, providing low-cost banking services to them, and more actively using their goods and services.

To kick this off, DBS has unveiled its enhanced Social Enterprise Banking Package, the first and only such offering available in Singapore. This package offers social entrepreneurs virtually free banking transaction services and loans on preferential terms, giving them time to focus on building their businesses and pursue their social causes.

Within its retail banking business, Deutsche Bank has launched operations of Magellan, the newest IT and processing platform for banking services in Europe.

Magellan comprises the entire IT infrastructure as well as all of the clearing and settlement processes of the Private & Business Clients (PBC) Business Division in Germany. The migration of more than five million savings accounts at Deutsche Bank to the new, high performance platform started on 2 July. Magellan will provide the shared foundation for operating the branches of both Deutsche Bank and Postbank, representing a further step forward towards industrialising business processes and greater cost efficiency in PBC. By 2015 PBC will have invested approximately €1 billion in developing Magellan.

Rainer Neske, management board member of Deutsche Bank with responsibility for the Private & Business Clients franchise, said at the platform’s inauguration: “For our clients, Magellan will result in a faster and more efficient service as well as greater product quality. Magellan is a further milestone in implementing our integration strategy for Postbank and in establishing a retail banking powerhouse in Germany. With this investment, we are consolidating our position among the top retail banks in Europe and will be clearly and sustainably bringing our cost/income ratio down over the medium term in the Private & Business Client Business Division.”

All of the PBC accounts and business processes in Germany will be migrated gradually to Magellan by 2015. The new platform will then be fully operational for the more than 2,000 Deutsche Bank and Postbank branches, serving a combined total of 24 million private and business clients in Germany. Through the resulting simplification and standardisation of its IT systems and all of its processing, the bank expects to generate cost synergies already in 2012 of around €200 million.

New service for social entrepreneurs

Deutsche Bank launch new platform

Deutsche Bank is migrating five milllion customers to a new platform

German banks Sparda-Bank Hamburg and Donner & Reuschel are to trial new payment sticker technology created by technology provider Giesecke & Devrient (G&D) and supplied by systems integrator The Deutsche Genossenschafts-Verlag.

When the sticker is attached to a mobile phone or smartphone, contactless payment becomes possible even if the device itself is not NFC-enabled. The SECCOS Mobile payment sticker is certified for the MasterCard contactless payment method PayPass. This allows bank customers worldwide to pay bills at over 350,000 PayPass locations.

Cardholders using the 48 x 28 millimetre G&D stickers as a MasterCard credit card can

make payments at over 350,000 contactless PayPass payment terminals in 37 countries worldwide. All transactions made this way are listed on the user’s normal credit card bill. For amounts up to 25 euros, there is no need to enter a PIN or provide a signature, cutting the transaction time by about a quarter compared to a regular card payment and by half compared to cash payments.

mopay, a global leader in innovative payment solutions for online merchants, has successfully completed its large-scale network extension initiative in the Middle East & North Africa (MENA) region.

Covering 14 countries in MENA – Bahrain, Egypt, Jordan, Kuwait, Lebanon, Libya, Morocco, Qatar, Saudi Arabia, Syria, Tunisia, Turkey, the United Arab Emirates and Yemen – mopay is committed to strengthening its footprint in these thriving regions. Being a global leader for us means closely monitoring every single region and

thus identifying market indicators at a very early stage”, said Ingo Lippert, CEO of MindMatics, the operator of mopay. “As was the case in South America two years ago, MENA today represents a highly fertile online market environment with above-par mobile penetration. Combined with the lack of an established and trusted payment method, we see a unique opportunity to provide both local and foreign online merchants with a broadly available, easy-to-use and safe way of paying online for their MENA-based consumers.”

German banks trial payment stickers

mopay extends mobile payments portfolio

Associate Member

Efma Journal No. 234 9

Soon 2,600 ATMs in Sweden will be operated by joint company Bankomat, which is owned equally by Nordea, Handelsbanken, SEB, Danske Bank and Swedbank. Efma caught up with Nordea’s Gunilla Gullbo to find out more.

How did the collaboration start? It started when we began talks on making a joint large purchase of ATM hardware, as many banks were facing large investments at the time in order to maintain a high service level. In a declining market it’s even more important to do this as cost-efficiently as possible. Through the joint company, Bankomat, the banks can split the costs and in that way continue to offer the service and quality that customers require.

What advantages will this cooperation offer?With a joint system we can optimise the infrastructure. Bankomat will have an overview of the whole network of ATMs, making it easier to keep them in less densely populated areas, even if they are not as frequently used. Another advantage is the chance to split investment and development costs – something that is important at a time when banks constantly have to adapt to new rules and regulations. Moreover we need to be at the forefront when it comes to crime prevention. Development can now be concentrated to one platform instead of one for each bank.

Any downsides?The only possible disadvantage with the collaboration is the risk that

Bankomat is unsuccessful. If anything goes wrong, then all banks will be in the same boat since we have the same system. In order to protect ourselves against errors in the direct transactions between the bank and Bankomat we have created back-up routes, where we can run transactions against the card networks. We also cooperate with other partners like the large supermarket chains where our customers can withdraw cash if anything should go wrong.

Has it been difficult for the banks to reach a common agreement? The biggest challenge has been the fact that it is a large project and a complex job that has taken several years. Initially it took time to build trust and understand that we can in fact work together. Naturally the banks have had different opinions on some issues, but generally things have worked out very well and in a good spirit of cooperation.

What happens now?Bankomat has started pilot testing a small number of ATMs taken over from some of the banks in the Stockholm region. During the autumn the tests will be extended. If all goes well the plan is that Bankomat will gradually take over responsibility for the remaining machines, starting from November.

Gunilla Gullbo is product manager for Nordea’s ATMs in Sweden.

Q&A: GuNILLA GuLLBo

working together

BookReview

According to a recent survey of UK retailers by the British Retail Consortium, a third of all respondents said they had accepted one of the emerging payment types – PayPal, Google Checkout or Amazon Payments – during 2011. Half indicated they will be ready to by the end of 2012. This is very significant for retailers and banks because the average cost to a retailer of having a credit or charge card payment processed was 36.2 pence, for a debit card it was 9.6 pence, but for those non-card methods (including e-payments), it was 7.9 pence. These evolving payment methods are the cheapest non-cash way for retailers to accept payments.

News

theFinancialServicesMarketingHandbook:tacticsandtechniquesthatproduceResultsevelynehrlichanddukeFanelli

This second edition of The Financial Services Marketing Handbook gives an overview of strategic tools involved in financial marketing including segmentation, positioning and branding, and creating a market plan. It also looks at specific financial marketing tactics, including advertising strategies, managing public relations and personal selling, attending trade shows and seminars.Bloomberg Press, 2012, 196 p.www.wiley.com

HappyCustomerseverywhere:HowyourBusinessCanprofitfromtheinsightsofpositivepsychologyBerndSchmitt,withGlennVanZutphen

Columbia Business School marketing professor Bernd Schmitt shows marketers, brand managers and entrepreneurs how to design an authentic and successful campaign that will reach, grow and sustain a devoted base of customers. The book explores three different approaches: the feel-good method, the values-and-meaning method and the engagement method. Palgrave MacMillan, 2012, 246 p.www.palgrave.com/home/index.asp

BankingServicesandtheConsumer:AReportbythenationalConsumerCouncil

The new edition of this report, prepared for the British government by the National Consumer Council in 1983, examines money transmission, access to banking services, new technology, banking and the law, disputes between bank and customer, saving and borrowing. There are special sections on bank executor and trustee work – all from a consumer perspective. Routledge, 2012, 246 p.www.routledge.com

“ In a declining market it’s even more important to do things as cost-efficiently as possible”

Credit or charge card payment

Debit card payment

Non-card methods (including e-payments)

Interest Rates

Method of emerging

payments used within the

retail sector during 2011

Credit or charge card payment

Debit card payment

Non-card methods (including e-payments)

Interest Rates

Efma Journal No. 234

News

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18% of UK consumers would acquire #mobile wallets from banks over other providers – report http://tinyurl.com/c2suqfg @ThePaypers

European banks forecast staff cuts, consolidation and tighter credit markets in FICO-Efma survey #FICOhttp://bit.ly/QbFn0q @FICOevents

“Bank customers want to know but not to learn.” Great case study on how good customer journeys enable sales by Sören Lundgren from SEB.@Alan_Nance

9th report from Capgemini and Efma shows relationship between banks and their customers at a crossroadshttp://bit.ly/IAbyQo @ComputerProfile

Individual banks are using #MobileBanking across three generations: bank in a pocket, full-featured mobile banking, augmented mobile experience @CIBBVA

84% of people unaware they will have to pay for financial advice after #RDR http://deloi.tt/OBXudW@DeloitteUK

After over 4 decades, ATMs are still vital to the banking industry. Nice article from @jsiebenmark http://dld.bz/bEChF@retailbanking

iZettle and samsung test Android payments app iZettle, a social payments company, is working with Samsung to start testing the Android version of its app and mini chip-card reader that turns a smartphone or tablet into a mobile credit card terminal. This step means that iZettle will be the first company to provide a mini chip-card reader for Android devices.

The Android app can be downloaded for free from Samsung Apps, and during the test phase, iZettle will allocate 500 chip-card readers free of charge. Samsung owners in Sweden who are interested in

participating in the test can request a reader when signing up for their free iZettle account.

“We are pleased to offer Android users mobile payments simply and securely through our partnership with iZettle. Just like iZettle, Samsung products are all about making life easier,” said Andreas Norberg, Nordic product manager for mobile phones at Samsung.

Brazilian design outfit Edra Equipamentos has developed an eco-friendly ATM and booth powered by solar energy and composed of recycled and renewable resources.

Lighting and operation of the machine is powered by an array of PV-cells installed on the roof, which can also be fitted with a rainwater collector to grow plants and create a ‘green’ rooftop.

The booth housing the machine is coated with a Solatube film developed by 3M that blocks 80% of infra-red rays from natural sunlight to cool the interior, while the walls and ceiling are crafted from recycled plastic and renewable resources such as oilseed plants. The finished product – which arrives at a cost of US$300,000 per unit –

emerged from an architectural design competition to build a contemporary bank. The price tag is 30% higher than similar free-standing ATM booths in operation across the country, but the firm says it is in negotiations with a number of financial institutions that are keen to burnish their environmental credentials.

Brazilian firm develops eco-friendly ATMs

upcomingeventsFutureofCashConference25-26September2012,pariswww.efma.com/cash

CardsandpaymentsConference25-26September2012,pariswww.efma.com/cards

MobilepaymentsConference25-26September2012,pariswww.efma.com/mobile

40thefmaCongress:Multi-channelintegration18-19october2012,Barcelonawww.efma.com/congress

CustomerintelligenceandCRMConference25-26october2012,pariswww.efma.com/crm

loyalty,CustomerRetentionandCommunicationConference13-14november2012,pariswww.efma.com/loyalty

Mellon Technologies, a leading IT integrator in SE Europe, is rolling out the first large-scale contactless EMV project in Greece. The project has been initiated together with Greece’s second largest financial institution Eurobank.

With the contactless technology, cardholders are able to pay for goods of up to €25 with no need to enter a PIN or sign the payment slip, whereas for larger amounts the transaction may still be contactless but the cardholder will need to either enter a PIN or sign the slip. The same card (based on dual interface technology) also bears a magnetic stripe and an embedded chip so that it can also be used on all the standard card acceptance devices.

The biggest advantage of contactless payments is the transaction speed – by simply holding a contactless-enabled card over a reader, without entering a pin or signing a slip. While a typical card payment needs approximately 12 seconds to conclude, the contactless payment takes less than a second.

“This project marks the beginning of a new era for payments in Greece. We do not, however, expect to see a widespread adoption before the middle of 2013, mainly due to the large number of small retailers that are dispersed even at the most remote areas of the country. What is certain with this project, is that Eurobank sets the pace for the deployment of contactless payments in Greece, bringing the market one step closer to NFC mobile payments,” said Despina Kontou, Banking Cards Solutions product unit manager at Mellon Technologies.

Mellon Technologies supports contactless eMV in Greece

The mini chip-card reader turns any smartphone into a mobile credit card terminal

Citizen Card, a non-profit company in the UK that provides proof-of-age and identity cards, is offering an ID card that also functions as a Visa Prepaid card.

The card can be loaded through direct deposit and at retail locations and Post Offices. The actual card number identifies whether the cardholder is over or under 18, serving as a way to prevent the

card being used to pay for age-restricted goods if the cardholder is not old enough.

As with any prepaid card, you have to load money onto the card before you can use it to buy anything. As a result, there is no danger of getting into debt. Indeed, fans of prepaid cards argue that this actually helps you manage your money more responsibly.

uK company combines payment and ID card

13

At CaixaBank technological innovation is an essential tool for achieving effective results

Efma Journal No. 234

BaNker’s View

As the financial knowledge of customers increases, their demands for products and services increase too. At a

time when resources are scarce and competition is rife, only the banks that focus their efforts on competitiveness and efficiency will succeed.

Innovation is an essential requirement for competitiveness. One can be competitive by maintaining continuous improvement systems, but when the market is saturated and affected by difficulties, and when demand is high yet resources are very limited, then the mere improvement of processes is not enough.

In an environment where the intensive use of technology leads to social change, technological innovation becomes an essential tool for achieving effective results. It is essential for generating services and products that meet new requirements, and it facilitates migration to the new distribution and

communication channels that are demanded by customers.

An example of this is CaixaBank’s multi-channel strategy, which was developed over a decade ago. Today CaixaBank is a leader in mobile banking in terms of international market share, with almost two million active users. It was the first financial institution to create its own app store, CaixaMovil Store, where customers can download the applications for the services and transactions they find most useful.

Currently social networks are the latest technology to transform not only the way the internet is used, but also the way in which society and therefore, the banking sector relates and communicates. CaixaBank has created several exclusive social networks including the online communities of Caixaempresa and Club Cambra for self-employed workers and business and Club Ahora for mature customers. The impact of these has have been significant,

reducing branch operating costs and releasing employees from administrative tasks. The time saved is used for a more direct, personal and commercial service for customers. Today over 85% of our operations are carried out via electronic channels.

A new way of workingWe regard innovation as an attitude to work, which, if it is to be successful, must fulfil three conditions that define it. Firstly, innovation should be transparent, and for this to be so it must be guaranteed that all members of an organisation can contribute their ideas, without any limiting interference of any kind. Second, innovation is relevant, and all levels of an organisation must therefore be quite sure that this is a very important concept for its development. And, lastly, innovation should be permanent, i.e. it should form part of the specific character of the entity, existing on a day-to-day

basis and not just making an appearance from time to time.

Innovation also requires the talent of employees and cooperation from customers and independent experts. It is therefore the organisation’s obligation to create the circumstances for developing both attitude and talent within the organisation.

We believe that innovation is the best tool for growing efficiently and responding both to a changing environment and, more importantly, to all our customers. With this in mind, we focus our endeavours on creating the framework and tools for both. We foster innovation through our customers by finding out about customers’ needs and suggestions first-hand. Each month, we receive 5,000 customer opinions on our products and services, which help us to improve constantly. Our online banking service, for example, is the result of customer contributions in terms of design and browsing and in the customisation of the options made

available to them. Similarly, our new ATM incorporates ideas taken from more than 2,000 interviews with users.

In 2012 we went a step further by creating a new tool called Inspíranos (inspire us), an innovation platform based on the generation and management of ideas. Inspíranos is accessed through Línea Abierta, the online home banking channel, and provides our customers with somewhere to suggest ideas related to the banking environment. The ideas generated through this platform are rated by all our customers and then studied and administered by our managers in order to involve our customers in creating new products and services.

We also foster innovation in our employees by furnishing them with the necessary tools to enable them to express their ideas. This has given rise to an exclusive area for employees where they can present innovative ideas for driving business, improving processes and using current and

emerging channels. In addition to this, in November 2011, we organised the FinAppsParty, a 24 hour marathon for developing mobile applications for financial services. Over 100 people in 45 teams took part, and over 40 projects were presented. We will do this again this year, bringing together a selection of international participants from USA, Kenya, Mexico, USA and Israel.

In October 2011, la Caixa was presented with an award for being the world’s most innovative bank at the Global Banking Innovation Awards, sponsored by BAI and Finacle. This award confirms that the direction of our efforts incorporating technological developments to provide our customers with complete and high-quality services is correct, and rewards and encourages the efforts of all our employees.

Benjami Puigdevall is managing director of e-laCaixa.

The power of innovation

Benjami Puigdevall Technological innovation has become an essential tool to face and overcome the increasingly high demands of economic agents, says e-laCaixa’s Benjami Puigdevall.

BaNker’s View

15Efma Journal No. 234

interpreting, communicating and responding to illuminate customer’s wants and needs and help identify potential service gaps. Feedback can be direct, in the form of formal customer surveys, focus groups, and unsolicited verbal or written customer comments. It will be a mistake to overlook the value of feedback available through indirect means such as social media and market studies.

After receiving the feedback financial institutions must have a means to deal with and respond to it. By tracking problems and resolving the root cause, banks can learn more about their customers and their wants and needs, turning an unhappy customer into a loyal supporter eager to do more business.

Customer satisfaction measurementConsumer lending companies typically measure customer service initiatives and performance using traditional

call-centre metrics and customer surveys, including average talk time, abandon rates, average speed of answer and call quality. While these methods provide information about customer interaction efficiency, they do not assess effectiveness. To obtain a deeper understanding of customer perceptions, banks have to implement more sophisticated methods of measuring customer satisfactions. This can be through reviewing calls, assessing transfer rates, measuring recommendation feasibility or using customer effort scales.

Developing better customer service strategyCustomers have different access points to consumer lending organisations, all of which are important. Poor service delivery in one channel often results in channel switching, which increases operational expenditure and results in customer frustration.

Data integration across channels is critical to delivering a superior experience. When customer information is consistent and shared across channels it delivers a satisfying experience for the customer and provides banks with a clearer, single view of customers, allowing opportunities for proactive selling and services. These practices help companies to retain customers and reduce costs for customer interaction.

While banks have weathered its share of storms, nowadays they can use technology to sustain growth and attract new loan customers. The latter do not want to sit through a lengthy, manual process to obtain a loan. By harnessing new technologies, lenders can expedite the process – and, potentially, profits too. Technology will allow lenders to provide speedier online applications, enable collaborative ventures with insurance companies, and receive payments on the web.

In-depth revision of your process To enhance the customer experience all processes should be viewed through the prism of customers to determine how they will perceive actions and how it will affect their experience. This starts when the customer walks through the door and throughout onboard, decision making, and fulfilment. Consumer lending companies need to continually update processes to align with the latest service requirements. There could be external factors, such as a shift in the financial climate, or internal ones, such as consumer finance acquisitions or servicing transfers. Customer journey maps are increasingly being used in other industries as a way to clearly identify the processes that the customer goes through within the organisation and the personal touch that drives satisfaction or potential frustration.

Pavlin Bonev is bank product specialist at Alpha Bank Bulgaria.

Alpha Bank uses technology to sustain growth and attract new customers

A s the consumer lending industry enters a new era – one in which customers carry significantly more

weight in developing a business concept – financial services organisations need to turn their focus to the customer experience. In order to remain competitive, banks need to take their cues from the customer and respond to consumer preferences, perspectives, tendencies, and needs. By enhancing customer experience, institutions open the door for increased customer loyalty and retention, more opportunities for cross-selling and generating new customers – all of which can attribute to greater profitability and better positioning in the marketplace.

While many institutions have already rolled out different strategies aimed at enhancing the customer experience, such as modifying the branch interior, mobile banking apps and social media, it is important to take

a step back and make sure that the enhanced customer experience strategy corresponds to the true need and wants of the customer base. As consumers move through various life stages, their financial need change along with their circumstances. It is important to know who your customers are and how they align to your products and services.

Gaining insight into the dynamics of a customer’s household is as important as knowing and meeting the needs of the individual. More households today are considered ‘non-traditional’ and consumer lending companies should adjust their approaches accordingly. Customer analytics will increasingly play a vital role in better understanding the different customer segments and the product-to-consumer-to-household mapping. While having a reliable customer database is challenging, especially for institutions that rely on legacy system that were developed many years ago, it is always better to carry out analysis

with a limited amount of data than to do nothing until a robust customer data warehouse or CRM applications is fully implemented.

It is important not only to be able to differentiate customers by their unique demographic attributes, but also to develop an understanding of the existing and potential profitability that they can generate. While it is difficult to calculate the precise value an individual or household will bring to an organisation within the foreseeable future, calculating an estimated customer and household lifetime value has proven to be a useful tool when performing relative comparisons across different segments. It also helps to justify investments on segments that might not be profitable in the short term but that can be significant revenue drivers in the future.

Listening to customers Customer feedback has proven to be an effective means of capturing,

Pavlin Bonev

a new concept in consumer lending

with many customers moving away from face to face contact, and towards online and mobile channels, banks need to make sure that every interaction counts. alpha Bank’s Pavlin Bonev highlights the importance of the personal touch.

Payments cover story

When two worlds collide . . . . . . . . . . . . 18

Going global . . . . . . . . . . . . . . . . . . . . . . 21

Floating from hubs to the cloud . . . . . . . . . 24

Getting value from electronic payments . . . 26

Understanding the game . . . . . . . . . . . . . 28

It’s time to get smart . . . . . . . . . . . . . . . . 30

Going mobile . . . . . . . . . . . . . . . . . . . . 32

Smarter, faster and more secure . . . . . . . . 34

The reality of supply chain finance . . . . . . 36

Aligning strategy and opportunity . . . . . . 38

Unprecedented changes are sweeping the payments industry. There is growing competition and pricing pressure, increasing regulation, an unstable macroeconomic outlook and changing customer demands. Only those organisations that are able to adapt, transform and link their businesses to more efficient operating models will prosper in this emerging payments landscape.

In this issue’s cover story we find articles that explore the payments universe, examining emerging trends and the growth of payments revenues across different markets . We also find a range of perspectives on emerging payments methods such as NFC and mobile .

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A s a concept, the smartphone has been with us since the early 1990s . Mainstream acceptance

took a firm hold in the late 2000s with the launch of the Apple iPhone and the emergence of true mobile broadband . The response from other players across the mobile ecosystem – perhaps most notably from global players such as Samsung, Google and Microsoft – has added fuel to the fire, creating a plethora of smartphone choice to match the whirlwind of consumer demand . By the final quarter of 2010, smartphones were selling globally at a rate of more than a million a day, up 94% on the fourth quarter of 2009 and equating to almost a quarter of all mobile handset sales worldwide .

The near-ubiquity of high speed connectivity has been hugely instrumental in determining the way in which these devices can be used, dramatically boosting their popularity . Through a combination of WiFi and 3G mobile broadband,

smartphones can be constantly and universally interconnected . Within three to five years, we are set to see the progressive emergence of yet more capable wireless network technologies, combined with a whole new level of inbuilt network intelligence such as location and context capabilities; setting the scene for a whole new range of services that work with smart and connected devices .

Today, the new generation of mobile devices is fuelling big changes in the way people behave, and the worlds of payment and mobile are well along the path to convergence . Demand from consumers is high and the rate at which devices are being brought into the market suggests that we will not be faced with a long tail of legacy phones with limited capability . Consumer behaviour is beginning to shift: contactless technology, as well as providing the infrastructure for future NFC implementations, can also drive the habit to part from cash payments and move to a new form

of spending . Consumers are ready not only for mobile payments at the point of sale but also for easier money management, e-commerce transactions and tailored loyalty campaigns – all enabled by the evolution of mobile technology .

The mobile device, in all of its different guises, seems certain to evolve into a mass market payment and acceptance mechanism . Embedded with secure payment details, NFC-enabled devices will initiate and authenticate contactless payments, and give a two-way link between consumers and their financial services provider . And consumers will expect to use these new payment channels as fully as they do today either online or in the real world .

The future of smartphones and NFC are clearly intertwined . Both the payments and mobile industries are innovating at an impressive rate and are visibly delivering on the promise of high contactless availability and smartphone variety .

When two worlds collide

As a new generation of mobile devices is fuelling big changes in the way people behave, the worlds of payment and mobile are well along the path to convergence. visa’s Sandra Alzetta tells us more.

Today’s momentum will ultimately lead us to unlock new services that will offer consumers even more innovative, convenient and flexible ways to pay and allow them to manage their money in the way that best suits their lifestyles .

Making the promise a realityIn order for mobile payments to become mainstream there needs to be a range of high-quality products on the market for people to choose from . Today, NFC is available in world-leading devices such as the Samsung Galaxy SIII: in the future, we expect it to be integral to almost every mobile device .

The convergence of these two very different worlds has also required new partnerships to be forged between payments companies and the mobile world . Those relationships are now in place and at Visa we are working with our members and with partners including Vodafone, Samsung and Telefonica to help them bring safe, secure mobile payment services to market .

Acceptance is another critical factor: in order to make this technology mainstream, consumers need to be able to use it in all the stores they’re used to visiting . This is

where retailers have a critical part to play . Our work in developing the contactless infrastructure – which has been underway since 2007 – has made enormous headway in this area and we are working to enable further mass market rollouts over the next twelve months and beyond .

Finally, there is the question of consumer habits . People need time to adjust to new technologies . We know from our research and the trials we’ve conducted that people who use contactless cards love the experience and the convenience; once someone has had a contactless

“ the future of payments is about a wide range of payment and money management services that reflect the way consumers behave today”

It is expected, by 2020, that half of all transactions over the Visa network will be from a mobile device

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card, they’re much more open to mobile payments . The rollout of contactless cards has an important part to play here; it helps people adjust to this new way of paying and also gives retailers the incentive to make sure they have contactless terminals at the point of sale .

Why mobile payments excite usContactless payment at the point of sale excites us because of the speed, security, convenience and reliability that it brings to the high street . But it’s about much more than the point of sale . The future of payments is about a wide range of payment and money management services that reflect the way consumers behave today . Whether it’s the ability to send money quickly and easily to a friend, an easier mobile interface for individual bank accounts, or an easier e-commerce shopping experience, the mobile device has the potential to fundamentally change the way people pay and manage their money .

In the next ten years we will see the creation of an entirely new shopping experience, where the high street store is integrated seamlessly with the personalised device in the shopper’s pocket . From the mode of checkout to deals and offers, the opportunity is enormous for consumers; for retailers; and for financial institutions around the world .

The speed of changeVisa Europe has been trialling mobile payments around Europe for some time . One of the most high profile was our mobile payment trial on the Samsung Galaxy SIII at the London 2012 Olympic and Paralympic Games . We equipped 1,000 devices with a limited-edition Olympic themed Visa payment application allowing trialists to make fast and easy payments at any contactless terminal in Europe . We expect to see the same kind of services coming to market this year, as well as more mobile services and contactless card rollouts from major financial institutions and

retailers . We know that availability creates enthusiasm: our research among contactless cardholders tells us that 73% believe that contactless technology will become more commonplace than cash .

We have taken the first big steps towards a fundamental shift in the way people pay: the growth of new payment technology will ultimately drive the creation of a less cash society . By 2020, we expect 50% of all transactions over the Visa network to be from a mobile device .

The futureWe are already surrounded by sensors and screens, all seamlessly integrated into our environment and the objects we use on a daily basis and linked together through a digital network . In tomorrow’s smart environment, any object with a digital heartbeat could be networked, communicating with other devices and enabling a multitude of functions . Components of this future are smart homes and appliances, integrated with smart power grids; smart transport networks, integrated with intelligent cars and road systems; and, of course, security and access control . This future will provide boundless opportunities for payments, often triggered automatically and underpinned by NFC; for example, paying a motorway toll or entering a central business district (already a reality in some countries), or even paying for your next supermarket delivery from a digital window on the front of your fridge .

Today’s momentum is sure to herald an exciting start to 2013, and will ultimately lead us to new services that will offer consumers more innovative, convenient and flexible ways to pay and to manage their money in the way that best suits their lifestyles .

Sandra Alzetta is senior vice president and head of mobile, contactless and innovation strategy for Visa Europe.

The growth in global non-cash payments volumes is continuing at a healthy pace, with the most rapid

expansion occurring in developing markets . Data suggests the growth is continuing despite ongoing weakness in economic growth and stresses in the Eurozone, according to research for the upcoming World Payments Report (WPR) 2012 from Capgemini, RBS, and Efma . At the same time, customer-focused innovation is a key aspect of transformation in the payments landscape, influenced to varying degrees by the ever-expanding range of regulatory and industry initiatives .

The global use of non-cash payments instruments (direct debits, credit transfers, cards and cheques) grew by 7 .1% to reach 283 billion in 2010, the most recent year for which official final data is available for all countries . The growth in volumes was far faster in developing markets than in developed ones, but, even in developed markets, the growth in non-cash payments volumes outpaced the rate of growth in gross domestic product .

Regulatory and industry initiatives help shape PSP innovation activity The World Payments Report 2012 looks again at the wide and ever-growing range of key regulatory and industry initiatives (KRIIs) shaping the payments landscape . This year’s research includes online survey or personal interview responses from more than 50 payments executives, and focuses specifically on the effect of KRIIs on innovation .

Insights from interviewed and surveyed payments executives suggest that payment service providers around the world, and especially banks, are clearly challenged by the high level of regulatory focus on payments . However, contrary to the common perception that key regulatory and industry initiatives are tantamount to constraint, we find innovation often emerges as the effects of KRIIs converge – especially in areas such as payments processing and servicing, as well as standardisation and security .

Certain KRIIs have great potential to result in substantive change in the payments landscape in ways that are highly visible to the customer . Initiatives around contactless cards

and near-field communications (NFC) offer a prime example . An increasing number of smartphones are being equipped with NFC technology, suggesting that the payments infrastructure will need to further evolve to handle this emerging form of transaction . Numerous NFC innovations are already being piloted by bank and non-bank players, including Google, PayPal, MasterCard, Visa, and Apple .

In practice, though, certain KRIIs create more direct value than others for customers, and PSPs can leverage those KRIIs that most affect users to enhance customer satisfaction . Consider m-payments, for instance .

M-payments enable users to execute payments anywhere, anytime . While many current initiatives are focused on developing smart phone platforms, the next stage will center on enabling other mobile devices with payment capabilities, helping to increase adoption—and boosting the ability of emerging-economy populations to access the financial services system . However, m-payments also have a substantial impact on payments processing

Going global A new report from capgemini, rBs and efma shows that global payments are making gains, despite volatility and regulatory impacts. capgemini’s Jean Lassignardie and Simon Newstead from rBs tell us more.

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by PSPs, so innovation requires significant commitment and evolution .

Ultimately, payments industry transformation is likely to be driven fastest and farthest by those KRIIs that have direct innovation objectives and provide mutual benefits to both PSPs and PSUs . ‘Quick-win’ opportunities for innovation hinge on those KRIIs that have a tangible impact on users and a beneficial (or at least manageable) impact on processors .

Many banks are increasingly shifting their innovation focus to customer centricityPayments innovation has clearly shifted in the digital age to become more customer centric . This is partly because non-bank PSPs have championed customer-focused innovations of speed, convenience, and cost – targeting specific areas of the value chain while leveraging existing banking platforms . This approach has been highly successful, not least because non-banks have been able to leverage intrinsic advantages, including new technology, lack of legacy-system constraints, and a relatively small compliance burden .

Banks, after sustained success in driving internal improvements for better efficiency and cost-effectiveness in existing operations, are also focusing more squarely on customer centricity . Hurdles to innovation remain, including ubiquitous barriers related to

governance, technology, and regulation . However, probably most challenging is the need to build a strong payments-specific business case, even when the return on investment is difficult to measure . Banks’ efficiency improvements are typically measured in tangible financial terms, however some valuable customer benefits are difficult to quantify in monetary terms . For all PSPs, and especially those facing diminishing room for incremental operational improvements, the most important dividends in today’s evolving payments space arguably lie in customer loyalty, retention and acquisition .

Many banks are also now targeting innovation in specific areas of the payments value chain . This is arguably a more cost-effective approach than attempting to innovate across the entire value chain as – if deployed successfully – it promises customer-focused innovation in areas of core competency and existing demand . Accordingly, the WPR 2012 survey confirms banks are likely to increasingly focus on separate activities, such as proposition development, payments instruction, operations processing, and account reporting and invoicing .

Successful payments innovators will have a granular understanding of the needs of their target customer segments, and their own innovation capabilities . In particular:

1 The key success factors (KSFs) for customer-centric innovation by segment, for both retail and corporate clients

2 Their own innovation readiness, measured in terms of their capability on the ‘Innovation Bricks’ that can be combined and aligned to build an ‘Innovation House’ – a construct that comprises four main domains: financial; stakeholder engagement; culture/governance; and internal process and technology .

To innovate successfully going forward, while still improving the efficiency of processes over time, PSPs will need to assess and strengthen these innovation foundation elements proactively, and select/create the most relevant proposition based on various ‘value spaces,’ that is payments propositions that resonate with retail and/or corporate clients .

ConclusionGlobal payments volumes continue to show robust growth, especially in developing markets . Evolving customer needs, regulation, and technology are all combining to drive innovation in the payments landscape, thereby changing the payment instrument mix and driving substitution . Mobile payments may be nascent, but by 2013 volumes are expected to have posted sustained gains of more than 50% a year in the 2009-13 period .

‘Innovation Bricks’ within the ‘Innovation House’

Financialspending a tangible percentage of revenue on greenfield innovation in payments

Dedicating a tangible percentage of total It investment to new payments technologies

Defined financial goal for revenues from new products

Organisational Culture/GovernanceLeadership team for innovation (e.g. chief Innovation officer)

High board-level commitment

smooth collaboration among product teams

employee performance metrics that reward innovation

Articulated innovation strategy

Internal Process/Technologystrong maturity of ideation process

Highly mature industrialisation process

Highly mature innovation-specific training programme

Flexibility of legacy/core processing

Integration of systems across products (e.g. via payment hubs)

shorter time-to-market for new products/services

Customer and Stakeholder Engagementstrong (real-time) feedback mechanism from customers

Product development strategy highly driven by customer needs (prioritisation)

Defined goal of co-creation of products with customer

Process for pilot runs with customers

collaborative dialogue with regulations

collaborative dialogue with merchants

collaborative dialogue with competitors (Banks and Non-banks)

Innovation by both banks and non-banks is being driven directly or indirectly by regulatory and industry initiatives, and is keeping the customer firmly at the centre of the proposition . As banks hone their customer propositions, while continuing to improve processes and internal efficacy, they will need to be increasingly mindful of the ‘value spaces’ in which they are positioned to thrive .

Those value spaces hinge on activities such as processing, securing, managing, storing, changing, lending, and moving money (i .e ., making online/offline payments easier), as well as propositions such as ‘analysing’ money by delivering information to corporate and retail clients, ‘timing’ money by offering real-time visibility into payments balances and transactions, matching money flows (i .e ., invoices and supply chain

information), managing the different types of payments risk (liquidity, counterparty, etc .), or even ‘being’ money by creating a new currency such as closed-loop payments in virtual environments .

Notably, much innovation might involve looking outside the banking industry to find partners with which to collaborate on specific, niche, customer-focused propositions .

The World Payments Report 2012, will be available to download from www .wpr12 .com starting October 17th .

Jean Lassignardie is chief sales and marketing officer for Global Financial Services at Capgemini. Simon Newstead is managing director of market and business strategy for Financial Institutions Global Transaction Services at RBS.

“ Payments innovation has clearly shifted in the digital age to become more customer centric”

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The payments industry has gone through major changes since 2005, under the combined effect of several

factors . New regulatory systems have been established, such as the Payment Services Directive and SEPA in Europe, and the European Commission is also offering incentives to encourage the development of electronic payments . At the same time, the trends in mergers and acquisitions have continued, leading to a concentration of players along with newcomers who have entered the market as well, including operators or payment institutions offering alternative means of payment . Cost cutting is also spurring new ways of working, while the development of technologies has spurred innovation .

These changes have led to the faster development of payment processing information systems . Traditionally designed as silos, the first stage of rationalising these systems consisted of progressively replacing them with off-the-shelf software packages . The

high level of investment required to deal with these changes in the payment industry forced players to seek economies of scale by setting up hubs or ‘payment factories’ to centralise and pool payments for one bank or one banking group, or even sometimes for competitors .

The components of a payment services hubThe first component of a payment services hub is the payment engine, which processes all instruments of payments generically .

Payment services are the second component of a payment services hub . They supply the services expected by all players in the chain of payment .

The payment engine and the payment services rely on a payment data store to provide storage for all of the data linked to payment orders (payments issued) and payment advice notices (payments received) . So the payment data store is the third pillar of a payment services hub .

The move towards payment warehousesThe changes in payment information systems have often led to a shift from a siloed structure to an architecture with functional layers . This solution makes it possible to pool services among payment instruments . It also makes it easier to progressively roll out or upgrade thanks to loosely coupled layers . However, when an end-to-end vision is lacking this decoupling can lead to the fragmentation of services offered . It also results in redundancy due to the multiplication of occurrences that the same payment is stored, triggering the risk of a bottleneck in processing . Data is also an issue . The sheer quantity of data required to fill all of the requirements of the various players in the payment chain has become vast .

With all this in mind, from this point on, a major step forward for payment services hubs will consist of pooling storage of payments by going from payment data stores to payment warehouses .

These payment warehouses will be capable of capturing flows at different stages and particularly the furthest upstream possible . They will store the payment orders and advice notices and the related media in the form of payment objects made up of the payment data and all related events and documents in classic XML format . These payment warehouses will grant access to all relevant data – and only relevant data – to anyone who needs it, which will be provided according to several different protocols . Warehouses will also offer an entire range of updates . In particular, payment warehouses will thus have the capacity to supply several payment data stores .

The move to the cloudThanks to the ability payment warehouses have to capture and transmit data flows at various stages of their life cycle, they can be shared by different players in the payment chain with each one exploiting the data it needs when it needs to . This means that payments will have reached the cloud .

But this will only be true on the condition it is possible to control and guarantee responsibility for a payment based on its stage of execution .

When it does come true, all payments will be stored upon arrival in the same payment warehouse . Even so, they will not necessarily all be made available in the same sub-systems of the bank’s payment information system .

Another possibility is a common payment warehouse shared between banks and major corporations . If payments are acquired at source, they will first be the responsibility of the corporation (or perhaps the subsidiary and then the group) up until a certain stage before moving under the control of a bank (or the bank’s various departments successively) or being transmitted to other banks that do not share the same ecosystem .

There are a variety of operators capable of hosting payment warehouses . Banks and banking groups can initially use them as leverage to rationalise their information systems . They can also represent an opportunity for them to

offer new services to their customers by exploiting the wealth of data owned . But other operators outside of the banking industry may also position themselves on this market . By gaining the status of a payment institution, some of these operators will want to add on payment execution services performed on behalf of their clients .

Creating valueBuilding payment warehouses is one of the paths that will lead payments into the cloud . Cloud computing will serve to rationalise the payment industry . Already a vehicle for new offers, it will free up resources to create value based on new payment services which are definitely at the heart of business challenges in the years ahead .

Bernard Ramé is senior solution manager for payments at Sopra Banking Software.

Floating from hubs to the cloud

over the last few years, payment information systems have gone through immense changes, moving from silos to hubs. sopra’s Bernard Ramé questions whether this movement is over, or whether the advent of cloud computing will constitute the next stage of change.

“ cloud computing will serve to rationalise the payment industry”

• It allocates a status to each payment it processes and updates this status based on events of different kinds: receipt of payment, time-related event, human interaction, interaction with an external system, change in status of another payment

• It reports any changes to these statuses to all players and systems that are relevant to them

• It has built-in sequencing and process orchestration templates for functions and services – so called ‘process flows’ – which are both ready-to-go and scalable or reprogrammable in order to

meet tailoring and customisation requirements related to the competitive nature of the payment services market

• It makes it possible to program new process flows for other means of payment, in particular to be used in new geographic locations .

Features of a payment engine

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The predominance of cash for small value payments and the almost complete absence of cheque use by individuals are

the prominent features that distinguish payment practices in Japan . This may be because of Japan’s safe social environment and low theft rate, which allows people to carry larger amounts of cash . In consequence, notes and coins in circulation as % of GDP are largest among Committee on Payment and Settlement Systems (CPSS) countries, according to recent findings from BIS .

In Japan, credit transfer and direct debits have been widely accepted as the preferred means of payment . Credit transfer includes paying wages, pensions, dividends and tax refunds . Direct debits are used for paying rent, utility bills, credit card payments, insurance premiums and other regular monthly payments . There are several reasons for this, convenience being at the top of the list . Japan has made a significant investment in payment services which has improved the ability for citizens

to cash and bank deposits through the domestic fund transfer system .

Developing B2B paymentsPaper bills are mainly used for corporate payments . However, the number of transactions has been declining since 1990 to avoid stamp tax duty and the cost of handling . Contrary to a cheque, bills (promissory note documents in which the drawer promises to pay the amount shown to designated receiver on or after the future date specified on it ) allows the drawer to extend payment date based on the creditworthiness of the drawer (company) . A drawer can issue bills even if the drawer does not have sufficient money at the date of issuance . Bills are a promise to pay a certain amount at future dates . Therefore, bills have two means: payment and finance .

In Japan, the Electronically Recorded Monetary Claims system (ERMC) was introduced under the Electronically Recorded Monetary Claims Act, which

came into force on December 1, 2008, for the purposes of (a) digitalising bills and facilitating accounts receivable financing via the internet, (b) promoting the liquidation of claims, and (c) facilitating business operators’ financing activities, especially SMEs .

From the late 1990s to the early 2000s, the financial crisis rocked Japanese banking systems .

Banks became hesitant to extend loans, especially to SMEs . During the same period, large companies gradually replaced bill payments with fund transfer services, in order to save costs from stamp duty, storage and delivery, and the risk associated with loss of bills . The use of bills shrunk to a tenth of what it was in the 1990s .

As a result, SMEs now have limited options for finance . Bills were an important part of complying with a receivable finance scheme that is required to confirm the holder of claim or assert a claim against a third party stipulated under Japan’s Civil Code . An alternative was clearly required – and ERMC fitted the bill .

Getting value fromelectronic payments

Japan’s payments system has been developed based on Japanese citizens’ strong preference for using cash, explains Akira Yamagami from the NttData Institute of Management consulting.

ERMC is a new type of claim, which uses neither bills nor nominative claims . Instead it is an electronic record which not only eliminates the shortcomings of bills and nominative claims by ensuring the security and liquidity of transactions .

There are many advantages of ERMC:• Enhanced negotiability of

accounts receivableERMC-enabled third parties can readily confirm the existence of claims and ascertain whether they have already been assigned or not . SMEs will ensure diversification of their financing options if finance secured by accounts receivable becomes as prevalent as bill discounting nowadays . For banks, ERMC enable SMEs’ credit risk to be accepted

• Drive operational efficiencyThe digital linkage of ERMC and accounting systems may significantly improve SMEs’ financing operations . Banks also have great potential to reduce their cost by converting their own loan receivables into electronic claims . Banks will be able to deploy paperless lending through ERMC, offering online loans whereby loan agreements are stored digitally

• Facilitate new financial productsThe use of electronically recorded information will also contribute to the development of new schemes

for syndicated loans distribution, factoring and asset-backed lending (ABL) . The creation of a secondary market for electronically recorded monetary claims is also expected to bring new types of investable financial instruments .

ERMC goes globalThe Financial Services Agency (FSA), a party in drafting ERMC, is considering whether to introduce the service to emerging Asian countries as a social infrastructure . This would bring several advantages . ERMC would facilitate SMEs in emerging countries by digitalising account receivables and trade accounts payable, improving financing measures by allowing SMEs to obtain immediate liquidity . Over the long term it would foster an interconnected domestic supply chain in these countries . Overall it would improve the stability of the financial structure and enable emerging countries to transform from their current export- and assembly-economy to a domestic demand-driven model .

Delivering new value In the B2B payment space, a digital agreement among stakeholders has the potential to be a catalyst of business process innovation for the financial services industry . The ERMC initiative marks the first steps of delivering new value through the digitalisation for both payment means and agreements .

Akira Yamagami is partner and head of the global consulting division for the NTTData Institute of Management Consulting.

“ the erMc initiative marks the first steps of delivering new value through the digitalisation for both payment means and agreements”

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Nobody with an interest in mobile financial services can have failed to notice the volume of excitement

currently surrounding the mobile wallet . Nonetheless, opinions remain divided . Detractors say it will be years before the technology is mature enough to warrant mass market adoption, while devotees insist we will be abandoning our traditional leather wallets far sooner than we think . Who is right?

The disappointing truth is that, despite its infancy, the market is already far too complex for anyone to predict the future with any real degree of accuracy . What’s worse is that for many stakeholders, confusion reigns . It is clear that mobile wallet technology holds huge commercial potential for merchants, banks and payment institutions, payment scheme owners, mobile network operators, device

manufacturers, service providers, operating system providers and

a considerable number of other stakeholders . What is less clear, however, is how all these parties will work together to achieve commercial success from the technology .

The ‘development ecosystem’ is both fragile and fragmented and yet the market is already gathering speed . With the first wave of solutions already starting to appear, stakeholders seeking to establish a seat at the table need to get to grips with the market’s shifting dynamics, and fast . Mobey Forum believes that simply providing an ‘easy way to pay’ will not be sufficient to drive mass market adoption of mobile wallet solutions . The technology’s strength will come from the variety and allure of additional services and the unique value-based content it is capable of providing .

With this in mind, it is clear that the number of potential stakeholder groups that can benefit from a having a piece of the action extends far beyond those in payments services alone . As things stand now, the most

Understanding the game

As the hype around the mobile wallet continues to build, the market is awash with predictions and speculation. But amid the furore, Mobey Forum’s Amir Tabakovic takes a more considered view.

prominent stakeholder groups are exhibiting three kinds of behaviour, each reflecting their own distinct commercial situations .

Firstly, some stakeholders are vying to re-establish their traditional roles in the new digital ecosystem . Banks, for example, with their existing payment infrastructure and services, will fulfil a vital payment processing role in the new ecosystem, just as they did in the ‘old world’ . Since the banks already hold customers’ financial accounts and are established issuers of payment cards and other instruments, they will wish to retain and extend this role throughout the customer’s transition to the mobile wallet .

Secondly, the stakeholders that support and enable the mobile wallet’s technical infrastructure are now seeking to establish further commercial opportunities . Mobile network operators, for example, will play a crucially important role in determining the success of the mobile wallet . As well as already holding direct relationships with consumers, they also control the mobile network and SIM card technology which will support the operation of the mobile wallet .

To complicate matters further, the third stakeholder group, the digital giants like Google, Apple and PayPal, refuse to limit themselves to any ‘traditional’ role at all, instead investigating all possibilities to compete directly with traditional stakeholders in order to capture greater market share . By opting to ‘go it alone’, these organisations are developing their own proprietary mobile wallet ecosystems and support online value-added services that they will deliver directly to their vast numbers of existing customers . For these players, mobile wallet technology is ‘just another channel’ to deliver services, as well as a powerful new means of obtaining mobile-specific, commercially-relevant customer profiling data .

So, by introducing mobile technology into the consumer’s ‘traditional wallet’ environment, we have an ecosystem where there are dramatically more stakeholders in play than before . Given the strength of the commercial opportunity, many traditional stakeholders also have heightened aspirations for control and influence . So where does this leave banks and other financial institutions?

Advice for banksFirst of all, banks should be aware of their strengths – they still hold the trust of the consumer and have the credentials and pedigree needed to encourage both consumers to adopt, and merchants to accept, the new technology . This puts banks in a very strong position .

Nevertheless, at the same time there is a clear need for all stakeholders, including banks, to accept the dynamics of the new digital age . Those that do, face a real opportunity to innovate, deliver value and demonstrate to consumers that they are still a financial force to be reckoned with, despite the transition to the digital arena . However, banks now need to mobilise quickly in order to keep pace with the new players and regain visibility in the mobile payment value chain .

Cooperation is essentialThere is much that still needs to be achieved before the mobile wallet

can realistically be expected to become a widespread success . Much of this work will need to be done through cooperation and begins with the development of a clearer understanding of the complexities underpinning the technology . Rivals will need to set aside their differences and work together to develop commonalities across a number of areas in the mobile wallet ecosystem if the overall mobile wallet proposition and user experience is to be sufficiently attractive to consumers .

Nevertheless in the near future we expect to see the most prominent stakeholders continue to develop proprietary mobile wallet solutions within the boundaries of their own individual ecosystems . It will be a challenge for banks and payment institutions to assess which – or how many – of these solutions they should align themselves with as the technology continues to evolve .

It is important to keep in mind that the consumer will ultimately decide the fate of mobile wallet technology, only ‘opting in’ when they decide that there is sufficient value on offer to justify a change in their behaviour . It is now the job of the banks to ensure that they are present and visible amongst those stakeholders delivering the winning solutions .

Amir Tabakovic is chair of the mobile wallet Taskforce at Mobey Forum.

“ the technology’s strength will come from the variety and allure of additional services and the unique value-based content it is capable of providing”

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From a paltry US$60 billion two years ago, mobile transactions are predicted to grow at a compound annual

rate of 95% and reach US$1 .13 trillion worldwide in 2014, just two years from now .

The ingredients for an explosion all seem to be there . Around the world today, mobile phones outnumber bank accounts by a factor of three or four . Mobile payments only represent less than 1% of all global payments .

E-commerce is now arguably mature and yet physical cash payments, although they account for less than a third of all transactions by value, continue to represent a massive 90% of all transactions by volume . Add in the potential for mobile money in emerging markets where poor infrastructure and transparency make cash expensive to store and to move, and the argument for the upside looks overwhelming .

But for developed markets, where mobile money is more a choice than a need, a drumbeat of scepticism is arising from some corners . Jordan Crook, the author of an article on AOL’s Techcrunch website, may have captured the essence of this view with the headline ‘NFC is great, but

mobile payments solve a problem that doesn’t exist .’ Until they no longer need to carry a physical ID with them, consumers are not going to get rid of their wallets, Crook reasoned . And since the actual motions required to pay with a smartphone are no simpler or more convenient than those for paying with traditional plastic, users will have no incentive to switch to a system that may not even be accepted by all merchants . Accordingly, the Crook suggests the only real value for the consumer of paying with a smartphone is that it’s cool .

Does this mean all the would-be players – from startups to mobile network operators, internet giants or major banks – are deluding themselves with all these mobile money pilots and grand plans?

It is true that we can’t assume it will all just happen . The ingredients for the explosive mix are there, but so far the spark is missing . The value proposition for customers must be overwhelming, and there needs to be a clear set of incentives for merchants, issuers, associations, network operators and equipment manufacturers .

All members of this ecosystem – including banks, as stewards of the payments system – need to

collaborate . But what good will this do if, ultimately, end-users aren’t drawn to mobile payments?

A manifesto for smart moneyIf all we are attempting to do is to pack the payment power of a debit card or a credit card into the physical container of a smartphone, the sceptics may ultimately be proven right . For all their intellectual appeal, mobile payments as we imagine them for developed economies may never come to pass .

In their simple comparison of the motions required to swipe a plastic card versus tapping a phone or scanning a barcode, the critics are not even factoring in other aspects of real-life usability and speed .

Unless you intend to walk around with an open digital wallet in your pocket, you will need to enter a numeric PIN or an alpha-numeric password before you can pay with your phone at the point of sale . You may already need to input a PIN for plastic EMV cards today, but at least you do not have to wake up the point of sale terminal as you do with your phone – which you may even need to unlock before you can wake it up and launch your mobile wallet app .

It’s time to get smartthe true value smartphones bring to money isn’t in their mobility, but in the ‘smart’ part of their name, says citi’s Andres Wolberg-Stok .

So, what will prove sufficiently valuable – valuable in the broadest sense, emotionally as well as economically – to seduce consumers into using mobile money and recommending it to each other in a viral phenomenon that drives true scale in advanced economies? The answer may be to forget mobile money, and focus on smart money instead .

To focus on the mobile aspect of mobile payments is to mistake the tool, the vehicle, for the goal or the destination . The reality is that a plastic debit or credit card is already just as mobile as your mobile phone . It already remains as close to you, day and night, as your phone . Mobility is simply not the real value-add .

The true value smartphones bring to money isn’t in their mobility, but in the ‘smart’ part of their name . A smartphone can allow us to do many things for consumers that simple plastic can never aspire to – but mobility is not among them .

What constitutes ‘smart’ for a form of payment? Here are a few angles, on an increasing scale of customer value:• Show me all my options – all

the accounts I can spend from, including checking, credit, and any rewards points or programmes in which I may be participating

• Show me how much is open to spend or redeem on each of these instruments

• Once I have spent, show me my new balances in real time – full integration with mobile banking

• Let me know if there is a beneficial relationship (for me) between one

of those instruments and either the retailer in whose store I am shopping, or the product I am buying, or both . Are there any discounts on offer a) for me, b) here and c) now if I pay with this card rather than with this other one? Any special opportunities to earn or spend rewards?

• Show me in real time whether any of my means of payment are offering me a payment plan for my big-ticket purchase

• Compute all of the above and give me an objective ranking of all the potential combinations and permutations available to me – suggest the best deal for me as a consumer, with no regard to who ‘owns’ this mobile wallet .

• Keep all of this simple and convenient, and integrate it with my broader social, professional and financial world .

Does your plastic card do that? No, I didn’t think so . Because that is smart money, not mobile money . With all respect, until now, money has been dumb as a plank . What smartphones now give us the means to do is to start adding some of that intelligence .

We can transform money . We can really make your money work for you . We need to make it smart, and that will be much more useful than merely trying to make it mobile – which it already is .

Andres Wolberg-Stok is global consumer mobile and tablet banking director at Citi.

“ A smartphone can allow us to do many things for consumers that simple plastic can never aspire to – but mobility is not among them”

Efma Journal No. 234 33

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Tell me about Etisalat Mobile Commerce. What did you aim to achieve with the solution?

During 2011–2012 Etisalat successfully introduced the Mobile Commerce portfolio of services across a number of African and Middle East countries . Service was introduced in partnership between Etisalat, MasterCard, Standard Chartered Bank and Oberthur Technologies .

Etisalat enables end-users to use mobile phones as a payment instrument truly anywhere, anytime without geographical borders in a highly secure, convenient and intuitive environment . The service is offered across all interfaces including NFC, online, STK and secured IVR .

To accommodate market maturity and regulatory requirements, the mix of services varies between markets and includes salary payments, P2P domestic/international funds transfer, utility/merchant payments, online purchases, cash collection, bank transactions, paired physical cards and m-ticketing . The target audience is un-banked, under-banked and fully-banked customers .

What makes Etisalat’s solution unique?The programme has been developed based on a number of groundbreaking and transformational innovations including a fully interoperable open-loop service offering and the first global implementation of affordable NFC services in the African continent .

Full interoperability is a cornerstone of Etisalat’s commerce services . By not limiting customers based on the payment scheme they use, bank partner they prefer, or remittance channel, Etisalat delivers an open-loop, fully interoperable ecosystem and was able to achieve a phenomenal service take-up in an extremely short period of time .

The service has been extended to incorporate a loyalty programme called ‘Epiq Nation’ to allow Etisalat customers to earn and redeem points, promotions and dynamic discounts .

How did you adapt the solution for local markets? Etisalat went above and beyond the principle of ‘it’s there and it just works’ by using its ‘all interfaces’ concept . We even custom developed and launched an NFC service for emerging markets

operating on a US$25 handset and delivering the most innovative mobile financial services to people with low access to education .

Support of local languages is a key part of our route to market . In addition to English, French and Arabic, the user interface is available in Swahili, Hausa, Ibo, Yoruba, Urdu, Tagalog and Hindi .

The simplicity of the fully interoperable NFC technology permits the user to complete a transaction with limited interaction . This is ideal for both emerging markets, where complex technology can be a major stumbling block for user acceptance, and high tech communities where the service integrates seamlessly into everyday lifestyle .

How have you ensured regulatory compliance? The service was introduced under close supervision and governance from the Central Banks of participating countries . All service transactions are fully compliant with MasterCard and partner banks’ service quality standards, platforms uptime and PMCI compliance . It’s also fully compliant with Know Your Customer, Counter Financial

Going mobile Late last year global telecommunications company etisalat successfully introduced its mobile commerce platform across a number of African and Middle eastern countries. It has since been crowned as ‘the Best Mobile Money Innovation’ during the GsMA Mobile World congress earlier this year. We chat to George Held, the company’s vice president of commerce, to find out more.

cover story: INtervIeW

Terrorism and Anti Money Laundering standards . All transactions are executed in the end-to-end secured environment in accordance with ISO-1 and ISO 8583 and all NFC transactions are fully compliant with GSMA UICC standards .

Tell me about the solution’s performance and impact so far.In 2011 US$1 .8 billion of transactions were completed through the Etisalat Commerce service . Not only this, but 5 .4 million parking tickets were sold through the service, amounting to US$17 .2 million .

The key objective of this programme was to rapidly engage and activate millions of mobile phones into the world of electronic commerce (both mobile commerce and online commerce) . We have

innovatively applied cutting edge technology to leapfrog traditional payment processes and, with contemporary international connectivity, millions of people around the world are now able to participate in global commerce .

Etisalat’s Mobile Commerce solution securely and conveniently brings the power of global commerce to the users of mobile phones without having to open bank accounts or without needing to apply for credit facilities . Through the introduction of a fully interoperable open loop ecosystem, this portfolio of services enables Etisalat to successfully deliver a tangible, meaningful, relevant service to the customers and deliver a meaningful tool against the commoditisation of GSM services .

“ etisalat enables end-users to use mobile phones as a payment instrument truly anywhere, anytime without geographical borders in a highly secure, convenient and intuitive environment”

Efma Journal No. 234

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Turkey currently has the sixth largest and most engaged online audience in Europe, with a 44 .4% internet

penetration rate . One in five people in the country now shop online, and this ratio is expected to increase significantly in the future .

Clearly achieving success in this space can be extremely beneficial, but merchants often find themselves faced with many barriers to success . Merchants must first of all have a contract with a bank when wanting to take card payments over the internet . The awards or loyalty programmes banks often offer to customers are very important, however, since alternative payment methods can’t offer such programmes to cardholders, they cannot completely meet the collection requirements of merchants . Furthermore, some customers still don’t feel secure when disclosing their card details online, while merchants are under pressure to ensure online transactions are completed quickly in order to increase customer satisfaction and

keep up with customer demand .With this in mind, Interbank Card

Centre of Turkey (BKM) discussed issues with major e-commerce players and banks and identified their key payment requirements . Founded in 1990, the company is a result of the partnership of 13 public and private Turkish banks that have come together to find solutions to common problems, and to develop rules and standards for credit and debit cards in Turkey . BKM initially discussed issues with major companies and banks and identified the key payment requirements for the e-commerce sector .

BKM’s four committees – business development, security, market development, operations and technology – are composed of bank representatives, where collaborative innovation opportunities, joint projects and procedures within the industry are discussed . Designing a product in this way is often difficult because getting all members to agree on the final solution through the committee structure is naturally time consuming .

Following long discussions,

however, BKM launched BKM Express in June 2012, a digital wallet platform for all cardholders, to make e-commerce transactions easier, faster and more secure . BKM Express was built on different fundamental points that meet various requirements of different cardholders .

Closed cycle pilots of BKM Express started in February with two banks and one merchant, with the full support of the banks’ IT teams . Other banks and merchants joined the pilot process following the first stage, which continued until June when the product was officially launched . Problems that were difficult to solve in the early days were solved quickly as the date of the launch approached and preparations for possible customer complaints that may have been raised following the launch were completed . BKM Express offers a single infrastructure platform to all banks and mobile operators via its website, at a competitive cost and ensures the independency of a mobile operating system .

The use of BKM Express allows

smarter, faster and more secure

Soner Canko discusses e-commerce activity in turkey, and tells us how Interbank card center of turkey (BKM) is moving forwards with a new strategy that brings advantages for customers and merchants alike.

cardholders to shop without sharing card numbers with virtual merchants on any merchant website they wish . In order to use it, the cardholder must create an express account online, which takes only a few minutes, and then they can easily add their debit, credit and prepaid cards to their express account . When ready to make a payment, cardholders can choose to pay by BKM Express by simply entering their username and password . To complete their transaction and authentication process, the bank sends a one-time password to the cardholder’s mobile phone . The cardholder can still benefit from loyalty programmes when using BKM Express, which offer rewards, promotions and instalment opportunities .

The benefits of this solution can be analysed for three main parties:• Cardholders: secure internet

shopping without the need to share card details; benefit from installment and reward programmes; quick and easy purchase of products .

• Merchants: increased customer penetration; lowered risks by not having customer card details; continued use of promotional campaigns and options designed with banks .

• Banks: a safer way for the banks to encourage their customers to use their cards for internet shopping, thus increasing revenues; continued customer ownership; e/m-commerce based customer aquisition; cost effective solution with minimal future maintenance required .

Leading e-commerce companies have supported BKM during the express product design . BKM identified several leading merchants from each sector and organised workshops . These merchants shared their industry and customer experience with BKM, so BKM’s Express project teams had the chance to analyse requirements

of various business models including B2C, B2B, C2C, bricks and clicks, private shopping, daily deals and marketplace . Subsequently, 21 brands were involved in the launch of BKM Express as supporting merchants . Five of them have already integrated BKM Express on their site, including e-bebek .com, Yakala .co, Ereyon .com .tr, Genpa .com .tr and Ciceksepeti .com . In addition, non-government organisations and associations have also supported BKM Express . The Turkish Electronic Commerce Operators Association and Association of Companies Providing Infrastructure Services for Electronic Commerce Sites have participated in the design process of express with the support of their management boards and members .

Accelerating the move to a cashless societyWe believe that BKM Express will exponentially accelerate the growth of e-commerce . By the year 2023, Turkey’s 100th anniversary of Turkish Republic, the country aims to see all payment transactions executed through payment systems and we feel that BKM will play a crucial role in achieving this objective . In the future, BKM Express will include contactless, mobile payments and money transfer functions and will be the chosen method for a fast transaction experience in all channels . BKM believes that express will be an important step towards a ‘cashless society’ .

Soner Canko is CEO of BKM.

“ We believe that BKM express will exponentially accelerate the growth of e-commerce”

The website www .bkmexpress .com .tr supports the digital wallet

Efma Journal No. 234 37

Payments cover story

To frame supply chain finance I like the approach taken in research done by Cranfield where three schools of

thought are identified . The widest definition is what is named ‘financial supply chain management’ . It includes all processes and financing techniques used to optimise the supply chain . A somewhat narrower definition is what they call ‘supply chain financing’ . This focuses only on the financing techniques used in the supply chain .

But unfortunately in many banks supply chain finance has become synonymous with supplier financing or reversed factoring – the narrowest definition . This is the typical setup we are now all too familiar with in which big creditworthy buyers confirm invoices, they more or less guarantee to pay the invoice towards banks who can then offer suppliers pre-payment of their invoices at favourable conditions . The buyer benefits through longer payment terms, the supplier gets cheaper and alternative sources of financing

and the bank earns a margin on the advance payment .

It is quite easy to build the business case for supply chain finance for larger companies . As long as you have a creditworthy buyer and a lower rated supplier the structure makes absolute sense . Yet there’s been a very slow adoption rate . This is for a variety of reasons . The lack of awareness of buyers and suppliers, lack of understanding regarding the product by stakeholders, silo based approaches both in the bank and within large buyers, difficulty in onboarding suppliers, the required change management on systems and processes, and the list goes on and on – even Basel III has been mentioned . But the best way to illustrate the reason for the slow adoption rate is to think about the physical flow of goods between within a large company, to/from its suppliers and to/from the logistics providers regarding raw material, finished goods, and spare parts . These are only the physical flows of goods . Now think about the financial flows, legal ownership

and the information flows and it becomes even more complex . What is clear, however, is that big buyers need to work closely together with their suppliers to manage their supply chain . It is all about delivery reliability . What’s more, any financial product that you might want to add to this relationship will require a multidisciplinary approach .

In most supply chains we see that a large player dominates the chain . This player steers the improvement processes in the chain . Such as the optimisation of logistics by forcing cooperation models or sustainability matters regarding social and environmental matters . This big dominant buyer has two very strong assets that give him the power to manage and control the supply chain: credit worthiness and purchase volume .

From the perspective of the buyer, supply chain finance is about leveraging these two assets to reduce costs and uncertainty in the chain . It does not necessarily mean that banks need to be involved . Big buyers can often structure this

the reality of supply chain finance

there’s a wide range of variation on the definition of supply chain finance. Michiel Steeman from Nyenrode Business University gives his perspective.

themselves . There is vast experience amongst large firms using payment terms, consignment stock, VMI, VOI, tolling agreements and other structures where optimisation has effect both on the physical and the financial flows .

The future for supply chain finance lies in structures where the bank

relies on the big buyer to manage performance risks related to the good flow to make it possible to finance based on order or purchase contracts . There are already inventory finance models in the market based on this principle .

Also, for second or third tier suppliers, the purchase contracts

can form the basis for financing equipment that is needed to fulfill the requirements of the contract . Structures we see in emerging markets . Even the purchase of land by large firms for the growing of a crop can be seen in this context .

It boils down to the importance of the supplied material and the importance of the suppliers themselves . The more critical the components are for the buyer the more willing he is to provide its suppliers, via banks or not, with support structures for financing the necessary investments .

Supply chain finance models will increase in importance given the foreseen scarcity of raw materials and the need for good sustainable suppliers . New models and techniques are needed to support these suppliers, to capture them, to control them . Banks will be requested to offer financing structures based on a deeper understanding of the supply chain . This is the direction in which supply chain finance is going . Much beyond reversed factoring, much beyond first tier suppliers and driven by the large dominant buyers .

Michiel Steeman is a member of Nyenrode Business University and co-founder of the Supply Chain Finance Community.

“ It is quite easy to build the business case for supply chain finance for larger companies. As long as you have a creditworthy buyer and a lower rated supplier the structure makes absolute sense”

The Supply Chain Finance school of thought

Interest Rates

Financial SupplyChain Management

Supply Chain Financing

Buyer Driven Payable Solutions

Efma Journal No. 234

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T he payments sector remains vibrant, dynamic and a principle area of innovation in financial services . The

low capital requirements and the annuity nature of payments represent an attractive business from an investor’s perspective . At the same time, the pricing of traditional payment instruments is under pressure and continues to be a point of interest for regulators, focusing the attention of incumbent operators .

Against this challenging backdrop, incumbent players in the legacy payments business – retail banks, card issuers, payment networks, merchant acquirers, payment processors, terminal vendors and merchants – all want to ensure their position is enhanced in an emerging, particularly mobile, ecosystem . Insurgents – mobile network operators, mobile device manufacturers, technology firms and a variety of new start-ups – are hoping to swiftly cannibalise these revenues and marginalise incumbents .

What are alternative payments?Defining alternative payments is hard: what’s unheard of in one market can be commonplace in another . What is clear, however, is that advances in technology are helping to shift emphasis away from physical payment instruments to electronic mechanisms for transferring value . In most developed economies, the use of cash and cheques is falling steadily, with debit and credit cards the most widely accepted substitute .

New payments methods are now challenging the established issuer-scheme-acquirer model that underpins payment card networks, and the ubiquity of consumer technology is supporting this trend . Face to face transactions are losing ground to purchases made online, while mobile devices are being put forward as a key component of the future payments ecosystem . These changes are attracting new competitors to a domain that has traditionally been the preserve of retail banks .

A tale of two marketsAlternative payment solutions are heavily dependent on the availability and acceptance of technology, the existing payment flows within the economy and the maturity of the existing payment architecture .

In developing countries, card-based payments are limited to the economic elites . Point of sale (POS) networks are clustered in tourist venues, major urban areas and higher-end merchants . Prepaid cards have potential to serve the unbanked, but today are only usable at the wrong venues – they are largely absent from smaller, neighbourhood retailers and rural areas . Instead, the prepaid mobile phone account is evolving into an alternative, mass market banking system .

Developed countries, however, have a more extensive payment infrastructure: most people have debit cards, and many have credit cards . Almost all retailers have POS terminals; prepaid cards are the preferred solution for the narrow segments of the unbanked . In these

Aligning strategy and opportunity

the belief that alternative payments will ‘go mainstream’ in the next few years requires all players to examine their strategy. With that in mind, oliver Wyman and efma are conducting a study to determine current attitudes in this dynamic environment. oliver Wyman’s James Sherwin-Smith explains.

countries, prepaid mobile plans have little white space to replace the legacy payments infrastructure .

To date, the adoption of alternative payment methods has therefore been strongest in the developing world where they are highly valued – in some cases they are the only source for secure electronic payments .

A new battlegroundHowever the importance of alternative payments in developed markets is expected to increase significantly . Three main factors are acting together to drive interest from incumbent players in the legacy payments ecosystem who all want to ensure their position is enhanced, while insurgents are hoping to cannibalise existing revenues, predominantly through intermediation . 1 . New technology has changed the

art of the possible . Mobile phones have evolved into multifunction devices that support a number of different interfaces and applications, supported by ever increasing data network speeds . The widespread adoption of such devices, together with rising acceptance of e- and m-commerce has meant that the use of mobile phone for payments is seen as a natural evolution from the status quo .

2 . Market conditions have made payments businesses more attractive . Compared to some other areas of financial services, payments is perceived as a low capital business line that delivers regular cash flows and is therefore relatively low risk . With regulators keen to see better value for customers, greater competition is being actively encouraged .

3 . New entrants have recognised the value of payments as a window to the customer . To date, the value of data inherent in payment flows has been poorly monetised given its insight into actual purchasing behaviour . Further, payments are being viewed by some as a gateway service to a broader financial services relationship with the parties involved . The ability to display offers and advertisements at the point of purchase via a mobile phone screen could prove a powerful marketing tool .

The key battleground at present is not for balances or transaction volumes, but rather for control over the interface that sits between the user and the legacy payments infrastructure . On the consumer side, the key interface is typically referred to as the mobile wallet

or ‘mWallet’, while for businesses a range of different solutions that enable alternative payments are being proposed . However, it is possible that if these new interfaces prove popular, they could challenge the dominance of current payment instruments and disrupt existing transaction flows .

SurveyGiven this context, Oliver Wyman and Efma are conducting a comparative survey with leading institutions during August 2012 . The study will compare views on the relevance and direction of alternative payments and highlight investment priorities for those that take part . In return for participation in the survey, respondents will receive a detailed and customised study that will make it possible for them to compare their views on alternative payments with their peers . The key findings will be discussed at the September Efma payments conference in Paris . If you’d like to participate, please visit http://surveys .efma .com/alternative_payments, where surveys are available in English, French, Spanish, Italian and German .

James Sherwin-Smith is a senior manager in Oliver Wyman’s London office.

“ the key battleground at present is not for balances or transaction volumes, but rather for control over the interface that sits between the user and the legacy payments infrastructure”

interview

Efma Journal no. 234

Always one step ahead

In the past, processing payments transactions took huge investments, so there were significant barriers to entry when it came to new innovations. Now,

however, new technologies have lowered those barriers. Today rolling out a mobile payments innovation, for example, simply involves creating a mobile app, and has the potential to transform any smartphone into a point of sale terminal.

At a time when consumers and merchants are becoming more demanding, and looking for more ways to pay, MasterCard’s chief innovation officer Garry Lyons says that consumers are becoming very comfortable making payments in environments that didn’t exist five years ago. “This can include buying an app or a song from their smartphone, tapping their smartphone on a PayPass-enabled terminal, making payments from inside a game, downloading an extension of the game, downloading tools to improve their chances of winning, and making payments via social media,” he explains.

Amidst this rapid change, doing the same thing over and over again simply wouldn’t work. While the rigor around MasterCard’s processes spurred its success in the past, Lyons

says “that type of rigidity around infrastructure and processes doesn’t allow you to try new things, take risks, and really be disruptive.” What MasterCard wanted, then, was to have the ability to run its core business but also to have the nimbleness to go after opportunities and threats. “And that’s why we created MasterCard Labs.”

MasterCard Labs is split into innovation management, which focuses on innovation processes and prioritising ideas, and the technology teams, which have the types of engineers typically found in Silicon Valley start-ups. “The types of engineers that are focused on research and development are very different from the engineers that are used to running a network,” Lyons explains.

One critical success factor for innovation which Lyons noted, and which is also part of the reason for setting up the centre in Singapore, is diversity. “We like cultural diversity, but we also like functional diversity where people have different skill sets,” he says. “80% of the people we bring into MasterCard Labs know very little or nothing about payments.” The reality, he said, is that when people know too much about a domain and are looking to be disruptive, they end up

in January, MasterCard announced that it would set up a new innovation centre in Singapore. richard Hartung spoke to chief innovation officer

Garry Lyons to find out how innovation works at MasterCard, and how leveraging this centre and other units helps maintain a competitive advantage

amidst fast-paced changes in payments.

interview

Garry Lyons MasterCard

“ we like cultural diversity, but we also like functional diversity where people have different skill sets”

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starting the conversation with “that won’t work because” or “it won’t work that way.” Additionally, people who know too much about a domain typically end up making incremental improvements rather than being disruptive.

The innovation processThe innovation process at MasterCard is indeed far different from what it used to be. Underlying it, Lyons says, is a philosophy called Fail Smart. “You determine which are the right innovations to bring into the Lab, and innovate at a very fast pace. If it’s going to fail, you fail fast, you fail cheap, and you learn from the failure,” he explains. “The key for MasterCard to create so many prototypes is the ability to fail smart.”

A first step in that innovation process is engaging the entire organisation. “If you truly want game-changing solutions,” Lyons says, “you need to engage the organisation. We’ve implemented right across the product life cycle – ideation, fast prototyping and commercialisation.”

To get those ideas, MasterCard launched an idea management platform called Aspire. “Through Aspire, we’ve gotten thousands of ideas from our organisation,” Lyons explains. “We’ve gotten some very bad ones, but we’ve also gotten some very good ones.” While he was told that best practice is for 10% of the organisation to log in within a year and 1% to participate by putting in or voting on an idea, at MasterCard 47% of the company logged in within two months and 11% participated.

The ideas come from a variety of sources - employees, business units, partners, customers, the development community, universities, and potentially even from cardholders.

When ideas come in, MasterCard has a model that quickly determines the ones to work on. “We have a model that takes into account about 25 different factors,” Lyons says. “They range from factors like size of the market and relevance for MasterCard to protectability and how fast the market is growing. MasterCard can score ideas in very short order and use the scores to develop a shortlist. We then apply a little bit of subjectivity to determine which ones should go into the Labs.”

Another practice MasterCard uses to create prototypes is Innovation Express events. Innovation Express, says Lyons, is a process where “you take people from all around the organisation – developers, designers, business people, product people, we’ve engaged people from all of our regions. You bring them to a location, and you effectively lock them in a hotel room for 48 hours and ask them to build a working prototype, a business plan, a brand and a video with a demonstration of what they’ve actually created.”

It actually works. At a recent Innovation Express event in Reykjavik, for example, a team developed an innovation for changing the engagement between consumers and merchants, creating value, and making the payment frictionless. It also allows the consumer to register their intent and have a special experience with the merchant.

To decide whether to move

forward with teams’ innovations, Lyons says, “typically what we do is we bring back the teams and we set up some form of judging panel. The winning team may not be the one that you move forward, or it may be. What we do is we typically choose the ideas based on business impact on MasterCard and customers, and creativity, in terms of how novel it was, in terms of the solution they created, and then technical proficiency. We’ve run three events so far, and have a strong pipeline. The effort has been absolutely fantastic, and we’ve taken a number of solutions to market.”

To implement some of the ideas, MasterCard sets up a Kickstart team. Kickstart, Lyons says, is “a start-up inside the organisation with the sole purpose of taking this innovation to market. You have all of the core disciplines you would need. We have representatives from product, technology, marketing, finance, legal, operations, and reporting in to the Kickstart CEO. It’s amazing what can get done in a really short amount of time when you operate like a start-up.”

While Innovation Express and Kickstart are entirely internal, Lyons says MasterCard also partners with many organisations. It was a launch partner for Google Wallet last September, for example, and it is partnering with Intel for their Ultrabook Programme to PayPass-enable the laptop. “We’re not going to try to do everything ourselves,” Lyons says, because “we recognise that there’s huge value in partnering. There are certain

things that we do internally. We also recognise that partnering gives us the ability to get scale on certain new innovations faster than if we take them to market ourselves.”

From innovation to implementationWhile new ideas themselves are good, Lyons acknowledges that there has to be execution. He highlights three examples to show how new products have moved out of the Labs and into the market. One innovation that began with Innovation Express and that Kickstart turned into a prototype is Koy, an end-to-end couponing ecosystem that engages young people and which is already live in Canada. At Koydeals.com, cardholders can download Koy to their iPhone or Android.

Another is InControl, which allows cardholders to control when, where and how their card is used as well as to receive real-time notification about transactions.

And a third is QKR (pronounced as ‘Quicker’), which Lyons says “embodies some of our philosophy as it relates to mobile. The optimal mobile payments solution has to deliver a context-specific compelling experience to the consumer but also leverage the capability of the device. Typically, a merchant only knows that you’re in their store when you’re paying and you’re on the way out. At that point, it’s too late to enhance the experience or benefit the consumer. With a mobile phone, however, merchants can create a compelling experience before, during and after the payment.”

QKR allows merchants to trigger payments via a variety of means including a QR code, NFC tags, labels or even audio. A customer can grab a coupon from a poster in the shop, share it with friends on Facebook, order, and press ‘pay now’ to check out. If a customer orders a kids meal, it could recognise that their children

are probably with them, deliver a kids’ video or cartoon, and say ‘please hand the phone to your children’. It could also offer advertisements or play a video that shows how to use a new product. A customer who has made a purchase, whether it’s a concert ticket or groceries, could also go to the receipt and order the same thing again – a concert ticket for a friend, for example, or next week’s grocery order.

Lyons also demonstrated another product from the Labs which is still a prototype. When he logged into his secure wallet, it was linked to his interface for Netflix and he saw his electronic receipts. When he watched a movie and wanted to buy a hat like one that a character in the movie was wearing, he paused the video, selected the hat, added it to his cart, checked out, and immediately popped back into the movie. When he was reading an online magazine and saw an ad for something like a Fendi bag, he clicked on a logo, clicked to buy that Fendi bag, added it to his cart, and then could choose to go back to the magazine or check out.

Measuring resultsWhat really matters, though, is results. Lyons says “you want to be delivering revenue and profits,” and what’s really needed is an appropriate way of assessing your successes. One tool MasterCard uses is the Vitality Index, which measures the percentage of revenue it has generated in the past 12 months from what has been created in the past 5 years. Another is the Innovation Premium. Lyons also uses the Agile methodology rather than Waterfall. Waterfall, Lyons says, means that you deliver on time and on budget but may not deliver what the customer actually wants, because the customer may not have known what they wanted when they asked for it. While an Agile methodology is probably harder

to manage in time and budget, he says, “you generally manage it based on features. What you end up with is a solution that the customer wants, because the customer has the ability to shape it throughout the process. Agile is a key part of our methodology. It allows things to come to life much quicker.”

What Lyons says is also critical is ultimately not focusing too much on revenue too early in the disruptive innovation journey. “If you focus too much on revenue too early on,” he says, “you basically game the process so the team is going to be innovating and creating solutions that may in the short term generate revenue but that may not be in the long term interests of MasterCard and its customers.”

What’s clear from the discussion is that MasterCard Labs, and other groups internally, are acting surprisingly like start-ups to develop new solutions. Or perhaps not so surprisingly. “If we can’t innovate at the pace the market wants, MasterCard is going to get left behind,” Lyons concludes. And it’s clear that he’s doing all he can to stay out in front.

interview

“ if you truly want game-changing solutions, you need to engage the organisation”

“ it’s amazing what can get done in a really short amount of time when you operate like a start up ”

Efma Journal no. 234

interview

45

Following several postponements to voting on account of the difficulty in finding a compromise

between the rapporteur and the shadow rapporteurs, the leading Committee on Economic and Monetary Affairs (ECON) finally came together on 7 June 2012 to make a decision on the draft report on credit agreements relating to residential property. Efma spent some time with Christian König, head of legal affairs at the German Association of Private Bausparkassen, to find out the results, and what this means for creditors and intermediaries.

What were the results of the committee vote? In principle, it can be summed up positively that the original proposal by the Spanish rapporteur (to create national mortgage registers and implement a system of mortgage key identifiers, as well as the ideas on the flexibility of the mortgage credit agreement and the obligation to

obtain a property valuation by an external independent appraiser) did not obtain a majority in the parliament. The committee voted to extend the exemptions from the scope. So, like the Consumer Credit Directive, credit granted by employers, loans granted to a restricted public under a statutory purpose or loans which are the outcome of a court settlement are excluded from the scope. Renovation loans which are not secured by mortgages are now within the scope of this Mortgage Credit Directive. To accommodate the United Kingdom in particular, Member States were given the possibility to transpose partial exemptions from the directive into national law with regard to loans for non-owner-occupied residential property.

What impact has this had on the general rules about the conduct of business and overall customer protection?The general rules on the conduct of business have been amended in so far that creditors and credit

intermediaries do not always have to act in the best interests of the consumer, but merely have to take the interests of the consumer into account. It is now also provided that Member States must ensure that the remuneration structure for creditors’ staff and for credit intermediaries does not impede with the compliance of the above mentioned principle. This also includes the specification of concrete sales targets and product results.

Creditors now must provide the consumer with the pre-contractual information sheet in good time before the conclusion of the agreement, similar to the rules in the Consumer Credit Directive. Following the ECON vote, there is now to be a standard pre-contractual information sheet Europe-wide. With regard to the reflection period, the consumer must have 14 days to compare offers. In the case of variable interest rate agreements, the creditor must inform the consumer of the highest and lowest interest rates over the last 20 years. In the case of foreign currency

loans, it is necessary in addition to indicate an interest rate which considers a possible depreciation of the national currency of 20% in relation to the currency of the loan.

The ECON has also drawn up a new article on variable-interest rate agreements and foreign currency loans, which entitles the consumer, under certain conditions, to convert the foreign currency into an alternative currency. In the case of variable loans, new information obligations have been introduced in relation to the consumer. For example, the reference interest rate of the past 14 years must be available.

In addition to this, according to the new wording, the consumer is granted a right to make early repayment in whole or in part. In such cases, the creditor may not impose any penalties, but are accorded a right to compensation. Member States may restrict this right to early repay to agreements with fixed interest rates.

Were there any other changes that particularly stood out? For the first time ever in EU financial service legislation, the tying of other products to a mortgage credit agreement will be prohibited. However, Member States may permit the link with a current account, insurance or a savings product if these products serve to repay the credit in whole or in part. Product tying is defined if one of the tied products is not offered separately.

The compulsory carrying out of a market comparison proposed by the European Commission if the creditor offers advisory services was also amended, so that consumers must be informed in advance whether or not advice is provided. Creditors and tied intermediaries then only have to recommend the most suitable product from their range, whereas brokers and intermediaries, who are not tied, are required to examine a sufficiently large number of products

available on the market. The term ‘independent adviser’ is prohibited if the broker or intermediary is remunerated by the creditor.

What was said about minimum qualification requirements?ECON amended the original Commission proposal to the effect that creditors’ staff and intermediaries must possess relevant qualifications and knowledge about the products marketed. The relevant persons are also required to undertake professional training on an ongoing basis to update and validate their knowledge.

What about property valuation?Member States must now provide sound valuation practices. The valuation can be carried out by internal appraisers of the creditor or external appraisers. This valuation must be documented and retained by the credit institution.

The restrictions of liability to the lending value established by the creditor or the restriction of liability to the collateral, originally discussed, did not receive a majority in ECON. The creditor must merely try, under the foreclosure, to obtain the best price for the property to be foreclosed upon.

What are the next steps? Following the vote of the ECON, the so called informal trialogue negotiations between European Commission, European Council and European Parliament will now start. The Council also agreed on certain changes to the proposed directive, which are in general for the main points of the directive quite close to the vote of the ECON. In view of the similarity of the European Council and European Parliament texts, completion of the procedure in first reading could still be expected by the end of this year. Member States will then have two years to implement these rules into national legislation.

Credit where credit’s due

On 7 June 2012, the leading Committee on economic and Monetary Affairs voted on the draft report on credit agreements relating to residential property. we spoke to Christian König from the

German Association of Private Bausparkassen to find out what happened.

Christian König German Association of Private Bausparkassen

“ Completion of the procedure in first reading could still be expected by the end of this year”

Efma Journal No. 234 47

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In some parts of the world it’s beginning to look like 2008 all over again as rating agencies downgrade banks and central

banks flood the financial system with emergency cash. Is this a good environment to invest precious capital in innovation?

We posed that question to some of the bankers and banking experts assembled by BAI to judge the 2012 BAI-Finacle Global Banking Innovation Awards at this year’s BAI Retail Delivery. The short answer was that it varies depending on the individual country where the financial institution is located but that continued investment in

innovation is required for long-term survival. Innovation “becomes an essential element for increasing profitability, reducing costs and achieving the competitiveness that makes success possible,” said Benjami Puigdevall, general manager and head of electronic channels at la Caixa, the overall winner of last year’s awards.

Other highlights of the discussion included continued excitement about the transformative effects on retail banking of mobile banking/payments, social media, personal financial management tools and the move toward multi-channel delivery that integrates branches

with electronic services. Joining Puigdevall on the panel were William Barnett, Thomas Siebel professor of business leadership, strategy and organisations at the Graduate School of Business, Stanford University; Patrick Desmarès, Efma’s secretary general; Asli Duzenli, head of mass market at Istanbul-based Yapi ve Kredi Bankasi; Jan Kraus, general manager of group strategy at Emirates NBD; Francesco Lagutaine, regional head of markets and customer experience at Citibank Asia Pacific; and David McQuillen, group head of customer experience at OCBC Bank in Singapore.

Q: Recent events in Europe have generated increased uncertainty for financial institutions globally. Should (or can) banks invest in innovation in this kind of economic environment or is it better to simply try to preserve capital?Desmarès: The situation varies across Europe. In some countries, the banks are in a seriously stressed state and have no choice but to cut costs immediately and raise capital. In other countries, there is a long-term need to increase capital levels. But this does not have to be at the expense of innovation, much of which can be done at quite low cost. There

are also countries where the retail banks are still expanding and making good returns – for example, Russia and Turkey – and there should be no financial constraints on innovation. In general, a strategy of only preserving capital will not lead to growth and therefore does not provide a long-term future for any institution.

Puigdevall: The current difficulties affecting banks in Europe and, more specifically, Spanish banks, have meant a radical change to the sector environment. Only efficient banks that are correctly dimensioned and adapt to new conditions will be competitive and, therefore, survive.

Innovation must be integrated into

the business model because it provides added value and differentiation and is essential for generating services and products that meet the new requirements. Innovation facilitates adaptation to the new distribution and communication channels that have been created by technology and that are demanded by customers. In other words, it becomes an essential element for increasing profitability, reducing costs and achieving the competitiveness that makes success possible.

Duzenli: It is generally true that banks are under pressure for capital availability. What we mostly see in Turkey is that banks are pushing hard with innovation on alternative

banking on innovation despite the banking crisis in europe and the need to conserve capital, investment in innovation is still required for long-term success. Kenneth Cline spoke to an international panel of bankers to find out more.

Patrick DesmarèsSecretary general,Efma

Benjami PuigdevallGeneral manager and head of electronic channels, La Caixa

The panel

Jan KrausGeneral manager of group strategy, Emirates NBD

David McQuillenGroup head of customer experience, OCBC Bank, Singapore

Francesco LagutaineRegional head of markets and customer experience, Citibank Asia Pacific

William BarnettThomas Siebel prof. of business leadership, strategy and organisations, Stanford University

Asli DuzenliHead of mass market,Yapi Kredi

“the current difficulties affecting banks in europe and, more specifically, Spanish banks, have meant a radical change to

the sector environment”Benjami Puigdevall

Efma Journal No. 234 49

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distribution channels (ADCs), which are in themselves reducing service costs. Therefore, the business case is always positive. Meanwhile, we see that banks are investing in process innovation rather than product innovation to improve efficiency in the branch network.

Barnett: It is important to separate uncertainty at different levels. Macroeconomic uncertainty, general political uncertainty and industry-specific (regulatory) uncertainty are all great in Europe. Only the third of these – industry-specific uncertainty – should affect investment in financial

services innovation. But that effect should be positive. Clearly, there will be a financial services industry in Europe in the future; the only question is its form. Continued investment in service innovation will keep banks at the forefront of the coming era of European retail banking.

Kraus: The recent uncertainty for banks and the regulatory steps that are being undertaken result in pressure both on capital and cost for a lot of banks. For those banks that are facing cost challenges, process and channel innovations can be actually done at reasonably low cost and help to achieve significant cost savings. Those banks that have managed capital and cost position well over the last years will have the capacity to invest in the future and will have an advantage to further enhance their value proposition.

McQuillen: Customers aren’t sitting still; new entrants aren’t sitting still. Banks can hardly say that they’ll innovate later. It might mean that we’re not investing in the big, challenging, disruptive ideas that may or may not pay off but we certainly can’t stop looking for even little ways to improve the lives of our

customers and help them make better financial decisions.

Lagutaine: While building and preserving capital is an important area of focus in these uncertain times, the key is striking the right balance with investing for the future. At Citi, we remain focused on driving innovation for our clients to deliver superior value propositions, speed, simplicity and an enhanced customer experience. Q: From a retail banking perspective, what are the most exciting technology developments that you are seeing in your particular region?Barnett: I study global markets, so I have to talk about a worldwide view. In my view, mobile technology is the single most exciting development. Payment processing and the organisation of transactions are being revolutionised in Brazil,

China, India, Indonesia and many other parts of the world. Retail banks are largely ignoring these developments – a typical response to radical innovation. But they are happening nonetheless.

Desmarès: The biggest focus in Europe is, of course, on mobile banking and payments developments. The full potential from mobile phones is only just now being exploited by a few of the more innovative banks. It is not just banking services that customers want through these devices but other value added-services such as targeted and relevant discounts and offers. New types of payment methods, such as contactless or person-to-person by mobile phone, are in many countries still at a very early stage of trial or limited deployment, so the ultimate impact on the banking industry is not yet clear.

Today’s top financial institutions are investing in innovation in order to stay one step ahead

“ the biggest focus in europe is, of course, on mobile banking and payments developments. the full potential from mobile phones is only just now being exploited by a few of the more innovative banks”Patrick Desmarès

Efma Journal No. 234

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Duzenli: I totally agree with Patrick and his response reflects what we see in Turkey.

McQuillen: It’s not really a development in technology but also in mindset. Banks are starting to wrap their heads around the idea that we can’t just help customers make transactions; we have to help them manage their money better. The online personal financial management tools that have emerged over the past few years are the first manifestations of that. But the real change happens when these innovations become a pervasive part of the customer experience – delivering useful information when and where customers need to make better decisions.

Puigdevall: Social networks give power to the individual. Geographical barriers disappear, segments become more specific and, as a result, so do individual and group requirements. The goods and services that are on offer can no longer be standard and customisation becomes a requirement. Customers want to give their opinion and businesses must be ready to create the tools needed to listen to their opinions.

The feedback obtained by businesses from their customers today is a very important value-add because it enables them to know

what their customers actually want in a very specific way. This knowledge makes it possible to optimise product portfolios and allocate resources to what is really necessary. It helps distribute priorities and lets businesses adapt and work for what is truly required of them. But also, and more importantly, it creates an emotional bond with the customer.

Lagutaine: Digitalisation is the key development and very evident in the financial industry in Asia Pacific. All the banks are actively developing digital capabilities. Citi was among the first to introduce mobile banking services in many of our Asia Pacific markets and we were also the first to launch smart banking in our branches, which delivers a totally different customer experience with touch screens and media walls. And we aim to be the digital bank, putting our services in the hands of our customers so they can decide when and where they wish to connect with us.

Kraus: In line with the high penetration of smartphones in the Gulf, banks are launching different initiatives in the mobile banking space. The mobile banking apps have focused largely on information and transactional capabilities. However, geo-location together with more advanced mobile banking services is definitely one area where

we can see some innovative and exciting technology that has the power to change customer behaviour.

While a few banks have ventured into the mobile money space, levels of adoption still remain low. Some Near Field Communications (NFC) payments pilot projects have been tested in this region but NFC is being positioned as a two- to five-year play.

Q: How has the digital revolution impacted bank branches in your part of the globe? Are your customers still largely using branches or moving rapidly to electronic channels?McQuillen: Revolution? The revolution is over – we’re part of the new regime and focusing strongly on improving and enhancing our online capabilities.

Desmarès: For all countries, the branch remains a key relationship channel and the most important channel for advisory activities and product sales. However, in the countries where online and mobile banking have developed the fastest, such as the Netherlands, the number of branches is falling and the branches that remain are gradually being converted into cashless or self-service. The speed of change is steady rather than dramatic,

but the take-up of mobile banking services seems to have reached an inflection point with the high number of smartphones available and fast internet connections. Again, there are differences and in some countries the number of branches is still increasing because, for historical reasons, the level of branch density has been quite low.

Duzenli: In Turkey, banks are still investing in branch network expansion although omni-channel integration is a top priority as well. The ADCs help eliminate the non-sales time spent in the branches and complement the branch service. We see more and more banks pushing for teller line sales capabilities and adjusting service models accordingly.

Barnett: These changes hinge on demographic change. The answers you get will depend on the age of your customer.

Kraus: In the United Arab Emirates, branches are still the dominant channel and around 50% to 60% of customers use them regularly. Transactions are gradually moving to electronic channels, especially online, but the percentage of active online banking users is less than 25%, which is low compared to Europe or North America. The high number of cash transactions and the wide use of cheques, paired often with a lack of a clear multi-channel pricing strategy, are currently

preventing a faster adoption of the electronic channels. Banks need to upgrade their IT backbone systems to provide more integrated services and faster development cycles to support the adoption of these channels. There has been some recent activity which shows that banks are moving faster than before in trying to use electronic channels as a competitive advantage.

Lagutaine: Citi has transformed many of our branches in Asia Pacific into smart banking centres as customers have changed the way they interact with a bank. With technology and change in consumer behaviour, branches are no longer the exclusive channel of interaction between customers and their banks. In Asia Pacific, in part because we always had to make up for a more limited distribution network, Citi has been innovatively serving our customers through a multitude of touch points. In fact, today, 95% of customer transactions at Citi happen outside the branches.

While branches will not be obsolete, they will serve different functions. Hence our smart banking branches are more for consultation when customers have significant decisions to make. They are also located where our customers work, commute and shop.

Puigdevall: CaixaBank has been applying a multi-channel strategy in

its business for more than a decade. Our bank has incorporated new channels – internet, mobile phones, tablets and, currently, digital TV – to provide customers with the best possible service at any time and in any place. This has resulted in another inevitable and logical step forward in the multi-channel strategy CaixaBank launched some time ago. It consists of the full integration of all the channels at the user’s disposal, bringing together the physical and virtual worlds to create a single management model that allows us to build a relationship of the highest possible proximity, together with efficiency and the idea of always putting the customer first.

The latest example of how CaixaBank applies this combination of the physical and virtual worlds is Ready to Buy (R2B), a new commercial management model in which the branch prepares the transaction and the customer signs it online via the internet, mobile phone or ATMs.

Kenneth Cline is managing editor of BAI Banking Strategies.

The 2012 BAI-Finacle Global Banking Innovation Awards 2012 winners will be announced at BAI Retail Delivery www.bai.org/retaildelivery, October 9-11, in Washington.

“ banks are starting to wrap their heads around the idea that we can’t just help customers make transactions; we have to help them manage their money better”

“ With technology and change in consumer behaviour, branches are no longer the exclusive channel of interaction between customers and their banks”

David McQuillen

Francesco Lagutaine

5353

Feature: Cheque proCessing

The number of cheques in general use has decreased significantly in the most advanced economies during the past few years. However, despite this downward trend, cheques are still used frequently today – especially for specific purposes and by specific markets. This represents a challenge for most financial institutions, who are faced with ever-increasing processing costs and more stringent regulatory requirements.

Meeting this challenge requires changes to cheque clearing processes around the globe, bringing one of the world’s oldest payment

methods into the digital age, aiming to replace paper with an electronic format and eliminate the need to move the actual physical items. Here we find out how different regions are dealing with this evolution, and discuss the feasibility of decommissioning cheques altogether, and/or reorganising the national clearing model.

You can also find more in-depth analysis of cheque processing across the globe in a new report Cheque Optimization from Efma and Panini which will be released on 24 September. Visit www.efma.com to find out more.

OnMoving

Payments worldParis, 25-26 September 2012

There has never been a better time for connected key banking industries to share a common vision of growth in cards, payments and mobile transactions and tackle challenges to go beyond economic instability.

This year, Efma has developed a new format and venue offering a one-stop Payments world 2012 agenda.

These two 2-day conferences aim to re-define the payments universe in one cost effective event format. The agenda will gather experts and visionaries to discuss emerging innovations and best practices in a new era of payments.

First Efma one-stop shop event

A new age of speed, efficiency and connected customer experiences

CARDS & PAYMENTS

www.efma.com/cards

Staying closer to customers in the new payments space

MOBILE & ADVANCED PAYMENTS

www.efma.com/mobile

Download the Efma Events App �Personalise your visit before, during and after the event

Key reasons to attend�

�• � ‘Mix and match’ sessions*

�•� Access connected industries

�•� Network with leading professionals

*Subject to seat availability in the conference room

Best practices in retail financial services

more information on www.efma.com

• CARDS & PAYMENTS• MOBILE & ADVANCED PAYMENTSThis is an exciting multi level programme for professionals in the cards and payments field offering an unmatched opportunity to share experience and insights with colleagues.

Efma Journal no. 234 55

Feature: Cheque proCessing

in the us, cheques are being slowly eclipsed by debit cards, credit cards, and other means of payment. however, Check 21 is giving cheques a new lease of life. Caroline Crosdale explains.

the us

Cheques used to be essential financial instruments in the US. “Not so long ago I didn’t leave the house

without my cheque book,” says Nancy Atkinson, senior analyst at Aite group. “Today, I don’t leave the house without my cellphone.”

This simple story illustrates the decline of the cheque as the dominant financial instrument in the US consumer’s briefcase. According to the latest available Federal Reserve study, the number of cheques used in 2009 was 24.5 billion, far from the 42.5 billion cheques Americans wrote in 2000.

Yet, can it be said that the cheque is dying? Atkinson doesn’t believe so: “The cheque will survive for quite some time,” she declares. “The volume is declining at an average of 7% a year, adds Bob Meara, senior analyst at Celent. “This is a significant amount, but it is not dramatic. For the foreseeable future, I expect no fall off the cliff.”

This survival is the “unintended consequence of a regulation signed into law in 2003 that could have killed it,” opines Atkinson. That new rule has actually slashed processing costs.

Curiously, the new law found its purpose during the few days following the September 11, 2001 terrorist attack. That Al Qaeda offensive led to the grounding of commercial air travel for several days. Many cheques, usually transported via the planes from payer banks to payee institutions couldn’t be cleared, and so the cheques were stuck. And, an enormous transfer of US$45 billion was interrupted. Suddenly, financial experts realised the risks of air transportation. “It was a catalyst to rethink the clearing process,” explains Bob Meara.

A few years later, in October 2004, the Cheque Clearing for the 21st Century Act, better known as Check 21, became effective. Its hard-learned purpose was to encourage the use of electronic cheque clearance, the idea being to create substitute cheques, digital copies of the front and the back of paper cheques, and declare these

copies to be as good as the originals. The law is not mandatory. The substitute replaces the original unless the bank insists on receiving the paper item. “The concept seemed a terrible idea,” says David Walker, president and CEO of ECCHO (Electronic Check Clearing House Organization), the alliance of 3,100 banks that was created in 1990 to enhance the efficiency of cheque payments.

Back in the year 2004, 16,000 different American banks had been reluctant to go paperless. So, the Federal Reserve, which processes one third of the cheques cleared between banks, took on the massive task of printing lots and lots of substitutes. “And, of course printing costs sky rocketed. But that flexible approach created a bridge process,” adds Walker. “And it gave time to financial institutions of all sizes to transition from a paper exchange to an image exchange.”

Little by little, banks invested

in image processing or outsourced to third

parties. “Technology capability took off,” recalls

Potts. There was a relatively quick adoption that surprised a

number of people because, after all, Check 21 wasn’t mandatory. But, the mechanism itself was very cost effective.”

Savings of US$2 billion a yearBefore Check 21, banks insisted that they receive the original paper cheque in order to transfer any funds. Cheques were therefore carried back and forth between banks, processing centres and, finally to the initial payer bank so that it could send back the cheque to the customer with his monthly statement. Several days were needed to transfer money causing costs to pile up. Transportation, labour costs, envelopes, papers, all together created a monthly expense between US$5 and US$10 per consumer, estimates Meara. “Today it costs pennies,” he concludes.

Banks invested in image processing, bankers learned to trust one another. By about 2008, the volume of substitute cheques declined. And, today, paper is on the verge of disappearing. The customer can still see the image of his cheques when he looks at his account online,

but he rarely gets back the original cheques in the mail. “We process 28 million cheques a day, 14,000 of which are pieces of paper,” says Brian Egan, senior vice president with the Federal Reserve’s Retail Payments Office.

The Federal Reserve System reinvented the clearing method: 45 processing sites were first reduced to 32 sites, which were then finally consolidated into one unique site in Atlanta, Georgia. Unit cost of processing cheques went down 70%, bringing annual savings of US$600 million, Egan estimates.

Meara calculates that as a result the entire banking sector is making savings of US$2 billion a year. And, the icing on the cake is that customers love the new process. Cheques are cleared more quickly, sometimes within the same day, and it’s even better with remote cheque capture technology that allows one to snap a picture of the cheque wherever he may be and send it instantly to the bank.

B2B resists Technology gave cheques a new life, but alternatives to cheques are increasingly in evidence, especially among Gen Y customers, so intuitively inclined toward electronic solutions. “Cheques to pay point of sale transactions have

virtually disappeared,” says Meara. The consumer is getting used to presenting plastic cards to pay for small purchases in-store.

But, business to business (B2B) cheques (27% of the total pie) resist this declining trend pretty well. “The reduction is 1.5 % to 2% a year,” estimates Meara. “Large businesses have entrenched accounting systems and upgrading would be expensive and risky. They prefer to write a cheque. There is no business case for a big electronic investment.”

So, the cheque resists, sometimes it even thrives. Brian Egan, the Federal Reserve specialist points to niches, B2B payments for remittance and consumer to consumer (C2C) cheques. From 2006 to 2009, cheques for remittance grew from 5.5 billion to 6 billion. During the same period, C2C cheques increased from 2.2 billion to 2.4 billion.

“There are no good solutions to replace cheques,” concludes Walker. “Debit cards are not designed to carry all the information that a business needs, and credit cards have a similar defect. Fedwire, the online real time transaction is a very strong system, but it is too expensive. With automated clearing the transaction is cleared one or two days later. The cheque is faster.” Indeed, like the cat, the dying cheque seems to have nine lives.

“ there are no good solutions to replace cheques. Debit cards are not designed to carry all the information a business needs”

Efma Journal no. 234 57

Feature: Cheque proCessing

A ccording to the UK Payments Administration, just over 3.1 million cheques were issued each

day in 2010, compared to 11 million in 1990. By 2018, that figure is expected to fall to 1.6 million cheques per day. But recent attempts to phase out the cheque in the UK were notable for their failure. In July 2011, the UK Payments Council announced the cancellation of its 2018 target for the closure of cheque clearing, saying that, while it will remain focused on security, efficiency and innovation in payments the cheque will continue for as long as customers need it.

Consumer usageAccording to the Cheque & Credit Clearing Company report Cheques Market Research 2012: Consumers,

consumer use of cheques is

falling, with older people tending to write more cheques

per year than younger

people. Of the 2,000 consumers interviewed, 93% had a personal

bank or building society account, with 50% of account

holders making payments by cheque

and 49% receiving cheque payments. Cash was often seen as a convenient alternative to cheque payments, particularly when it came to paying an individual, society, charity donation or payment for a child’s school or leisure activity. However, internet banking, debit cards and direct debit were also seen by many as convenient alternative ways to pay.

Significantly, 35% of UK account holders said that they had neither made nor received a payment by cheque within the past year. Clearly, the cheque still has a role to play for consumers, particularly when it comes to paying individuals and small organisations – but the lower use of cheques among younger people (the UK’s 16-24-year-olds wrote an average of 0.6 cheques per year, compared to 8.6 for those over 65), suggests that this payment method is much more relevant to older generations and might therefore be expected to gradually die out.

Business usageCheque use seemed considerably stronger among UK businesses, with the Cheque & Credit Clearing Company’s Cheques Market Research 2012: Businesses report stating that 76% of UK businesses had made payments by cheque in the past month while 78% had received cheque payments. There was, however, a fall in the number of cheques both written and received by

businesses per month compared to the previous year.

Larger businesses wrote and received more cheques than smaller ones, as may be expected due to their higher turnovers. Larger firms are also more likely to accept cards than smaller ones, but while the increase in card acceptance was small compared to 2011, it was particularly notable among smaller businesses. So it seems that while the use of cheques is on the decline among businesses – and small businesses are beginning to move towards alternative methods of payment – cheques are still very much an acceptable currency.

The clearing processCheque clearing in the UK takes place within a 48-hour period over three days, excluding Saturdays, Sundays and bank holidays. On the day of transaction each branch sends all cheques received from customers to its bank’s clearing centre at close of business, to arrive by the early hours of the following day. On day one the clearing centre processes the cheques through its reader/sorter machines which capture the codelines and amount details. Electronic files are sent to the paying banks by 11.00am, through the Inter-Bank Data Exchange (IBDE) network. At the same time, physical cheques are batched together with others drawn on the same bank and handed over to the paying banks. On day two the paying bank updates its customers’ accounts and the Cheque & Credit Clearing Company calculates the net amounts the banks need to exchange with each other.

While some electronic files are used in cheque clearance, the process is primarily paper-based and, in the absence of investment in an electronic clearing system, improvements in speed are unlikely. The UK Payments Administration says that, due to the decline in volumes of cheque usage, “it makes more sense to target

investment toward card and electronic payment systems where growth is consistent” than to invest in a faster, electronic cheque clearing process.

However, efforts have been made to clarify and introduce certainty into the cheque clearing process, with the introduction of the 2-4-6 clearing system in November 2007. The regulation means that, two days after a customer pays a cheque into their bank, they will begin receiving interest on the amount (or interest due on outstanding overdraft balances will be reduced accordingly). On day four, the customer can withdraw money paid in by cheque, and on day six, they can be certain that the money won’t be reclaimed from their account without their consent. At this point, the customer is protected from any loss if the cheque is subsequently found to be fraudulent – unless the customer is knowingly involved in the fraud.

This means customers can be sure that when they pay a cheque into their account, the money will belong to them within a maximum of seven days. However, five years after the 2-4-6 system was introduced, some confusion remains: the Cheque & Credit Clearing Company research noted above found that knowledge of the precise timings of the 2-4-6 system remains limited among businesses and consumers alike.

So, what does the future hold for the UK cheque? Right now, this payment method finds itself in a somewhat contradictory position. As cheque

volumes continue to decline in the UK, issuing, handling and processing them is likely become increasingly expensive. Notably, a small but growing number of businesses are now refusing to accept cheque payments; fewer people among the younger generations are using cheques; and many banks now issue chequebooks for current account holders on a request-only basis. But at the same time, the demand for cheques is clearly strong enough to have fended off the threat of a phase-out for the foreseeable future.

In addition, while the UK Payment Council has no plans to decommission the cheque altogether, it has stated its intent to encourage innovation to develop viable alternatives. The Capgemini World Payments Report 2011 notes a need for ‘proactive strategies’ in the UK if the use of paper-based cheques is to be significantly reduced and eventually eliminated. Thus, the Payments Council will continue to monitor cheque usage closely, and with investment firmly focused on developing alternative payment methods, it seems likely that cheques in the UK will rumble on in much the same way until their processing is no longer economically viable. When that happens, the Payments Council will have to think again about how it supports cheque processing, whether to charge for it, and what effect any changes would have on the wide variety of stakeholders who rely, to varying degrees, on cheque payments.

the uKCheques may be in decline, but they’re still maintaining a determined grip in the uK, says Jacqui griffiths.

“ it seems likely that cheques in the uK will rumble on in much the same way until their processing is no longer economically viable”

Efma Journal no. 234 59

R egardless of how widely cheques are used, usage is declining in

virtually all countries in Asia. Capgemini found in

its World Payments Report 2011, for example, that usage had dropped from 20% of payments in mature markets in Asia in 2001 to just 6% of payments in 2009.

There are more than 60 countries or territories in the Asia Pacific region, and each has its own practices relating

to cheques. Capgemini found, however, about 60% of non-cash payments in Asia Pacific are in the mature markets of Australia, Japan, Korea and Singapore while about 15% are in the Asian BRICS countries of China and India. Since these six markets account for the vast majority of payments within the region, then, it is useful to focus on practices in these countries.

Regulatory frameworksWhile regulators around the Asia Pacific region have taken a strong interest in ensuring the stability of the cheque clearing system and

do have regulations in relation to cheques, banking associations have also played an important role in establishing guidelines or common practices. More recently, central banks in a significant number of countries have stepped in to promote electronic payments, with the rationale for the push ranging from cost reduction and transparency to efficiency and customer service levels.

Cheque truncationWhile small markets like Singapore as well as the emerging markets of China and India have shifted towards cheque truncation or implemented it, banks in larger markets like Australia and Japan have legacy infrastructure and have not implemented cheque truncation so far. Cheque truncation seems less likely to happen in some of these markets, then, because the resources required for a shift to electronic payments may outweigh the cost of implementing cheque truncation at a time when payments are moving towards electronic channels and there are fewer cheques.

Cheque eliminationEven though the number of cheques in the region has continued a steady decline, there has been relatively little serious discussion about eliminating them entirely in markets in the region.

With that background, we’ll now focus on the mature markets as well as the two Asian markets among the BRICS.

AustraliaOver the past decade cheque use in Australia has dropped by more than 60%. With such a steep drop underway, the Australia Payments Clearing Association (APCA) undertook a study in 2011-2012 to look at how to manage the steady decline. In study results released in May, APCA said it saw no need to

force the elimination of cheques. Instead, it encouraged the payments industry to use a combination of industry collaboration, support for emerging payment products, engagement with government and consumers, and efforts to boost public awareness of the benefits of electronic alternatives. With Reserve Bank of Australia statistics showing bank processing costs of A$7.69 for cheques and A$1.21 for electronic payments as well as 75% of Australians no longer using cheques, cheques seem likely to disappear in the coming years.

ChinaWhile the number of cheques in China has shown a gradual drop, headline numbers from BIS show that the volume of cheques in China is several times GDP and cheques account for nearly half of payments. However, the vast majority of the volume is inter-bank payments via cheques. Actual consumer and business usage of cheques is low.

In late 2006 China launched a pilot of its Cheque Imaging System (CIS), which enables banks to exchange cheque images electronically and cheques to be used for payment nationwide rather than just in the city where the cheque was issued. Usage of the CIS is gradually expanding.

JapanAs the Bank of Japan said in 2009, cheque usage has been in a steady decline since as far back as 1990 and there is a long-term shift away from cheques in favour of credit transfers via the electronic Zengin system as businesses seek to avoid the costs of stamp tax as well as processing costs for cheques. Government and businesses have been the primary users of cheques in Japan, though they are gradually shifting towards electronic payments, and consumer

cheque usage in Japan has been extremely low.

KoreaCheques remain a widely-used payment method in Korea, with a combination of cashier’s cheques and current account cheques used for payments. The relative usage of cheques has declined, however, as companies have gradually started shifting towards electronic payments. It’s important to note, though, that the actual value of the cheques has actually risen slightly over the past several years at the same time that the number of cheques has been declining.

SingaporeCompanies and consumers alike continue to use cheques extensively in Singapore, and the drop in usage has not been as dramatic in other markets. However, the government’s initiatives for electronic payments may speed up the shift to electronic payments. One of the first steps towards efficiency was the establishment of the Cheque Truncation System (CTS) in 2003 for cheque clearing, and all cheques are now processed using CTS. Singapore’s G3 initiative, which is intended to enable real-time processing of low value payments as well as bulk file processing, will be rolled out within the next couple years and may produce more incentives for a shift from cheques to electronic payment usage.

Cheques still have a role to play Throughout the region, for reasons ranging from efficiency to customer service, payments are shifting towards electronic channels. Despite the shift, most observers expect cheques to be around for at least the next decade or longer. While the number may continue to fall, there’s clearly a role for cheques in payments in Asia.

asiaCheque usage varies greatly in asia. in some countries they’re widely used for consumer payments, yet in others cheques are used only for a relatively small number of corporate or inter-bank payments. richard hartung investigates.

Population GDP* 2006** 2007** 2008** 2009** 2010**Australia 22.3M $1.38T 491 418 371 333 291

China 1.34B $5.9T 1,189 977 882 875 896

India 1.18B $1.75T 1,367 1,460 1,397 1,379 1,387

Hong Kong 7.1M $223B 132 141 122 115 116

Japan 127M $5.9T 134 123 112 96 NA

Korea 48.8M $1.03T 1,152 1,186 1,104 831 752

Singapore 5.1M $236B 84 85 83 79 78

CHEquE uSAGE ovEr THE lAST FIvE yEArS IN MAJor MArKETS IN ASIA

Source: Bank for International Settlements *Number of cheques per annum, in millions **Population is in millions (M) or billion (B). GDP is in US$, in billion (B) or trillion (T). Both are for 2010.

Feature: Cheque proCessing

Efma Journal no. 234 61

Feature: Cheque proCessing

In the past cheques were the dominant form of payment in India. However, the number of cheques used declined by

8% between 2007 and 2011. More significantly, the value of cheque usage declined by 26% during this period and the share of cheque transactions in total payment transactions declined from 73% in 2007 to 54% in 2011.

According to a report by Boston Consulting Group, the share of cash and cheque transactions in the payments industry in India will fall below 15% by 2020. However, in terms of value, payment through cheque still holds a dominant share. During the financial year between March 2011 and March 2012, 1,461 million cheques were cleared, valuing US$1,784 billion and comprising 82% of the total retail payments in the country.

Several factors are contributing to the decline of cheque use in the country. India’s central bank has facilitated a rollout of the Real Time Gross Settlement (RTGS) system, enabling the flow of large payments between financial institutions,

corporate entities and the government to be carried out electronically. The country’s central bank, Reserve Bank of India (RBI) has asked non-bank financial institutions to use the electronic payment system instead of cheques in order to reduce paper-based transactions. And the ministry of finance at the central government level has rolled out an e-payments mechanism for distribution of subsidies to the consumers. In addition to this, the growing customer preference for direct fund transfers using electronic channels has compounded the decline of paper based transactions.

However, despite all this, customers are expected to continue using cheques frequently during the foreseeable future, especially those belonging to the SME segment and those customers who prefer to transact through paper based instruments. Furthermore, there is a potential to migrate cash payments to cheque based transactions. In India the total value of bank notes and coins in circulation was US$171 billion during 2011. The

value of notes and coins in circulation was 12.04% of GDP, a figure which is much

higher than that in some of the other emerging markets such as Russia,

Mexico and China.

Cheque truncation at a countrywide levelIn order to facilitate a faster, cost effective, and more secure system of cheque clearing and settlement processes, India’s central bank has pushed the banking industry to move towards automated cheque clearing and has spearheaded the adoption of the Cheque Truncation System (CTS) at a countrywide level. CTS enables cheque clearing and settlement without the need to physically transport the cheque out of the branch. Instead, the cheque’s image is captured and this information is exchanged between the presenting bank and drawing bank.

However, the adoption of CTS on a countrywide basis isn’t without its

challenges, and a number of new regulations, rules and

guidelines have been issued. In order

to improve the cheque image quality, and to

reduce fraud incidence, RBI issued new guidelines

in December 2010, requiring banks to decline

cheques with overwriting, even those on which the date is changed.

In November 2010, RBI reduced the maximum validity of the cheques presented to commercial banks from six months to three months to reduce the frequency of old cheques used in the system. RBI set the deadline of April 2012 for implementation of new rule. In December 2010, RBI extended the same rule to urban cooperative banks.

And, in February 2010, the central bank rolled out a new set of guidelines related to cheques’ size, design and security features. Cheques must be printed on high quality paper, and they must include a watermark and logo of the bank with invisible ink and incorporate security codes. Significant fields must also be included, with a clutter free background in order to improve the image quality. All banks across the country were

required to implement the new standard by September 2012.

Lingering problems and new challengesAs the industry is implementing these new measures, some of the old issues are still left unresolved and new challenges have emerged for the banking industry. Harmonisation of routing codes is one critical element which is yet to be addressed, as a variety of different codes are still being used. Similarly, the standardisation of account numbers is also required. Different banks have different account number standards based on their own requirements and the length of account numbers varies from 10 to 17 digits.

Fraud is another big issue, with the growing automation of banking services and the industry’s efforts to move customers towards self service channels contributing towards a growth in criminal activity. Several high profile cases of cheque fraud have been reported in the press since the rollout of centralised cheque processing and clearing in the country. Due to this, in December 2011, 17 banks collectively called upon the central bank to provide specific guidelines regarding reporting of fraud under the CTS system.

The introduction of new guidelines and the implementation of new rules related to cheque clearing and processing has led to a growth in the

number of cheques being declined or returned. One of the reasons behind this is a lack of customer awareness. Many customers continue to use old cheques and commit common mistakes such as overwriting and presenting cheques which were more than three months old, both of the practices which were common previously, but were barred under the new rules.

Cheque rejection by the bank has created problems for customers, as some of these cheques are sent to make payments for credit card bills, loan instalments, utility bills and insurance premiums. Rejection by the bank due to incorrectly filled cheque resulted in these companies imposing penalties and late payment charges.

Because of this growing problem the central bank has issued further new guidelines earlier this year, stipulating that banks must inform customers about the outcome of the cheque submitted for clearance within a day. Banks are required to put in place a mechanism to exchange information between the presenting bank and drawing bank at a mutually decided place and time each working day.

All in all, banks predict that old cheques and customer practices will prevail during the early phase of implementation. However, their prevalence will taper off gradually due to increasing customer awareness.

indiaas india’s banking industry moves towards the adoption of cheque truncation to reduce clearing cost and time, it has to establish new safeguards and increasing customer awareness in order to reduce fraud and decrease the surge in the cheque rejection rate, says Fahim uz Zaman.

“ Customers are expected to continue using cheques for the foreseeable future, especially those belonging to the sMe segment”

Efma Journal No. 234 63

SPECIAL REPORT

There’s no doubt that the state of the crisis is today far worse than any of us could have predicted. No-one can miss the daily media portrayals of debt, property

and banking crises coming from the southern eurozone countries including Greece, Italy, Portugal and Spain.

As perhaps the biggest threat to the global economy, the eurozone’s future is undeniably under question, with many market analysts openly questioning which countries will remain. Others are optimistic that ultimately European leaders and institutions will do whatever is necessary to protect the euro and keep the eurozone from collapsing. Is it be possible that it could emerge from the crisis stronger and more integrated than ever?

On the following pages you’ll find perspectives from three key thought leaders in the region to find out about the current challenges they are experiencing, and solutions to drive the much needed recovery. Bruno Colmant gives us his opinion on the current monetary situation, Gail Wessels offers perspective on the Spanish property crisis, and Georges Pauget highlights the steps necessary for banks to move onwards and upwards.

Post-crisis recovery in the eurozone

OnwardsUpwards?and

Efma Journal No. 234 65

Post-crisis recovery in the eurozoneSPECIAL REPORT

The current monetary shock is not determined by the results of the Greek elections or German budget orientations.

Even recent inaction of the European Central Bank (ECB) becomes an accessory element in this moving landscape. The situation is much worse. Indeed, the understanding between European populations is no longer sufficient to share the ultimate expression of sovereign power: that of coining a common currency.

Moreover, what more is money than a state convention destined to support transactions and savings? Yet, the value of savings is the measure of time. This time has already been borrowed from future generations by the public debt accumulation that they will inherit. Today, after having squandered future generations’ growth, eurozone countries no longer share the same future visions.

Thirteen years after the consecration of a political project

thought out by visionary men that were the last war’s conscience guards, European States risk having to wave farewell, abstaining from monetary reconfiguration and economic drifts. The latter will occur quickly yet untidily, for it is impossible to assure social order without monetary discipline. In the hope of regaining the basis of a stable economy, some countries will face political and national spasms.

Does this imply that some countries only wished to have a single currency to satisfy circumstantial interests or to take advantage of fact-of-life effects? This view cannot be excluded. The political movement that should have accompanied a monetary alliance has never been established. Some countries were the covert passengers of the Euro. Others saw immediate interest in expanding their internal markets, avoiding the revaluation of their money.

For a long time we thought, like numerous economists, that the

political vision of a single currency would be sufficiently profound to take long-term stake measures. However, after three years of monetary procrastination and community cowardice, we have to admit that we can no longer be optimistic about the situation. It’s a disaster.

What else can be observed? Without accepting the consequences of the alliance, the weak and little industrialised European countries were imposed a strong currency, typical of countries disciplined by manufacturing exportations. Instead of reinforcing their socio-political structures, the monetary link has caused these very countries to let their public debt increase under abnormally favourable conditions.

Few understood that the Euro was a voluntary choice of belonging to a liberal and more flexible market economy. Indeed, a monetary zone can only exist when production factors, specifically labour and capital, are fluid and mobile

throughout the zone. However, contrary to anticipations, various European countries have increased their state weight in the market economy, by hardening labour regulations and by making production factor adaptation rigid. Instead of relaxing the economy, euro public loan conditions have reinforced the welfare state.

European authorities should have confronted those member states with increased public debt drifts well before the 2007 crisis. Yet, no serious message was given. At the same time, everyone knew that the cost of an ageing population would start to bear an impact on public finances. Political community lethargy, regulatory complacency and social rigidity were added to the lacking prospective of leading our European economies towards an unsustainable and incompatible debt level with a currency that we want to be single, but without sacrificing fiscal and national budget independence.

We wrote that everything was being put into place for monetary disaster. To observe those elements that the financial markets have already anticipated, both from intolerable interest rates in Southern Europe and financial enterprises’ loss in value of 50% in a year’s time, we only need to notice the erratic character of political orientations.

Indeed, while disastrous unemployment rates (11% of the European active population) is added to unseen hypothetical contraction, European political authorities impose the fragile countries austerity programmes that lead to a lethal spiral, i.e. recession fed by rigidity. These budget programmes strongly weaken the local banks, which are already confronted with huge losses.

At the same time, recent ECB interventions are destined to allow the banks of weak countries to buy the debts of their own States back. These

countries (Portugal, Italy, Spain etc.) therefore progressively drift away from the European capital market and have to rely on their own local savings for their auto financing. The risk of financial contamination is reduced, but at the cost of each country’s individual fragility. This leads to an unspoken nationalisation of the banking sector, the liquidity of which will inevitably dry up. These very financial establishments could even disappear, except with European support that they only are granted under socially unacceptable conditions.

We are therefore far from the idea of hypothetical Eurobonds, which Germany will refute. Why would this country, that has allowed other member states to run into debts under the conditions of its social discipline, in future accept having to be subjected to the conditions of lax countries? The same reasoning goes for the illusory ‘banking union’ and the European deposit protections that remain on the outside in times of financial crisis.

Moreover, as we already observe in the weak countries, this even

Common currency – the day after

The eurozone’s inevitable dislocation is rather like witnessing a catastrophe in slow motion, says Bruno Colmant.

“ A monetary zone can only exist when production factors, visually labour and capital, are fluid and mobile throughout the zone”

Efma Journal No. 234 67

Post-crisis recovery in the eurozoneSPECIAL REPORT

comes with a massive escape of savings towards other countries, from the fear that the Greek monetary expulsion will, on a short or middle-long term, be transposed to other State members. It’s the proof that the citizens of peripheral countries have lost confidence in their own States, while this monetary confidence concretely stands for social appeasement guarantees.

What, therefore, will happen if Greece abandons the Euro? The other peripheral countries, paralysed by the Greek case, will have to nationalise their financial sectors and

impose restrictions to capital trying to escape the country. This will result in state intervention. The countries of the South of Europe will no longer form a homogenous monetary zone, but will adopt different currencies, except maybe from Spain and Portugal that will co-exist with the same monetary standard. It will therefore not be a Europe with two gears, but a gear box with detached pieces.

The other countries of Northern Europe will stay grouped in a Deutsche Mark zone, spreading from the Benelux to Austria, including some countries from Northern or

Eastern Europe, even Poland. France will join this monetary aggregate, while the fate of Italy or Ireland is more uncertain. The financial markets have already chosen, dividing the European countries in two categories based on their interest rates. The German epicentre will be directed by rates close to zero or negative.

However, aren’t we delighted with this situation, in which Belgium appears to be part of the good side of Europe, even though regional differences between Flanders and Wallonia mean that they constitute

an economic pause themselves? The end of the eurozone would come with the triggers of commercial flux dislocation and would lead, apart from immediate losses, to a contraction of the GNP, to which the constraints of a strong currency, i.e. the Deutsche Mark, would be added. Stock markets would suffer a very severe and strong correction.

This is the distressed landscape towards which a lacking European harmonisation or a monetary expulsion of Greece could lead. And let the badly informed public opinion stop reprimanding the banks and

financial markets, the scapegoats of a systematic financial crisis! It’s not the banks that have excessed, but the States, i.e. us who have sinned against discipline, believing that debt would be absorbed by capital.

It remains an exit ramp, but the orifice is getting smaller every day, i.e. a brutal integration of political structures accompanied by massive monetary injection and subsequent inflation that would lighten debt weight and would allow generational wealth rebalancing.

However, we fear that, except from an expression of decisive will,

State members, like the artisans of the Tower of Babel, have committed a political sin, coupled with monetary vanity. They no longer speak the same language. Political messages disappear into cacophony. Their time – and ours – has run out. 2012 will be the moment of truth. Without any major political push forward, it will at best be a colossal injection to temporarily save the Euro or its disintegration.

Bruno Colmant is member of the Belgian Royal Academy and president of the Belgian CFA Society.

‘Banking: The Great Leap Forward’ posits three different scenarios for the future of the eurozone, each based on a different variable. The first variable relates to the rate of GDP growth. Should growth be limited, as is foreseeable today, or even non-existent across the region and negative in certain countries, the constraints on monetary and budgetary policies would be even greater and the room for manoeuvre reduced. The second variable concerns the level of integration among European policies. The third variable refers to the amount of

control achieved in public deficits and in the debt path.

The first scenario is that of integration. Without going so far as federalism, Europe makes headway in its organisation. Budgetary and fiscal policies are effectively coordinated and the eurozone thus maximises its potential to become the world’s leading economic area. In that context, the financial system would be stabilised and the banks able to restructure in order to ensure the right conditions for financing the economy. Clearly, their operating conditions would

be radically different from those they enjoyed until 2007, with liquidity and solvency requirements modifying the economics of the finance industry. However, these are classic problems faced by all businesses in adapting to a changing environment.

The second scenario is that of break up, with one or more countries leaving the zone. This is a costly hypothesis: at least 15% of GDP and a continued climate of heightened uncertainty. European banks would turn in on their domestic markets and the idea of a single market for

The great leap forward

financial services would decline, probably definitively.

The third scenario is that of a deepening of the crisis. Governments take the necessary decisions to avoid a break up but do not reach consensus on the future of Europe or on the conditions that would allow a rapid exit from the crisis.

The Summit of 29-30 June 2012 brought hope with the announcement of a higher level of solidarity among Europeans and a desire to implement banking supervision at the European level. This could have made it possible to head towards

the integration scenario. However, the difficulty of defining what this means in operational terms has led to fears of a deepening of the crisis. That would be the most unfavourable situation for European banks: they would have to establish new prudential rules while at the same time contribute to solidarity efforts through the imposition of new taxes. They would have to simultaneously increase the collection of deposits and savings to improve their refinancing and thus rely less on the market, lower their expenses, and better understand their risks in order

to reduce their costs. They would also have to innovate in order to protect themselves from new players entering the service markets. All banking activities are concerned. However, going forward retail banks, which had been largely spared from the crisis, must undergo a fundamental transformation, reviewing their production methods and reorganising their distribution networks.

Georges Pauget is currently chair of Economics and Finance Strategy. He was CEO of Credit Agricole until 2010.

Georges Pauget gives us an overview of his new book, ‘Banking: The Great Leap Forward’, highlighting the steps necessary for banks to move onwards and upwards in the wake of the crisis.

“ Going forward retail banks, which had been largely spared from the crisis, must undergo a fundamental transformation”

Efma Journal No. 234 69

Post-crisis recovery in the eurozoneSPECIAL REPORT

In the midst of a full-scale property crisis, Spanish banks are finding themselves challenged by a multitude of technical property

management considerations when dealing with defaulting property developers. It could be argued that if banks had been more astute to the workings of the property industry then much of the current crisis could have been avoided. But before getting into ‘solution mode’, let me set the scene of this ever-worsening catastrophe for those of you who are not living it.

Common to the majority of the assets banks have to deal with is the fact that they are often of an unsustainable nature. This is so for a number of reasons. First, they are located in areas of extreme excess supply which is unlikely to be absorbed unless the population of entire cities in Europe are to relocate to Spain or the local buying population is to suddenly dramatically increase. Second, they are often poorly linked to economic hubs. And

third, they are of poor building quality and unattractive style.

What this means is that the bank’s money is tied up in the underlying security or asset for a very, very long time, with generally zero options of recovery from the debtor nor any options to generate income from the asset if repossessed by the bank.

Taking control of the assetConsidering that recovery from the debtor is unlikely with the only possible source of recovery being the sale of the asset, the decision is when and how to take control. In some cases, especially when the asset is land, there may be no benefit in taking control thereof, when the value and prospects of sale are likely to be close to zero.

This decision is generally informed by the risks identified in a due diligence and urban report, legal and property management cost considerations, provision for loss implications and capabilities in managing the properties post-takeover. Ultimately, the only

viable option may be to purge these ‘toxic assets’ from the banking system in order to provide what is left the chance to survive. This seems to be partly the intention behind the creation of the Asset Management Company as proposed by the European Financial Stability Facility Framework Agreement.

The market contextAccording to journalist Kiko Llaneras in the blog Nada es Gratis (Nothing is Free), between 2007 to 2012, home sales have declined by 70% and average house prices 30%, resulting in a housing market decline from 30% of GDP to just 6%, whilst unemployment has exploded and the economy has stagnated or contracted.

Consultants RR de Acuña y Asociados in their Spanish Real Estate Yearbook 2011-2012 state:• The financial sector exposure to real

estate in 2011 represents 50% of the total credit to the productive sector

• The real estate sector cannot afford to pay financial institutions

• The biggest problem is that oversupply has increased rather than decreased since 2007, with 2 million homes on offer and land to build 4 million more properties

• The average selling time is estimated to increase from 1.4 to 11.4 years

• Currently, for every four homes sold, one is bought by a bank or savings bank.

Getting to the root of the problemA triangle of greed made up of government, banks and property developers has resulted in an unsustainable property market mushrooming overnight in an environment which could never support it.

Without any consideration of the basic economic principles of supply and demand, huge tracts of land were rezoned by local government for development, bought by voracious property developers and financed using easily obtained and reckless credit. This all without suffiicient assessment by any of the three role-players of the sustainability of the development. Between 30-40% of government income came from the construction industry, the extensive construction in Spain meant lower unemployment rates together with fantastic economic growth rates, so one can easily imagine why no one was prepared to stop the proverbial ‘party’.

Low interest rates and easily obtainable credit meant that thousands were able to buy not only first homes, but second homes as well. The four million immigrants in Spain obtained relatively easier access to credit as the more stringent risk policies normally governing lending to these segments were abandoned, creating an unprecedented demand for buying properties.

While the construction industry was so easily fuelling the economy, other industries were neglected without sufficient consideration of a more integrated approach to economic development.

Provisions for loss are at the core of a much needed correction and normalisation of the Spanish property market. It is what essentially informs strategic asset management decisions, and of course what largely determines the sustainability of each bank. In February 2012, the Bank of Spain increased the minimum average provision requirements for guarantees. Finished housing was raised to 35% provision, housing under development to 65% (including a 15% capital buffer) and urban land to 80% (including a 20% capital buffer).

The latter was the most significant increase, which has been raised from 50%. It is estimated that many banks will not be able meet these requirements, leading to further mergers and bank bailouts. On the positive side, these new requirements may mean that banks may be more willing to accept lower prices as more of the loss would already have been provided for.

The methodology used to value assets should also be reviewed. Generally an ECO valuation is used which generally produces a very different outcome to that of the more robust and realistic income flow valuation methodology. The differences in final value often ranges from 25% to 35%, the ECO rendering the higher value.

Looking forwardThe most effective way of breaking the triangle of greed may be to impose more onerous lending regulations for banks. Credit is necessary and caution needs to exercised not to create a legislative framework which shuts down the credit market.

The question is whether the Spanish regulators and government have the appetite and courage to introduce not only responsible lending regulations, but regulations with effective sanctions for non compliance, together with a more robust provision for loss framework. Although such regulation may result in contracting the economy even further in the short term, it may be what is required to set the Spanish economy on a more sustainable path to recovery and growth. With the increasing involvement of European authorities in the banking sector in Spain, it may very well be a task that is performed by these authorities, and one can only hope for more bravery, responsibility and accountability than there has been to date.

Gail Wessels works in business support and recoveries at Barclays Bank in Spain. These views are her own, and not necessarily those of the company.

The accidental property manager

Managing the current Spanish property crisis has been a steep learning curve for all involved, particularly for banks, says Barclays’ Gail Wessels.

Completed first residences situated in a tiny village 45km outside Madrid, vacant and not selling

Efma Journal No. 234

case study

71

the facts...

“We operate a purpose-built It platform using best-of-breed systems. this allows

us to constantly innovate”

Tinkoff Credit Systems’ unique approach is enabling it to grow faster than the market

employs

3,000 people

Retail customer accounts up to

US$355million in 2011

Interest income up by

215% to us$331.9m from 2009-2011

Loan portfolio quadrupled within

3 years

Fourth largest credit card issuer in Russia

85% Roae as of Fy2011

Described as ‘Russia’s best known businessman’, Oleg Tinkov has a long-history of successful entrepreneurial

projects. So when he decided to create a groundbreaking online bank, there was no question that it was going to be a success.

Tinkoff Credit Systems (TCS) was established in mid-2007 with subsequent help from Goldman Sachs and financial investor Vostok Nafta. Originally dubbed ‘Russia’s answer to CapitalOne’, the company

evolved quickly and began to make a mark of its own.

Today the company, which is still run by the very same management team of core professionals, employs 3,000 people and has in excess of two million customers, putting it in the top four credit card issuers in Russia by market share. “Our branchless model puts clear blue water between us and what our competitors are doing,” explains Oliver Hughes, TCS president and chairman and former head of Visa in Russia. “It gives us

a very flexible approach to doing business, enabling us to respond quickly to the external environment, whilst giving us low fixed-cost and scalability. It also enables us to work all over Russia – over 90% of our customers are outside of Moscow and St Petersburg.”

The company’s commitment to its customers also sets it apart from the competition. “We acquire and service our customers in every city, town and village in Russia through our extensive ecosystem of partners, including

the Russian Post Office and a host of online partners,” says Hughes. “We employ a number of different acquisition channels, including online, direct mail, direct sales agents, co brands and other partnership programmes, enabling us to find customers in underserved parts of the country. What’s more, reaching us is totally free – a rarity in Russia – we offer free phone calls, free statements and free repayments, making our offering accessible to everyone.”

Adding to the customer experience is TCS’s investment in innovation. It offers card to card transfers via mobile phone as well as a new card product linked to e-wallets from the money

transfer service called Yandex Money. TCS also has its own in-house courier service. “Delivery infrastructure is notoriously poor in Russia, so we took matters into our own hands,” Hughes explains. “Our couriers handle sales, fulfilment, delivery and scheduling, and they’ll also take a photo of the customer at the point of delivery so that we have the identification necessary to take deposits online.”

Furthermore, using a data-driven approach allows further value to be passed on to customers. “We operate a purpose-built IT platform using best-of-breed systems,” Hughes says. “This allows us to provide not only a high level of customer service, but also to constantly innovate and manage the business through numbers. This gives us 360 degree visibility on credit risk through which we maintain some of the lowest risk indicators in the market. The fact that we operate more like an innovative high tech online company, instead of a traditional bank, is an essential ingredient of our success.”

Clearly Hughes and his team are getting it right, and, with a credit card portfolio of US$1.3 billion today, which is expected to double again this year for the third year running, there’s no doubt that the company has mass-market potential. “The Russian consumer lending market continues to grow very rapidly from a low-base. Our focus and unique business model enable us to tap into this growth and to grow significantly faster than the market. And the potential is enormous - penetration of credit cards is still only in the low teens,” Hughes concludes.

at a time of global economic crisis, the pioneering approach behind tinkoff credit systems has earned it substantial success in the Russian markets.

Tinkoff Credit Systems

Original thinking

Efma Journal No. 234

case study

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the facts...

T raditionally insurance companies have assumed a position in the market where practically the whole

customer relationship is delegated to tied agents. Indeed, it used to be the case that the only contact made by the insurer itself was that required by law such as the notice of payment receipt or claims settlement, or through blanket marketing collateral advertising new products. Any ‘relationship-building’ contact with customers was virtually non-existent.

However, the market has changed dramatically in recent years, posing

new challenges for insurers. Customers are better informed when looking for insurance products and can compare offers and deals at the touch of a button. As insurance products have become regarded increasingly as commodities, comparison sites have flooded the market, compounding the issue further.

With this in mind, industry transformation is necessary in order to provide added value to customers. To succeed, insurers need to better identify opportunities and challenges, bringing a greater customer focus to all activities.

Caixa Seguros has approached this in a number of ways. It started off by introducing a customer lifecycle model, identifying all the key moments in which it wanted to ‘talk’ to customers. It focused its resources on actions of loyalty and the development of its existing database, launching campaigns on commercial networks. Its aim was to minimise the churn and avoid the loss of customers, while improving the customer experience. It wanted to change the customer opinion that ‘insurance is mandatory’ to an attitude of ‘I want the best insurance to protect me’.

“We needed a 360 degree view of the customer, understanding their behaviour at a number of key moments in their life – from pre-purchase, through to the time of decision-making, after decision-making and at the moment of churn,” explains Rita Sambado, the company’s director of marketing. “To achieve this we needed an upgradable and scalable database that could be segmented for both life and non-life insurance products.”

After a lengthy process, Sambado and his team succeeded in creating this, and the company is now able to accurately predict a churn, value, and potential incremental value score for each customer. The use of these scores enables segmentation, which results in creating a value proposition and a relationship model adjusted for different types of customers.

the 4th

Largest playerin the Iberian market

the largest and most diverse network of distribution and insurance products inPortugal

a market share of37.2% in the life segment

More than

3,300 employees

203,000 corporate customers

26.6% market share in the non-life segment

Caixa Seguros has transformed itself into a customer-oriented organisation

caixa seguros is achieving success in today’s markets after evolving from a product-oriented organisation to a customer-oriented one.

“using socio-demographic variables we can differentiate customers

according to their needs”

“We are now able to truly understand our customer base and establish a strategic goal by segment; adapt the commercial management (value proposition, communication and commercial measures of customer loyalty and retention) to the value of the segment and its characteristics; adapt the model of relationship to the segments (communication channels, message and service levels) ensuring satisfaction and quality defined; and optimise commercial and marketing resources,” Sambado explains. “Using socio-demographic variables we can differentiate customers according to their needs so as to define value propositions, relationship models and plans of loyalty and retention, differentiating by customer type and age.”

By looking at the crossover of these variables, the company can get groups of customers in different clusters. “However, having a big number of segments is dangerous,” Sambado says. “Therefore, we decided on three segments: those that make up our high gross margin business, those that make up our low gross margin business, and those that are simply unprofitable. For each segment it’s possible to observe the values of the key performance indicators in comparison with the entire company. So, we can see the number or customers and polices, the average cost of claims, the average profitability, the average potential incremental and the average maturity.”

In addition to this, the capillarity and size of Caixa Seguros’ distribution network has really helped it to give a

high level of customer service. “Caixa Seguros operates globally in the insurance market, selling products of all classes of insurance, as part of a multi-brand strategy and through the largest and most diverse network of distribution of insurance products in the domestic market,” says Sambado.

The company sells through its own agencies (the Fidelidade Mundial and Império Bonança brands), tied agents, brokers, bank branches of CGD (the largest Portuguese bank), post offices, the internet and telephone. “The brands are particularly important when the strategy and the results depend on the confidence of customers, which often happens in financial services, given the intangible nature of the respective products,” Sambado explains.

Excellence in the resolution of claims is also key. According to satisfaction surveys conducted by independent entities, over 75% of victims were satisfied or very satisfied with the resolution of the claim, in terms of workmen’s compensation, motor insurance and homeowner insurance.

“With this in mind, it’s easy to see why the insurance companies of Caixa Seguros had in 2011 a share of 14.7% claims compared with the market share of 33.4%, with particular emphasis on motor insurance where the values are 9.6% and 26.5% respectively, concludes Sambado. “We pride ourselves on being the first choice of millions of customers, who entrust us with their savings and their risks, knowing that we are efficient and qualified, and renew the commitment to serve them better and better.”

Caixa Seguros

a new focus

councils

75Efma Journal no. 234

The third event in the second series of meetings of the Operational Excellence Advisory Council (OEAC) took place in Rome on 8 June.

The meeting’s first main presentation focused on the evolution of a back-office operating model, highlighting the need for the development of a more focused operational model, the use of lean technology, a significant reduction in the number of operational platforms used, and extensive employee training.

Cutting costs were also discussed, with observations that many banks had given a knee-jerk reaction to the crisis by cutting the number of employees. However, this can be short-sighted: before removing people, banks need to see how they can improve processes. Otherwise, they will be ill-equipped to provide the levels of service needed.

The second presentation focused on frameworks for operational and service excellence, highlighting that there is a level of operational capabilities that banks ought to be able to describe so that they can show what deliverables they have. Excellence is ultimately about the ability to deploy and execute.

www.efma.com/oeac

The fourth and final meeting in the seventh series of Retail Banking Advisory Council (RBAC) events took place in Amsterdam on 13 June.

During the day, there were three main presentations as well as a visit to a Customer Experience Centre. The key discussion focused on the evolution of the branch, highlighting the need for fresh, modern branches that give more value to today’s tech-savvy customers. A Danish bank apparently has different doors in a branch, leading to different types of services. Other banks have branches with different formats for service, advice etc. The secret is to differentiate according to the specific local needs.

Overall, the customer experience is key. One financial institution had identified four key areas that help to create a great customer experience: operational excellence, optimising the balance sheet, customer centricity and being a top employer. New technologies were also discussed. Consumers want transparency and simplicity, and technology can help to provide these.

It was surmised that banks now need to focus on issues such as developing new CRM strategies; redesigning processes; the integration of channels; creating a consistent approach across channels; and improving the dialogue they have with customers.

www.efma.com/rbac

The fourth and final event in the second series of Retail Insurance Advisory Council (RIAC) meetings was held in Brussels on 15 June.

The meeting included three presentations that stimulated debate and discussion between members and also led to an exploration of other issues. Much of the discussion centred on the tied agent network. Current trends could profoundly affect the way in which insurance is distributed. Some people believe that traditional channels will disappear. However, there will probably be a future for the agent network but the model will need to be adapted.

A recent survey suggests that agent networks are facing two major threats: the rise of bancassurance and of direct insurance. Some banks have become a one-stop shop for insurance and banking products. They are often strong in life and are getting stronger in non-life products. Alongside this is the increasing use of the internet for insurance. At the moment, it is used mainly for quotations but increasingly for claims management and acquisition. There is also a strong demand from consumers for Internet access. One possible solution is to integrate Internet access within the agent distribution channel.

Innovation and differentiation were also heavily discussed. Social media is evolving rapidly which adds complexity – customers are better informed but do they believe insurers? There have been further developments in the use of the Internet, mobiles and other new devices and there are still more changes to come.

www.efma.com/riac

The third meeting in the second series of Risk Management Advisory Council (RMAC) events took place in London on 20 June.

Most of the discussions revolved around the topics featured in the four main presentations that were given at the meeting. The first was a presentation from Michael Pearson on the results of a small survey of 12 Council members. The survey had prompted some useful discussions, so the Council decided to ask Michael to provide a further questionnaire on collections and recoveries.

The second presentation was about Efma’s recent Credit Risk Conference had stimulated some healthy debate on various issues, such as the future of regulation and recent trends in different channels (such as the use of mobile for mortgages).

Risk management was also discussed in depth, in particular surrounding the Nordic countries who have largely managed to avoid the worst effects of the economic crisis so far. This is partly because countries like Sweden had a major crisis (mainly in real estate) in the early 1990s. That experience has helped banks there to develop a strong credit culture. However, Denmark wasn’t hit at that time but is now experiencing the crisis. A member commented that when a company or bank has a strong economy, people tend to forget about risk but when the economy gets hit, they remember it and the focus returns to effective risk management. Another person said that in a risk culture, a bank needs to get everyone across the business to be part of the process of managing the risk.

Other discussions covered consumer lending and the current situation in Greece.

www.efma.com/rmac

Healthy debate

Driving change Customers first Managing risk Getting stronger

A number of Efma council meetings have taken place over the past few months, spurring debate between members. Here’s a summary of the highlights.

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If banks are going to attract and retain loyal customers, they must have the capability to be present in their customer’s lives

at any time, in any place and across any channel or device. While some banks have already embraced digital channels and are experimenting with different ways to interact with customers and offer services online, others are choosing to put off these types of initiative until they are really sure of the business benefits.

Integrating channelsBanks at the conference talked a great deal about digital channels and the multi-channel approach. Those who are using digital channels say that they cost less. In some cases, customers don’t see the bankers but they are more satisfied than if they do! A delegate therefore asked if a retail bank should put a digital strategy as its main channel strategy for the future sustainability of the retail business over the next

ten years. One speaker said that over time the importance of digital will increase, but to put all of your eggs in one basket and to go for a leading digital strategy would be very aggressive and wouldn’t fit traditional incumbents.

For the most part, it was agreed that the branch will be present in the future; mobile is growing and will soon be more important than the internet. While one delegate felt that branches need to be part of the online strategy, a presenter said that there needs to be a connection between all three channels. Branches are needed for more complex products. For his bank, the mobile channel is currently processing over 35% of all transactions and the bank is now using the internet primarily for orientation.

Customer participationSome banks have virtual conferences, online customer workshops and other forms of interactions that help them to understand their clients’ needs. In

Scandinavia, one bank has a focus group with a Facebook-type feature where customers can make suggestions and others can vote on them.

However, when banks try and involve customers in the development of processes or product ideas, this can also lead to problems. One bank admitted that it was too slow to respond to customers and to implement their ideas. It’s important to set up the interaction in the right framework and to choose a very specific area in which the bank can involve customers.

Direct bankingA direct bank was asked why it also has branches. A speaker replied that he believes that his bank can win in the future because it has a low-cost operation. The three main costs are people, real estate and IT. The bank will therefore never have a large branch network but it feels that it stills need a physical presence through a handful of branches.

Another presenter agreed and said that his bank has small branches in Australia and also has an online bank. However, he is convinced that a physical presence is needed to show the bank’s accessibility and to enable it to meet people.

FacebookAccording to one participant, something like 5-10% of Facebook’s revenues next year will come from the financial sector, marking the social networking site’s intention to become involved in payments and even banking. However, it’s doubtful that people will want to make investments through Facebook in the immediate future.

Another delegate commented that some of his colleagues are afraid of Facebook but his bank is trying to find a way to cooperate with them. Banks have the complex back-office and IT systems needed to process payments, so

he believes that there will be more cooperation than competition in the future.

Social mediaThe panel was asked how senior banking executives can be convinced about the need for using social media. One person responded that what makes people move is emotion. If a bank sees what people are saying on the social media, it can ignore it or tackle it.

Last year, when the audience was asked what they use Twitter or Facebook for, most banks said that they were monitoring it for comments but very few were using it to talk to customers. The audience was asked the same question this year. About half are still using it for monitoring purposes but a higher number than last year are now using Twitter or Facebook to communicate directly with customers.

Digital financial services – marketing

Attendees of this event discussed how to achieve greater intimacy with remote customers by taking advantage of digital channels and encouraging online dialogue.

Paris

10 -11 May

www.efma.com/digitalm

“We don’t use social media for commercial purposes. Using

social media is like being in the customer’s living room. It’s not

the place to make a sale: you’re building an emotional attachment”

Benoît Legrand, ING Direct

“We are now trying to attract customers in a non-financial way. The first initiative was a Groupon approach.

We promoted Zuno: you could become a customer for

€1. We decided to sell 1,000: they sold in eight hours. We said that once they had registered, we would give them €20, so we were effectively buying the customers. From 1,001 people, 600 became clients and 540 of these paid and got the €20”

Peter Lakata, Zuno Bank

“We allow people to rate our products on our own platform. It’s about social

integration and transparency. We have a group that is proactively

discussing the development of the interest rate with us. We make a decision based on consensus. If you treat your customers like co-managers, they will behave like co-managers. It’s social commerce”

Matthias Kröner, Fidor Bank

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Multi-channel is now an important aspect of the banking agenda. Gone are the days

where banks carry out the majority of customer interactions within the bank branch. Today, they are expected to offer a consistent customer experience in the branch, in the call centre, online, via mobile apps, across social networking sites and so forth. This can have considerable implications on the way in which banks organise their operations, with many having to take a close look at their strategy and reconsider where they should focus their efforts in order to meet and exceed their customers’ needs.

Customer expectationsCustomers expect digital banking to be flawless: they believe that anything that is possible online should also be possible on a mobile device. They also want convenience, whether they are being served on Facebook or elsewhere. They don’t like radical

change: banks can lose many customers if they proceed with changes that are too drastic or too sudden. It’s better to change things gradually.

One bank remarked that delighting customers doesn’t necessarily have to cost much. It enables its customers to write a cheque on their iPhones, so that it’s no longer necessary for them to carry a cheque book. The idea came from a team within the bank and they decided to experiment with it.

Call centresThe importance of call centres is sometimes neglected. A Turkish bank has a large call centre that sold 2.1 million products and services last year; and 31% of cards sold to customers were generated by the call centre. The bank invests heavily in call centres. In Austria, banks also invest in call centres, but it’s difficult to close sales. In short, call centres do a good retention job. Their motto is clear: each contact is an opportunity

(to sell, to know, to enrich the database, to cross-sell).

Mobile Generally speaking, banks are still at an early stage with mobile. It is still a separate channel but there will eventually be a convergence of technologies: one access point will lead you to different platforms. There might not be different devices; but usability and convergence will improve. The cloud will also make things simpler.

A bank in Singapore has built a mobile app that helps people to buy homes in Hong Kong. This app gives customers information about the building they want to buy. If they can afford it, they can call the bank. The bank is focusing on the home-buying activity rather than offering a mortgage.

Multi-channel distributionCustomers expect banks to deal with all of the channels at the same time:

they expect to be recognised across all of the channels. It’s important to have personalised campaigns and personalised information, as this is important for trust.

In a recent European survey, the participants were asked how many channels they would be prepared to use to buy a loan. On average, people answered that they would use three or four channels. This means that each advisor has to have a clear view of the customer no matter what channel they have interacted with previously.

SecurityIn the past, the security issue was the task of banks; customers weren’t really aware of what was happening. Banks tried to make customers more conscious of the issues – but security is now more mainstream. There is greater awareness of the need for it – not only in banking applications, but also when storing private data in the cloud.

Because data is stored on mobile devices, they are a particularly easy target. A virus on an iPhone is able to infect Paypal, for example. Thankfully, there are new ways of authentication which depend on the context and the application, and Europe is leading the way on authentication for mobile banking.

Training and developmentToday, customers are better educated and informed, and they often have personal finance management tools at their disposal. This has an impact in terms of staff training. Banks need to train their employees (and also involve them) in mobile development. They need to have customer insight so that they can communicate more effectively with their clients. Employees should be encouraged to use mobile banking, social media and new types of banking technology so that they are better equipped to serve customers.

Digital financial services – organisation

faced with the challenge of ensuring a consistent customer experience across multiple channels that go beyond the branch, banks need to focus on aligning their organisation in order to strengthen their remote actions.

Paris

10 -11 May

www.efma.com/digitalo

“We’ve seen an explosive growth in mobile, with 11 times more contact with mobile customers in 2011 than in 2010. Consumer behaviour has also changed: they want to manage their own finances”

Anke Slagter, ABN Amro Bank

“Simplification is needed: websites should be easy to understand and give you the information you want. Customers want simple functions,

innovative tools, mobile services and some fun”

Tamas Braun, IND Group

“New clients are attracted by our online banking and by the BNP brand. Some are disappointed by traditional banking and its opening hours and want to try another approach to a relationship with a personal advisor”

Julie Raoux, BNP Paribas

Efma digital financial services conference. Key words no1=mobile; no2=crowdsourcing;

no3=PFM; no4=gamification; no5=social media@RKrivine

Efma Journal No. 234

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A speaker said that sales and service live together – but like everything, the situation is changing. Is

it sales or something different now? Banks now talk about customer experience instead of service. But it’s not really about the words that are used; it’s more about what they imply that is important. What is certain is that banks need to provide a much more personalised environment for customers – one that is both impactful and immediate.

Account openingA participant remarked that the time taken to open an account online is very important. For one bank that was present, the fastest speed was about 12 minutes. In reality, it usually takes 45 minutes to an hour if the customer has the right documents with them.

Branch managersSome banks believe that the branch manager plays a key role as a coach when it comes to improving performance. A speaker said that if a bank implements things from a distance, the branch manager is a crucial person to make that change in the individual branch. He must believe in the bank’s strategy or the implementation will be lower. It’s the difference between an average level of success and being very successful.

Customer satisfaction If a bank increases its customer satisfaction levels, this will be reflected in higher profitability and greater loyalty. The only way in which a small bank can compete against larger banks is to do things better than them. Quality is a key pillar in this. An important aspect of both sales and customer satisfaction

is an effective CRM system. If this has an integral multi-channel approach, a bank can see all of the products and services that the customer has.

Employee motivationIt can sometimes be difficult to keep employees motivated. One delegate said that the secret is to make sure that they are led by brilliant leaders. When the bank had asked employees why they left, many of the reasons were rooted in poor local leadership.

Innovation and future planningIn the current climate, it’s difficult to plan ahead even for a year. However, one participant commented that his bank is thinking more in terms of where it should be placing its bets for the future. IT projects tend to have a lead time of about five years, so 2020 is not

really that far ahead. When asked where his bets would be placed, he said that his choice would be to bring everything online and have a cross-channel marketing platform.

Reasons to changeBanks that had undergone a transformation in recent years were asked what had prompted the change. One said that if the bank had only been interested in that year’s performance, it wouldn’t have had to change anything. However, because it was interested in the future, it had to make some profound changes so that it could start being prepared to be the best.

Another participant said that there had been two components driving the decision to change. The bank’s performance was fine but it had a limit. On the other hand, it could see in many markets that it

was missing out on the full potential available. So the bank gave people the freedom to perform to their true potential, which has also given them more pride and power.

TrainingDespite the difficult economic climate, one bank said that it has increased its budget for training. This is because it believes it is feasible to change people – so it identifies those that need support and defines a plan for each. After the training, if there is a problem of attitude, the bank moves the employee to a different job. Overall, banks need to invest more in training employees in the behavioural aspects of their work. If a bank can create the right attitude in its employees on a daily basis, this can make a real difference.

Sales and service

As the dynamic between the customer and their bank continues to evolve, financial institutions need to explore how they can deliver superior sales and service while finding a way to link them together to create an enriched, profitable customer experience.

Brussels

24-25 May

www.efma.com/sales

“Multi-channel customers are stickier in terms of active products and they are also more profitable. This drove us to develop an integrated customer experience across all channels, which represented a big change in mindset, processes and brand perception”

Sinéad O’Connor, Banco Santander

“Our industry is changing and we have

to change. We must empower our front

line and give more freedom to our sales people and look at

our clients’ needs and satisfy them”

Thomas Gatter, UniCredit Bank Austria

“Banks have used performance

development systems for many years. Our

objectives include a massive behavioural element. Recognition

is a huge issue. I got into the habit of texting people to thank them for small things”

Barnaby Davis, Barclays Bank

“Social media is in real time, so you don’t have two or three days to prepare a suitable response. You need to look at the social profile of your brand and decide how to increase your engagement and presence. Try and understand where your customers are”

Joseph Zammit, Bank of Valletta

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83

W ith many European retail banks now dealing to a large extent with liquidity

and deleveraging, the race for volumes is over, as is the competition for putting ‘new flags’ everywhere. The focus is now on improving existing set-ups and working on profitability. Ultimately, this is about putting the consumer at the centre of a company’s operations and thinking about consumer value rather than consumer risk.

OpportunitiesThe crisis has created an opportunity for solid players to take advantage of lower competition. A delegate suggested that there is an opportunity to do this on a broader European level; as players retreat from the market, entities are up for sale and portfolios are being run off. Consumer finance organisations should think

carefully about the opportunities being created for market share capture. If they are prepared to go against the grain, they might find sunshine behind the cloud.

A speaker also highlighted the huge potential in combining the strengths of a consumer finance company with those of a retail bank. Consumer finance companies have developed over many years but they can still benefit a lot from retail banks. For car finance and wholesale finance, they can use the credit systems from retail banks and the relationship the retail bank has with distributors and car manufacturers. The combination of the two provides a lot of benefits.

Customer centricityIf financial institutions have a very strong focus on customer centricity, how can this remain compatible with the objectives of developing

the business and achieving a good profitability? A participant observed that the changes in the financial services sector over the last five years mean that customer centricity is and will be a priority – perhaps forever.

So where does the bottom line end? One participant believes that in the future, the bottom line will not be what it is today and that competition will be more fierce and some companies will disappear. There will be little room for specialised consumer finance units in the future.

RegulationsCan the EC make rules and regulations that are easier to understand? There are a few ways in which this could be done. One is that the EC has tried to move from directives to regulations over the past few years. Directives are rules made at a European level that then need a national law in order

to be implemented. In contrast, regulations are directly applicable and can be put into action more quickly. The EC now always tries to carry out two activities before proposing a regulation: an impact assessment and a wide stakeholder consultation across the market. It has made some improvements over the last two years. Most of its rules come from a G20 decision – and global decisions tend to be easier to understand than national ones, so this should also help.

The future for consumer financeSome of the presenters were asked which of the main developments that they have been implementing in their companies would be likely to remain in the future. One replied that the first point involves refocusing on what the company wants to be in a different market and with different products. His

company won’t make such a diversification in the future in terms of products and geography as it has in the past. He also added that an organisation still needs to have some scale or it wouldn’t win.

The second aspect is a good risk system. This might be risk-based or value-based, but it needs to have much more integrated modelling from the acceptance level to the final collection, using the right segmentation. Another speaker remarked that the first element is the people. The crisis has been a fantastic opportunity for companies to remind themselves that consumer finance is a fantastic, data-driven business. What his company has learned from the crisis is that the basics were already there and that it will have capable managers in place with data tools so that it can go through and win.

Consumer credit

coNfereNces

changes in the financial services sector over the last few years have brought about the need for retail banks and consumer finance companies to become more transparent and develop sustainable business models when it comes to consumer lending.

Brussels

5-6 June

www.efma.com/credit

“We might think we have risk under control but we might find that it isn’t. When you enter

into collections, the goal is to

get as many clients as possible back to normal and to get your money back. Our foundations are responsible lending, the right people, a good structure and ICT”

Bart Vanhaeren, KBC Consumer Finance

“Every bank is trying to differentiate its tone of voice. To differentiate ourselves, we are

trying to be seen everywhere and

to be reachable everywhere with the help of technology”

Ebru Artaç, DenizBank

“So, can we fit consumer finance and banks together or should we disappear so that banks do

everything? I believe consumer

finance can bring something to banks. Firstly, a profitable business, with good services and products. There is knowledge and platforms that can be shared”

Gianluca Soma, Société Générale Consumer Finance

Efma Journal No. 234

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W hat is the ‘new normal’ for retail banking and credit? This was the question that was

asked at the Credit Risk and Debt Management conference held in Brussels earlier this year. Regulatory compliance, risk management, liquidity requirements and geographic variations were all hot topics on the agenda.

Regulator interventionIt’s very difficult for regulators to determine when to intervene in a bank’s activities. A formerly strong business model can become flawed due to changes in the environment. For example, government debt has now replaced mortgages as the highest risk factor. When regulators intervene in a bank, they have to review strategic decisions regarding investments and divestments. The big concern for supervisors is to mistakenly raise a red flag on an

acquisition and damage a bank or stop it from being able to expand.

Risk managementThe panel was asked about the alignment of risk management decisions and the use of capital. One speaker said that there is a top-down process that specifies the level of exposure by geography, product and market. However, this has to be operationalised by determining which segments or customer profiles should have their limits increased or reduced. There’s a need to work out strategies for the recruitment and retention of customers, based on risk-reward assessment. In the future, banks will have to allocate capital in a more precise fashion, because margins need to be restored for return on equity.

Basel IIIA member of the audience commented that Basel III hasn’t solved the

crisis, which is deepening in some geographies. He asked if this is the final line, and if not, what are the next regulatory steps from a risk management perspective? A speaker replied that shadow banking is the next step, because it isn’t under control and the accumulation of risk is enormous.

Another delegate said that he had become accustomed to wearing a coat during Basel II and is now carrying an umbrella because it’s still raining! It’s going to continue. Protective measures can be taken but these don’t address the root of the crisis. Risk officers will be better equipped but will have to remain very prudent about the root of the problem and not only the consequences.

Best practices The chairperson asked about best practices for understanding customers and building models while in the

midst of change. A participant commented that there is no better way of assessing risk for very large numbers of customers than using science. His bank’s models help to segment customers by behaviour.

Another speaker replied that a model is good but is just a model. Just as a doctor performs different tests and makes a diagnosis, banks have to use models as part of the decision-making process. The models must include relevant factors, such as the legal age limit for a loan in some countries, otherwise the results will be skewed.

CollectionsIt’s vital to have collections feedback in the lending model. Scorecards can’t be applied consistently across every region in a country, and need to be graded by region and branch to ensure appropriate lending. The income in the capital is usually greater

than in the suburbs and countryside, so if a bank has the same scorecards for all areas, it could over-commit in some areas and under-service others.

Future outlookThe panellists were asked how optimistic they are. One replied that although his bank had been through multiple crises, it always ended up stronger from the experience – but this may take some time. Another said that it depends on the outcome in Greece, whether Europe is prepared to contain contagion, and the political struggle around the regulation of the financial sector. If banks can get through these, they will be stronger. A third speaker remarked that the crisis shows that we can all fail and we need to invest in better governance on all sides – including politicians, whose messages are unclear.

Credit risk and debt management

The financial landscape has changed irrevocably. Now it’s up to financial institutions to adapt to this ‘new normal’ and develop growth strategies to position themselves for long-term success.

Brussels

5-6 June

www.efma.com/risk

“Uncertainty and risk aversion prevail. The key is to balance the aims of financial reform and sustained credit growth. Financial stability will depend on solutions to the sovereign debt crisis and the macroeconomic slowdown”

Rudi Bonte, Banque Nationale de Belgique

“The changes in Basel III won’t prevent another crisis but will make it less likely”

Romain Berry, Citigroup

“Collection is an ongoing process of enhancement. You have to listen to ideas and feedback from customers and staff and test them;

and keep looking for ways around problems”

Kseniya Avdyeyeva, ProFinBank

“Despite predictions of doom, I believe in the future. We are engaged in changing risk culture to address future risks more effectively”

Zoran Sikora, Hrvatska Poštanska Banka

“Risk managers moving to business areas is rare, because risk management skills are rare”@ManuelGonsalves

Efma Journal No. 234

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The credit crisis has led to fundamental shifts in the mortgage market. Banks are much more conservative,

leading to higher mortgage rates and lower origination levels. Meanwhile new regulations such as Basel III will put even greater pressure on banks to retain capital. At the same time, many customers have lost their confidence in banks. Some say it will take a generation to repair that damage. So how should lenders respond? While the future is uncertain, the consensus is for banks to improve the sophistication of their mortgage pricing, better understand their risk exposure and be more straightforward with customers about the product, fees and costs involved when taking out a mortgage.

Basel IIIA delegate asked the panel about the potential impact of Basel III upon the ability of banks to fund long-term mortgages in newer markets.

A speaker replied that Basel III isn’t the final line because many banks won’t be able to comply with its requirements. There’s a complete change in the regulatory environment and in the environment in which banks allocate capital, and the fundamental nature of lending will change.

Hoarding and stabilityA presenter commented that banks are definitely hoarding: they need to be de-incentivised to hoard. They need to be resilient and to try to avoid going bust. Banks have maturity transformation and manage risks. They are inherently unstable unless there are mechanisms, a regulatory framework, and a central bank framework to support banks, to provide confidence that they will be stable and properly capitalised in adversity.

Housing loansIn France, housing loans resumed in 2011, but the demand is now

contracting, as potential buyers are being more cautious and banks have to shrink their balance sheet to deal with more regulations and ration the distribution of credit. In Spain, the private sector has to deleverage. It isn’t a good time to accumulate fresh debt. The situation is very different across different countries. A delegate commented that banks haven’t realised that a mortgage represents a 20 to 25 year commitment and isn’t a cash loan. It requires a long-term evaluation of the customer’s ability to repay the loan.

PricingA speaker remarked that lenders have constrained liquidity and capital. In the UK mortgage market, most lenders try to cherry-pick low-risk customers and are prepared to offer a huge price differential between the two LTV buckets (75% and 90% LTV). The central pricing unit is running more education programmes for the front line to explain the breakdown of customer profitability, the value of

the mortgage, and why there are different pricing segments.

Responsible lendingWith Basel II and Basel III, the value of a bank’s portfolio could change month by month. Banks need a better understanding of the type of risks they have inside their portfolio over the entire life of the mortgage. A speaker said that if a customer came to his bank to ask for a mortgage, he would have to combine their risk profile and their family profile over time; a risk-based approach is not enough. Responsible lending requires a balanced and comprehensive approach.

Application processIn France, between 5-10% of customers use the internet to apply for a mortgage. Prices are the same, irrespective of the channel used, because of the multi-channel distribution model. This avoids having problems with the other channels.

Plus, it is difficult to give discounts because of the very low margins. A speaker said that for his organisation, there are four steps in the application process. For the final step, customers usually have the choice of going to the local branch advisor or contacting the online advisor. His company pushes existing customers to go to their local branches but customers might start the interview online and go to the branch later. It is a real multi-channel system.

Future strategy One presenter said that his strategy for staying active in the business over the coming years is to carry on building strong risk management and to reinforce his collections capabilities. He said that he wouldn’t compromise on lending quality and would place service to customers at the centre of the proposition. Financial institutions shouldn’t lose sight of the fact that they are handling clients’ money.

Mortgage lending

The mortgage market is expected to remain muted for some time yet. recovery will come down to improved risk management, greater transparency and more sophisticated pricing models.

Brussels

5-6 June

www.efma.com/mortgage

“Under Basel II and III, the requirements placed on banks to retain capital are very prudent, sensible and logical but represent a tremendous challenge for many European banks”

Tim Rooney, Deutsche Bank

“Lenders need to deliver better value from their pricing. They need a better understanding of costs; to differentiate cost components; and to push cost and profit drivers into pricing decisions”

James Bryan, Oliver Wyman

“Flexible mortgages seem to be a good solution; price is no longer the only way to convince customers. Flexible loans give added value to our customers in line with our strategy of being a housing partner for them”

Maud Delbecque, BNP Paribas Fortis

“Only a small percentage of customers are knowledgeable. You don’t buy a house everyday: people aren’t experienced and want to be reassured they are doing the right thing. The internet plays a huge role in informing and educating customers”

Wim Flikweert, ING Bank

Efma Journal No. 234

sigN out

Social communities are the perfect place for brands to connect with their audience,” Lithium senior vice president

Bruno Teuber wrote in The Guardian recently. Companies like Victoria’s Secret and Walmart, which Campalyst says are the leading retailers with 18.5 million and 15 million fans respectively, are clearly using social media well.

Retail banks should be no different. After all, their customers are on social media too. Yet, despite the potential, most banks are lagging far behind. Indeed, few banks have taken even tentative steps into the social media environment.

Those that are leveraging it, however, are doing it well. Indeed, KPMG expects that they will package suites of products tailored specifically to individual clients, reduce call centre staffing as they become increasingly proactive in their management of issues, and conduct everyday transactions through social media apps that provide banking services using the social network’s authentication system.

Some bankers expect they’ll be able to go even further than just using social media to serve customers, potentially by offering differentiated pricing or service tiers based on social media analytics. Earlier this year, for

example, Westpac chief technology officer Jeff Jacobs told Australia’s iTnews that the bank had discussed the possibility of valuing customers’ social connections with its outsourcing partner, IBM.

And Deloitte sees social media as a tool for recruiting staff with leading-edge skills. Social media is “an important tool for attracting top talent, particularly for younger generations that are the workforce of the future,” Deloitte said.

So why don’t retail banks do more? Along with a lack of expertise, technology and business models play key roles. “Most banks are structured in silos,” ING Retail Banking Direct’s chief information officer Saul van Beurdenn wrote recently, so customer data often resides in multiple systems and databases. In contrast, customers using social media expect their bank to have a “holistic and single view of all of their interactions and accounts.” Banks need to make “significant changes in their technology infrastructure and related processes so they can achieve real value via targeted sales pitches, cross selling and effective customer support.”

While many banks do lag, a few are ahead of the curve and use social media far more effectively than their competitors. Along with garnering attention, they’re also

gaining a competitive advantage and new customers.

ASB Bank in New Zealand, for example, has set up a Facebook Virtual Branch that it sees as another distribution channel that’s as effective as any other branch. And its social media team monitors Twitter and Facebook constantly to promote the bank.

Citibank has used a multi-pronged approach. It leveraged Twitter in 2011 as a channel for customer interaction, and uses tools like LivePerson chat integration for secure chats between customers and staff. And another part is its internal social networking site exclusively for the children of super-rich clients.

Other banks with leading-edge services include Alior Sync in Poland, which enables customers to transfer money directly to friends through Facebook photos, and FNB bank in South Africa, which offers secure online banking as well as sending vouchers that are convertible to cash.

Overall, it’s clear that developing a winning social media strategy requires far more than simply putting information on Facebook and monitoring Twitter. While the majority of banks are lagging behind, those that have leapt ahead see themselves as gaining clear and financially rewarding competitive advantages.

Banking on social MediaAs social media usage grows, with nearly a billion people on Facebook and tens or hundreds of millions on everything from Whatsapp or Youtube to Weibo, customers expect to interact with companies they buy from via social media too, says Richard Hartung.

“

“Few banks have taken even tentative steps into the social media environment”

40th Efma CongressMultichannel coordination and integration

Barcelona, 18-19 October 2012

Best practices in retail financial servicesmore information on www.efma.com

Key reasons to attend• � Meet and share

Networking opportunities with key professionnals of multidistribution

• � Learn and exchange Featuring in-depth case studies and interactive Q&A sessions

Forty years of Efma congresses and nearly as many years of reinvented distribution strategies and channel additions. What is the current state of play?

True multidistribution is hard to achieve. It requires significant long-term investment, but what benefits or return on investment can banks expect? There is unfortunately no easy answer, but there is one place where you can learn from the bankers with the most experience in this area:

True multidistribution, an attainable Holy Grail or a mirage?

The 40th Efma Congress

Efma reports www.efma.com/congress

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Hear several specially commissioned Efma reports:

• Multichannel banking, by Efma RBAC, sponsored by Microsoft• Retail banking distribution 2020, by BCG• Ten years of multichannel banking, by McKinsey• Pricing in retail banking, by Oliver Wyman