Insurance Repository and E-Policies 51THE MUCH AWAITED • Eliminates risks arising from between various stakeholders TCS BaNCS Research JournalMOVE TOWARDS paper– i.e. risk of loss or damage in the Insurance sector, throughDIGITIZATION CAN HELP of physical documents the setting up of InsurancePOLICYHOLDERS AND Repositories. It is worth noting thatINSURERS ALIKE IN • Eliminates the need to visit the countries such as India and a fewBENEFITTING FROM THE respective Insurer’s office for countries in Africa have taken theMANY ‘STRAIGHT- all the policy servicing needs. lead towards setting up nationalTHROUGH-PROCESSING’ All updates such as a request Insurance repositories. CSDs areMEASURES THAT for Address or Bank information naturally viewing the InsuranceAN INSURANCE can be made once on the Repository business as one thatREPOSITORY IS centralized platform accessed can help them leverage theirDESIGNED TO PROVIDE. by all Insurers. investments in infrastructure and technology as well as operations • Faster claims settlement expertise. For example, in India, two of the four Insurance Repositories • In case of the policyholder’s that are already operational, have demise, beneficiaries of the been promoted by the local CSDs. deceased have easy access to the policies maintained Therefore, the much awaited move electronically and can initiate towards digitization can help the necessary steps for raising a policyholders and Insurers alike in claim. benefitting from the many ‘Straight- Through-Processing’ measures In summary… that an Insurance Repository is designed to provide, and thus The insurance sector is expected to ensure more transparency and witness a significant drive towards efficiency. More importantly, the digitization, with many regulators rights of the average policyholder evaluating options to move towards are adequately safeguarded in the a “paper-free” world, by making it event of national disasters even mandatory for new policies to be while protecting Insurers from issued in electronic form. Along incidents of fraud, thus leading to with this, regulators are also trying better governance globally. to streamline the interaction Malini Raman Pratima Rani HTTPS://GOO.GL/MGNYPT Senior Consultant Assistant Consultant TCS Financial Solutions (TCS BaNCS) TCS Financial Solutions (TCS BaNCS)
52 Automating Corporate Actions ReclaimsTCS BaNCS Research Journal AUTOMATING CORPORATE ACTIONS RECLAIMS NEGLECTED BABY; CRYING FOR AUTOMATIONHTTPS://GOO.GL/MGNYPT It will not be exaggeration to say increasingly frequent and complex. the risk of misinterpreting the that, “The number of corporate Corporate actions processing announcement. These factors actions in a country is an indicator has traditionally been highly pressurize the financial institution of the maturity of capital markets manual and volume sensitive, with to attempt automation of corporate in that country”. As capital markets resourcing requirements greatly actions processing. Several product of a country evolve, the number impacted by seasonal peaks vendors have entered this space, and type of corporate actions and troughs. Manual processing helping improve the overall increase manifold. For mature is expensive and introduces automation framework. markets, corporate events are
Automating Corporate Actions Reclaims 53 TCS BaNCS Research Journal TAX RECLAIMS ARE THE RECLAIMABLE PORTION OF INCOME THAT A GLOBAL CUSTODIAN NEEDS TO CLAIM FROM A TAX AUTHORITY OR AGENTS AND RETURN TO ITS CLIENTS.The value chain of Asset Servicing market participants. The inefficient HTTPS://GOO.GL/MGNYPThas multiple parts with few prone reclamation of over-withheldto high degree of automation. There tax on income from cross-borderare specific areas around taxation, securities can result in significantwhich are important and not heavily monies being left on the table,automated. This article attempts and missed opportunities as far asto take a look at the challenges maximizing the value of portfoliosinstitutions face with withholding are concerned. Efficient processingthe tax reclaim process, and its can add value to clients’ portfolioscurrent and future state. and beseen as a critical competitive benchmark service for custodialWithholding Tax Reclaim performance.Processing To avoid complexities of taxTax reclaims are the reclaimable reclaims, some organizationsportion of income that a global ensure that multi-listed shares arecustodian needs to claim moved to the appropriate depot,from a tax authority or agents considering Tax Reclaim or Relief atand return to its clients. The Source and Treaty rate. For example:withholding of a tax reclaim Certain European markets (such asprocess is complex, expensive and France) are capable of providingpredominantly manual for most relief at source but not others
54 Automating Corporate Actions ReclaimsTCS BaNCS Research Journal (Spain). Banks will proactively points have reduced considerably move shares from the depot in due to automation introduced byHTTPS://GOO.GL/MGNYPT TAX RECLAIM Spain to France to avoid the time state-of the-art IT platforms in ENTITLEMENTS NEED delay and processing difficulties the Asset Servicing value chain. TO BE CREATED ON AN of tax reclaims. Further, there are There are platforms that provide ACCRUAL BASIS BASED scenarios where the event currency core corporate actions processing ON THE CLIENTS’ is different from the reclaim as well as systems that provide TAX STATUS, EVENT currency, leading to differences in automation for specific areas of INFORMATION, FX. Organizations take similar steps asset servicing like announcements WITHHOLDING TAX of moving the security wherever scrubbing, claims, and tax reclaims. RATE AND THE RECLAIM possible to avoid differences in FX There are only few tax reclaim RATE BETWEEN TWO rates. service providers globally who can COUNTRIES. provide their services to custodians Typically, a large global custodian in tax reclaims management. ends up spending 50-75 Million Smaller firms are managing this USD in processing reclaims manually and medium-to-large arising due to corporate actions firms are struggling to automate processing, across markets. processing of withholding tax Institutions either outsource this reclaims due to the complexities function or deal with it internally involved and the changing nature by having market-specific teams of forms involved. for complex and multiple reclaims forms for each market. Challenges associated with the Tax Reclaim Process Typical processing steps in withholding tax reclaims Long Process: Reclaims have to be processing are: tracked either with tax authorities or global custodians. There is no • Tax reclaim accrual creation: standard SLA or dates for this Creation of tax reclaim process, which results in open entitlement reclaims for months & even years. • Reclaim validation and Too Many Forms: Typically, global Enrichment: Enrichment with custodians have to deal with tax authority address, check for 100+ reclaim forms and these minimum reclaim amount vary across markets, are prone to frequent changes, which are • Bulking of reclaim entitlements: a major challenge in the way of Based on country, depot complete automation. account Lack of Integration: Lack of • Packaging of reclaim integration with tax authorities are entitlements with specific form another reason of concern. While names for some markets, electronic filling options exist, most markets are still • Reclaims payment: Receipt dependent on paper filling of tax of reclaim payment and reclaim packages. settlement of reclaim entitlement Elements in Automation of Tax Reclaim Processing Current State Tax Reclaim Entitlement Creation: In spite of the challenges, it will Tax reclaim entitlements need to be fair to say that manual touch
Automating Corporate Actions Reclaims 55IN THE COMING be created on an accrual basis Conclusion & Industry Trends TCS BaNCS Research JournalYEARS, INSTITUTIONS based on the clients’ tax status,WILL BE KEENER event information, withholding Automation in corporate actionsTO AUTOMATE VALUE- tax rate and the reclaim rate has improved over a period ofADDED SERVICES between two countries. The reclaim time covering larger areas of AssetLIKE WITHHOLDING TAX entitlement thus created needs servicing. Localization in processingREFUND AND TAX to be tracked for the complete is another big hurdle in the wayREPORTING. LARGE payment from the Depository/ to automation, however, platformGLOBAL INSTITUTIONS Agent Bank. providers are trying to deal withWILL LIKE TO HAVE it effectively. New platformsPLATFORMS WHICH Tax Reclaim Form Creation: Tax form are technically advanced andCAN EFFECTIVELY DEAL creation based on templates in configurable to deal effectivelyWITH CORPORATE different markets is a core element with localization. In the comingACTIONS, TAX of the process. All additional years, institutions will be keenerREPORTING AND TAX reference data required for form to automate value-added servicesREFUND IN ONE SYSTEM. creation in different markets need like withholding tax refund and tax to be stored and used. reporting. Large global institutions will like to have platforms which Tax Reclaim Settlement: Tax reclaim can effectively deal with corporate settlement needs to be performed actions, tax reporting and tax refund either through processing of in one system. These processes are MT 566, via proprietary feeds, quite different across markets and or manually. In any case, the will lead to additional integration automation of tax reclaim touch points with local tax settlements will eventually ensure authorities in some markets. tax refunds to customers. Sumeet Ahuja HTTPS://GOO.GL/MGNYPT Consultant TCS Financial Solutions (TCS BaNCS)
56 Asset Servicing Managers Tool KitTCS BaNCS Research Journal ASSET SERVICING MANAGERS TOOL KIT RISK. SO MUCH HAS BEEN WRITTEN ABOUT IT. WE TALK OF WAYS TO IDENTIFY RISK, HOW TO MEASURE IT AND HOW TO SIMPLIFY RECORDING RISK, BUT RISK PERSISTS, AND LOOKS AS THOUGH IT WILL BE HERE TO STAY.HTTPS://GOO.GL/MGNYPT Risk has always been an underlying Risk still remains. lack of control and management part of Asset Servicing, and while it oversight. has declined over time through: - Indeed, some would argue that its very existence is as a result of the The historic approach follwed - Messaging standardization above-mentioned improvements. has been that the manager or the The feeling being that improved supervisor who was part of the - User/Client interfaces for automation, the impact of reducing Processing Team, and an ex-team direct entry costs, the increase in outsourcing member with great experience and offshoring have all resulted in a and knowledge, would still “chip - Improvements to Straight less experienced work force which, in” when required to help out with Through Processing (STP) in turn, has led to a perceived processing. - Reduction of human/user touch
Asset Servicing Managers Tool Kit 57 WHAT THE MANAGER TCS BaNCS Research Journal NEEDS ARE TOOLS WHICH GIVE THEM AN OVERSIGHT TO THEIR OPERATION. TOOLS THAT SHOW FORECASTING AND PAST PERFORMANCES, THAT CAN IDENTIFY HIGH VALUE ITEMS OR EVENTS THAT ARE CURRENTLY OPEN IN THE PROCESSING CYCLE.Further, the processing was by an processing be controlled and and that can identify high value HTTPS://GOO.GL/MGNYPTindividual user, who owned the managed when the management items or events that are presentlyevent, who touched everything and the staff are in different open in the processing cycle. Theyduring the event lifecycle, who locations and time zones? And, should also help raise alarms whenchecked every process, who ticked where volumes are often hiding real key triggers (KPI’s) are breachedback a reconciliation and who issues and where the reporting is and ensure that the higher riskcompleted a check list when the end-of-day and effectively out-of- situations are identified, thuscompleted file was signed off date on production? allowing for appropriate actions toclosed. be taken and avoid any escalation Historically, when managers were in the risk.So, when you consider the part of the team, they would haveprocessing changes of the past greater insight and oversight and From the operational process we25 years, the automation, the would instinctively know when need to consider the scenariosStraight Through Processing and something was amiss. (Call it a gut and situations that would needthe management by exceptions, feeling or a sixth sense.) to be captured, recorded andand off set that by the increasing monitored.complexity of events, the inability So how can the manager of today,to bypass or break rules, and the have this edge or advantage? What - When a process hasn’tloss of operational experience and tools can they use to get them completed within itsawareness. You have to wonder if there? expected/allowed timewhile the processing may now beconsidered better, it’s fair to ask if it What the manager needs are tools - Where a process has ais any less risky. which give them an oversight to regular performance level their operation. Tools that show and its performance hasFrom a risk perspective, the forecasting and past performances, dropped (or increased)question is, how well can the
58 Asset Servicing Managers Tool KitTCS BaNCS Research Journal - Where a Processing Team - Identifying risks as possibly • Control and manage their or a Function is overloaded happening and managing teams/functions from theHTTPS://GOO.GL/MGNYPT with work and cannot meet them so that they don’t correct level its performance targets happen (more on a regular basis – • Ensure issues are identified, one offs whilst contain risk, - If it does happen, to ensure addressed and closed or raised are just a one off) that the impact is managed immediately correctly - Where there are insufficient • Provide an overview of their resources to perform all the As the potential for error occurs current responsibilities processing at all stages during the event lifecycle, its only right to ensure • Allow performance and progress - Where the system breaks that the risk is measured and to be measured or a process kicks out, and managed throughout the event there is an increase in lifecycle. And, for the manager • Ensure efficiency in resource workloads, much more than to have the underlying data management was expected presented in a way that she can clearly see the message being • Ensure that processing is - Where processing shown and be able to direct the conducted in a risk-free and (event) volumes increase action to resolve and restore. controlled manner beyond the current staff/ performance levels What should be recorded? The information offered needs to equip them to: So when these situations occur or Well, not everything, that’s for sure. are forecasted to occur, then there But there needs to be clear focus • Gain an oversight of their is a correlation to the increase in on high risk/high value events operations processing risk, as these additional or outstanding tasks and actions pressures will ultimately lead to within those events. The manager • Be made aware of any arising either a near risk or a physical needs to have at their fingertips issues loss because one or more of the live data showing and highlighting following has occurred - the current state of play. • Be informed and kept abreast of activity deemed high risk, such - Not performing or The aim must be to - as exposure reports, unelected completing an action or a events process 1. Capture the correct data, understand what is relevant and • Be made aware of capacity/ - Not performing or useable as compared to what is resource management issues completing an action within purely volumes or a statistical the given time constraints analysis • Answer the question “How are we doing?” - Performing or completing 2. Present the data captured, the action incorrectly ensuring it’s produced in good • Complete performance analysis time, in the best format and to and reviews - Not following up on an the right party action or task and therefore • Undertake resource forecasting missing the chance to 3. Identify where an issue is, and and performance impact perform or complete the how it can be tracked, reported action as intended or and resolved Therefore, the answer seems to required to be to offer the manager a range of The manager requires an easy to dashboard views to work with data. Put simply, the manager needs the use Control Dashboard, which will The following are suggestions for tools to ensure that either - allow them to - meeting these needs, however, the complete picture would be driven - One or all of these actions by the underlying organization’s doesn’t happen operations, their set up and
Asset Servicing Managers Tool Kit 59A VIEW BASED events will give a view of of the staffing levels over the TCS BaNCS Research JournalON PRE-SET VOLUME the overall level of current coming periods and also forVALUES FOR THE processing that needs extra annualization (holiday cover, HTTPS://GOO.GL/MGNYPTPROCESSING TEAM/ care or attention. This allows temporary staff) of staffingFUNCTION THAT assessing of current staffing requirements.MEASURES CURRENT volumes and redirecting them as 3. Performance Analysis – ThisVOLUMES AS A required. will give a view of the day’sPERCENTAGE OF performance i.e., how productiveMAXIMUM CAPACITY 4. Current STP Processing Rates the processing teams/functionsVOLUMES. THIS WILL – A summary is created by have been on that day (openingALLOW FOR THE processing teams/functions of position + new – completed =MANAGER TO DIRECT a particular day’s STP rates. A closing position).RESOURCES FROM ONE count of the number of actions With these tools available, aPROCESSING TEAM/ completed automatically versus manager can control processes,FUNCTION TO a count of those that did create easily identify where issues andANOTHER. an exception are also collated. concerns are, and address them The comparison is tracked and in the correct order. Certainly, thisreporting requirements, among recorded against expected/ will take care of issues relatedother concerns. accepted figures allowing for to overseeing of Offshore Teams above/below norm performance. and allow for remote monitoring1. Team/Functional Overview This will also be used for through digital tools. Status - A calculated status is projection and forecasting Effectively, the manager will be given to each of the processing activities, and will highlight back in control. teams/functions. This status areas for potential improvement is an indication of overall and change. Alan Lawman performance at that particular Consultant time. The status will draw to the 1. A Summary Exposure Report TCS Financial Solutions (TCS BaNCS) attention of the Manager if a - This report provides a view particular function is ok or not, across all processing team/ and will alert them to raise any functions of current cash questions. exposure, by value, client, account. This will help with2. High Risk Work/Exception Items financing/funding from a cash – A view across all Processing management perspective and Teams/Functions of all the identify exposure to certain current high risk work Items. To clients/counterparts that if give an overview of work that defaulted could cause loss. The has, for whatever reason not figures would form part of the been completed with the normal overall operations risk figures. time, and has become a priority. 2. Capacity Matrix - A view based3. High Risk Events - A summary on pre-set volume values analysis of current High Risk for the processing team/ function that measures current volumes as a percentage of maximum capacity volumes. This will allow for the manager to direct resources from one processing team/function to another. Further, by creating trending, this will also allow for forecasting and projection
60 RISK TRANSFER PRICING - Back to Basics in Evolving RegimesTCS BaNCS Research Journal RISK TRANSFER PRICING - BACK TO BASICS IN EVOLVING REGIMESHTTPS://GOO.GL/MGNYPT Fund Transfer pricing (FTP) has of customers, products, business same till today: to aggregate the been a method used by bankers to units, channels, etc. Analyzing such interest rate exposure of the whole evaluate profitability of deposits attributions leads to informed and bank into a central location but also and loans. FTP is the price of money precise decision making regarding add liquidity and credit risk and, to – opportunity costs of the resources, product pricing and other key some extent, operational risk. which is factored into accounting drivers and levers of profitability for performance to measure the real the bank. In short, FTP has now evolved profitability. Further, analytics into a risk transfer pricing tool to based on FTP, helps the bank in Till some time back, FTP was centralize business-wide risks and understanding the profitability primarily a tool to manage interest effectively analyze and monitor rate risks. The purpose remains the such risks.
RISK TRANSFER PRICING - Back to Basics in Evolving Regimes 61Treasury – The Bank Within Borrowers TCS BaNCS Research JournalThe bank’s treasury function acts Lending Business Unit (LBU)as a central risk management hubfor all business lines. In some LBU pays FTP rate TFC lends moneytreasuries, a specialized ‘FTP Book’or Funding Center is designed to Treasury Funding TFC Raises Funds Money &monitor and manage such a hub. Center (TFC) CapitalTypically, the treasury function Markets‘borrows’ deposits raised bydeposit-taking units of the bank DBU lends money TFC pays FTP rateand ‘lends’ to loan-originating units— hence the notion of a treasury Bank Deposits Business Unit (DBU)acting as ‘bank within a bank’ or Depositors‘In-house bank’. One can think ofthe FTP process as the treasury to charge for the funds it acquires the netting of the assets and HTTPS://GOO.GL/MGNYPTextending an internal loan to the and redistributes? Treasuries liabilities of the business units andbusiness line to fund customer employ three main approaches produces pool-specific FTP rates.lending, or accepting an internal to determine the FTP rate applied The approach still suffers fromloan from the business line made to business units and the funding dependencies on pool averages andup of customer deposits. center—the single-pool approach, assumptions about the acceptable the multiple-pool approach, and the level of granularity.The interest rate at which the matched-maturity approach.treasury charges business lines Matched-Maturity Approachfor extending new loans, or Choosing the Right Methodremunerates it for raising new The approach that is recognizeddeposits, is called the ‘transfer There are several ways of today as the most adequateprice’ or FTP rate. The business line calculating Transfer Price for various for achieving the goals of a FTPwill subsequently decide the rate financial instruments. framework is known as matched-at which to extend loans or raise maturity transfer pricing.deposits, taking the transfer price Single Pool Approachinto account. All the assets and the liabilities In the simplest case, the FTP are first “transferred” into a centralSo, how does the treasury decide center nets the excesses of some book, referred to as the “FTPhow much to pay and how much business units with the deficits of book.” The transfer is achieved others. This method will always by replicating the cash flows ofONE CAN THINK OF THE leave both interest rate exposures the assets and liabilities into “FTPFTP PROCESS AS THE and funding costs unmatched, as book”.TREASURY EXTENDING Treasury applies an average rateAN INTERNAL LOAN TO unware of the mismatches in assets Choosing the Right Behavior ofTHE BUSINESS LINE & liabilities. Assets and LiabilitiesTO FUND CUSTOMERLENDING, OR ACCEPTING Multiple Pool Approach For the purpose of FTP, the maturityAN INTERNAL LOAN of loans and deposits is calculatedFROM THE BUSINESS This approach takes into note not on a contractual basis, but onLINE MADE UP OF the maturity structure during a ‘behavioral’ basis, that is, basedCUSTOMER DEPOSITS.
62 RISK TRANSFER PRICING - Back to Basics in Evolving RegimesTCS BaNCS Research Journal TO UNDERSTAND THE on the bank’s assumption of how executing an interest rate swap for IMPACT ‘BEHAVIOR’ HAS long these balances are likely to that tenor. So, the transfer price isHTTPS://GOO.GL/MGNYPT ON THE CALCULATION, stay on its balance sheet. Some the swap rate of the same maturity CONSIDER AN EXAMPLE, methods to determine behavior as the loan with some spread for IF A BUSINESS LINE focus on identifying core and the funding premium. EXTENDS A 15-YEAR volatile portions of these accounts LOAN, BUT IT BELIEVES while others choose more advanced Typically, in Matched Maturity THAT THE CUSTOMER statistical models, studying the Model, a match funded transfer WILL SEEK TO REPAY OR behavior of these accounts in price is assigned to each principal REFINANCE THE LOAN different rate cycles to ascertain a payment of the loan and then an AFTER THREE YEARS, pattern that best correlates with the amalgamation of these individual THEN IT WILL GIVE THE account’s historic behavior. rates turns it into a single transfer LOAN A ‘BEHAVIORAL’ price rate based on a time/balance LIFE OF THREE YEARS. To understand the impact ‘behavior’ weighted algorithm. has on the calculation, consider an LIQUIDITY OR example, if a business line extends Choosing the right transfer price AVAILABILITY OF a 15-year loan, but it believes that curve is as important as the FUNDS HAS ASSUMED the customer will seek to repay choice of the behavioral model. PROMINENCE WITH THE or refinance the loan after three The transfer pricing curve should IMPLEMENTATION OF years, then it will give the loan a represent the institution’s own THE BASEL III ROUND OF ‘behavioral’ life of three years. A ability to source funds of various BANKING REGULATIONS further example is that of demand terms from various sources. THAT HAVE PLACED AN deposits: contractually they may ADDED PRESSURE ON be withdrawn on demand, but they Another dimension to the problem BANKS TO MAINTAIN A often remain on a bank’s balance of choice is maintenance of distinct BUFFER OF LIQUIDITY. sheet for several years. FTP curves for assets and liabilities, which enables the bank to charge The choice of behavioral a spread between the two sides assumptions is, therefore, an of the balance sheet. This enables important determinant of the more detailed analysis of the transfer price that gets assigned to balance sheet. a loan (or deposit) product of and thereby influence capital allocation, Components of adjustments business lines and economy in which have been traditionally general. considered before finalizing the Transfer Price are Selecting the Right Transfer Price • Credit Spread. Cost associated The assets and liabilities, which are with Credit Risk on the customer transformed into a series of cash flows based on the behavior, are • Option Spread. Cost associated notionally transferred to the FTP with bearing embedded option Book. in the product/transaction. When transfer pricing a fixed-rate • Basis Spread. Basis Risk arises loan, for example a five-year retail when yields on assets and costs loan, the transfer price is arrived at on liabilities are dependent by considering the cost of raising upon different indices, and fixed-rate funds of the same these indices move at different maturity in the market. Alternatively, rates or in different directions. the bank may need to raise floating- rate funds to arrange for the loan. Pricing New Risks To hedge this, the bank will be FTP has been brought into the spotlight of regulatory scrutiny
RISK TRANSFER PRICING - Back to Basics in Evolving Regimes 63in the aftermath of the financial in their FTP methodologies. Basel provide remarkable business TCS BaNCS Research Journalcrisis. Liquidity or availability of III requires maintenance of a insights in multiple areas, whichfunds has assumed prominence contingency liquidity buffer and can be used for profitable decision HTTPS://GOO.GL/MGNYPTwith the implementation of the cost of holding this buffer goes making.the Basel III round of banking into the transfer price. The pricing An effective FTP function is the firstregulations that have placed impact is different for loans & line of defense for a bank’s balancean added pressure on banks to for deposits. An incremental loan sheet and its business model.maintain a buffer of liquidity. requires incremental wholesale ReferencesHence, additional adjustments have funding and in turn incremental 1. Fabrizio Cadamagnani, Rashmibecome important and are being cost towards liquidity buffer, whileincorporated into FTP frameworks an incremental deposit would Harimohan, Kumar Tangri – “A mean lower wholesale funding and bank within a bank: how aIncorporate cost of Basel III liquidity cost advantage for lower buffer commercial bank’s treasurybuffers requirement (stable retail deposit function affects the interest requires smaller buffer). rates set for loans and deposits”Prior to the crisis, some banks Bank of England Quarterlydeemed funding to be readily Incorporate Cost of Bank’s own review 2015, available at http://available and consequently did Default Risk www.bankofengland.co.uk/not adequately reflect liquidity publications/Documents/and credit risk when pricing new Banks are now required to plan for quarterlybulletin/2015/q204.loans and deposits. Post crisis, an orderly wind-down in the event pdfbanks have started to include both of resolution, reducing the impact 2. Joel Grant, “Liquidity transferan additional funding premium on economy and to the taxpayer. pricing: a guide to better There will be a possible impact on practice”, available at http://BANKS ARE NOW banks’ cost of capital, as a result www.bis.org/fsi/fsipapers10.pdfREQUIRED TO PLAN of setting of capital towards suchFOR AN ORDERLY a wind down plan and will also Subrato BWIND-DOWN IN THE impact their credit worthiness or Senior ConsultantEVENT OF RESOLUTION, ratings, and thereby their ability TCS Financial Solutions (TCS BaNCS)REDUCING THE IMPACT to raise funds. These additionalON ECONOMY AND TO costs needs to be incorporatedTHE TAXPAYER. THERE into banks’ transfer pricing for theirWILL BE A POSSIBLE deposits and loans.IMPACT ON BANKS’ COSTOF CAPITAL, AS A RESULT The Way ForwardOF SETTING OF CAPITALTOWARDS SUCH A WIND Using FTP, the banks set rates onDOWN PLAN AND WILL their loans and deposits, whichALSO IMPACT THEIR in turn have a crucial impact onCREDIT WORTHINESS OR economic activity through theirRATINGS, AND THEREBY effect on borrowers’ and savers’THEIR ABILITY TO RAISE decisions. Robust governanceFUNDS. of FTP regimes within banks is therefore important to ensure that the treasury function is managing risk and setting the internal transfer prices appropriately. A strategically sound, functionally robust, and structurally scalable implementation of a FTP framework can perform far-reaching strategic functions. These analyses can
64 PSD2 and the Evolution of FintechsTCS BaNCS Research Journal PSD2 AND THE EVOLUTION OF FINTECHSHTTPS://GOO.GL/MGNYPT The advent of the fintechs (financial payments from their banks accounts PSD2 (PAYMENT technology companies) and their but, more importantly, outside of SERVICES DIRECTIVE impressive array of services has the existing banking ecosystem. 2) BRINGS IN A been the topic of discussion for PSD2 (Payment Services Directive NEW DIRECTION IN more than a year now. Whether 2) brings in a new direction in PAYMENTS REGULATION they will replace banks or will payments regulation by expanding BY EXPANDING ITS collaboration be the way forward its scope to include fintechs SCOPE TO INCLUDE remains to be seen. that do not enter the traditional FINTECHS THAT DO NOT flow of funds. PSD2 is not just ENTER THE TRADITIONAL The first Payments Services another new clearing scheme FLOW OF FUNDS. Directive in2007 led to significant like SEPA or standard ISO 20022 growth in payment technology, and implementation. Looked at as a we are today in the era of point of propeller for fintech growth, it is sale (POS) payments. Fintechs or expected to completely transform PSPs (Payment Service Providers) the payments landscape, ensuring are able to help customers initiate a level playing field for Banks
PSD2 and the Evolution of Fintechs 65(Account Servicing Institutions) and Banks and PSD2 – Surviving and PSD2 DEFINITELY IS TCS BaNCS Research JournalPayment Service Providers (PSPs) Thriving in the Payments Evolution ENCOURAGING FINTECHas far as payment initiation and EVOLUTION BUT AT THE HTTPS://GOO.GL/MGNYPTservicing are concerned. Existing payment institutions SAME TIME ATTEMPTS come with strong assets. They TO MINIMIZE AND AVOIDPSD2 is triggering off an evolution process domestic and international THE RISKS, WHICHwhich aspires to: payments daily and enjoy a solid FINTECHS MAY FACE. customer base and accompanying• raise competition in payments in assets. They are experienced to TO SUPPORT PSD2 Europe, and not only within one manage fraud, risk and compliance, REQUIREMENTS, BANKS country while they offer omni-channel NEEDS TO SCALE UP TO capabilities to their customers. THE SAME 24X7X365• raise interoperability between They are able to leverage predictive AVAILABILITY THAT THE the different payment paths analytics to mine customer NEW PSPS PROVIDE, (debit or credit cards, direct preferences and tailor-make their WHICH MEANS THAT debit, credit transfers) offerings accordingly. The general THEY HAVE TO ENHANCE public reposes confidence in banks THEIR CORE BANKING• provide 7x24x365 accelerated that do their job well, resulting in AND TRANSACTION payment service higher levels of customer retention PROCESSING SYSTEMS. and loyalty. However, banks• regulating and enabling non- focus on known disciplines like banking enterprises, the investments, credits and payments. so-called PSP (Payment Service Given this somewhat limited view, Provider), to contribute to the they are less disposed to being payments value chain able to support their customers across the entire payments value• raise cooperation between chain. Moreover, banks’ technology service provider and payment has grown over the years and not institutions usually in a linear fashion, resulting in them being at times burdened by• restrict negative impact on a complex technology ecosystem, payment service users with the cost of changing and time to market being high.• offer a transparent charging practice in payment processing To support PSD2 requirements, banks needs to scale up to the• provide transparent information same 24X7X365 availability that about payment execution the new PSPs provide, which means that they have to enhance their corePSD2 definitely is encouraging banking and transaction processingfintech evolution but at the same systems. Normally, only high valuetime attempts to minimize and and dedicated prioritized paymentsavoid the risks, which fintechs may processing are accelerated duringface with respect to: office time with an existing core banking solution. These systems• compliance with regulations are not designed to integrate (money laundering, blacklists, with nor support round-the-clock fraud, data security) accelerated payment processing.• payment risk to illiquidity of Following the PDS2 approach, a debtor or intermediary agent bank can reshape its value chain, wherein fintechs can support the• reliability of service• security of access and authorization of all participants
66 PSD2 and the Evolution of FintechsTCS BaNCS Research Journal banks in a non-discriminatory data security, reconciliation, fashion. Banks can offer API multi-language, multi device GUIHTTPS://GOO.GL/MGNYPT banking to support fintech services (Graphical User Interface)needs THE FINTECH in turn, and monetize access to as well best practices in customer COMPANIES ARE bank accounts of their customers support. If their solution needs to PLAYING THE GAME and bank services. be used by a range of partners, FROM A COMPLETELY they need to invest in an ITIL (IT DIFFERENT BASE. ATM services and card withdrawals/ Infrastructure Library) and focus THEIR GOAL IS TO purchase of goods happen on a mature change and release INVENT NEW BUSINESS real-time, any time. The PSD2 management methodology. Most IDEAS, SIMPLIFY approach is challenging the of them rend to rely on a lean EXISTING PROCESSES, business model and revenue workforce, making them vulnerable PARTICIPATE IN streams of card processing, thereby to takeovers. They are also at times EXISTING REVENUE increasing competitiveness and restricted by financial and resource STREAMS (E.G. APPLE interoperability. With PSD2 it’s constraints. PAY) OR CREATE NEW even more difficult to sell a REVENUE STREAMS customer a dedicated banking app Fintechs and Banks – A Synergized AND UP SELL. for just one bank. You hardly find Approach anyone who wants to use several apps for the same purpose. Most It is obvious that the two come customers prefer to cover cash from multifarious cultural management and payments with a backgrounds and have much single app or use pre-existing apps to learn from each other. Their that are enhanced with banking collaboration will lead to more functionalities. valuable services to the end customer, with lesser time to Fintechs and PSD2 – Transitioning market and greater regulatory to the regulated arena compliance and security. The risk of bad investments in a joint/co- The Fintech companies are playing opted solution can be remarkably the game from a completely reduced, if all participants different base. Their goal is challenge the approach to focus on to invent new business ideas, the business value and evolution simplify existing processes, of the provided solution. To treat participate in existing revenue a partner as a supplier may work streams (e.g. Apple Pay) or create as well, especially, if a partner has new revenue streams and up sell. a dedicated and restricted role; They are more focused on user although, it’s difficult to focus on experience, customer processes innovation with this approach. A and in supporting their value pain point, if not clarified from the chain. Fintechs look at customer beginning, is the clarity with which behavior to derive and sell new how all participants will derive products or services. Their agile revenue or share losses in such a approach makes them develop partnership. and sell new services with shorter turnaround times compared to Fields of Cooperation in the Value the banks. However, they need to Chain of Payments Processing become aware of security, fraud and compliance requirements, BCM The following schematic presents (Business Continuity Management) areas of cooperation/collaborations between fintechs, PSPs and banks:
PSD2 and the Evolution of Fintechs 67PSP Domain Archive PSP Backend TCS BaNCS Research Journal Supporting Customer Information ServicesField of Co-operation User Payment Payment Compliance NotificationInteraction Initiation Validation and Fraud Prevention End-to-End Security Customer BehaviourBank Domain Provide Account Settlement Archive Bank Backend Masterdata Management Supporting ServicesBlue: dedicated bank topicsRed: functionally driven PSP and cooperation related topicsLight Blue: topics of cooperation, conflict and high impact areasWhat is needed for a successful contracts linked with PSP User Interactions HTTPS://GOO.GL/MGNYPTcollaboration is: with daily limits, duration of access, among others • Is the user front endEnd-to-End Security provided by the PSP? This Customer Information (of PSP) will be of great interest from • User authentication/ a collaboration point of authorization end-to-end • PSP to customer-related view, as this will mean that master data the bank is participating in • Prevents intrusion, loss or the customer experience falsification of information • Customer information when interacting with their enriched with profiles of PSP accounts with the fintech • An agreed firewall solution. mechanism between the PSP • Authorized PSP services and Bank • How to share data from user • Customer contracts to interactions and use it forMaster data accounts of different banks mutual benefits? used by the customer • Customer authorization Payment Initiation/Validation/ based contract driven access Customer Behavior Notification of account information to PSPs • Interactions of customer • Validation of payments accounts • To validate payment • Fraud prevention initiation of PSP, e.g., clearing • Used services of PSP and directories banks • Plug-in functionality of the bank used by PSP, e.g. FX • Required to support bank • Turnover of transactions and and money market; apply for processing, e.g., account threshold usage
68 PSD2 and the Evolution of FintechsTCS BaNCS Research Journal PSD2 AND ITS loans, securities trading as a risk of losing visibility in the overall INCREASED SCOPE MAY cross-selling effort value chain. Without cooperation APPEAR AS A CHALLENGE with fintech companies or adoption TO BANKS AND THEIR • Notification of execution and of fintech behavior, the journey is INCUMBENT MARKET error handling going to be difficult, expensive and POSITIONS. ON THE risky. CONTRARY, IT CAN • Business Continuity BE VIEWED AS A WAY Management to provide The market is evolving in this TO COLLABORATE reliable services direction and the speed with which AND LEVERAGE players are adapting to market EXISTING MARKET Compliance and Fraud Prevention needs is outperforming existing OPPORTUNITIES. market participants. Providing PSD2 • Fraud prevention over all PSP is challenging enough, but co- provided services operation and moving with market trends may go a long way in making • Align compliance and fraud this easier. PSD2 and its increased prevention of the PSP with scope may appear as a challenge to that from the bank. What banks and their incumbent market is the most effective setup positions. On the contrary, it can to gain high efficiency, be viewed as a way to collaborate reduce redundancy, manual and leverage existing market interactions and costs? opportunities. How to avoid loss of trade secrets? Archive PSP/Bank • Traceability of processing, customer support – especially, marking the initiation and servicing of the payment transaction • Availability and access to archived data Back-end and Supporting Services • Customer support PSP/Bank • Covering ITIL processesHTTPS://GOO.GL/MGNYPT In Conculsion... Urs Meier Technical Architect With PSD2, as well as other market drivers, new market entrants with TCS Financial Solutions (TCS BaNCS) less or no banking experience are entering the financial services domain, and some of them are clocking success as well. Strong undercurrents may amalgamate banking services into the larger ecosystem, and banks do stand a
70 Understanding the Digital Expectations of the Wealth Management ClientTCS BaNCS Research Journal UNDERSTANDING THE DIGITAL EXPECTATIONS OF THE WEALTH MANAGEMENT CLIENTHTTPS://GOO.GL/MGNYPT 1. Sifting through the Digital This common refrain has resulted enable continuous access and Trends in the Wealth Management in many surveys and much research better control over their wealth. Industry being conducted and findings This expectation can be largely establish that: attributed to: “Digitization is disrupting the wealth management industry; however, a. Wealth Management Clients • The post financial-crisis firms are slow to adopting digital are expecting their wealth scenario of reduced trust when compared to the other players managers to provide them with and returns (eluding alpha) in the banking industry”. increased digital services to
Understanding the Digital Expectations of the Wealth Management Client 71 creating higher expectations TCS BaNCS Research Journal around digital innovation inIN SPITE OF THE • The rapid pace at which the services offered by wealthEXCITEMENT AROUND banks are expanding their management firms.FINTECH-LED digital offerings is raising the Overall, these reports indicate thatDISRUPTION bar on standards and thus traditional WM firms will continueTODAY, THE REALITY leading to increased levels to be the preferred choice and firmsIS THAT THESE NEW of client expectations need to leverage their strengths andENTRANTS HAVE BEEN lead the digital innovation to regainABLE TO ONLY CREATE b. Clients still prefer to have an customer confidence.A WRINKLE AND IN advisor unlike the retail bankingCERTAIN PARTS OF THE industry where the relationship The new environment provides theWEALTH MANAGEMENT manager is more a facilitator necessary impetus and directionVALUE CHAIN. for account opening and to wealth managers to review introduction to new products. their current operations from the Here, the advisor is looked upon front-to-back office and innovate HTTPS://GOO.GL/MGNYPT as someone who can add value business processes to satisfy through intelligent, fruitful clients’ digital expectations, while recommendations and look after balancing stakeholder expectations and secure assets. and regulatory mandates. 2. Client Journeys determine c. In spite of the excitement Digital expectations around fintech-led disruption today, the reality is that these Clients follow a distinctive path new entrants have been able in their interactions with their to only create a wrinkle and wealth management firms, which in certain parts of the wealth in turn determines their service management value chain. expectation levels. As depicted Their impact has mostly been in the diagram below, clients are restricted to that of automating conducting any of these activities advice on asset allocation at any point of time during their strategies and monitoring of interactions with their Wealth portfolios. More importantly, Management firms and this serves they have been successful in as guidance about what they expect. Needless to say, a consistent 05 Transacts 04 Manages 03 Seeks Advice 02 Explores 01 Views
72 Understanding the Digital Expectations of the Wealth Management ClientTCS BaNCS Research Journal and simplified experience is what expressed on specific stocks based on, say, a pattern makes a customer stay on. Let us in Twitter, Facebook, among emerging from holdingsHTTPS://GOO.GL/MGNYPT take a look at each of these points others which are not traded for in the customer journey and review a long time? the digital expectations therein and • Contextual information how they translate to what a wealth like stock-specific research • Contextual alerts to review manager can offer. reports such as a client’s the goals based on life underlying stock that could events, investment advice a. Views portfolio holdings and be impacted most on a based on outstanding performance – this is by far the particular day credit in a bank account - most frequent activity which is accounting for factors like carried out by the client. • Intuitive recommendations goal target and current such as providing investment performance, or risk profiles Digital expectations in relation ideas of specific stocks to this activity are: • Easy and instant c. Seeks advice from the wealth accessibility to the advisor – • 360 degree view of wealth manager to validate opinions through online chat or video across all firms calling tools Digital expectations in relation • Continuous and updated to this activity are: • Mailing features – ability to Information – 24x7 access quickly capture and email a to view portfolio balances, • Quick Goals – the client screenshot to an advisor to performance and holdings wants to purchase a car, for seek his advice and alerts on portfolio example, and seeks advice to performance based on create a financial goal. This is d. Manages wealth based client setup; e.g. percentage one of the areas where retail on perception of the movement banks are gaining traction by aforementioned steps, which providing PFM tools, which includes assessing risks, • Contextual updates on mimic financial planning creating model portfolios, portfolio performance on capabilities. What clients allocating assets, among others occurrence of events such as look for today is the ability extreme movements in the to create an end-to-end Digital expectations in relation market process from goal planning to this activity are: to fulfillment in a few clicks b. Explores the market and social [i.e. goal planning, asset • Risk Assessment – tools to ecosystem for investment ideas allocation, portfolio creation carry out risk assessment and fulfilment of needs (or tagging), order initiation and execution] • Portfolio creation – Digital expectations in relation involving a seamless to this activity are: • Intuitive + contextual advice process i.e. assess risks, from wealth managers– choose and create model • Research views of the firm Expect the firm to leverage portfolios, and decide on on markets, stocks and customer analytics and asset allocation portfolios advise clients, for e.g. • Rebalancing - Ability • Market news in the form i. Can the firm help create to review and carry out of running tickers showing a retirement portfolio rebalancing from drift quotes and important on a client’s birthday or analysis corporate actions a college fund on the occasion of the child e. Transacts – carries out a • Peer group views in the form attaining a certain age transaction like a buy or sell of inputs from Social Media order and shapes views on sources – these could take ii. Can the firm suggest portfolios, or transacts based on the form of listening to views stock lending ideas the advisor’s recommendations
Understanding the Digital Expectations of the Wealth Management Client 73 Advise Integration Layer/API Strategy In house TCS BaNCS Research Journal Networth External Performance Market Feeds Transactions Social Media Beyond the Firm Fintech Disruptors Collaboration Integration/API Strategy FunctionalitiesApps/Dashboards Digital expectations in relation 3. Strategic considerations in THE FIRM HAS TO HTTPS://GOO.GL/MGNYPT to this activity are: delivering innovative digital DECIDE AND CHOOSE services WHICH OF THE CLIENT • Order initiation and tracking FACING DEVICES IT – ability to create an order, Firms need to consider the WOULD LIKE TO ADOPT manage and track the same following aspects when IN PROVIDING DIGITAL determining their digital strategy: SERVICES. ITS CHOICE • Intuitive – capability to WILL PRIMARILY DEPEND initiate an order at the stage Apps/Dashboards – the firm has ON THE VARIOUS CLIENT when viewing or managing to decide and choose which of SEGMENTS, AMONG portfolio performance the client facing devices it would A HOST OF OTHER like to adopt in providing digital FACTORS. • Quick Transactions – for e.g.; services. Its choice will primarily depend on the various client i. Purchase a product segments, among a host of other in two clicks over the factors. mobile phone. This would mean a pre-approved Functionalities – the firm will have process with just two to decide the extent of services it clicks to make it happen. would like to digitize for its clients. This would depend on the extent of ii. Ability to elect corporate coverage of the WM value chain of actions choices and the firm, its analysis of the value in also decide on their each area of services, etc. utilization on receipt
74 Understanding the Digital Expectations of the Wealth Management ClientTCS BaNCS Research Journal WHEN SELECTING AN IT Integration/API Strategy – this is based priorities and extent of SOLUTIONS PARTNER TO the most critical choice for the transformation HELP OFFER DIGITAL firm and one that can help extend SOLUTIONS TO THEIR its services beyond the normal b. Flexible workflow management CLIENTS WEALTH realm. For e.g., the firm can leverage to allow business process re- MANAGEMENT FIRMS payment services (through APIs). engineering – to enable the firm NEED TO LOOK FOR to review and reengineer its CAPABILITIES SUCH Collaboration – This is much talked current processes AS COMPONENT- about today, but is a critical factor BASED ARCHITECTURE in making sure that all players in c. Service-Oriented Architecture TO PROVIDE THE the ecosystem add value and grow to allow ease of integration and FLEXIBILITY TO MIX together. Joining hands with fintech definition of new services, such AND MATCH DIFFERENT firms or leveraging other financial as open APIs. FUNCTIONALITIES AS services from the larger ecosystem PER THE TIME BASED will go a long way in entrenching d. Flexibility that components PRIORITIES AND EXTENT customer loyalty. can provide for in reinventing OF TRANSFORMATION. and relooking at processes What should a Firm look for when to help stay a step ahead in THE TRANSFORMATION selecting an IT partner or solution? understanding clients and JOURNEY WILL REQUIRE markets, while also establishing THAT FIRMS REVIEW When selecting an IT solutions simpler processes and higher EXISTING VALUE CHAINS partner to help offer digital levels of user experience. AND INTRODUCE solutions to their clients wealth NEW ELEMENTS AND management firms need to look for The transformation journey will PROCESSES WITH THE capabilities such as: require that firms review existing HELP OF A value chains and introduce new COMPREHENSIVE AND a. Component-based architecture elements and processes with the FUNCTIONALLY to provide the flexibility help of a comprehensive and ADVANCED SOLUTION to mix and match different functionally advanced solution that THAT WILL EMPOWER functionalities as per the time will empower them to cater to the THEM TO CATER TO THE evolving needs of their clients. EVOLVING NEEDS OFHTTPS://GOO.GL/MGNYPT THEIR CLIENTS. Vijay Ramachandran Senior Consultant TCS Financial Solutions (TCS BaNCS)
Strate is the Central Securities Depository for South Africa. Strate desired to move fromphysical settlement to electronic settlement of securities. Tata Consultancy Services (TCS)developed a unique clearing and settlement system based on multilateral netting, to ensurea smooth transition. All within record time and allocated budgets. As one of the world’sfastest growing technology and business solutions providers, and a trusted partner of Stratefor over 15 years, TCS delivered an e cient and cost-e ective platform enabling them tobenchmark their solution against global best practices and standards. Also, helping Stratestay competitive by playing a signi cant role as its solution partner for all asset classes.
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