International Finance Magazine Jul - Sep 2015 by International Finance

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July - September 2015

Volume I Issue 4

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pg.12

‘MNCs

WORRIED OVER

BREXIT TALK’

The Great Monetary Experiment

SPECIAL FOCUS: PAYMENT SYSTEMS

pg.16

Despite policies such as Quantitative Easing and historically low interest rates, many economies around the globe continue to struggle

pg.42

‘Faster payments eliminate chargebacks,

so is very attractive

to merchants’

Note FROM EDITOR

reece is giving nightmares to the Eurozone. It will serve as a test case for the EU â&#x20AC;&#x201D; for ordinary people and also those who manage the finances of the continent, and elsewhere. However, while everyone was focused on Greece, the demand for Brexit seems to have been pushed to the background. But, for how long? The divide among the British people about being a part of the EU is just too much to ignore. Prime Minister David Cameron is committed to holding a referendum in the end of 2017. Until then, businesses will be on tenterhooks. The indications are that MNCs will go slow on further investment in the UK until they know the result of the referendum, or at least are certain which way the vote is headed. While our political and financial leaders keep a watch on developments in the EU, more ordinary people are engrossed by payment systems. Every day brings in a new system that simplifies the way we pay for products or services. That is why we have devoted a special section to payment systems. We look forward to hearing your feedback on our coverage of this fast developing sector. One of the biggest concerns for Netizens and law enforcement agencies is phishing. The sheer scale of the operation makes it difficult to curb.

In the absence of any chance of being caught, let alone punished, hackers have become bolder. Now, they have begun targeting businesses, sending malware and viruses to purchase managers, customer service and the corporate communication teams. It is impossible for such teams to ignore incoming mails, making the job of hackers that much easier. This is a challenge that businesses will have to tackle in the coming years as the internet, the number of users and also hackers grow. On September 13-14, IFM is organising the Oman SME Summit in Muscat. I invite each one of you to participate in this once-in-a-lifetime opportunity to lend a hand to the efforts of the Sultanate to diversify its oil and gas-based economy. IFM has taken one more step to make it easier for our busy readers to access the magazine at their convenience. You can now download the tab version from the App Store or Google Play. We are eagerly awaiting your feedback on the stories and interactive features. Happy reading!

Director & Publisher Sunil Bhat Editor Dhiraj Shetty Production Sarah Williams, Mark Miller, Karan Belani Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Suparna Goswami Bhattacharya Business Analysts Dave Jones, Adam Lobo, Sharon Mendis, Ashton Ray, Tanya Jones, Sean Thomas Business Development Manager Steve Martin Business Development Newton Gois, Sunny Shah, Ashish Shenoy, Sid Jain Accounts Angela Mathews Head of Events Basant Das Registered office INTERNATIONAL FINANCE MAGAZINE is the trading name of INTERNATIONAL FINANCE Publications Ltd 843 Finchley Road, London, NW11 8NA Phone +44 (0) 208 123 9436 Fax +44 (0) 208 181 6550 Email info@ifinancemag.com Press Contact press@ifinancemag.com

Dhiraj Shetty Editor

Design & Layout Rahil Shaikh Miya

editor@ifinancemag.com

Jul - Sep 2015 International Finance Magazine

INDEX July - September 2015

Volume I Issue 4

COVER STORY

Welfare Check

National Bank of Oman In support of Vision 2020

The GREAT monetary experiment

100 28

David Drake

Democratising investment processes

International Finance Magazine Jul - Sep 2015

120

Egypt: Opportunities ahead

Conrad Warren

The evolution of Deep Value Investment

The future

is in your

hands

SPECIAL FOCUS

P40-89 PAYMENT SYSTEMS

128

106

Metro Bank: The smile is widening

110

South Africa: Going nuclear

122

Damian Young Challenges of regulation and fintechs

114

Paraguay: The unpretentious superstar

‘I love action related sports activity’

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Jul - Sep 2015 International Finance Magazine

byte by byte

Does this sound

phishy?

Businesses, not consumers, are the new target for hackers sending out fake â&#x20AC;&#x2DC;phishingâ&#x20AC;&#x2122; emails, and the criminals are winning Tim Ring

International Finance Magazine Jul - Sep 2015

byte by byte

hat are the chances that you would reply to an unsolicited email from your bank saying “Please reset your password immediately” or a message that tells you “You have won the lottery”? Hopefully slim to none, because they will be those now-familiar ‘phishing’ messages, sent out by hackers trying to trick you into visiting their fake web pages and downloading their malware. But what if you were an HR person who had placed a job ad on Career Builder. com and someone sent you their CV? Would you look at it? And what if you work for internet security firm Websense, recently acquired by Raytheon, and you got an email from your new employer welcoming you to the company? Would your guard be up? Well, both of these are ‘real’ (excuse the pun)

phishing messages sent out recently, whose carefully crafted nature distinguishes them from old-style mass-produced scam emails, giving them a much better chance of getting past the defences of even the most savvy business email user. The fake CVs on Career Builder were laced with malware and got through to a number of energy firms, broadcast companies, credit unions, electrical suppliers and stores, before they were spotted by security firm Proofpoint. The fake ‘welcome’ emails sent to Websense staff also hid a malicious file, though in this case Websense’s cyber defences stopped them on time. But the fact is that the phishing hackers are getting smarter and, according to the latest surveys, it’s paying off. A new report from Proofpoint says hackers are increasingly ‘going corporate’ — moving on from

highvolume phishing attacks on consumers to more sophisticated attacks on middle managers in business. Proofpoint says: “Widespread end-user education succeeded in raising awareness of phishing as a threat. In response, by the end of 2014, cyber criminals were targeting subtly different user populations and employing tactics that looked very different from what users – and automated defences – had adapted to.” The recent ‘2015 Data Breach Investigations Report’ (DBIR) from security firm Verizon studied nearly 80,000 cyber security incidents and confirmed that despite all the warnings, criminals are winning. The survey found that the number of people fooled by phishing emails ac-

For example, how would you target an organisation’s office manager? You could send them an email from a known office supplier, with almost guaranteed success James Moore, senior consultant at security firm Phish’d

Jul - Sep 2015 International Finance Magazine

byte by byte

tually rose to 23% last year, up from 10-20% in previous years and more than onein-10 people actually clicked on the malware-laden attachments. James Moore, senior consultant at security firm Phish’d, confirmed: “Phishing emails could once be detected far easier due to poor grammar and general mistakes. However, they are becoming increasingly more realistic with information that an untrained eye would mistake for the real thing. “We are seeing more and more breaches originating from phishing emails. Attackers and the phishing methods they use are becoming progressively sophisticated and targeted, able to draw data from social media, corporate communications and general information found on the internet. “For example, how would

you target an organisation’s office manager? You could send them an email from a known office supplier, with almost guaranteed success.” What’s the answer? It’s clear that no businessperson receiving emails can relax for a moment. As security expert Mark James of ESET said: “It’s a sad but true case these days that you must treat every email with caution. Every single link and attachment should be scrutinised to see if it is suspicious.” Some experts believe training staff is the answer. Lance Spitzner, training director for the SANS ‘Securing The Human’ programme, said: “One of the most effective ways you can minimise the phishing threat is through effective awareness and training. You can reduce the number of people that fall victim to

International Finance Magazine Jul - Sep 2015

(potentially) less than 5%.” James Moore agrees. He said one reason for the success of phishing attacks is “they on human’s natural need to connect with others. But companies can educate and condition this natural behaviour. Organisations need to combine a wide range of training that educate employees, condition them to behave securely and empower them to make the correct security decisions.” Businesses may also want to focus their training on key users: Verizon’s report found that departments like Communications, Legal and Customer Service are far more likely to open emails than all other teams (partly because opening email is a central part of their jobs). But, against that, the DBIR study rates the chances of any company escaping a concerted phishing attack as practically

It’s a sad but true case these days that you must treat every email with caution. Every single link and attachment should be scrutinised to see if it is suspicious Mark James, security expert at ESET

byte by byte

As well as using the latest anti-virus and related software to prevent phishing emails getting through, companies may want to consider taking out cyber-insurance so that they are protected if they are breached. But it is turning to be an uphill battle zero: “A campaign of just 10 emails yields a greater than 90% chance that at least one person will become the criminal’s prey. And it’s bag it, tag it, sell it to the butcher (or phishmonger) in the store,” it says. Another worrying stat from DBIR is that companies have almost no time to react to new ‘phishing’ attacks. In tests involving over 150,000 emails sent by security companies themselves, it took an average of just 1 minute, 22 seconds for somebody to click on an email and let the attacker into their corporate network. Given this, as well as using the latest anti-virus and related software to prevent phishing emails getting through, companies may want to consider taking out cyber-insurance so that they are protected if they are breached. But this too is turning to be an uphill battle, as advisory firm KPMG has found a massive trust issue among companies considering cyber cover. Nearly three-quarters (74%) of a panel of businesses surveyed by KPMG have refused to take out cyber policies, mainly because around half of them simply do not believe the insurer will pay out when they are hacked.

KPMG warns: “Distrust around insurers honouring their contracts is leaving businesses vulnerable to the effects of cyber crime.” And Mark Waghorne, head of KPMG’s International Information Integrity Institute, is urging businesses to rethink this resistance. “The availability of specialist cyber-related insurance has improved during the past year with clear evidence that carriers do pay out,” he said. So, a mix of prevention and detection technology, staff training and cyber insurance may be called for as phishing attacks get harder to spot. And if you still need convincing of that, why not test your own ability to spot a scam message? Try this online ‘phishing detection quiz’ set up by security firm McAfee. http://www.cbsnews. com/news/mcafee-intelsecurity-phishing-quiz-canyou-spot-a-scam-dont-beso-sure/ But be warned: only 3% of 19,000 people taking the test correctly identified all 10 real and fake messages...and this author, to his shame, was not among the 3%! IFM editor@ifinancemag.com

In tests involving over 150,000 emails sent by security companies themselves, it took an average of just 1 minute, 22 seconds for somebody to click on an email and let the attacker into their corporate network Verizon’s report found that departments like Communications, Legal and Customer Service are far more likely to open emails than all other teams

Jul - Sep 2015 International Finance Magazine

OPINION

Strengthening

digital capabilities Peter Taberner

International Finance Magazine Jul - Sep 2015

In a survey by Santander, 56% of firms said their websites are making their businesses more successful

MEs in the UK are looking to increase investment in their digital capabilities, by £53 billion over the next two years, says research from Santander Corporate and Commercial. The study revealed that the average SME committed £33,212 to digital investment over the past year, and intends increase this by £28,224 in the next two years. Evidence from the respondents also suggested that many companies have spent more, and are looking to further invest in expanding their digital range. Eight percent of the firms questioned said that they had paid over £100,000 for digital services last year while a further 6% outlined plans to escalate their digital budget, by over £100,000 in the future. Interestingly, Santander’s research also highlighted regional disparity in how SMEs were allocating funds to digital marketing. When asked the question “Approximately how much, if anything, are you planning to spend” on digital services, London came out on top with an average of £42,925. The capital was followed by the Midlands region, as they are looking to budget £31,531, with the south east region slightly behind on £30,800. The south west of England did not seem to see

the value in digital, as they looked to spend a relatively small £19,500, the lowest amount in the survey. Scottish companies were the next parsimonious, saying that they could pledge £24,490. The study also suggested that there are changes in trends which are taking place, as companies are now making websites a priority over mobile technologies. The research concluded that 54% of firms invest-

ing in digital capabilities are looking to develop their websites, compared to just 16% who are launching digital apps. In total, 56% of firms said their websites are making their businesses more successful. Some firms though have struggled to create their own website, as 16% said they do not have one in action. When looking industrywise, the IT and financial services have lead the way,

Approximately how much, if anything, are you planning to increase your company’s investment in digital capabilities over the next two years? Regional breakdown (ranked by spend) London

£42,925

Midlands

£31,531

South East

£30,800

North West

£28,300

Yorkshire & Humberside

£27,449

Wales

£25,745

North East

£25,114

East of England

£24,674

Scotland

£24,490

South West

£19,500

Average

£28,224

“

For any business, developing a useful website is the first stage in building a digital presence. The growth of mobile shows that as companies become more sophisticated and comfortable with engaging online, a mobile presence is very beneficial to serving more customers Santander, Spokesperson

Source: Opinium, commissioned by Santander Corporate & Commercial

Jul - Sep 2015 International Finance Magazine

having invested in digital by £46,429 and £49,500, during the last year respectively. Both industries are also looking set to follow the general trend, as they predicted that over the next two years, spending on digital will surge. IT firms typically plan to increase digital service outlay by £43,962 while financial services companies expect to spend £42,083 more. Stephen Dury, Santander Corporate & Commercial’s managing director of SME markets & business development, said, “IT and financial services companies are more likely to have technology at the heart of their business. So, tech investment is usually a higher priority for them.” “Consumer habits are changing quickly, and people are using more technology and researching financial

products online, which require greater investment from these companies to get their propositions online, develop tools and gain the necessary insights.” Dury reflected that companies are investing in their websites in all kinds of ways, and mobile devices should be considered part of the online spectrum. A total of 71% of firms

International Finance Magazine Jul - Sep 2015

say digital infrastructure is important to the growth of their business, and the majority say their business is more successful as a result of their website. Typically, they’re using their websites to create new sales channels. “Not all companies will benefit from having a website, but we believe there are many more SMEs who

would benefit from one. The government provides a lot of knowledge-based support for SMEs, and this includes information on online marketing and selling,” he added. The Funding Circle is an SME in the financial services industry, which focuses on small businesses by providing an investment and loan marketplace.

Hitherto, they have raised around $300 million of equity capital since 2010 from some of the most influential investors on the planet. So how do they view Santander’s research? A company spokesperson said: “Britain’s small businesses are increasingly using technologies to help increase the breadth of their activities.” “We see many retailers who are moving online and have a global audience. Funding Circle borrowers, such as Cable & Cotton and the Stripes Company, are harnessing the power of the internet to take their relatively small businesses global.” “At Funding Circle, technology is at the heart of everything we do, and we’re investing more and more, to ensure that we remain at the cutting edge of our industry.” The Funding Circle are adamant that financial technology, or “fintech“, has grown significantly over the last five years, particularly in London, as the Santander results imply. More and more companies are now merging financial knowledge with technology to better serve customers. As an industry, it’s ripe for disruption, and technology is allowing that to happen at a very fast pace. “For any business, developing a useful website is the first stage in building a digital presence. The growth of mobile shows that as companies become more sophisticated and comfortable with engaging online, a mobile presence is very

beneficial to serving more customers,” the spokesperson added. Improvements to the digital advertising strategy for the Funding Circle will continue to be made, both to their onsite and mobile channels, in communicating with their customers. Many of the respondents to the Santander study are also targeting areas of how to improve their digital marketing approach in the immediate future. The companies that have committed to digital investments are looking to implement online payment facilities. Some are looking to launch websites for the first time, with others having a vision to develop a foreign language version to their websites, a niche service in order to expand into new markets. Scientific advancements in the digital marketing sphere have come a long way, and it is a digital system that combines many parts where SMEs can look forward to positively interacting with their markets in the future. IFM editor@ifinancemag.com

Stephen Dury, Santander Corporate & Commercial’s MD of SME markets & business development How many companies participated in the survey? 536 Is this the first time that you have carried out the survey? Yes What prompted this exercise? Digital technologies are one of the main drivers of growth in the UK and around the world, yet there is limited understanding of how this is developing in the SME sector. We hope this research sheds some light on this fast-growth area, and also helps SMEs understand what kind of activity is being undertaken by their peers.

Jul - Sep 2015 International Finance Magazine

‘Brexit

would cause more damage to European integration than a

Grexit’ IFM spoke to Dr. Thieß Petersen of the Bertelsmann Stiftung who has contributed to a policy brief on the potential economic consequences if the UK exits the EU Giovanni Puglisi

International Finance Magazine Jul - Sep 2015

INTERVIEW

Dr. ThieĂ&#x; Petersen, Program Shaping Sustainable Economies Bertelsmann Stiftung

Jul - Sep 2015 International Finance Magazine

INTERVIEW INTERVIEW

ost experts and recent surveys suggest that the chance of Britain leaving the European Union seems pretty unlikely. However, the outcome of the country’s EU membership referendum (expected to be held in 2017) remains uncertain and could affect the UK business environment, especially negatively impacting the financial sector. Indeed, Britain should move as quickly as possible to hold the referendum to avoid the risk of a long period of uncertainty affecting growth. This has been reflected by the Confederation of British Industry’s cut of its previous growth forecast for Britain’s economy this year to 2.4% from 2.7% predicted in February, due to the risks associated

with the EU referendum and the possible turmoil caused by the Greek crisis. According to a recent study conducted by Bertelsmann Stiftung in collaboration with the Ifo Institute in Munich, if the UK exits the EU, it would have long-term negative consequences for the country’s growth dynamic, while the economic losses for Germany and the remaining EU member states would be significantly smaller. IFM spoke to Dr. Thieß Petersen, Senior Expert at Bertelsmann Stiftung, to understand the extent of the damage that a Brexit could cause to both the EU and the UK. Excerpts from an interview:

UK leaving the EU would arguably strip Europe of its leading advocate of open trade and weaken the EU’s global influence. What would be the likely economic consequences of a Brexit for Europe? A Brexit would reduce cross-border trade activities in Europe and hence reduce economic growth in the UK and the entire EU. Calculating the impact of these is extremely difficult

On the other hand, what would be the worst scenario? In the most unfavourable scenario, the UK would lose all trade privileges arising from EU membership (“isolation of the UK”). The long-term losses in real GDP calculated for the EU-27 (EU without UK) range from 0.1% in case of a “soft exit” to 0.36% in case of an “isolation of the UK”. Ireland would suffer most due to its strong economic

since nobody knows exactly how relations between the UK and the EU would be organised after a Brexit. In the study conducted by the Ifo Institute on behalf of the Bertelsmann Stiftung, we therefore worked with different scenarios. In the most favourable case for the UK, the country would receive a status similar to Norway or Switzerland. This means, there would be only minor increases in non-tariff barriers (“soft exit”).

International Finance Magazine Jul - Sep 2015

ties with the UK, the calculated losses in GDP range from 0.8% (“soft Brexit”) to almost 2.7% (“isolation of the UK”), while other countries with losses above the EU-27 average would be Luxembourg, Malta, Cyprus, Belgium and Sweden. In addition, the remaining 27 EU countries would have to compensate for the missing British payments to the EU budget. According to our calculations, Germany’s increase in its annual gross

INTERVIEW

payments would be the highest at €2.5 billion, followed by France with an increase of €1.9 billion. The biggest fear among business leaders in UK is that an exit from the EU would damage the country’s competitiveness and could lead many of the largest corporate players to reconsider their investment in Britain. Is this a realistic scenario or London would still be able to retain most of its multinational companies’ HQs? This depends on the concrete arrangement of relations between the UK and the EU. In case of a “soft exit”, there would be little need for relocations. In case of an “isolation of the UK”, multinational companies might be more willing

to move their headquarters. In any case, I am afraid that multinational companies might reduce their investments in the UK until a final decision about Britain’s future in the EU is made as investments need a stable economic and political environment. Hence, this uncertainty might cause lower investment and lower economic growth in the period until the referendum. Although all sectors would suffer from a Brexit, London’s most important industries, such as banking and insurance services, would face the greatest impact. Is the city facing considerable risk of losing its centrality as Europe’s major financial hub in favour of Paris or Frankfurt? Yes, financial services in

the UK would suffer aboveaverage losses from a Brexit. According to the calculations of the Ifo Institute, the long-term effect of a Brexit would be a decline in value added by nearly 5% for the financial services sector. Conversely, European financial capitals would benefit. In Germany, for example, a Brexit would increase net value added of the financial services sector by 1%. Some analysts have gone as far as claiming that the combination of Grexit and Brexit is probably the greatest danger that Europe has faced since the Cold War-era. Is it a fair concern or has been over exaggerated? During the last decades, we saw a growing economic and political integration in Europe. A Brexit would

be a severe setback for the European integration with economic and political damages for all countries. It would weaken the EU and Europe’s role in the world. Due to the economic power of the UK, a Brexit would cause more damage to European integration than a Grexit. However, unlike with the Cold War-era, we are not talking about threats to peace. IFM editor@ifinancemag.com

Jul - Sep 2015 International Finance Magazine

COVER STORY

The Great Monetary Experiment Despite policies such as Quantitative Easing and historically low interest rates, many economies around the globe continue to struggle Tim Evershed

International Finance Magazine Jul - Sep 2015

COVER STORY

he response of monetary policymakers and central banks to the extraordinary financial crisis of 2008 was a series of extraordinary, but necessary, measures. These included phases of Quantitative Easing (QE) and historically low interest rates for a sustained period. However, in spite of some growth, many structural deficiencies of the global economy remain unaddressed. The Eurozone debt crisis lingers on, with only modest growth, high unemployment and unsustainable debt levels in some countries. Japan also continues to be mired in

low growth while China’s growth rates are decelerating. Traditional policy measures, including expansionary fiscal policy and monetary easing, are either no longer feasible due to high debt burdens or have reached their limits, as interest rates have reached the zero lower bound in many markets. Jerome Haegeli, Swiss Re’s Head of Investment Strategy, says, “At this stage, central banks can do

more by doing less. The measures that we see today were all necessary and we have to thank the central banks for what they have done following the global financial crisis. They acted swiftly and decisively at the height of the crisis. Now it is a matter of moving beyond crisis management and resolving the crisis without the great monetary experiment backfiring. “There is a danger that the financial market becomes more and more dependent on the central bank liquidity. These official policies

17 mean that funds that would otherwise go elsewhere go into sovereign bonds. That can have very serious consequences on the market. “If these policies continue, you will have an overreliance on central banks. You can get distorted price signals, which is not good for the overall financial market stability and thus the health of the global economy. If you look at today’s very low interest rate levels, it is a testimony to the financial repression era that we live in but it is not a well-designed policy. Switzerland was able to issue 10-year paper at nega-

We are getting a bit excited with the short term views that we’re receiving from the economy with signs of a lift in most countries. It is still very fragile Jean-Michel Six, Chief Economist for Europe at ratings agency Standard & Poor’s

Jul - Sep 2015 International Finance Magazine

COVER STORY

tive rates. If you do that, you weaken market forces… weaken capital markets with serious consequences.” The US Federal Reserve and the Bank of England can both claim that QE has helped restore economic growth. “The US is an example of where it has worked. It may be fragile still and inflation is still low but the job market is phenomenally strong. In fact, it is stronger than it was before 2008. So, that is an example of it actually working,” says Andre Severino, Head of Fixed Income for US and Europe at Nikko Asset Management. More recently, the Eurozone has followed suit and the European Central Bank will be hoping that it can emulate results in the US and UK and has had some encouraging early signs. “We are getting a bit excited with the short term views that we’re receiving from the economy with signs of a lift in most countries. It is still very fragile,” says Jean-Michel Six, Chief Economist for Europe at ratings agency Standard & Poor’s. “Let’s

not forget that at least part of this pick up was triggered by a massive fall in oil prices along with the lower exchange rate. It remains to be seen whether those temporary factors, oil in particular, will have been sufficient to really trigger a bit of a virtuous circle,” he adds. However, in some emerging market economies and in Japan, where QE has failed to kickstart growth, more radical strategies are entering the policy debate. These include measures ranging from exchange rate controls and even the use of helicopter money to intentionally fuel an inflationary cycle. “Helicopter money is effectively an extreme form of QE, basically printing cash and dropping it over towns. It is a nice theoretical experiment to think about but in practice, it is fraught with political risks around its distribution,” says Adam Chester, Head of UK Macroeconomics in Commercial Banking at Lloyd’s Bank.

International Finance Magazine Jul - Sep 2015

“How do you implement the policy? Which regions do you pick? Which cities do you pick to drop the money over? As an economic theoretic thought exercise, it is quite interesting but its practical applications are close to zero.” “Exchange rate controls are an attempt to give that economy a competitive advantage or to prevent capital leaving the country. You get rhetoric coming out of policymakers to try and influence the exchange rate to suit their own domestic agenda. The risk is that policymakers may underestimate the longer-term implications of inflation.” The consequences of such policies are highly uncertain. Short- to-midterm consequences include profound distortions of risk-return profiles, potential asset price bubbles, an impaired credit intermediation channel and increasing economic inequality. Long-term

Helicopter money is effectively an extreme form of QE, basically printing cash and dropping it over towns. It is a nice theoretical experiment to think about but in practice, it is fraught with political risks around its distribution Adam Chester, Head of UK Macroeconomics in Commercial Banking at Lloyd’s Bank

COVER STORY

unintended consequences include the potential for higher inflation, as well as reputational damage for central banks. Meanwhile, continuous low interest rates strongly impact the balance sheet of conservative, large asset managers like insurers and life insurers. “It has been a challenging time. Investors are constantly seeking higher yields and a number of the funds we manage, we take active currency exposures on global fixed income. So we’re actually able to generate returns by actively managing the currency exposures. There are ways to offset the loss of income from low rates. We’ve become much more active in credit markets as well,” says Severino. According to Swiss Re’s Haegeli, a preferable strat-

egy to promote economic growth and sustainable investment is for public and private sectors to work together on major infrastructure projects. He says: “I would rather see an orchestrated effort from policymakers to increase infrastructure spending to go with the private sector. That would strengthen the role of long-term investors and the positive role they play for economic growth. The risk globally is not seizing the opportunity that we have today by having a well-defined framework for infrastructure spending. “There is exposure to political risk given that it is a 15-year plus investment, but it is a bigger risk from a society and policymaking point of view not to take the opportunity and build a public-private framework

for infrastructure debt. We need more growth and the right policy actions for the private sector to create more jobs. Putting in place the conditions for a tradable infrastructure asset class is a win-win strategy.” IFM editor@ifinancemag.com

There are ways to offset the loss of income from low rates. We’ve become much more active in credit markets Andre Severino, Head of Fixed Income for US and Europe at Nikko Asset Management

Jul - Sep 2015 International Finance Magazine

COVER STORY

“C ECONOMISTS’ VIEWS

entral banks have started moving their efforts towards longterm nominal interest rates, trying to push them down in two ways. The first strategy, quantitative easing, consists of printing money on a large scale to buy long-term bonds, especially government bonds, in order to generate more appetite for the remaining ones in public hands thus increasing their price and pushing down the long-term rate. “The second strategy, forward guidance, consists of using communication about future central bank actions to influence present behaviour: if a central bank can convince markets that it will leave interest rates low for quite a while, allowing a faster recovery in the future than it might normally tolerate, then investors have an incentive to start investing more in the present. “I do not think that quantitative easing should continue forever as massive liquidity interventions generate distortion and its discretional nature conflicts with more effective rules-based monetary policy measures. Conversely, forward guidance could be part of a monetary policy for the future provided it is consistent with the rules-based strategy of the central bank as it can enhance central banks’ transparency. “However, if forward guidance is used to make inappropriate promises for the future, it would be time-inconsistent and should be abandoned. Additionally, if central banks do not clarify their priorities, forward guidance might turn out to be a vague statement and a less powerful tool than it could be otherwise.”

‘QE should not continue forever’

International Finance Magazine Jul - Sep 2015

COVER STORY

Giacomo Nocera, Professor (finance) at Audencia School of Management

Jul - Sep 2015 International Finance Magazine

COVER STORY

“T ECONOMISTS’ VIEWS

here is a limit to what central banks credibly can achieve given the tools to which they have access. Central banks are there ultimately to influence aggregate demand, help for spending and business investment by keeping interest rates very loose or very low, particularly real interest rates compared to inflation rather than just nominal interest rates. “Also, through unconventional policy stimulus like going into the market and buying up government bonds and pumping money into the system in the hope that liquidity will boost asset prices, bond prices; and leave households and businesses with surplus cash balances. “Central bank policy is very much geared towards the demand side of the economy. To that extent, its impact is quite limited. “To drive long-term growth what you need is not just strong demand but the supply-based economy to recover as well. Between 2008 and 2012, the challenge for economies around the world was demand, but falling oil prices and low interest rates have improved Western economies markedly. What is missing to date has been further improvements in the supply side of the economy. There is a danger that if they overcook the demand side by keeping policy loose but the supply side does not improve then they could cook up inflation.”

‘Eventually, the central bank will win but…’

International Finance Magazine Jul - Sep 2015

COVER STORY

Jean-Michel Six, Chief Economist for Europe, Standard & Poorâ&#x20AC;&#x2122;s

Jul - Sep 2015 International Finance Magazine

COVER STORY

“T ECONOMISTS’ VIEWS

here’s a complex situation on interest rates. On one side, the markets and investors are trying to reassess their growth and inflation perspectives to factor in the beginning of the recovery. We’re in positive territory. There’s slightly higher growth across the region and unavoidably, this is causing long-term yields to come up somewhat. “Typically, a steeper yield curve would be associated with a position in the cycle where we see acceleration in growth. A more technical reason is the lack of liquidity in the market. “On the other side of the equation, the central banks are trying to convince the markets that although we have stronger growth that does not justify a significant steepening in rates because we will continue to inject massive liquidity and keep long-term yields at very low levels. “Eventually, the central bank will win but this summer could be a bit volatile. By year-end, it will stabilise though and if the Bund is at 1% that is very, very reasonable. That will prevail until we move into the next stage, although it is difficult to predict when this will happen.” “It will happen when the ECB starts bringing its QE programme to an end, which will bring volatility into the market with a more neutral monetary position.”

‘There is a limit to what central banks can achieve’

International Finance Magazine Jul - Sep 2015

COVER STORY

Adam Chester, Head of UK Macroeconomics in Commercial Banking, Lloyds Bank

Jul - Sep 2015 International Finance Magazine

COVER STORY

“I ECONOMISTS’ VIEWS

t has been a pretty extraordinary period of central bank policy history. If you look at the US Federal Reserve, they managed to end their QE programme but not reduce their balance sheet. The balance sheet ended on around $4 trillion and the economy is probably strong enough now that they will begin to normalise rates in September. “The question remains what do they do with the balance sheet? There’s still low inflation and relatively low inflation expectations. If it were to reduce its balance sheet at this point, the market wouldn’t take that very well. Interest rates would react pretty badly in terms of rising. “The ECB has the balance sheet to continue until September of next year at a pace of €60 billion a month. We are seeing early signs of it working. One sign is in asset prices. We’ve seen equity markets rise pretty quickly this year in Europe. That has a knock-on affect on consumer confidence. It is only one piece you have to have: the labour market with people feeling confident in their jobs. “You have to hope that there is enough momentum in the real economy to get it going in place of QE next September.”

‘Hope there is enough momentum in the real economy’

International Finance Magazine Jul - Sep 2015

COVER STORY

Andre Severino, Head of Fixed Income for US and Europe, Nikko Asset Management

Jul - Sep 2015 International Finance Magazine

COLUMN

David Drake

Democratising 28

investment processes

International Finance Magazine Jul - Sep 2015

COLUMN

Now you can invest as little as $5,000 in pre-vetted real estate projects compared to the traditional $50,000 to $100,000

ecently, there has been a rise in institutional capital as it pours into the real estate sector, boosting the sales volumes every year since the 2007/2008 financial crisis. However, it is the pool of additional capital from family offices and ultra-rich individuals that is surfing the growing wave of real estate investment. Through crowdfunding, family offices are increasingly diversifying investments by identifying and investing in viable real estate properties and projects. The big names in real estate crowdfunding iFunding is one of the big names in the crowdfunding

for real estate space that offers family offices top notch tools to make investing in real estate more customised, well researched, efficient and profitable. According to its founder and CEO William Skelley, â&#x20AC;&#x153;Crowdfunding offers multi-family investors a new approach to diversify their wealth across multiple locations and opportunities. At the same time, entrepreneurs are able to access numerous accredited investors through our network. The scalability of crowdfunding platform enables iFunding to handle opportunity evaluation processes, exchange of documents and report generation for both parties. This allows investors to focus on selection

while issuers focus on their projects.â&#x20AC;? There are several other companies in the real estate investing space that have identified the potential of crowdfunding and are capitalising on it as a way to disrupt traditional financing approaches. Besides iFunding, Fundrise and Realty Mogul are two of the many other crowdfunding platforms that have created opportunities for family offices to invest in real estate through crowdfunding. Fundrise allows investors to invest a minimum of $5,000 making it possible for them to build real estate portfolios that fit their goals. Through this platform, investors can invest in leading US markets and earn re-

turns that average between 12 and 14 percent. On the other hand, Realty Mogul provides investors with information about real estate projects that historically was not easy to access. Further, investors are able to browse through and screen investment details before signing deals online. Early years of William Skelley iFunding is the brainchild of William Skelley along with Sohin Shah. William Skelley participated in Harvard Business Schoolâ&#x20AC;&#x2122;s esteemed Owner/President Management (OPM) program where he met one of the top global disruptive innovation thinkers Professor Clayton Christensen.

Jul - Sep 2015 International Finance Magazine

COLUMN

During the past century, regulations on private securities, the nature of properties and professional relationships among ultra-rich individuals and their advisors ensured that diversification and attractive returns from consumer loans, real estate deals, invention backing and other classes of less liquid assets were the reserve of a select few

Professor Christensen’s hedge fund, Rose Park Advisors, invests in private and public companies that embrace disruptive innovation. William Skelley got the opportunity to join this hedge fund and advised clients on transacting over $2 billion across capital structure. One of the major companies that the fund invested in was CircleUp, which, to date, has raised more than $23 million in venture capital making it the biggest crowdfunding for equity platform in the US. Prior to joining the Harvard Business School Executive Program, William Skelley was a boutique investment bank owner. He started thinking of alternatives after the real estate industry halted following the collapse of Lehman and other companies during the economic depression period. During his time at Professor Christensen’s hedge fund, William Skelley saw the opportunity for technological innovation in the real estate sector. His disruptive idea had to do with facilitating smaller institutions and individual investors to engage in a broad range of investment deals via an online platform that offers financial terms comparable

to those previously available for ultra-wealthy individuals. The birth of iFunding The thought of democratising investment processes in real estate led to the establishment of iFunding. Upon its founding, the company moved with speed to establish a top notch managerial team with solid backgrounds in real estate, finance and politics. Its most recent addition occurred in 2014 when it appointed David Paterson, former New York governor, as Director of Community. iFunding became the first investment platform to launch an Android/ iPhone app that allows users to access deals from their phones, anytime, anywhere. The company is growing rapidly in the US and to date, the crowdfunding platform has helped to raise more than $31 million for more than 25 projects. It has expanded to establish an operational base in Singapore from where it hopes to expand its reach to at least 18 countries in Asia. iFunding joined big players like Fundrise, which focuses on increasing efficiency and reducing costs for both investors and real

International Finance Magazine Jul - Sep 2015

estate, and Realty Mogul, which creates opportunity for accredited investors to purchase shares in already vetted properties. iFunding founder, William Skelley, believes that disruptive innovation is a concept that is well aligned with crowdfunding, particularly in the real estate sector. His firm envisages that crowd investors will get more sophisticated, seeking varied deals — debt or equity, commercial or residential, buy-and-hold or flip-and-sell — from reliable crowdfund companies that have strong technology and processes. Regulatory impact on disruptive innovation During the past century, regulations on private securities, the nature of properties and professional relationships among ultra-rich individuals and their advisors ensured that diversification and attractive returns from consumer loans, real estate deals, invention backing and other classes of less liquid assets were the reserve of a select few. Crowdfunding has disrupted this theory making it possible for individuals to raise more than $5 billion through online markets to fund consumer loans at

Prosper, Lending Club and others. iFunding allows investors to invest as little as $5000 in pre-vetted real estate projects compared to the traditional $50,000 to $100,000 that was initially required for investments in real estate. Traditionally, the real estate sector had limited access to quality institutional deals but with crowdfunding, investors are now able to participate in projects that have the potential to yield huge returns from smaller investments. IFM

editor@ifinancemag.com

David Drake is an early-stage equity expert based in New York City. He is the founder and chairman of Victoria Global; LDJ Capital, a family office and private equity advisory firm; and, The Soho Loft Media Group, a global financial media firm.

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Why

crowdfunding Visy Valsan

It frees entrepreneurs of the constraints placed by banks, VCs and angel investors

International Finance Magazine Jul - Sep 2015

undable, a crowdfunding platform recorded in 2014 that the industry worldwide has grown 1000% in the last five years. Last year alone, according to its estimate, the industry stands to have grown at 92% — raising questions on why an increasing number of startups chose to turn to this mode of financing as opposed to traditional venture capital funding or banks. With entrepreneurial fervour powering much of the business industry today, a considerable number of online startups prefer crowd-

funding because of their intangibility as opposed to ‘product-based’ non-virtual startups where donors can ‘see’ and ‘assess’ the success of the product before investing in them. Sramana Mitra, a Silicon Valley entrepreneur and a strategy consultant in her piece ‘Can Crowdfunding Solve the Startup Capital Gap? published by the Harvard Business Review points out how “angel investors and VCs are only interested in businesses with a clear path toward an exit”. In an online startup, no one can be sure of how things are going to turn out.

According to her, this leaves 99% of the businesses outside the realm of their framework. “These ‘Other 99%’ businesses are often excellent niche businesses. They can be profitable, cashgenerating concerns, quite capable of paying dividends to their shareholders. However, the dividend model of investment is pretty much missing in the angel/VC industry. Crowdfunding could plug this gap,” she writes. And that’s what brought crowdfunding platforms into existence. Both Kickstarter and Indiegogo — rewards-based crowdfunding platforms — con-

“

I wanted to help myself and young entrepreneurs in the region who aspire to be the next Mark Zuckerbergs to find a platform that would support them in overcoming the biggest challenge: funding Abdallah Absi, founder, Zoomaal

Jul - Sep 2015 International Finance Magazine

tinue to raise hundreds of campaigns every year. What works for the online startups that sign up with them is the concept of enabling just about anybody on the planet to invest in them. “Ubuntu (from Canonical) raised the most money ever on any platform. It’s a product-based campaign, but the company behind it -- Canonical -- run their business online,” reveals Anastasia Emmanuel, Indiegogo’s UK Marketing and Community Manager. “The campaign of Tens: The Real Life Photo Filter was also a great success. They are an Edinburgh-based startup,

running their sunglasses business also online via their website www.tenslife. com,” she added. One of the key reasons why many online startups turn to crowdfunding is when due diligence cannot be performed. For an online business to attract investment, it’s very difficult for the entrepreneur to show its competency in the virtual world unless it begins to attract traffic. And banks and financial institutions want its worth proven, something impossible for an online startup especially in the starting stages. “Working capital financ-

International Finance Magazine Jul - Sep 2015

ing is one of the key requirements of all small startups. Today, banks take notoriously long to approve minimal amounts of credit. If that pain can be addressed via crowdfunding, that would massively lubricate small businesses, unleashing tremendous amounts of growth,” says Mitra, who is also the founder of One Million by One Million, a global virtual incubator. In Lebanon, where conflict wages a fresh battle against businesses and creativity every day, Zoomaal has entered the crowdfunding industry with the hope of giving wings to budding

Working capital financing is one of the key requirements of all small startups. Today, banks take notoriously long to approve minimal amounts of credit. If that pain can be addressed via crowdfunding, that would massively lubricate small businesses, unleashing tremendous amounts of growth Sramana Mitra, a Silicon Valley entrepreneur and a strategy consultant, the founder of One Million by One Million, a global virtual incubator.

entrepreneurs. Founded by Abdallah Absi in Beirut in July 2012, the crowdfunding platform serves to get campaigns started immediately. Holding himself as an example, Absi recounted how before Zoomaal, he, as a young entrepreneur, had started six startups all of which failed because of funding issues. “I wanted to help myself and young entrepreneurs in the region who aspire to be the next Mark Zuckerbergs to find a platform that would support them in overcoming the biggest challenge: funding.” Discouraged by continuous political strife and

incessant violence, many in the Arab world have turned to entrepreneurship only because of lack of jobs, says Absi. When asked about financing via banks and investors, he said: “We don’t judge projects. While banks, accelerators and normal investors do so. We at Zoomaal don’t just aim to be a crowdfunding machine in the region, but become the enabler of creativity in the region.” The ‘Crowdfunding Study 2020’ posted on the German Crowdfunding Network by a group of experts also aims to focus on the importance of crowdfunding startups in

the coming years. The study points out that crowdfunding could be a viable option as banks nowadays suffer a loss of confidence post the financial crisis. Due to the possibility of risk diversification and the promise of attractive returns, crowdfunding for startups could in the future become a serious investment alternative, the study says, replacing most traditional financial products. IFM

Ubuntu (from Canonical) raised the most money ever on any platform. It’s a product-based campaign, but the company behind it -- Canonical -- run their business online Anastasia Emmanuel, Director, UK Technology & Design, Indiegogo

editor@ifinancemag.com

The ‘Crowdfunding Study 2020’ posted on the German Crowdfunding Network by a group of experts aims to focus on the importance of crowdfunding startups in the coming years

Jul - Sep 2015 International Finance Magazine

COMPANY nEWS

In support of 36

Vision

2020 International Finance Magazine Jul - Sep 2015

National Bank of Oman is the anchor financier of the Special Economic Zone in Duqm and is helping diversify the Sultanateâ&#x20AC;&#x2122;s economy

COMPANY NEWS

Jul - Sep 2015 International Finance Magazine

COMPANY nEWS

or more than four decades, since its creation in 1973 and up to this day, National Bank of Oman has proudly provided financing for the Sultanate’s most ambitious and strategically important infrastructure projects. Over the last three years alone, the bank has committed over $1 billion to support major developments in the tourism, transport, infrastructure, power and water sectors, among others. It is little surprise, then, that the bank is the anchor financier of the Special Economic Zone in Duqm or, as it is more commonly known, SEZAD. As the largest development of its kind in the Middle East, SEZAD has the potential to transform an entire region of the Sultanate. This aligns with National Bank of Oman’s commitment to support the Sultanate’s Vision 2020, wider macroeconomic agenda and diversification objectives through the provision of financial support and technical assistance from its Project Finance division. The bank has been a catalyst for SEZAD’s development from the outset, when the mega project was just beginning to rouse investor interest. National Bank of Oman was a leading and one of the earliest providers of financial assurance and project funding to SEZAD. In 2014, the bank formalised its support of SEZAD with the signing of a memorandum to provide financing to potential investors. To date, NBO is the

leading financer for most of the major projects currently in progress, serving as the region’s financial backbone and remaining steadfast in its support of Oman’s visionary goals for Duqm. Perhaps, the most visible demonstration of the bank’s involvement with SEZAD can be seen in the much talked about Frontier Town Project undertaken by the Duqm Development Company (DDC), which involved developing a residential township consisting of apartments, villas and leisure and service facilities. Following the signing of a long-term loan facility agreement, the project’s entire requirement of funds of RO 25 million was financed by National Bank of Oman. In addition, the bank also provided quality accommodation and other common amenities for the management and staff of Oman Drydock Company. Alongside providing longterm project financing for the DDC’s Frontier Town

International Finance Magazine Jul - Sep 2015

Project, the bank will be extending its role as SEZAD’s key financier by offering additional funding in association with other banks. This will be mostly for the various large infrastructure plans in the pipeline, including the staff permanent accommodation project for over

17,000 workers being undertaken by Renaissance Services SAOG at a total cost of around $200 million, SEZAD refineries and the petrochemical complex, among others. National Bank of Oman’s growth plans in relation to SEZAD go far beyond project financing. The bank is also committed to establish-

ing a reliable and efficient retail banking footprint in the region, in anticipation of a labour force influx to support the zone’s numerous projects. The bank operates a fullfledged branch in SEZAD catering to retail and SME banking customers, as well as the first and the only multi-functional ATM at Dry Dock area. There is also

COMPANY NEWS

Mr. Ahmed Al Musalmi, CEO, National Bank of Oman

a dedicated team located at the Head Office which regularly travels to SEZAD and interacts with Duqm companies, which have a presence in Muscat in order to stay on top of developments taking place in the region and to be able to offer support and services as early as possible. An enabler of economic

diversification and opportunity across Oman As one of the oldest and largest financial institutions in the Sultanate, National Bank of Oman has a proud track record of supporting economic diversification across the country through the provision of financial solutions and favourable lending policies. The operations of its large

and growing Project Finance division are fully aligned to the Sultanate of Oman’s economic agenda. The division offers project finance and loan syndication services to encourage private and foreign investments, and further support Oman’s diversification strategy. National Bank of Oman is the first bank to sign an MOU with SEZAD and the first and the only bank to finance front (residential) complex. In addition to its support of SEZAD, the bank has also provided project finance to Oman Oil Company and its various subsidiaries, ORPIOC, Octal Petrochemical Company, Electricity Holding Company and many other multi-million rial projects as well as all IPP and IWPPs, which were established in the country, including Sohar Power, Dhofar Power, Barka Power, Sembcorp Salalah and Al Kamil. Most recently, the

bank provided $116.24 million financing for Dalma Energy’s Petroleum Development Oman project, enabling the acquisition of five state-of-the-art drilling rigs. National Bank of Oman also understands the important role that SMEs play in developing a strong and diversified economy. In 2014, the bank revamped its Small Business Unit in a bid to extend support to Oman’s SME sector, including the launch of a first of its kind initiative in the form of SME Hubs with dedicated, expert staff. So whether it is supporting the biggest projects and companies in the Sultanate, or the smallest start-ups and nascent businesses, National Bank of Oman is proud to be playing an active role in the ongoing diversification of Oman’s economy. IFM editor@ifinancemag.com

Jul - Sep 2015 International Finance Magazine

The future

is in your

hands

International Finance Magazine Jul - Sep 2015

he payment systems ecosphere is thriving with innovation and new products. Cash is increasingly becoming one of many but less attractive options. So much that Denmark is trying to eliminate it altogether in select sectors. Let us look at the alternatives — credit card, debit card, net banking, mobile payments and payment through social media. Of these, mobile phones seem the most attractive. Not everyone may have a debit/credit card, but the number of unique mobile phone users worldwide crossed 50% in the second half of 2014. In 2016, the number of smartphone users worldwide is expected to cross two billion. And it is these users who are

driving the mobile phone payment ecosystem. But even those with a simple mobile phone are getting to see a world that was restricted to people with bank accounts. Mobile banking is a revolution that is unrolling across large parts of Africa and Asia. The irony is that the world’s most technologically superior nation — the USA — is playing catching up with the rest of the world where payment systems are concerned. While companies are spending millions to push the use of credit and debit cards, not a single penny is going into the promotion of mobile phones. These devices fulfil a need — to be connected. These connections are opening windows to collaborations

of various types. One of them is payment through mobile phones. The magnitude of the potential and the fast developments in this space prompted IFM to devote a special section to payment systems. Mobile phones could be a decisive factor for banks looking to expand their footprint in a crowded market. The banks which take the lead could very well end up as the dominant force in that particular market. Having to deal with a new world, they have been slow on the uptake. But the ones who are led by CEOs with foresight are trying to incorporate the mobile phone in their operations. While there are risks with mobile payments, they are not greater or lesser than in

the case of the alternative methods of payments. In places where the idea has taken off, the options are so few that the mobile phone is the only alternative. Merchants are happy because their payments are guaranteed even as they have lesser cash to handle. The changing scenario has prompted ATM manufacturers to innovate faster. This section features just a few payment systems because it is simply not possible to cover all the innovation that is happening around the world. But it will surely give you an idea of what the future of payment systems is going to be like. Do give us your feedback on this special section.

INDEX ‘Cash handling is an incredibly

pg.42

expensive exercise’ Liz Oakes helps banks, merchants, payment firms and central banks understand how payments are changing

48 Benefits vs Risk 52 Cash not accepted 56

Question mark on the wallet

Undercutting the big boys

Safety in virtual currency

Pay the social media way

David Poole 74 Fighting online abandonment 78

Faster payments is not for US

Jul - Sep 2015 International Finance Magazine

‘Faster payments eliminate chargebacks, so is very attractive to merchants’

Liz Oakes, Associate Director, management consulting at KPMG in London, spoke to IFM about mobile payments Tom Groenfeldt

he trendy, artisan coffee shop had six different payment terminals on the counter and a very confused cashier who apparently didn’t know how to use many of them. Oakes paid cash. It’s not as if Oakes doesn’t understand payments. At KPMG, she has worked on the UK’s Faster Payments initiative, she consults with the US Federal Reserve Banks on the program of reform to the US payment systems ecosystem, including the development of real-time payments, and she

International Finance Magazine Jul - Sep 2015

is working with The Clearing House (a private sector payments operator owned by a consortium of the largest US banks) on its real-time payments initiative. Her work these days is helping banks, merchants, payment firms and central banks understand how payments are changing and what they need to do to prepare. She spoke to IFM about some of the issues she confronts. Excerpts from an interview:

Liz Oakes, Associate Director, management consulting at KPMG in London

Jul - Sep 2015 International Finance Magazine

INTERVIEW INTERVIEW

What challenges do merchants face in the changing world of payments? We have had a number of merchants come to us asking for a strategy for point of sale (POS) upgrades and it is very, very difficult to advise a long-term strategy at this point. We can say here are all your options, what do you think your customers will want? How many POS systems can you afford to support? Will your customers want to wave and pay, or tap and pay, or swipe, or stick their card into the machine? Choice is just one of the issues facing users in the global payments system where the US in many ways lags the UK, Europe and Africa. Where does the US lag? I had a shocking moment of truth when I was in Atlanta for a meeting designing faster payments. I told them that at home in the UK, a friend organised a holiday for a number of families. We are going to the same place at the same time. She booked the whole thing and I had to pay my share. She had just sent me her bank details via Facebook Messenger. So, I was logging into internet banking and paid her direct to her bank account in seconds. I guess I could have sent her money via check, except I no longer keep a checkbook. My US colleagues looked at me blankly and said ‘how did you do that? Most of our banks don’t allow us to do this. We have to write a check, as the majority only has bill payment options’. That was an eye-opening

experience. Now I understand why PayPal and other online and mobile apps have become so popular in the US. What is to be done? The US needs to fix two things — faster payments is probably the first. The concept that you can’t just pay to any account quickly except by writing a check is unbelievable in this age of technology. The second is the concept of direct debits without a mandate in place. If you have someone’s current account details, in the US you rely on the checks carried out by the originator’s bank. You could potentially take money out of an account without someone knowing about it, or authorising it in advance. In almost every other country outside the US, there are stronger controls. So, you can’t set up direct debit without all sorts of checks, an indemnity guarantee is in place and a physical signed mandate or phone authorisation from the owner of the account is required. Is it different in the UK? In UK, consumers know there is a lifetime guarantee. So, if you set up a gym membership and if they make an error taking your money, you can cancel the direct debit at any time and your bank will return your money immediately. In the US, it appears as if an organisation can submit a collection file to a bank, but they don’t have to present a mandate. How does the bank check that the end consumer actually signed up? It does not sound like they are required to do this

International Finance Magazine Jul - Sep 2015

in advance, and many don’t. I was shocked. Protecting the customer’s data is more challenging with this system. I find direct debit very convenient, especially because most utility companies in the UK will give you a discount of 2 to 5 percent because they know when they are going to get paid and they like predictable cash flow. In the UK, people on social welfare often rely on prepaid cards and smart metering to pay utility bills, but regulators are pushing to reduce their charges and to enable them to use direct debit. Do you think banks and regulators operate differently in Europe? Consumers have different rights in Europe, which I think is largely because within the banking industry, people have had to work collaboratively to create national (and now panEuropean) infrastructure, formats and standards and have had to sit around the table saying that “I as an individual want to do this, so that is part of our requirements”. When you design these systems, people rely on possible “use cases”. You have to ask what do people want to use this for, what are we trying to solve. If you have a diverse group, you might understand you can’t have uncontrolled direct debits because a lot of people are living handto-mouth or have a seasonal or variable income. If you started taking money out of their current account randomly, they could end up destitute. The Clearing House is reaching out to

credit unions and smaller organisations to understand what consumers need and the system is likely to be a push credit model. What, besides speed, changes with faster payments? The 24/7 nature of faster payments means you have to reflect on what customers might want to do – or not do. I recall a hilarious discussion recently with a group of bankers about whether we might even want to help block transactions by drunk customers at 2 a.m. in a bar, maybe by introducing an app asking: Are you sober, can you read this number? It’s impossible to say what people are trying to do in the middle of the night and why. They might be intoxicated, but if they were able to sign for or input their PIN number while they were drunk, did they really need to be sober? We see people using faster payments late at night in the UK for all sorts of reasons. Some people will be researching holidays and paying for them while other people might work shifts, come home late at night and pay bills. We must look at whether card usage is in the context of the customers’ pattern of behavior. What do European consumers gain from collaboration between banks and regulators? One clear difference between the US and Europe is that regulators in Europe have been more proactive in pursuing the digital agenda. One example — checks have largely disappeared, replaced by credit transfers

INTERVIEW

and direct debit with strict controls, and card use is surpassing cash in many countries, including the UK. Another contrast is that American consumers have to pay to use cash machines that aren’t in their bank’s network. The charge reflects some of the actual cost of handling cash. We often don’t see a cost handling cash, but then again, we often don’t see the cost of a huge number of services we use. I can walk in a park for free, but someone had to build that park and maintain it. Many of the costs in financial services are hidden. So, consumers don’t think of them as having any cost at all. Cash, for example, has costs associated with it. If you take out $200 and leave it in wallet for a month, do you see a cost associated with that, like loss of interest? The cost of cash handling includes the

armoured trucks delivering cash or picking up a canister of cash from merchants. It’s a cost somebody has to pay. What’s the problem with cash? Cash handling is an incredibly expensive exercise for high street retailers. Ask any high-street food chain how much it costs them to handle cash every year; it is likely to be in the millions. They have to count it, store it, put it in a safe, pay for the safe, get coin deliveries, sort the coins, pay someone to pick up the cash and they need to maintain a float of the appropriate notes — they don’t want loads of $100 bills. Cash is not necessarily convenient for individuals either. If I call a plumber in the middle of the night, the last thing I want to do is leave the guy in the house while I drive off to an ATM. That’s where a ubiquitous person-to-person payment

using a mobile phone number (such as Paym in the UK) is so convenient. Where do you see mobile payments going? Payments by mobile means different things in different countries. Mobile carrier payments, like MPesa, are taking off in places where banking isn’t widely available, such as Africa, Bangladesh and Romania. Carrier billing is complicated because most organisations don’t want to be regulated as banks and undergo the scrutiny that banks do. If they don’t want to extend credit and be responsible for looking after client money, they may look at prepaid options. Or, some of them may become financial organisations because that’s what is required to comply with regulation. Vodafone in Africa, for example, is trying to bridge the gap by partnering with banks.

In many developed markets, mobile payments provide an access point to your current account or a credit card. There will always be a place for credit cards because they provide access to credit. I am not sure about the long-term future of debit cards in the plastic format because a debit card is just a proxy, a way of pointing at your current account. If you can use faster payments and a mobile, do you need to use a debit card? In the EU, we see interchange on debit cards trending towards zero, due to regulatory pressure to reduce this fee to merchants. Faster payments eliminate chargebacks, so is very attractive to merchants. Are payment systems getting better at sending data along with payments? Handling data along with money is complex. In the past, retail has been physical goods vs. cash,

Jul - Sep 2015 International Finance Magazine

INTERVIEW INTERVIEW

46 but increasingly merchants want data. It’s not your local grocery store any longer; they don’t recognise you at the checkout, but they want to understand more about you and what you like to buy. So, they are trying to profile you afterwards using data analytics. They want to incentivize you to come back, perhaps with coupons. They are trying to build a profile of you as a frequent shopper, your age, your demographics. With electronic payments, they know much more about you, and perhaps they can drive you to spend more, and visit more often by sending you offers on your mobile. At the point of sale, a debit card on a mobile might be faster than a card. Retailers

will try to get customers to use their own retail app so they can collect more data. The game is changing in retail. It has become a science with extensive data analytics. Eighty to ninety percent of retail is in-store. We talk e-commerce, but the vast majority of sales is going into stores, where shoppers can try stuff on, see if they like it. But if the customer uses cash or a check, that is a dead transaction — they have no idea who you are, while if you buy online or use a card they know, they know who you are. Are banks keeping up with requirements of retailers? In the UK, retailers have also been challenging the banks. We have

International Finance Magazine Jul - Sep 2015

seen well-known retailers, including the likes of Tesco, Sainsbury’s and Marks and Spencer, enter the financial services market offering unsecured products and savings accounts. The longer established retailers, such as Tesco and Marks and Spencer, are expanding their offering with products such as current accounts and mortgages thus further challenging the big banks. The top reason given by challenger bank customers for choosing to bank with one of the challengers is the ability to earn loyalty points or get discounts. This is a trend that is most apparent in relation to large retailers with established loyalty schemes. It might be argued that consumers act

irrationally in this respect – overvaluing such schemes when compared to more fundamental measures, such as price and customer service. Meanwhile retailers, corporations in general, government departments and even charities face the challenge of reconciling payments and receivables. When you receive money, you need to know what it is for and whom it is from. The receivables side is typically where a lot of expense is incurred. Organisations can have hundreds or thousands of people reconciling payments from people who attach a check to an invoice or send a note saying this is a donation. Those details need to be handled with the payments and it takes a

Access the best stories in the world of business at your convenience huge number of people to sort that out. Are you comfortable with your personal data being held by banks and retailers? Banks have held customer data sacred. They know where customers live and how much they earn and how they spend their money. The information is profoundly personal and it has been treated as sacred and protected. Now everyone is talking about mining data, and I say, wait a minute. I as an individual think that is my financial data, and the minute you start selling it to somebody I will leave or start using cash. Banking is a bit like your medical info â&#x20AC;&#x201D; you have HIPAA (US privacy regulation for health records) around your health information. You might expect your banking data should have the same type of protection. I think we are at a critical point in this debate to determine how our data is monetised, what we are prepared to allow and how we indicate informed acceptance. Sometimes, we are faced with the law of unintended consequences with data protection and use. In the UK, the regulator (FCA) introduced the Mortgage

Market review, a new rule to stop financial institutions extending mortgages to people who canâ&#x20AC;&#x2122;t demonstrate they can pay it back. As a result, legislation was introduced to ensure banks perform additional checks on borrowers. Various interpretations of this have resulted in some lenders performing comprehensive lifestyle checks on what first-time buyers are spending their money on â&#x20AC;&#x201C; everything from beauty treatments to gym memberships and Saturday nights out. The nature of these checks has resulted in scrutiny from the media and consumer groups. It has created a real backlash and may drive consumers back to cash to achieve anonymity. IFM

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Jul - Sep 2015 International Finance Magazine

OPINION

Louisa Buckingham

Benefits vs

Risk International Finance Magazine Jul - Sep 2015

There are problems with every form of payment but the benefits can outweigh the potential risks

OPINION

o back a few decades and everything would be paid for with cash. In this day and age, there are dozens of different ways to submit payment, both for consumers and businesses, including contactless, direct debit and even mobile phone apps. Companies need to be aware of changing consumer payment habits, the increasing need for speed and the possibility of more security breaches as technology becomes more advanced. There has been a lot of talk over the past few years surrounding the cloud. Starting with software such as Dropbox and Apple’s iCloud, this technology is no longer reserved for those who want to back up their images and videos. The

49 cloud is now making its way into professional businesses as a way of storing confidential data, such as direct debit details, offsite on secure servers. Not only does this help with security, it also allows for easier access whenever you need it. The use of a cloud storage system is becoming increasingly common, especially with Non-Banking Financial Institutions. Using the cloud to store financial details and submit payments is a divisive issue, as while the benefits are clear — increased flexibility, the ability to make direct debit payments much faster and for those working with financial details, the cloud is the ideal Disaster Recovery Tool, as data can be backed up and stored safely within seconds — there are very

obvious drawbacks. Predictably, one of the largest concerns when it comes to financial institutions using the cloud is security. Although cloud service providers have worked hard to allay these fears, company owners still have nightmares about their confidential information being hacked, which could not only release client details, but also compromise the firm’s reputation. As the cloud is public, your data could be stored in a data centre anywhere in the world. While this can ensure that your clients’ information is safe, the data protection protocols in that particular country may be different, which is something to be seriously considered when using a cloudbased storage platform.

“

Smartphones are already being used to check balances, transfer funds and transact online, but they have not reached a ‘mobile wallet’ status globally Jolyon Barker, Managing Director of Global TMT Industry, Deloitte Global

Jul - Sep 2015 International Finance Magazine

OPINION

on the phone in the form of virtual “limited-use” cards. This in itself presents its own security problems, with the possibility that hackers could locate the card details through the use of malware, viruses or phone cloning.

The future

Going Mobile From cash-in-hand to debit and credit cards, from PIN numbers to contactless payments, the way that consumers pay for their goods and services has certainly changed a lot over the past few years. People are prioritising speed and ease much more nowadays and the use of cash is clearly decreasing, with a report from the Centre of Economics and Business Research (CEBR) showing that the average cash payment in 2014 was worth only £10.32, with the number dropping slightly every year. Although debit cards remain the number one choice for people in the UK, it is hard to ignore the growing trend of mobile payments. Simply by having a smartphone equipped with NFC (Near Field Communication) technology and downloading an app, people can pay for goods just by touching their smartphone to a payment pad. In their annual Technology, Media & Telecommunications report, Deloitte predicted that 2015 would be the year that mobile payment reached the mainstream, with the organisation anticipating a 1,000% increase in the number of mobile in-store payments. Speaking earlier this year, Jolyon Barker, Managing Director of Global TMT Industry, Deloitte Global, stated

International Finance Magazine Jul - Sep 2015

that payments via smartphones were the next step forward: “Smartphones are already being used to check balances, transfer funds and transact online, but they have not reached a ‘mobile wallet’ status globally. We predict 2015 will be the first year that all mainstream mobile requirements will be addressed, making smartphone payment options easier, with user friendly security in place.” Understandably, security will be at the forefront of most people’s minds when it comes to mobile payments, especially surrounding available apps such as Google Wallet and Apple Pay, and even more so when using prepayment apps such as Starbucks where money is pre-loaded. A great deal of a phone’s security will depend upon the owner who, if they left an unsecure smartphone lying around, could find all their pre-loaded credit is spent, as well as their phone stolen. If card details are stored on the internet, and then accessed remotely by the user whenever they need to pay for something, there is always a risk of hacking, just like with any other account on the internet. The way to combat this risk is through the use of a technique called ‘tokenisation’, which is where the payment details remain

Every time a new type of payment technology hits the market, whether it’s for businesses or consumers, a plethora of issues come along with it, namely to do with security. However, we must remember that there are problems with even the most traditional forms of payment (how many of you have lost your wallet or had cash stolen from your pocket?) and the benefits of speed and the ease of use can outweigh the potential risks. This is particularly true for Non-Bank Financial Institutions who are looking to improve their handling of clients’ financial details, as the cloud is agile enough and secure enough to be adapted to suit their specific requirements. You will also rid your office of paper and files, make it easier to access information and you’ll also be able to process payments far quicker than beforehand. Before choosing a cloud provider, it is important to conduct thorough research and speak to experts so you can decide if the cloud is right for you. IFM

Louisa Buckingham is a marketing executive at First Capital Cashflow editor@ifinancemag.com

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Cash not accepted 52

Select retailers in Denmark to refuse payments in cash, possibly as early as January 2016

Tim Evershed

groundbreaking proposal from the Danish government has put the Scandi navian nation firmly in the vanguard of moves towards a cash-free economy. The proposal will allow select retailers such as restaurants, clothing stores and petrol stations to refuse payments in cash. Exceptions would be made for grocery stores, post offices, prescription drug purchases, as well as doctors and dentists who would still have to accept cash as a payment method. If the Danish Parliament approves the proposal, it will allow shops to say no to cash payments as early as January 2016. “It is an opportunity that shops can say ‘No’ to cash. For many years now,

International Finance Magazine Jul - Sep 2015

the take-up of cards, online banking, mobile banking and tablet banking has been extremely fast,” says Mark Wraa-Hansen, Head of the MobilePay division in Danske Bank. Thanks to debit and credit cards along with digital currency such as Bitcoin, and mobile wallets like PayPal, Apple Pay and Google Wallet, there has been a decreasing need to use actual physical cash to pay for your purchases. In addition, we are seeing services such as prepaid technology working for people without bank accounts by providing a secure way of storing their money. Prepaid multi-currency cards allow consumers and holidaymakers to spend abroad and in places that do not accept cash.

These have budgeting advantages for students, travelers and business people where it can simplify the expense claims process. The cards can also provide security at events such as festivals where theft is common Marty Carroll, Client Services Director at digital agency Head, adds, “We are seeing a shift and there are a number of factors driving it. The internet means more online transactions are happening than there are offline. At the same time, the incentives are increasing for offline retailers to accept electronic payments over cash. The Point of Sale infrastructure is in place and the cost of those transactions is falling all the time.” If the Danish proposal becomes a reality, will it really be another major

step towards a cashless economy? What would be the advantages and disadvantages of a cash-free society? Is the current financial technology up to the task of safely processing all those extra transactions? How would such a move affect developing economies where large swathes of the population do not have a bank account? Why go cashless? The reasoning for the proposal, according to the Danish government, is that cash purchases are both an administrative and a financial strain on retailers, such as the cost of hiring a security service to send cash to the bank. “The Danish government are backing this because it is a growing market.

Some estimates put US e-commerce transactions at between $2 trillion and $3 trillion, which is a huge part of GDP. So, of course, governments want a part of these revenues,” says Carroll. “In Denmark, they can spend more on things like education and health because of the government getting a contribution from these transactions.” In addition, a recent study from McKinsey explains “electronic payments make banking systems more productive and lessen the need for an informal or shadow economy, which isn’t taxed nor monitored by the government”. Dealing a huge blow to the “black economy” and making tax evasion all but impossible are two obvious attractions for any govern-

ment. However, there could be other bonuses for the authorities. This is also part of a programme of reforms aimed at boosting growth in the Danish economy, as there is evidence that high cash usage in an economy acts as a drag. And, if taken further, it would give governments futuristic new tools to fight the cycle of boom and bust. This is because the more money is held in bank accounts, easier it is for authorities to encourage us to spend more when the economy slows though negative interest rates. Or, spend less when it is overheating by imposing taxes on transactions. Such an approach would be a far more effective way to damp an overheated economy than today’s blunt tool of a rise in the central bank’s official interest rate. Other advantages of a cashless society include the fact that forgery is impossible, as are cash robberies. Can the technology cope? One of the main fears that consumers and businesses

alike have of a cashless society is electronic fraud. In Sweden, for instance, where four out of five purchases are made electronically, cases of card fraud have doubled in the past 10 years. To alleviate possible fraud, the national bank, Danske Bank, has linked individuals’ MobilePay accounts to their national insurance numbers. Almost a third of the Danish population already uses a Danske Bank app called MobilePay, which according to WraaHansen has one-sixth of the fraud of credit cards. He says: “The technology is secure and cash is not exactly secure. If you are a business that handles cash, you always have the risk of theft. The technology is there and it is safer than handling cash. Handling cash is very expensive. You have to take it back and forth. You can make many rational arguments why cash shouldn’t be around anymore, but it will take a while.” Wraa-Hansen adds: “Whenever you enrol your card into a net, your information is secure. Then it is about having very high standards for security online or mobile or on tablet. Whenever there is something new around, people have questions about security and they have to get used to it.” However, others question the efficacy of legacy systems in the banking sector and their ability to cope safely with an increased volume of transactions: Robert David Steele, a strategic IT analyst, says, “Denmark and Sweden

Jul - Sep 2015 International Finance Magazine

are trying to force-feed a cashless society on a legacy digital world that is very corrupt. Most systems have old legacy code. Frankly, I wouldn’t trust most systems. Part of the problem is also that banks make so much money that they’ve been able to afford the cost of hidden corruption. A cash-free society needs a complete redesign from the bottom up.” And it is not just a matter of security but also a question over whether the technology can process transactions in a timely manner. Paul Heywood, MD EMEA at Dyn, says, “Paying for a product with a smartphone means that consumers don’t even need to carry a physical wallet. However, in order to serve this type of tech-led experience, merchants will need to ensure that their digital supply chain can handle the uptake when there is an increase in activity in digital banking. “Banks and their digital suppliers rely on internet performance to ensure that all transactions and updates are up and running, even at peak times. In a cashless economy, the risk of digital banking suffering downtime or delays needs to be completely eliminated, as there is no alternative payment method. If merchants and banks don’t make their internet performance a priority, they risk upsetting consumers.” Fertile ground In many ways, it is natural that Denmark is leading the way towards a cashless society, as the Danes are clearly receptive to electron-

ic methods of payment. According to WorldPay’s Alternative Payments Report in 2012, 84.2% of Danish transactions were made using cards. In addition, the use of MobilePay, which allows payments with a simple swipe on a smartphone’s screen, is widespread. Chris Lund-Hansen, a Verifone GM for Denmark, says, “The concept of a cashless society is not a new one, but Denmark is close to this becoming a reality. Nearly a third of the Danish population uses MobilePay, a smartphone application for transferring money to other phones and shops, and Denmark is one of the top three European Union countries when it comes to credit card transactions per inhabitant. Giving businesses the legal right to not accept cash payments comes as a natural extension of the wider societal trend and therefore, should not be met with much opposition. If anything, it will only push the adoption of alternative payment methods further, bringing Denmark one step closer to a truly cashless society,” he adds. In fact, MobilePay’s latest tie-up, which sees the addition of the “buy anywhere” capabilities of mobile commerce platform PowaTag means Danes will find it even easier to take their love of electronic payments with them when they travel. It allows instant purchases with participating brands in locations around the world. “The Danish people are incredibly switched on to the huge potential of mobile payments, as demonstrated by the fact that two out of

International Finance Magazine Jul - Sep 2015

three smart phone users now use our solution. With PowaTag, we can over time take MobilePay to the next level with a new set of services,” says Wraa-Hansen. But, which other nations might follow in the footsteps of the Danish proposal to make cash optional? Where next? Although it was not a shock that one of the Nordic nations is leading the way, many were surprised that it was not one of Denmark’s neighbours that got there first. Carroll says, “I was surprised that Sweden didn’t do it first because the Swedes prefer trading electronically over using cash. In Sweden, unlike the UK, you can buy the smallest items using a card, even things like chewing gum.” However, cashless initiatives around the globe are already taking place with varying degrees of success. In the UK for example, 2014 was the first time that non-cash payments have exceeded those made with cash, reflecting the steady trend to use automated payment methods and debit cards, which accounted for 52%, rather than pay by notes and coins. This trend is set to continue as the limit of £10 on contactless payments was raised to £30 last September while Transport of London says over 41 million journeys were made across London using contactless within just five months. However, it is the developing economies of Africa that are in many ways the world leaders in cashless

“

In Sweden, unlike the UK, you can buy the smallest items using a card, even things like chewing gum Marty Carroll, Client Services Director at digital agency Head

and mobile technologies. At least 68% of Kenyans use SMS banking and only half of them own a bank account. Perhaps, even more surprising is the fact that 34% of Somalis use SMS banking while the country does not even have a functioning government. This is because electronic money is an inclusive and convenient system, giving poor and rural sectors of an economy – where cash machines and bank branches may be few and far between and not all people have accounts – a tool for easy participation in the economy. It also often an easier sell in developing nations, as there is little traditional banking infrastructure to replace. “Africa is a leader when

it comes to mobile payment solutions. They have jumped a few phases because there is no traditional banking infrastructure and there is no fixed line telephone infrastructure. Many people more or less have their bank accounts on their phone and do all their banking on their phones,” says WraaHansen. Cash – minted liberty Despite the growth and spread of the various electronic payment methods it still appears that cash will be around for a long, long time to come. Some people will always prefer using cash. And there is still national pride and other psychological factors associated with using physical currencies. And as the famous Rus-

sian author Fyodor Dostoyevsky once said: “Money is coined liberty.” Ron Delnevo, Executive Director of the ATM Industry Association (ATMIA), agrees, “It looks like the card companies are driving this for their own ends. We are not against cashless payment types. Cash is actually a civil liberty and we just want people to have choice.” He adds: “The payments industry is seemingly in a constant state of change. Many innovations have the potential to make life easier for both businesses and the public. However, it is important that such innovations broaden choice, rather than imposing limitations. “In Sweden, crime has actually risen since the increase in cashless transactions. Card fraud is up

and so are other crimes, including armed robberies of jewellery stores and the like.” While Wraa-Hansen agrees that cash is here for the foreseeable future, he thinks it is just a matter of creating the right conditions for us to move closer to a cashless economy. He concludes: “You will always find people that prefer cash for different reasons so getting rid of cash completely will take some time. It is about regulation, it is about technology, it is about consumer comfort, it is about business behaviour and businesses investing in a neat and convenient user experience. Many aspects have to be a success for it to really take off.” IFM editor@ifinancemag.com

“Many innovations have the potential to make life easier for both businesses and the public. However, it is important that such innovations broaden choice, rather than imposing limitations”

Jul - Sep 2015 International Finance Magazine

uestion mark on the

wallet

The usability gap mobile payment providers are trying to exploit is very thin, but that has not hampered their growth Suparna Goswami Bhattacharya

International Finance Magazine Jul - Sep 2015

ive years ago, a question on mobile wallets would have generated little response from people or companies. One could count the number of organisations involved in this space on their fingers. But today, the mobile phone is posing a threat to the traditional wallet. Is the world ready to discard the good old wallet? For most of us, the pain points are not particularly sour. Hence, the usability gap that mobile payment providers are trying to exploit is very thin. Most offers are designed for clients that are financially well served in geographies that are characterised by solid and reliable communication infrastructures. More interestingly, innovations are almost universally targeted at clients that already have electronic means of payment in their pockets. Matteo Snidero, Head of IT, Finance in Motion, says, “On one side, we have mobile payment technologies that are now out of their infancy, allowing multiple players to take part in the payment game. On the other side, we have a somehow slim business case for m-payments and plenty of good alternatives just there in the wallet.” And if there is any

hint of chaos in the market, users will simply go back to good old card, he remarks. However, a section, though small, feels the market is big enough to accommodate every player and talk of it being crowded does not hold much ground. “I do not think having too many mobile wallets will confuse users. They will choose the most reliable and trustworthy of them all,” says Andy Khawaja, CEO, Allied Wallet, a California-based online payment processing service. “They (newcomers) will have a hard time earning trust once a few companies have majority of the market

share, as customers would want to depend on companies who have been in this business for at least fourfive years.” There is a good chance that each country or region will have three or four dominant players. “Most probably it will be Apple, Google as OS players are at a vantage point. I expect some startups in some regions to do well and scale, and perhaps banks/FIs/ carriers in highly regulated countries,” says Amit Goel, co-founder, Letstalkpayments, an information resource for the payments industry. Having said that, one must admit that the situation will differ with each country depending on the maturity of payment systems. “If I am standing in a queue at a grocery store in Rome or London, I will certainly pay with card faster than going through the mental process of choosing

I do not think having too many mobile wallets will confuse users. They will choose the most reliable and trustworthy of them all Andy Khawaja, CEO, Allied Wallet

Jul - Sep 2015 International Finance Magazine

the mobile payment scheme appropriate for this merchant,” remarks Snidero. In any case, such a scenario does look unlikely as mergers and acquisitions have already started taking place with big players aiming at being accepted by majority merchant stores. Google has acquired Softcard, Samsung acquired LoopPay while PayPal acquired Paydiant and Vemno. “The intense competition has definitely led to acquisitions and new investments by incumbent players. The value proposition from all players is evolving but the ensuing battle will be won by companies that offer seamless integration with banking systems and credit/ debit cards, convenience in terms of usage, low transaction fee, increased privacy,” says Ashwin Vellody, partner, KPMG in India. Such mergers and acquisitions are an indicator of a vibrant and fast evolving market. This is expected to continue, especially in the more fragmented market. It is too early to predict the winner. “The war has just begun. The industry is still at an experimenting stage where consumers are willing to try out various products. The winner

will be someone who offers a wallet which has capabilities such as coupons, loyalty and ticketing functionalities. One should be able to use it for transportation, parking at eateries and even to pay for government services. Then it will truly replace the wallet, just the way mobile has replaced the camera and calculator,” says Goel. IFM editor@ifinancemag.com

Industries influencing the space • • • •

• •

Financial Institutions: Bank of Beijing, ICICI Bank, Reserve Bank of Zimbabwe Retailers and Services: Starbucks, Amazon, eBay Wireless (network providers): Vodafone, China Mobile, Deutsche Telecom Payment Services (mobile): PayPal, Square, Venmo Payment Services (traditional): Master Card, Visa

(Source: Appinions, ‘Digital Mobile Payments. An Industry Influence Study. March 2014)

Value proposition for customers

Convenience

Leave wallet at home

What is mobile payment?

Using a mobile phone, or an internet-connected device, to facilitate a transaction that might otherwise have taken place using a credit or debit card, or cash.

International Finance Magazine Jul - Sep 2015

More organised

Value proposition for retailers

Increased customer data

Increased customer engagement

The winner will be someone who offers a wallet which has capabilities such as coupons, loyalty and ticketing functionalities Amit Goel, co-founder, Letstalkpayments

Payment enabling technologies Near Field Communication (NFC) What it is: In its most common avatar, it is a tap & pay solution that can be used for retail offline payments Companies involved IBM, Google, ISIS, Apple, Samsung, Disney

QR and Bar Code What is it: A Quick Response (QR) code is basically a 2D readable bar code.With smartphones and QR codes, customers can store their bank account details in their phones, go to a store, pick up an item, scan the bar code and checkout. Companies involved Nokia, Levelup, Paydiant

Bluetooth Low Energy What is it: It is a wireless computer network technology which allows connected devices to communicate with each other while keeping the energy consumption by the devices at a very low level. Companies involved Paypal, Apple, Shopkick

Mobile Card Reader What is it: Basically include chip and pin card readers that insert into the audio jack of a phone Companies involved PayPal, Intuit, Square

Email/Chat/Phone What is it: You can transfer money through email (PayPal, Google), chat (WeChat) or phone (Dwolla and others) Companies involved Google, Dwolla, PayPal, Square

The players PayPal, Google Wallet, Apple Pay, Square, ISIS, Alipay and Starbucks are among the early birds who are making hay while the sun shines. However, every now and then we hear of new entrants into this already crowded space. According to Letstalkpayments, there are more than 90 mobile wallets in the US and each has their own set of merchants.â&#x20AC;&#x153;This fragmented approach is an inhibitor to the overall adoption of mobile payments along with other inhibitors to growth, such as no compelling proposition and compatible devices,â&#x20AC;? says Amit Goel, co-founder, Letstalkpayments. To think of a world with one mobile payment app per company would be unfeasible and inconvenient for consumers. At the same time, it is highly unlikely that Apple, Google, Samsung, Alibaba and others will tolerate a payment ecosystem in which every major company processes its own transactions.

(Source: Letstalkpayments and Knowledgefaber) Jul - Sep 2015 International Finance Magazine

Cash

is not

dying any

time soon ATM manufacturers are coming up with innovative services to engage customers

Suparna Goswami Bhattacharya

International Finance Magazine Jul - Sep 2015

he ways we pay for things has been changing more in the past 15 years than in the previous 200 years. Every new innovation we see, right from the days of credit card, is taking some share away from cash. Looking at this, one might think that cash is fast losing its relevance and so are ATM manufacturers. After all, technology news nowadays is dominated by ApplePay, Samsung Wallet, Google Wallet, etc. More companies are entering the fray to grab a piece of the action. To add to this, some nations, like Denmark and Netherlands, are moving towards being a cashless society. Despite this, cash has managed to remain a vital part of everyday transactions. It still remains the most commonly used mode of payment. Data by Retail Banking Research (RBR) states that annual cash withdrawal vol-

umes worldwide will grow by an average of 7.9% per year between 2013 and 2019 — well ahead of GDP growth rates of countries over the same period. “The cashless society has been predicted since the credit card was invented in New York in the 1950s but plastic failed completely to stop the popularity of, and growth in demand for, cash. Now plastic could be displaced by mobile phones initiating transactions instead of cards. Part of this is the popularity of cash as a store of value (like gold). Hence, one cannot discount the fact that cash is the global payment method of choice, still accounting for at least 8 of every 10 payment transactions,” says Michael Lee, CEO, ATMIA, an independent, non-profit trade association, which aims to promote ATMs. Further, a report by RBR states that ATM cash withdrawals worldwide is expected to be 94 billion this

year compared to 62 billion in 2009. Even today, amidst talk of a cashless society, consumers globally make up over 90% of the total volume of transactions and use cash as the payment method in roughly 85% of those transactions, according to a research by RBR. “Cash continues to play a key role in small transactions. Cash in circulation in the US has grown 50% during the last 10 years, according to the Federal Reserve Bank in San Francisco. In Europe, it’s 80% higher in the past 10 years (European Central Bank),” says Andy Mattes, CEO, Diebold, a US-based manufacturer of ATMs. What ATM manufacturers are doing Larger Independent ATM Deployers (IADs) have been purchasing smaller entities to acquire a bigger share of the market. The players are also going for an image overhaul — most of them want to change the common

Cash continues to play a key role in small transactions. Cash in circulation in the US has grown 50% during the last 10 years, according to the Federal Reserve Bank in San Francisco. In Europe, it’s 80% higher in the past 10 years (European Central Bank) Andy Mattes, CEO, Diebold, a US-based manufacturer of ATMs

Jul - Sep 2015 International Finance Magazine

perception that ATM is just a ‘cash and dash’ device. “For Diebold, we have our feet planted in the physical world of cash, but we know where the puck is going in the digital world of cash. While digital channels are the new freeways of the payment landscape, you still need cash to get to and from the freeway. Our role is connecting people with their money to provide these avenues,” says Mattes adding that “new payment venues do not necessarily replace other methods of payment.” Mobile penetration in most societies exceeds penetration of bank accounts and credit cards. All these potential users of digital money need a way to put cash into the system. In Kenya, where mobile money is common, people do it through human agents. Mattes is betting that machines will do the job in more advanced economies. “Our playground – to connect the physical and digital worlds of cash.” Generally, ATMs are considered an extension of a bank’s branch network and

an important touch point with consumers. Banks need to reduce their cost and physical footprint, but can’t afford to leave the neighbourhood. Therefore, they seek smaller branches in the form of ATMs. ATM manufacturers too are leaving no stone unturned to reinvent themselves. For instance, Diebold recently acquired Phoenix Interactive Design, the leading provider of ATM and branch automation software, which can help banks gain a deeper understanding of their customers as individuals. “For example, if I frequently visit an ATM to deposit $2,000 every two weeks, after a few visits an ATM, which is software ‘aware’ enough to know me, will ask if this is what I wish to do before I push any buttons. It will also ask me if I’m interested in opening a high-yield savings account. And it can do all this in an automated setting. This is a level of customisation and personalisation that is very compelling to banks right now, and is keeping ATMs

International Finance Magazine Jul - Sep 2015

very relevant,” remarks Mattes. According to Ashwin Vellody, Partner, KPMG in India, “ATM players are already taking steps in this direction to bring back the human touch by introducing features such as ‘video teller assistance’ and ‘assisted self-service’. This not only improves the experience of the customers by making the banking services available 24/7, but also brings down costs of hiring staff (tellers) to manage operations”. The ATM players can also tie up with ecommerce players to offer a channel for transacting in remote areas where the adoption of PCs/ internet is low, he says. Banks continue to roll out Deposit Automation and Recycling ATMs as they attempt to increase the migration of routine transactions from the teller to self-service. They are offering services like deposit automation, cardless ATM programmes and value-added services, such as dynamic currency conversion, payment of utility bills, traffic

Customers appreciate the advantages automated deposit have over envelope deposit and over the counter transactions, such as quicker account crediting and extended hours access Michael Lee, CEO, ATMIA an independent, non-profit trade association, which aims to promote ATMs

fines, ticketing and mobile phone top-ups. “Customer demand remains high and even in markets where banks are trying to encourage a reduction in the use of cash (e.g. the Netherlands). Customers appreciate the advantag-

es automated deposit have over envelope deposit and over the counter transactions, such as quicker account crediting and extended hours access,” says Lee. IFM editor@ifinancemag.com

Will cash be relevant 50 years from now? Though cash is not dying any time soon, the advent of new mode of payments will increasingly take the share away from cash. In the US, for instance, cash probably represented close to 100% of consumer-initiated transactions in 1900, now it is 40%. That is a huge decline, but a very small one when looked at in a single year. “That decline will continue, but probably still at a pretty slow rate in any given year. We are talking about the share of all consumer transactions, not the absolute level of transactions falling. As GDP grows and more households become purchaseintensive as their standard of living rises, the overall pie of payment transactions (mobile wallets, etc) will rise. Cash’s share can decline even as the number of cash transaction rises or stays about the same,” remarks Daniel A Littman, Economist, Federal Reserve Bank of Cleveland.

SHARE OF PAYMENT MECHANISM IN THE US IN 2014 Mode of Payment Cash

Number: 40 Value: 14%

Debit Card

Number: 25 Value: 19% Credit Card

Number: 17 Value: 16% 63

Cheque

Number: 7 Value: 19% Electronic

Number: 7 Value: 27% Others

Number: 4 Value: 5% Source: Federal Reserve Bank of San Francisco

Jul - Sep 2015 International Finance Magazine

Undercutting

the big boys Bitcoins may offer an alternative to the high fee charged by traditional remittance firms from the Africa diaspora Tom Jackson

International Finance Magazine Jul - Sep 2015

ending money within and to Africa is expensive. Western Union and MoneyGram dominate the landscape, controlling 50 percent or more of the remittance market in most Sub-Saharan African countries. But they have been criticised for their high costs. This is a situation that is only getting worse, with recent research by the Overseas Development Institute (ODI) finding restricted competition was helping to push up charges. Operators like Western Union and MoneyGram charge an average fee of 12.3 per cent to send $200, twice the global average. The likes of Comic Relief have been vocal critics.

Yet, money continues to be sent. The more than 30 million Africans in the diaspora sent home almost $40 billion in 2014, with the average per migrant of $1,200 representing five per cent of GDP on a countryby-country average. On these transfers, total annual fees amount to $1.4 billion. Alternative methods of payment, both in terms of remittances and purchases, are sorely lacking in Africa. Less than three per cent of the population owns a credit card, while PayPal is blocked in most countries and relatively expensive in the few where it has set up operations. The solution to this problem may come from an unlikely source, however. Often demonised in the West

for currency fluctuations and the controversy surrounding the now defunct Mt. Gox exchange, Bitcoin is looking to find a home in Africa. And a number of companies are vouching on the possibility of it taking off on the continent. Rick Day is co-founder of Igot, a Bitcoin exchange that recently went live in Africa. Day believes the digital currency can disrupt the remittance market in Africa due to the unique solution it offers to the high rates charged by the traditional operators. He claims his company can keep the cost of remittances as low as one per cent, with same day transfers and cash immediately converted into local currency to negate the effect of fluctuations.

â&#x20AC;&#x153;

There is nothing for them to lose by accepting Bitcoin. There is no excess fee and the speed is faster than traditional payment systems Rick Day, co-founder, Igot, a Bitcoin exchange that recently went live in Africa

Jul - Sep 2015 International Finance Magazine

Day is certain Bitcoin has a bright future in terms of uptake by African users. “There is nothing for them to lose by accepting Bitcoin. There is no excess fee and the speed is faster than traditional payment systems,” he said. Nikunj Handa, chief executive officer (CEO) of Ghanaian Bitcoin remittance service Beam, agrees with Day on the opportunities for the digital currency. Beam charges a three per cent fee for transactions. “Bitcoin is improving the international remittance market by being a near-instant and extremely low-cost settlement solution between ‘sender’ and ‘recipient’ remittance organisations that want to work with each other,” he said. “Using Bitcoin for settlement is significantly more efficient than using bank transfers or other traditional payment solutions.” Handa believes Africans are more likely to accept Bitcoin given their willingness to adopt alternative payment methods in the past, with the continent’s usage of mobile money dwarfing that

elsewhere. In Kenya, 43 per cent of the country’s GDP is estimated to flow through the M-Pesa mobile money service. Handa also believes businesses will see the benefit of being paid in Bitcoin, given the lack of credit and debit card penetration in Africa. “If African merchants are provided with a service that allows them to easily accept and convert Bitcoins, they will be likely to accept it,” he said. “Banks and payment processors are known to give African merchants a very hard time in accepting payments dig-

International Finance Magazine Jul - Sep 2015

itally. An innovative Bitcoin company can change this and make life much simpler for African merchants.” One concern over the use of Bitcoin is its security, but Timothy Stranex, who runs African Bitcoin exchange BitX, says the network itself is very secure. However, he said some companies providing Bitcoin services have not properly secured themselves, and therefore people need to be careful about what services they use. “Good companies use technologies like cold storage and multi-signature wallets to

“

Using Bitcoin for settlement is significantly more efficient than using bank transfers or other traditional payment solutions Nikunj Handa, CEO, Ghanaian Bitcoin remittance service Beam

The more than 30 million Africans in the diaspora sent home almost $40 billion in 2014. On these transfers, total annual fees amount to $1.4 billion

secure their Bitcoin holdings,” he said. “The security risk is minimal when these protocols are implemented properly and the company is trustworthy. Bitcoin companies are being formed by stronger and better funded teams as the industry matures. Security in the industry as a whole is getting better all the time.” So, given its lower costs, the ability to convert into local currencies immediately, and improving security, can Bitcoin really find a home in Africa? Gilles Ubaghs, financial services analyst at Ovum, believes so, saying it has the potential to aid hugely in the remittance market, as well as the broader money sending market. “This includes for moving money in interbank transactions. Cryptocurrencies can hugely lower the cost of sending money for financial services providers, who in turn can, in theory, pass this on to consumers and users,” he said. Though he cautions that Bitcoin, especially in Africa, is at a very early stage of development, he says it has the potential to “move pretty quickly, and relatively cheaply”. “If I was Western Union or the like, I’d be pretty seriously reassessing my business model and looking

at adapting it,” he said. Ubaghs does caution on the security aspect, echoing Stranex’s concerns over the security of individual service providers. “The currency itself is very secure, but there are still huge challenges with Bitcoin wallets and repositories and exchanges getting robbed and bitcoins being stolen. For emerging markets in particular, authenticating users could be really challenging particularly if you want to make it user friendly,” he said, though he added he does think someone will crack the problem eventually.

For Stellenbosch-based hacker Simon de la Rouviere, who has written a book on Bitcoin and speaks on the subject across South Africa, the rise of the digital currency as an alternative means of remitting money to and between African countries is inevitable. “It will only fail if state actors clamp down on a massive scale and coerce people to not use it. However, as we’ve seen time and time again, if it is something people want to use, the people will always win out,” he said. IFM

“

Cryptocurrencies can hugely lower the cost of sending money for financial services providers, who in turn can, in theory, pass this on to consumers and users Gilles Ubaghs, financial services analyst at Ovum

editor@ifinancemag.com

Jul - Sep 2015 International Finance Magazine

Safety in

virtual currency Bitcoin scene booms in Argentina due to a volatile economy Kamilia Lahrichi

International Finance Magazine Jul - Sep 2015

rgentina is leaping into the digital age. The South American nation has become a fertile ground for virtual currencies like Bitcoin – thereby illustrating how Bitcoin might provide a reliable alternative to unstable economies. In the capital’s uptight neighbourhood Recoleta, Matias Caputi opened Bitcoffee1 in August 2014, the first coffee place where customers can pay with Bitcoins. It is the world’s “first decentralised digital currency”. In the in-vogue café, two large television screens showcase abstract art and landscapes of New York and Rio de Janeiro. The dim red lights make it the perfect 1

spot for next-door students and coffee aficionados to relax on the cozy couches. To make it 100% digital, customers can charge their phone with different devices plugged into the walls. “This is the coffee place of the future,” says Matias, with a dash of pride. A bit, he explains in reference to the coffee shop’s name, is the smallest unit of information in a computer system. On the beat of The Beatles’ “eight days a week” song, the 30-year old software engineer says that Bitcoffee is the only entirely digital coffee place in Latin America – from ordering to paying. He developed a digital card software that enables customers to place orders on touch screens in their

own language to boost efficiency and reduce staff. Although there are only up to two clients a day – out of 200 – who pay with Bitcoins, Matias is confident that the digital currency will gain traction in Argentina. Once, he remembers, he generated a QR code on his computer to allow a lost American tourist to pay for coffee and food with Bitcoins. The traveler then sent a picture of the QR code with his phone to a friend in the United States who paid instantly for his expenses. “For many people who do not have a bank account, like teenagers, Bitcoin allows them to pay with their cell phone and without cash or a credit card,” says Matias.

https://www.facebook.com/bitcoffee.store

Bitcoin explained

itcoin is an alternative to traditional currencies because it does not depend on any central monetary authority. You first need to download a Bitcoin wallet from the Internet onto a computer or a mobile phone. This will then generate a Bitcoin address that can be shared with people with whom you will make transactions. It also enables to make payments without exposing customers’ personal information. You can then transfer Bitcoins immediately from one account to another, anywhere in the world, without going through a bank or a payment service like PayPal. In addition, Bitcoins can be traded for traditional currency, like US dollars or euros, on several exchange rates.

Bitcoffee opened in August 2014 in Recoleta in Buenos Aires. It is the first coffee place where customers can pay with Bitcoins

Jul - Sep 2015 International Finance Magazine

Bitcoffee is the only entirely digital coffee place in Latin America – from ordering to paying

A growing market Although it is hard to track the growth of Argentina’s Bitcoin scene due to limited data available, Bitcoin transactions have significantly increased in the South American country. A May 2013 report by TradeBlock2, an online platform for bitcoin traders, found that Argentina’s bitcoin meet ups are the best attended in the world, after those in the United States, Canada and Israel. Most importantly, these gatherings have prompted the creation of Bitcoin startups. TradeBlock monitored downloads of bitcoin software, interest in the digital currency, exchange volumes, companies’ investment in bitcoin as well as physical interactions around Bitcoin.

2 3 4

Argentina’s Bitcoin landscape has grown from a few dozen companies in 2012 to hundreds of them in 2015. Retail outlets are increasingly accepting Bitcoins. In August 2014, there were 8,000 convenience stores selling bitcoins in the country. Emblematic of Bitcoin’s penetration in the South American market, Taringa!, an Argentine social network with 75 million users a month, announced in April 2015 that its members would receive payments in bitcoins based on advertising revenues. Taringa! inked a $750,000 deal with Xapo, a California-based business founded by the Argentine Wences Casares. It offers a digital Bitcoin wallet to store and secure the virtual currency. Customers can

use a debit card linked to their wallet to spend their Bitcoins. Taringa! users can deposit pesos in shops in Argentina to put Bitcoins in their wallets. Another example of Bitcoin’s growth in Argentina is BitPagos3, a payment processor launched in 2013 to allow over 200 hotels in Latin America to accept Bitcoin payments. Bitcoin evangelists Still, Bitcoin use in Argentina remains marginal. It is limited mainly to groups geared toward computer science. Matias Bari, CEO of SatoshiTango4, a startup allowing to buy and sell Bitcoins with pesos with a 2% fee, explains that the wide majority of his customers are 20 to 35 year old

https://tradeblock.com/blog/mapping-bitcoin-adoption-a-global-perspective/ https://www.bitpagos.com/en/ https://satoshitango.com/

International Finance Magazine Jul - Sep 2015

men living in Buenos Aires and on the outskirts of the capital. Many of them work in information technology. Some are freelance designers. “Today the majority of users are ‘early adopters’, people who are evangelists of Bitcoin’s operations,” says Matias Bari. SatoshiTango customers can pay in cash or with coupons on payment platforms, such as PagoFacil and RapiPago. The tourism industry, in particular, is a key market as foreigners try to eschew Argentina’s official currency rate. Solution to crippled economies? Bitcoin could offer a financial alternative to unstable markets like Argentina, which are plagued by a long history of macroeconomic policy mismanagement, a highly fluctuating currency, depleting foreign reserves and skyrocketing inflation – estimated at up to 40% (official inflation figures are dodgy in Argentina). Since January 2014, the Argentine government devaluated the peso to preserve its hemorrhaging international reserves, which had then fallen to a seven-year low. This has spurred the creation of a burgeoning black market. At the time of writing, the “blue dollar” stands at 12.8 pesos to the US dollar. In comparison, the official rate trades 8.9

On an average, two clients a day – out of 200 –pay with bitcoins

pesos per dollar. On the bustling Florida street in downtown Buenos Aires, men and women are screaming the words “cambio, cambio, cambio” (meaning “change” in Spanish) to invite people to trade pesos at the unofficial rate. In such a tumultuous economic context, Bitcoin could mesh with Argentines’ needs to circumvent the government’s heavy restrictions to get foreign currency. Since 2011, it is illegal to withdraw US dollars or euros in Argentina to prevent capital flight. “The most interesting aspect that will allow Bitcoin to spread massively is that people do not have to worry about its quotation,” explains Diego Da Col, Payment Solution specialist in Buenos Aires. “Remittances are sent in the local currency and received in the currency of the destination country,” he says.

5 6

Equally important, customers do not pay any fee – or a small one based on the platform. This is a relief in Argentina, where retail shop owners are trying to avoid the 6% to 10% charges for credit card payments. The Argentine government has also levied a 35% tax on foreign credit card transactions since 2013. “This exceptional [economic] situation enables to dedicate efforts to find alternatives for new startups to develop solutions using Bitcoins,” says Diego. Indicative of the urgent need to reform President Cristina Fernandez de Kirchner’s economic policies, Argentina introduced in 2013 the Certificate of Deposit for Investment (CEDIN) to allow Argentines to trade their US dollars into pesos, while receiving tax amnesty. These certificates, called cedines, are a means to tap

into Argentines’ undeclared money abroad, estimated at $160 billion. Taking up the challenge If Bitcoin could mitigate the economic problems of emerging markets, it remains a six-year-old experimentation only. For instance, there is no legal framework to manage Bitcoin transactions in Argentina. Resolution No. 300/2014 of the Financial Information Unit5 (UIF is its acronym in Spanish), a governmental body that investigates money laundering and prevents terrorism financing, is the only legal norm in Argentina that governs virtual currencies. Bitcoin deals – or any transfer of digital currencies – are deemed as legal as any private transaction. Yet, Argentina’s Central Bank indicated in a 2013 press release that virtual

currencies lie outside its sphere of competence. Its head also made it clear that the bank does not issue any virtual currency, which is not legal tender. Finally, it might be difficult to consider Bitcoin as a reliable alternative to traditional currencies due to its fluctuation – just like any crypto currency. A Bitcoin’s price can indeed increase or decrease over time. Since 2013, its value fluctuated between $70 and $1,200. At the time of writing, its value stands at $2376 — roughly twice its 2013 value. “For the time being, Bitcoin’s volatility does not enable it to be a good reserve of value. Therefore, it is difficult to go from pesos to Bitcoins while avoiding losing money due to inflation and the devaluation of our currency,” says Matias Bari. In 2013, Argentina’s Bitcoin value dropped due to harsh regulations on capital controls. Bitcoins in Buenos Aires were worth 30% to 40% of the value of its more liberal neighbour Uruguay. Notwithstanding these hurdles, experts consider that the Bitcoin outlook is positive, as it is a young currency with potential. “I think that we will see Bitcoin banks globally. Customers will be able to freeze the price of Bitcoins with respect to other less volatile commodities like gold, the dollar or the euro,” explains Matias Bari. IFM editor@ifinancemag.com

http://www.uif.gov.ar/uif/index.php/es/acerca-de-la-unidad-de-informacion-financiera http://www.coindesk.com/price/

Jul - Sep 2015 International Finance Magazine

$ € 72

Pay the

social Media way I n the startup space, ideas are aplenty. However, success often depends partly on execution and uniqueness of the idea. This is where, Fastacash scores brownie points over its contemporaries. The Singapore-based company leverages existing social media networks with payments – that is, one can transfer money, airtime, etc along with content like photos, videos via Facebook, WhatsApp or Twitter. Yes, you read it right. If you are spending most of your time on social media, why not use it to make payments? For Shankar Narayanan, Chief Innovation Officer, the

International Finance Magazine Jul - Sep 2015

Singapore-based startup leverages social media platforms to transfer money, airtime (mobile recharge), coupons and other forms of value Suparna Goswami Bhattacharya

idea grew out of a need for a simple way to send money. Be it to a daughter who is in the same city, or to parents living in another country. As most teenage kids, Narayanan’s daughter was always asking for his credit card to make payments for various purchases. At the same time, he noticed that she was spending a lot of time on social media and messaging platforms. And this is when the idea of combining social media and payments struck him and Fastacash was born in April 2012. The technology allows consumers to transfer value, which can be money, airtime or coupons, along with digital con-

tent across social media and messaging channels. “We partner with banks, mobile operators, remittance companies, payment service providers, mobile wallets and other financial institutions to bring our technology to the end user,” says Narayanan. The company has adopted a cobranded approach, where the social payment service using Fastacash’s technology is launched to the consumer, under the partners’ brand name, with Fastacash as a secondary brand. Fastacash has existing partnerships in India, Indonesia, Vietnam, Singapore and Russia. More recently, in India, the company has launched a multi-social payment app with Axis Bank called Ping Pay. The app allows account holders to send and request money and airtime to friends and family through various social media channels. In this case, recipients need not have an Axis Bank account. For Fastacash, the time is ripe to leverage the social platform. “The number of people accessing the internet and social apps is increasing, as is the time

users are spending within these environments,” says Narayanan. In the US alone, on average, people spend 16 minutes per hour on social media and messaging channels, he remarks adding that often the first thing people check are their messaging and social media platforms as compared to their email. Most of this behavior is driven by mobile phones. In most developing markets, people are skipping computers and directly accessing the internet from their mobile phones. “We are seeing payments and social media come together – with social and messaging channels also launching payment capabilities. Financial institutions are realising the importance of social media and looking at a player like Fastacash to bridge the gap between social media and payments. With us, they are able to deliver services that meet the needs of the next generation of consumers,” remarks Narayanan. The company has done away with the need for the sender to know the receiver’s bank account details. All they need is

to be connected through a social channel and they can transfer value amongst themselves. The company provides an agnostic social platform. It sees that people use various social media and messaging channels to meet their various ‘needs’. They may use Facebook for engaging with a broader set of friends, sharing updates and videos, WhatsApp to chat with an individual or plan a get together with a group of friends, and Instagram to share photographs. “We believe that we need to give the sender and receiver the choice of channel they want to use.” He is confident that Fastacash will make a mark in new markets. “As we partner with more players, and social media and messaging channels start enabling payments, acceptance will continue to increase. Across our various launches, we are seeing very positive numbers in terms of consumer uptake and usage.” IFM

We partner with banks, mobile operators, remittance companies, payment service providers, mobile wallets and other financial institutions to bring our technology to the end user Shankar Narayanan, Chief Innovation Officer, Fastacash

editor@ifinancemag.com

Jul - Sep 2015 International Finance Magazine

OPINION

David Poole

Fighting online

abandonment Itâ&#x20AC;&#x2122;s easier than you think

International Finance Magazine Jul - Sep 2015

OPINION

art abandonment is the scourge of digital commerce. Every day, businesses see revenues slip away from them because customers give up on the transaction before completing it. Right now, the global average for abandonment is 76%1. More than threequarters of those who start an online transaction don’t finish it. That is a staggering statistic but there isn’t much that an online business can do about this. It’s not possible to force someone to buy something that they don’t want or can’t afford. Some of this rate of abandonment is undoubtedly due to there being no actual intent to really purchase in 1 2

the first place, much like a window shopper or someone browsing in a physical store, but this is not the only reason. One thing is for sure, when people put something in their virtual basket there is a genuine opportunity to close that sale by making the process as efficient, seamless and frictionless as possible. A 2014 study2 into abandonment identified three flaws in payments systems that were causing consumers to give up on transactions: • 23% gave up because they needed to create an account • 13% gave up because of concerns over security • 12% gave up because

the payment process was overly complicated or unfamiliar Adding it up, this shows that 48%, almost half, of cart abandonment is down to shortcomings in the payments system. It’s a stark figure, but the good news is that it is something that can be fixed. So, how can the savvy online business overcome these problems? Creating an account – don’t make it compulsory unless you have to The first question to ask is, “is it absolutely necessary?” There are, of course, industries where know-your-customer (KYC) regulations mean that it is. Banking, gaming and financial products, for example,

require that any customer is thoroughly authenticated to guard against identity theft or money laundering. If it isn’t a legal requirement, then ask if it is truly worthwhile and vital to complete the sale. Of course, for CRM purposes, it’s valuable to capture customer information. A merchant wants to know who it is selling to, understand demographics and target them with offers. However, if it is costing sales, it’s probably not worthwhile. It shouldn’t be compulsory for a customer to create an account unless it is essential. Merchants should give customers the opportunity to create an account if they want to and make it worth their while after the

Listrack, June 2015 VWO ecommerce study, 2014

Jul - Sep 2015 International Finance Magazine

OPINION

76 sale. But not force them to jump through hoops just to buy something. Make it safe and make it appear safe In the days before Chip and PIN, if you wanted to pay with a card in a restaurant, the waiter would disappear with your card before coming back with the payment slip for you to fill out. This was accepted as perfectly normal and safe. Nowadays, no one should want to let their card out of their sight, and with good reason. We are all more aware of the dangers of card fraud and identity theft and want to keep our payment

details safe. So it is not enough that your payment process is safe, it should look safe too. The online checkout page should look familiar, something that consumers are used to using. Lots of users choose not to implement 3D secure as itâ&#x20AC;&#x2122;s not optimised for mobile. They would rather take the risk of fraud as overall they believe they will be better off. Retailers should demand better solutions, more familiar to the card holder. Keep the process as simple as possible Why do shoppers give

Nomi, 2014

International Finance Magazine Jul - Sep 2015

up on in-store purchases? Because it takes too long to pay. Recent research3 has shown that a third of customers will abandon their purchases if they have to wait more than five minutes in a queue and nearly half would actively avoid that retailer in future. When customers have to fill out lengthy forms to authenticate themselves and then deal with complex security to make the payment, the merchant is, in essence, making them wait to make that purchase. Smart retailers invest in queue busting technology in-store. Mobile point

of sales, self-checkouts, contactless payment terminals are all weapons in the retailerâ&#x20AC;&#x2122;s battle against queues. So if we know that it hurts your business to make people wait to pay in-store, why make them wait to pay online, especially when consumers expect online transactions to be even quicker than in-store. Technology exists to speed up authentication and payment times. The payments industry is full of disruptive technology that can make a serious impact on the complexity of your

OPINION

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online checkout. Fight your online queues as well as your in-store ones. Conclusion There is no single method to getting your abandonment rates under control. Yet, a change in attitude is a step in the right direction. It should be the easiest thing in the world for a customer to pay in exchange for whatever it is you provide. If a retailer does not have this ethos, it is likely turning away business. So all businesses that transact online should evaluate what customers have to do to purchase from them and see what barriers can be removed. Some might need

simple rethinking, others might need modest investments in new technology. Either way, it will be both measurable and worthwhile. IFM

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David Poole is Director, Business Development, myPINpad

Jul - Sep 2015 International Finance Magazine

Faster payments is not for US Federal Reserve expects the countryâ&#x20AC;&#x2122;s payment system to take up to 10 years to get to real-time Tom Groenfeldt

International Finance Magazine Jul - Sep 2015

eal-time payment systems are now live around the world in 18 countries. The US is conspicuously not among the ranks that include the UK, Mexico and Japan. While Australia and Finland are working on their own real-time payments and the UK is preparing for a second generation of its Faster Payments1, the US Federal Reserve expects the country’s payment system to get to real-time within 9 or 10 years. McKinsey’s study for the Federal Reserve found a new real-time system wouldn’t have a positive return on investment (ROI) for banks, using an admittedly conservative forecast, and the major banks blocked a move to real-time by NACHA2. Although 1 2

NACHA recently announced it would move to same-day payments, one payment expert describe is as just a Band-Aid. And The Clearing House, owned by the world’s largest commercial banks including the major banks that voted down realtime at NACHA, in October “announced plans to undertake a multi-year effort to build a real-time payment system,” without providing a date for going live. Paul Thomalla, senior vice-president at ACI Worldwide, who leads the payments company’s EMEA operation, agrees that realtime in payments doesn’t necessarily make a business case — for banks. “But there is a business case for the country or the region and that is why regulators, central banks and central clearing firms

are saying this is the way we need to go,” he explained. “Whether in Australia, Finland or the UK, for that matter, what you see is there are good business reasons from a commercial point of view, and the regulator is siding with the consumers and saying there is a need for faster payments.” Nothing similar is happening in the US where the Fed says it lacks authority to impose faster payments and instead seeks consensus. Congressional action to promote faster payments is unlikely with Republican majorities who think the market provides the best solution. Since the banking industry employed 339 lobbyists in Washington last year and spent $60 million, it will probably be able to move at its own speed in getting to real-time.

Advanced economies like the US and UK find it kind of hard to do these projects because they already have a very safe and reliable ACH network David Yates, CEO at VocaLink, which implemented Faster Payments in the UK and a real-time credit and debit system in Singapore

Faster Payments is a UK banking initiative to reduce payment times between different banks’ customer accounts from three working days using the long- established BACS system to typically a few hours. NACHA – the Electronic Payments Association – has served as the trustee of the ACH Network, which today moves more than 20 percent of all electronic transactions each year. The Network requires careful development, administration and rules in order to function effectively, and NACHA provides crucial management on a daily basis. Through its collaborative, self-regulatory model, NACHA — and the more than 10,000 financial institutions it represents — facilitates the expansion and diversification of electronic payments on the ACH Network.

Jul - Sep 2015 International Finance Magazine

“It is a lot easier for foreign governments to play a larger role in the move to faster payments in countries where the banks are relatively few in number,” said a senior banking consultant. “Consensus in the US among all of its banks and credit unions will be an enormous feat for the Fed and other supporters of real-time payments in the US.” Advanced economies like the US and UK find it kind of hard to do these projects because they already have a very safe and reliable ACH network, said David Yates, CEO at VocaLink, which implemented Faster Payments in the UK and a realtime credit and debit system in Singapore. “It may not be as fast to clear as everyone would like, but it’s not terrible and it’s not broken.” One issue in the US is infrastructure is fragmented and split among parties and you have a vast number of banks, he added. “We have a reasonable num-

ber but nothing like what you have in the US.” But Gene Neyer, global product manager at Fundtech, doesn’t think that makes it impossible for the US. True, the US has about 12,000 banks and credit unions, but Europe has a similar number of financial institutions, and it instituted SEPA3. The business case in the US has been all about banks; he thinks the business case should be heard for merchants and consumers as well. “Don’t tell me the US can’t do this, because it has been done by smaller, less sophisticated countries.” “A lot of the challenges in the US are because realtime is not mandated, it is not a regulation,” said Sandra Horn, lead product manager at ACI Worldwide. “The ROI model has been difficult for the banks to get their heads around. They know the system’s implications will cost money as they move from batch to real-time. They know there

are security implications and their fraud prevention needs shoring up. They can probably quantify the costs but it’s hard to quantify the benefits.” In countries with faster payments, residents who get a final warning from their utility can pay the bill immediately and electronically, with no need to take time off work to travel to the utility’s office and hand over cash. In the US, 25 percent of consumers surveyed said that sometime in the last six months, they needed to make an expedited bill payment to avoid late charges or the shut-off of services such as utilities or cable. Several non-bank payment providers can deliver real-time or near-real-time payments in the US. The benefits of realtime payments, especially when coupled with mobile phones, are striking. In Singapore, DBS FAST allows instant movement of up to S$10,000 between accounts at participating

banks. A mobile application in Singapore lets small businesses pay for deliveries with a mobile phone which links the payment to an invoice. The payment is immediate and records generated automatically. In Australia, home buyers no longer need to bring bank cheques to the closing; the money to purchase a house can be moved in real time when the title is transferred. Some businesses in the UK have been using Faster Payments to improve their working capital. By using Faster Payments, they can order more frequently, reducing their inventory, said Zilvinas Bareisis, a senior analyst within Celent’s banking group. It was an unanticipated use of the country’s real-time payments network, he added. The UK’s Faster Payments has shown some of the benefits that are so difficult to measure ahead of implementation Businesses think it is phenomenal, said Yates. “Employers with regular payroll for irregular amounts can pay employees on time without having to submit their payments days in advance, which is very important. The UK government can provide emergency funding for people in trouble and deliver the money instantly, and that’s what matters.” The government is the largest user of the UK payment system.

The Single Euro Payments Area (SEPA) is an initiative of the European Union for simplification of bank transfers denominated in euros.

International Finance Magazine Jul - Sep 2015

Paul Thomalla, senior vice-president at ACI Worldwide

VocaLink added more in a whitepaper: • Insurance payments can be made immediately when funds are required • Short-term loans can be effected as soon as they are approved • Companies can pay hourly staff • Small business invoicing and requests for payment provide a practical alternative to cash Those benefits won’t appear in the US for a while. At a Chicago Fed symposium last year, nonbank companies expressed frustration with the Fed’s proposed 10-year time-line. In 10 years, technology can change radically, said one corporate user of payment systems. “The Fed seems to be backing away from developing an entirely new realtime system,” said Mark

Flamme of Strategy&, a consultancy which used to go under the more intelligible name of Booz & Company. Meanwhile, other providers are moving ahead. “Right now they are pondering what they want to do,” he added. “Real-time will be driven by the private sector — Fiserv and FIS (financial technology firms) are the industry leaders. The private sector will take the lead in the short run while the Fed and association driven organisations like NACHA will be slower to act — it is notoriously difficult to get a decision out of NACHA, but it will be pushed into action as the private sector develops. The financial institutions will clamour for standards, but with such diversity of providers, it will be challenging to gain consensus around standards.” US banks have taken a very narrow view of the fu-

ture and focused too heavily on their fear that real-time will cannibalise profitable wire payments, he added. Real-time opens up a lot of new product innovation and revenue opportunities, he said, and cannibalisation hasn’t been as bad as some people had thought in countries that have moved to real-time. Real-time is an operational challenge, said VocaLink’s Yates. “When you move to realtime operations, first of all there are operational issues related to making sure your systems stand up 24x7 and making them available to post current balances during the working day. Then you have choices to make not only about your back office systems, but how they interface with the settlement systems like the Bank of England or the Monetary Authority of Singapore.” The systems also require liability management, he added. Most community banks and central banks do not operate 24x7, and that requires a rethink to make sure all parties are standing up to run day-and-night 365 days a year. “The central service needs to be up 24x7 and manage relations with the settlement organisation, the Bank of England in the UK.”

“

The Fed seems to be backing away from developing an entirely new real-time system Mark Flamme, Strategy&

Fraud prevention “When you start to move money fast, you need to be clear that any new system, especially one that moves money quickly and irrevocably, will throw up issues of fraud, especially if it is not just push payment but also

Jul - Sep 2015 International Finance Magazine

pull,” said Yates. When payments move in real-time and are final when they arrive, fraud prevention has to be real-time too. ACI Worldwide’s Thomalla thinks banks will work together to develop a shared resource to combat fraud and meet Know Your Customer (KYC) requirements. “Fraud management should become a utility and you will start to see it being managed by bodies that will do fraud management, in

the same way you will see KYC and AML services. We have fantastic fraud products.” It bought ReD Shield last year for real-time fraud prevention. Banks gain no advantage running their own compliance shops, Thomalla added. “There are companies which specialise in creating massive utility infrastructures like switches, fraud and account management. These aren’t things that

institutions get differential business from; they get benefit from the services they add on top.” Real-time payments are not such a huge issue in Mideast but they can probably do it as soon as they like, have modern switches, modern systems, they could go to real-time quickly, said Thomalla. IFM editor@ifinancemag.com

The way

to go

In five months, the mobile banking platform of Commercial Bank of Africa had 3 million users

ith 80 percent of Kenya using M-Pesa for mobile payments, Commercial Bank of Africa (CBA) saw an opportunity for expansion by attracting phone-savvy users beyond payments to other banking services. The bank partnered with Safaricom, provider of M-Pesa, in 2012 to launch M-Shwari, an entirely mobile phone based banking platform. It worked. M-Shwari onboarded 1 million customers in its first 40 days, using automated KYC to verify identities. In the first three weeks, the customer base grew to 850,000 and more than KES1 billion in deposits. After five months, the mobile banking platform had 3 million users. The bank’s core business was running on the Temenos T24 banking platform, so it turned to Temenos for its mobile bank as well, giving the software company six months to be up and running and integrated with the payments system. Temenos did it in five months.

International Finance Magazine Jul - Sep 2015

Customers can set up interest-earning accounts and apply for 30-day loans just by using their phones. Transactions are straight-through, so the system is supported by just 7 back-office and IT staff, providing excellent cost-efficiency. “M-Shwari gives CBA the platform to offer a much needed service to all market segments through mobile-centric banking services,” CBA explains on its web site. The M signifies mobile and Shwari comes from a Swahili word meaning to make something better. The bank notes that the M-Shwari service is accessible only through the mobile handset, not through any CBA branch. “All you need is your handset and to be registered on M-PESA! There are no forms or additional documents required for you to sign up to M-Shwari.” In return for its relatively low-cost mobile services — compared to maintaining a branch network — the bank offers customers no minimum balances, no ledger fees and no transaction charges for moving money between M-Shwari and M-Pesa, competitive interest rates and access to credit.

Waiting for

Apple

Entry of the American giant is expected to give further impetus to the growth of mobile payments in South Africa Tom Jackson

redit card fraud is rampant in South Africa, with the South African Banking Risk Information Centre (SABRIC) reporting losses increased by 23 per cent to ZAR453.9 million ($37.8 million) in 2014 from ZAR366 million ($30.5 million) in 2013. Debit card fraud is also on the rise. Perhaps in response to this, South Africans are increasingly adopting mobile payments apps such as SnapScan and Zapper, which allow them to leave their cards - as well as cash - at home. Both services say they have hundreds of thousands of users, and rising in the country while SnapScan has signed up more than 16,000 merchants.

International Finance Magazine Jul - Sep 2015

The apps are simple, and work in similar ways. Merchants receive a static quick response (QR) code identifier to display next to their tills, while customers register for the app and link their cards. Payments can then be made simply by scanning the code and verifying payment through a fingerprint or PIN code. Kobus Ehlers, founder of SnapScan, says it is not only fear of credit card fraud but also the ease and efficiency of services such as SnapScan that are driving uptake. The company also allows users to pay for parking in Cape Town or buy a Big Issue using the app. â&#x20AC;&#x153;By leveraging the power of the smartphone, we can

85 enable users to complete transactions in places which was never previously possible - whether at a small street vendor, your favourite coffee shop or on social media,” Ehlers says. “Our approach has always been one of quick iteration and agility. Listening to feedback from our users, we identified that the real payments need in South Africa was in the real world. We adapted the product to cater for that requirement.” Derek Wiggill, general manager of SnapScan competitor Zapper, said the apps are seeing uptake both from the more tech savvy and those that would otherwise be wary. “As with anything new, there are those early adopters that jump right in and love the new experience

from inception,” he said. “Then, there are those more mainstream and conservative consumers who tend to make a fairly small payment and wait to see what happens. Once they realise that the process is not only easy and convenient, but also incredibly safe and reliable, we see them using it more and more frequently with larger and larger amounts being processed.” The whole market is also set for a shot in the arm this year, when Apple launches its Apple Pay service in South Africa. Payment apps and experts alike think the arrival of Apple can only benefit the industry. Gilles Ubaghs, senior analyst in the financial services technology team at Ovum, says though Apple Pay’s impact will be mixed in

terms of its uptake, with few people owning the necessary iPhone 6 and merchants likely to be put off by the reliance on near field communication (NFC), its entrance will spur the development of mobile payments. “Apple has the market visibility, and really the bling factor, that means consumers will notice it and take much more notice of it compared to other systems,” he said. “One thing we’ve seen in other markets is since Apple launched Apple Pay, the wider market has seen a hugely heightened level of development as everyone rushes to be competitive.” IFM

“

By leveraging the power of the smartphone, we can enable users to complete transactions in places which was never previously possible - whether at a small street vendor, your favourite coffee shop or on social media Kobus Ehlers, founder, SnapScan

editor@ifinancemag.com

Jul - Sep 2015 International Finance Magazine

Potential

in POS

Nomanini ushers African traders in informal sector into cashless society Tom Jackson 86

s far as gaps in the market go, the one spotted by South African Vahid Monadjem was a gaping one. Monadjem is the chief executive officer (CEO) of Nomanini, a rapidly expanding point of sale (POS) company. South Africa alone has more than 100,000 ‘spaza’ shops — informal convenience stores — turning over an estimated $600 million per year. More generally, half of the world’s population makes purchases from small shops and street hawkers. Yet, as Monadjem says, almost all transaction technology is developed with larger, more formal trade in mind. “At Nomanini, we see the opportunity to build transaction tools for informal

merchants in the mobilefirst, cash-first, developing market context,” he said. “The specific opportunity starts with moving the $70 billion trade in mobile scratch cards to an electronic alternative and then, using this base, enabling merchants to offer additional products and services such as prepaid electricity and mobile money transactions.” The original Nomanini solution was a prepaid vending machine for mobile airtime, a rugged, easy-touse point of sale terminal designed for informal markets where electricity is not always available and vendors have traditionally dealt in cash. It replaces physical distribution of airtime with virtual distribution, saving time and money

International Finance Magazine Jul - Sep 2015

while reducing the retailers’ overall risk. The vendor can simply select the type and amount of airtime to be sold and a voucher is printed within seconds. The device’s battery lasts for five days and can be fully charged within eight hours. “Informal vendors can use the terminal to sell and print airtime vouchers as required. There’s no need for retailers to buy scratch cards in bulk and then worry about selling all the stock. And distributors don’t need to print and deliver anything either. All that’s required is a roll of till paper and the terminal, which can be used even when there’s no internet access or electricity,” said Monadjem. He has seen his idea take off in extraordinary fash-

ion. The company now has approximately 750 terminals in a number of African countries processing more than one million transactions. Investors have bought into the idea — Nomanini has raised more than $2.5 million in funding — and expansion to the United Kingdom (UK) is on the horizon. Plus, its terminals now allow merchants to sell electricity and insurance, withdraw from mobile money accounts, and offer microloans. “I think our success so far has been built around three things,” he said. “First, we have a flat and open organisational culture,

next milestone is to reach 10,000 units this year. That will mean $2.5 million in revenue, including both hardware and annualised recurring platform license fees. The 2016 goal is to quadruple that number.” With this growth in mind, the company is likely to seek more funding this year, something it has not had any problem obtaining in the past. “We’ll likely see another round this year to accelerate our expansion and continue innovating. We’ll be growing our commercial and operations teams to keep up with this expansion. In addition, we see that there is lots more opportunity to create a broader range of transaction terminals and there’s a need to augment the services offered on the platform.” He said a combination of the scale of developing markets as well as their po-

“

If you look, there are already amazing companies operating in every developing market. Their operational capability combined with our technology can achieve wonders Vahid Monadjem, CEO, Nomanini

Local partners have been crucial to the swift rollout of the Nomanini solution across Africa

which enables us to move and learn fast. Second, we focus very deliberately on the experience and business of the merchant. Too often, between mobile operators, big fast-moving consumer goods companies and banks contending for consumers, the merchant at the point of sales is forgotten.” The third reason, he said, is that Nomanini builds partnerships to serve merchants. “If you look, there are already amazing companies operating in every developing market. Their operational capability combined with our technology can achieve wonders,” he said. Local partners have been crucial to the swift rollout of the Nomanini solution across Africa. Most recently, it partnered ICT provider Paratus Telecom to launch a mobile airtime distribution service in Namibia, while also linking up with Zambian airtime distributor StreetCred to facilitate rollout there. Monadjem says partnerships are the only way the company can expand. “Our local partners customise our terminals and configure our back-end system for their local markets and make it their own. We took a strategic decision

early on to focus on creating the world’s best technology for informal merchants. This requires focus,” he said. The focus has paid off. Both through selling terminals outright and licensing access to the back-end platform on a monthly basis per terminal, the company already makes significant revenues and is hugely positive about the future. Initially, it is all about the continued growth of the company. “Our overarching goal for the coming years is to be serving one million merchants by 2020,” Monadjem said. “Along this trajectory are a few revenue and profit milestones. We are growing fast, and in the next few years with this growth will mean reduced profits. We are focusing on revenue for our next few milestones. The immediate

International Finance Magazine Apr - Jun 2015

Jul - Sep 2015 International Finance Magazine

How is airtime loaded into the device/ terminal by the company selling airtime? • • •

Airtime is loaded on to the Nomanini platform through the management dashboard. Each company gets their own dashboard, which is hosted on Nomanini’s cloud infrastructure. They log in and upload the files that they receive from the mobile networks.

How does the vendor pay the company offering the airtime? • •

Taxi driver, South Africa

tential was what had made Nomanini an attractive destination for investment. “Beyond commodities, investors who need scale in fragmented markets are looking for companies that can grow across many markets,” he said. “Also, given that infrastructure in developing countries is, well, developing, this often means they focus on critical infrastructure, such as logistics or financial services. Moreover, many investors have recognised that these markets are fundamentally different, and require new approaches. Nomanini fits this mould.” Monadjem believes his company has demonstrated it has a solution to a real problem in the financial inclusion space, and that it is not specific to one country. At the heart of Nomanini, according to its CEO, is the valuable assistance it pro-

vides to end users, in terms of increasing merchants’ direct and indirect profits, ‘assisting distributors in virtualising the logistics of scratch cards and other products’, and helping providers of economically sustainable services. “These providers might be electricity utilities, insurance companies or wi-fi providers, who need to collect revenues in small increments from consumers in informal trade. With our platform in the market, they can do that without bearing the cost and operational overhead of setting up their own revenue collection channel,” he said. However, Nomanini is the only platform that offers offline vending — where terminals can continue to sell even when there is no cellphone signal. IFM

•

This is different for every company/ partner. In South Africa, Nomanini has partnered with the local chain stores and banks so that merchants can deposit at till points in stores, in banks or ATMs. Other countries have runners that collect cash and return that money to local offices. Staff at those offices credit merchants through Nomanini’s dashboard.

About Nomanini Nomanini (nomanini.com) is a South Africa-based mobile Point of Sale service for facilitating cash transactions in informal markets. With its rugged point of sale terminals and highly scalable, cloudbased backend, enterprises are able to efficiently distribute prepaid mobile and electricity vouchers and facilitate micropayments in frontier markets across Africa and beyond. Nomanini has signed partnerships in Kenya, Namibia, Ghana, Zambia and Mozambique with active terminals processing over one million transactions in those regions, including South Africa.

editor@ifinancemag.com

International Finance Magazine Jul - Sep 2015

Apr - Jun 2015 International Finance Magazine

Focusing on

emerging markets

ahid Monadjem is the founder and CEO of Nomanini, a South Africa-based mobile Point of Sale service for facilitating cash transactions in emerging markets. He is a trained engineer with extensive innovation and product design experience. He is passionate about working at the intersection of technology and design in informal markets, where Nomanini’s solutions can directly impact people’s lives. His vision for Nomanini is to provide platforms for transactions in emerging markets by empowering local partners to create the tools that best suit their particular environment. Before founding Nomanini, he was McKinsey & Company’s global fellow for Emerging Market Product Development. He has worked in Africa, South East Asia, North America and Europe in a wide range of industries, including technical services, design, consumer goods, stateowned utilities, petrochemicals and telecommunications. Vahid completed a BSc degree in Electromechanical Engineering at University of Cape Town, graduating with first class honours, before completing a BCom degree in Financial Analysis and Portfolio Management, again with first class honours. Based in Cape Town, he regularly travels around the world meeting partners and scoping out new opportunities to introduce Nomanini’s cloud-based, rugged point of sale terminals to informal markets. IFM

Jul - Sep 2015 International Finance Magazine

Welfare check Conservatives and UKIP feel Britain has attracted benefit migrants due to the relatively easy access to the social assistance scheme when compared to other European partners Giovanni Puglisi

International Finance Magazine Jul - Sep 2015

uropeans are increasingly concerned not just with the mass scale immigration from North Africa, but also with the increasing internal migration within the continent itself. According to a recent Eurobarometer survey, the issue of so-called ‘social benefit tourism’ preoccupies not only populist parties on the rise but more broadly large segments of the population in most EU Member States. The principle of non-discrimination highlights the importance of the mobility of workers for European integration and creates the basis for the existence of the Single Market. Indeed, the EU is often seen as an economic project and although the free movement of people within the EU remains a fundamental principle, Member States still retain control over their social policies and pressure to adjust them is high. For

example, freedom of movement and immigration are key issues in UK, where the government is looking for a way to legally curb the benefits and welfare payments available to EU citizens who move to Britain. However, UK is not alone, as discomfort among other Member States has risen sharply in recent months, especially in Germany. Problems do not arise for employed EU migrants as they and their families are eligible for the same social security benefits as employed nationals, but for those migrants who are not employed in the host country, access to social security is currently restricted, and there is mounting pressure to limit it even further. A recent ruling by the European Court of Justice (ECJ) on social assistance in Germany now seems to suggest a move in this direction,

allowing Member States to exclude economically inactive EU migrants who do not have sufficient resources for themselves and their families from accessing social assistance benefits. Yet, in the EU, current legislation entitlements of economically inactive EU migrants are not fully regulated. According to AmeThere is no alignment lie F. Constant, Program among EU countries Director of Migration at about transfer of benIZA, “There is no alignefits, pensions and ment among EU countries insurance. While the pilabout transfer of benefits, lar of EU is free mobility pensions and insurance. of labor, many benefits While the pillar of EU is free that go with the job are mobility of labor, many ben- not transferable from efits that go with the job are one country to the other not transferable from one Amelie F. Constant, country to the other.” Program Director of Yet, some individual Migration at IZA Member States, outside the framework of EU, have been trying to rewrite the rules of social assistance, which

Jul - Sep 2015 International Finance Magazine

remains a ‘grey area’ where stipulations among individual member states vary widely. Gudrun Biffl, Head of the Department of Migration and Globalisation at Danube University, Krems notes, “Basically, what it dwindles down to is the fear of a need for a converging social or welfare model in the EU. This means significant institutional change and one does not know what model to give preference to.” The Conservatives and UKIP in Britain feel that their country has attracted benefit migrants due to the relatively easy access to the social assistance scheme when compared to other European partners. However, there are virtually no signs to date that, as

claimed, migrant flows are gravitating towards established Member States which offer generous social security systems. Dr. Constant argues, “There is no strong support for the immigrant welfare tourism hypothesis.” She suggests that initial migration decision is not based on welfare benefits but migrants move for jobs and due to the high wage differences between home and host countries. ‘Benefit tourism’ is not a mass phenomenon as the majority of EU migrants are, by far, active workers. A European Citizen Action Service study analysed fiscal effects generated in Germany and

International Finance Magazine Jul - Sep 2015

UK, respectively, by citizens of other EU countries living there and, on balance, taxes and social security contributions raised by the EU migrants considerably outstrip expenditures on social benefits for them. According to Steen Mangen, Professor of European Social Policy at the London School of Economics, “The evidence is substantial that migrants are no more likely to be in receipt of welfare benefits than natives” and they are considered net welfare contributors in that they pay more in terms of taxes and social insurance than they consume in benefits.

The savings likely to accrue from this measure will be minimal given that EU migrants tend to remain in work, find new work quickly or migrate again Steen Mangen, Professor of European Social Policy at the London School of Economics

93 The Conservative Party in UK also aims to withholding unemployment benefits to EU migrants for the first two years of residence in the host country. However, according to Institute of Fiscal Studies, and as Prof. Mangen points out, “The savings likely to accrue from this measure will be minimal given that EU migrants tend to remain in work, find new work quickly or migrate again.” Moreover, there are other options currently being evaluated at the EU level for access to social benefits that do not inappropriately hamper the free movement of citizens within the EU, such as introducing longer waiting periods for economically inactive citizens who wish to claim benefits in

the host countries or switching to the home country principle when calculating social transfers to these citizens. Though, Dr. Constant warns, “The waiting period is tricky’ because one has to define the optimum period. While two years could be a workable solution, longer periods sound inhumane.” She argues that a successful scheme should include changes to the current welfare systems and active labour market policies. All in all, a definite solution to the problem posed by ‘inactive’ economic migrants within the EU has not yet been found, but what seems clear is that there should not be any

further or new limitations on immigration as it would represent an economically damaging step backwards in the integration process. On the contrary, workers’ migration as a mechanism to eliminate labour market imbalances should be regarded as an asset and free movement of people should still be considered as one of the key achievements of the EU. IFM editor@ifinancemag.com

Basically, what it dwindles down to is the fear of a need for a converging social or welfare model in the EU. This means significant institutional change and one does not know what model to give preference to Gudrun Biffl, Head of the Department of Migration and Globalisation at Danube University, Krems

Jul - Sep 2015 International Finance Magazine

Demographic projections in the EU Old age dependency ratio

2012

2060

4 people of working age to 1 person over 65

2 people of working age to 1 person over 65

in Mio 530 520 510 500 490 480 470 460 450 440 430 420 410 400

2015

2020

2025

Population change with migration International Finance Magazine Jul - Sep 2015

2030

2035

2040

2045

2050

2055

2060

Natural change in population without migration

Employment trends in the EU

Top occupations with labour shortages Health

Sales

Engineering

Finance Source: European Vacancy and Recruitment Report 2012

Job openings in 2010-2020 stem from the change in the number of jobs available and the number of jobs that need to be filled as people leave the labour market

By sector Primary sector & utilities Manufacturing Construction Distribution & transport Business & other services Non-marketed services All industries

Change in number of jobs

Jobs to be replaced

Total job openings

-1 397 000

6 979 000

5 582 000

-936 000

9 640 000

8 705 000

265 000

4 474 000

4 739 000

2 688 000

17 491 000

20 179 000

5 598 000

17 584 000

23 182 000

1 005 000

17 064 000

18 069 000

7 223 000

73 232 000

80 456 000

12 721 000

22 834 000

35 556 000

4 990 000

31 555 000

36 545 000

-10 488 000

18 843 000

8 355 000

7 223 000

73 232 000

80 456 000

By qualification High qualification Medium qualification Low qualification All qualifications

Jul - Sep 2015 International Finance Magazine

OPINION

Opinion

John Sharp

Investing in financial innovation

In the face of the awesome past inventions, is there really any genuine innovation happening in financial services today?

International Finance Magazine Jul - Sep 2015

OPINION

’m currently reading Smart Money: How High-Stakes Financial Innovation is Reshaping Our World for the Better, by Andrew Palmer, Head of Data Journalism for The Economist. Palmer does a fine job of illustrating the fact that financial innovation is not a recent phenomenon: there has, in fact, been a continuing history of financial innovation, one that spans centuries. Take, for example, the invention of interest, or profit sharing. Palmer postulates that the use of livestock as currency, in combination with the propensity of that livestock to breed, may have led to the creation of the concept of a “return on investment” – which, over time, no doubt led to many innovations with respect to the “splitting of the upside” among the lender and borrower. Peer to peer lending? P2P lending pre-dates banking by centuries. Unified currency and coinage? Emperor Qin Shi Huang unified the Chinese currency system in 210 BC. Trade finance? Banking? Stock exchanges? Derivatives? Foreign exchange? Centuries old innovations. Even the humble credit card — the archetypal consumer finance product — has been around for decades. So what’s left to do? In the face of such awesome past inventions, is there really any genuine innovation happening in financial services today? The good news for investors is “yes” — there are still massive problems still to be solved, and as Michael Lewis showed us in

Flash Boys, innovation (and millions of dollars in upside) doesn’t have to involve inventing a new form of exchange: it can sometimes come down to figuring out the best location for a server in a server room. At Hatcher, we invest in ICT (Information and Communications Technology) companies, the bulk of which have a financial services or technology component. And the success and rapid growth of these companies provides strong proof that there are still massive problems yet to be solved in finance — and massive gains to be made by venture investors. ApexPeak, a Singaporebased company founded by Gakim Solomons and Nick Gan barely two years ago, is an online trade finance platform that enables suppliers to receive early payment of their outstanding bills. The problem that ex-bankers Solomons and Gan are solving is how to supply working capital to small businesses based in markets that have yet to develop sophisticated credit scoring systems. That effort was recently given a boost by the acquisition of Dubai-based Cashnomix, founded by Sujith Kurup. Kurup and his technology team studied data on over 300,000 businesses, primarily within MENA, and developed a new approach to credit-scoring for emerging markets that is a good match with the innovative approaches to capital sourcing and insuring receivables pioneered by ApexPeak. Is this a worthy use of venture capital? You bet.

According to the International Trade Center, the Top 10 categories of physical goods traded annually amounts to over $9 trillion dollars, worldwide. That number does not include services, which in some countries such as the UK, account for more than 70% of GDP. Supplying capital to these markets may not be easy, but with help from the Internet, smart data systems based on emerging markets data, and innovative insurance products, there is potentially billions of dollars to be made from supplying working capital to emerging or under-served markets. Another of our startups working to improve access to funding and payment systems in emerging markets is Telr, last year’s recipient of the Arabian Business

“Startup of the Year” award in Dubai. Telr has developed a payment processing technology platform that is being further developed to support merchant cash advance (MCA) capabilities, based on an alternative system for determining credit-worthiness that leverages realtime data obtained directly through the platform. The upside? E-Commerce is just getting started in many of Telr’s key markets, and merchant cash advance — a business that is already able to target more than $1.4 trillion in annual B2C transactions (eMarketer) — is a nascent business in the fastest-growing e-commerce markets in the world. As investors, we like that combination: underserved and fast-growing. We have several other

Jul - Sep 2015 International Finance Magazine

OPINION

companies in our portfolio that are working on solving problems in the financial industry that are massive in scope — ThoughtRiver is solving the problem of automating document analysis so financial and other due diligence materials can be scored at scale; Heardable is producing detailed real-time reports based on correlations between social media, digital marketing and financial data; LenderExchange.com is currently in stealth mode but I think the domain should give you a reasonable indication of the market we are targeting. As a final example, I’d like to mention Hatcher. The “why” behind the development of the Hatcher Platform is illustrative of how financial innovations start with small needs and grow into large platforms. Prior to co-founding Hatcher, as angel investors, Harveen Narulla and I faced constant challenges

in getting information from our startups, keeping them compliant with filing deadlines and audits, and getting them in shape for future investment from companies with high standards of due diligence. In founding Hatcher, we decided to focus on developing a platform that would enable startups to quickly and easily report on their progress, stay in touch with their boards and investors, and stay compliant with government agencies. Then we had the idea of extending the platform to become a kind of investor club — a closed-end crowd-funding site, in reality — where we could share information on new investments, and market expansion opportunities, with our global base of investors, and investee mentors. The next thing we knew, the platform has developed into what Hatcher is today: a global system of micro

International Finance Magazine Jul - Sep 2015

venture funds in multiple markets, linked to a global fund and a network of expert mentors, supported by a highly flexible technology platform that makes it easy for startups to build their businesses and stay connected to their investors. I mention this last point because the development of the Hatcher platform came about for the same reason as every one of the other innovations I’ve mentioned in this article: there was a genuine problem to be solved. We didn’t create our platform because we were focused on making money as our primary objective — we created the platform in order to maximise the potential of our investee companies. And therein lies the truth at the heart of Palmer’s examples and our own experience in venture investment into financial innovation: set out to solve a problem, and you may create an enor-

mous market in your wake. And that may change the world in all sorts of positive and unexpected ways. IFM editor@ifinancemag.com

About the writer John Sharp is cofounder and CEO of Hatcher. Hatcher is a globally-focused venture investor with a simple mission: invest in startups run by awesome people who have a deep desire to solve real problems, and use our management platform and mentor network to help make these businesses continually stronger. For more information, visit https://hatcher.com.

Opportunities

ahead

With a relatively well-developed economy, Egypt stands to gain a lot from the new FTA pact, which covers a population of 625 million in the eastern and southern parts of Africa 100

Alessandra Bajec

n June 10, Egypt along with 25 African nations signed in Sharm El Sheikh an agreement to form a single free trade area (FTA) that would cover a population of 625 million in eastern and southern Africa, integrating three existing trade blocs — the Southern African Development Community (SADC), the East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA). The plan is intended to ease the movement of goods across member countries, which represent more than half of Africa’s GDP ($1.3 trillion), and boost investment within a common market.

Yomn M. El Hamaky, Professor of Economics at Ain Shams University, welcomed the FTA agreement as an important step for Africa which will take advantage of the wider market base of 26 member states, and use its own resources. She pointed out that Africa’s natural resources have been unfairly exploited by foreign multinational companies for years, with no effort to process those same resources in Africa. “With the creation of a free trade area, there’s potential for Africa to use resources efficiently by their people for their people,” Prof. El Hamaky noted. According to Dr. Ayman Shabana, Professor of Political Science at Cairo Univer-

International Finance Magazine Jul - Sep 2015

sity’s Institute of African Studies, the FTA deal will boost intra-African trade — at the lowest rate, compared to any other region — by opening up trade relations among African countries which, he estimated, account today for as little as 2 to 5% since Africa mainly trades with former colonial states. Dr. Shabana believes a common market will make it easier to trade goods across Africa, allowing African products to enter the continent’s market. Likewise, he thinks that access to such a large-size market will benefit Egypt, helping it to look beyond Europe, the US and Asia, and push its trade into Africa. “The free trade zone will

enable Egypt to market itself in food production, textile and petrochemical manufacturing,” the political scientist added, “Also, African products like coffee, tea, timber, gold and other metals will enter the Egyptian market.” Shabana is positive that Egypt will particularly benefit from investing in infrastructure, construction, banking communications in Africa, with companies like Mobinil and Arab Contractors already established in some African countries. Egypt is one of the most dynamic African markets, and enjoys a privileged geographical position making it an ideal hub for Africa. El Hamaky is confident that Egypt can act as a

bridge between Africa and the world, and also offer a base to sell in the other 25 African countries and vice versa which, she stressed, will translate in mutual benefit once the FTA is created. With the formation of a single trade zone, it is hoped to reach an 85% reduction in tariffs within three years and non-tariff trade barriers. “By reducing or doing away with tariff and non-tariff barriers to trade, you can export more easily, produce more, cut down costs, then you become more competitive,” the economist argued. In El Hamaky’s view, Egypt has a great deal to gain from the FTA plan in all sectors, from agriculture to manufacturing and the service sector. Over the years, Egypt has signed several multilateral and bilateral trade agreements that give the country access to the world’s largest markets. Shabana and El Hamaky agreed that the establishing of the FTA will not conflict with or affect Egypt’s existing commercial deals with other countries. Instead, it will encourage both Egyptians to invest in African countries and Africans to come and invest in Egypt. Enhancing profitable investment will, in turn, create opportunity to generate growing trade. The FTA is aimed at raising Africa’s share of global trade, which currently stands at just 2%. During the FTA pre-launch summit, COMESA Secretary-General Sindiso Ngwenya said the deal will ensure that jobs are created as companies involved in the production of goods and service across borders will be established in the region. Mr Ngwenya added that the FTA will allow for businessmen and women to trade freely and cheaply, noting that multiple trade protocols usually result in expensive business deals while a single, harmonised trade protocol will allow for cheap business deals. He said free movement of people across borders will stimulate business development and investment opportunities for the three economic regions. There is still a long way before the pact goes into force in 2017. First, the parliaments of all member-states —

Egypt’s parliament is yet to be elected — need to ratify the treaty. Besides that, although many African countries had signed up to previous trade bloc agreements, in practice they didn’t really mean anything. For Shabana, political will is one well-known challenge. Whether there is among the 26 countries sufficient will to follow through implementation. In part, the political science professor explained, that has to do with the fact that there are those who would profit as well as those who stand to lose from this deal due to unequal economic standards among these countries. The mixed group encompassed by the trade pact, ranges from big, populated countries with large economies like South Africa and Egypt, to countries with smaller economies and less wellestablished manufacturing sectors such as Somalia or Djibouti. The other key issue is infrastructure. With or without trade barriers, the poor state of roads, railways, airlines and ports makes intra-African trade difficult and expensive. Only greater commitment towards better infrastructure can support trade in Africa. Dr. Shabana mentioned another constraint is similar production which could leave out few trading options between African countries, known to be exporters of raw materials with a very low amount of manufactured goods. He added the continued commercial relations with former colonial states, dominating various African markets, and the instability caused by armed conflicts are two other factors that could hinder the FTA’s implementation. Prof. El Hamaky pointed to institution capacity-building as one key aspect to Africa’s trade integration, along with coordination efforts among the FTA members geared to make the trade deal work out on a win-win basis. “It’s important to identify who’s going to benefit, who’s going to lose from this integration and compensate these states fairly,” the economics professor said. El Hamaky emphasised that the

FTA’s drive is to find the comparative advantage, enhance industrialisation and to upgrade the human resources. Provided that the finances, the physical infrastructure, technology transfer and manpower skills are there, the success of Africa’s FTA will depend on how the resources will be used efficiently, enhance competitiveness and create potential for African businesses. IFM editor@ifinancemag.com

Less delay at

borders

frica is a big, attractive market for foreign investors from around the world. Trade links between Africa and China are set to continue growing. With the establishment of freer trade within Africa, Europe will find added value in trading with Egypt and 25 African countries as part of a single market. Freer trade and more harmonised markets generate a more convincing case for foreign direct investment. The less businesses have to deal with superfluous paperwork, long delays at borders, and a number of regulations, the better the business case for investment. According to Prof. El Hamaky, Egypt is one of the countries where the highest profitability can be achieved worldwide. Foreign investors have put funds in the Egyptian market after four years of unrest.

Jul - Sep 2015 International Finance Magazine

101

Growth in

cards MasterCard, Visa scale up African operations

102 Tom Jackson

he scale of Africa’s dependence on cash and the lack of formal banking on the continent are formidable. Africa is a place where credit card penetration is below three per cent, and more than 90 per cent of transactions are conducted with cash. Only one-third of the adult population has access to formal banking services. Yet, in this relative underdevelopment of the financial services industry lies a tremendous opportunity. The World Bank believes retail banking in Sub-Saharan Africa will grow at a compound annual rate of 15 per cent until 2020, bring-

ing the sector’s contribution to the continent’s collective GDP to 19 per cent. Many global firms have spotted the size of the opportunity MasterCard and Visa are at the head of the queue. Daniel Monehin, division president for Sub-Saharan Africa at MasterCard, describes the continent as a “very unique opportunity” for firms such as this. There are 2.2 billion MasterCard and Maestro-branded cards globally. In the Middle East and Africa, the company has doubled the number of cards to approximately 100 million in the past three years. “What is important to note is that Africa has im-

International Finance Magazine Jul - Sep 2015

mense strategic importance to MasterCard. It has been one of the fastest growing businesses for us globally over the past few years, and we expect it to continue to register high growth as demand for electronic payments continues its upward cycle,” Monehin said. The evidence of this growing interest from MasterCard - and Visa - in Africa is there for all to see. MasterCard is working with the Nigerian government to roll out an electronic payments solution through the National Electronic Identity Card project, and is engaged in a similar programme in Egypt. In South Africa, it has rolled out a biometric

grant payment disbursement system, while in Zimbabwe it has partnered mobile money service EcoCash to issue debit cards to customers. It also recently became the first international payments network to enter Somalia. Visa, meanwhile, is not being left behind in this scramble for electronic payments in Africa. The firm is supporting Rwanda’s cashless agenda through mVisa, a low-cost interoperable mobile branchless banking product, and has launched a Visa mobile prepaid card with Orange Money in Botswana. It has similar partnerships in southern Africa with MTN and Vodacom,

and is also active in various areas in Ghana, Kenya and Nigeria. Both firms are busy in Africa in a big way. This frantic level of activity has been assisted by the fact that both firms are fulfilling a genuine need while also playing a part in creating a customer base for themselves that did not exist a few years ago. Kamran Siddiqi, group executive for Central and Eastern Europe, Middle East and Africa (CEMEA) at Visa, said the company believes one of the most valuable contributions it can make is helping to bring more people into the formal financial system by creating pathways to financial inclusion. “We believe access to financial services is essential for progress. Financial inclusion moves people from being untapped and isolated members of our economic

system to thriving and contributing participants,” Siddiqi said. “Improving access to financial services and electronic payments is a critical building block to help more people improve their lives and lift themselves out of poverty.” That said, there is a significant business case. The social benefits may be stressed, but MasterCard and Visa are for-profit firms who, like many others, have spotted the scale of the opportunity in Africa. “The opportunity for Visa in Africa is immense. With most of these countries being cash-based economies, the opportunity to bring the benefits of electronic payments is vast and Visa will continue to invest in the region,” Siddiqi said. Monehin said delivering financial products and services, and so making

financial inclusion a reality, is MasterCard’s business imperative. “We designed a business case for financial inclusion where we have married the business case together with the altruistic case to create a new financial inclusion business model,” he said. “We refer to this model as “Doing Well by Doing Good”. What we are building in Africa is good for the governments and businesses of Africa, good for the people of Africa, and good for MasterCard. It’s not a zero sum gain; everybody wins.” Both companies are engaged in a long-term play, however. Bringing Africa’s near one billion people into formal banking offers the companies a great opportunity, but it is also a huge job that will not be completed overnight and requires different models

What is important to note is that Africa has immense strategic importance to MasterCard. It has been one of the fastest growing businesses for us globally over the past few years, and we expect it to continue to register high growth as demand for electronic payments continues its upward cycle Daniel Monehin, division president for Sub-Saharan Africa at MasterCard

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Aside from the flagship initiatives, much behind-the-scenes work goes in to make sure the “ecosystem” MasterCard and Visa need is developing properly.

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for different countries and regions. “There are barriers to the widespread provision of financial services, such as the lack of formal identity documentation, the challenges facing banks serving poor and often remote populations, and the need for improved financial literacy,” Monehin said. An ecosystem approach, relying on public-private partnerships (PPPs) and arrangements with companies such as Orange and MTN already long-term active in Africa, has proved important to both companies. “There is no single stakeholder in the value chain that can drive financial inclusion alone, deliver a full suite of solutions, and provide consumers with adequate financial education materials. Partnerships are imperative,” said Monehin.

“Globally, the public sector represents the single largest flow of money to the financially excluded. About 30 percent of what they receive comes from governments by way of social security payments and other benefits. You need the public sector to help with regulations, to help with a citizen identity system to facilitate Know Your Customer compliance, and to help create a good business climate. You need the private sector to bring distribution, efficiencies, and the capacity to execute.” Visa also believes partnerships are critical to its programmes, being the “third pillar” of its strategy. The firm works with financial institutions, governments and mobile network operators as it looks to expand access to electronic payments.

“An important partner to us is working with governments on regulation and interoperability,” said Siddiqi. “Investment and innovation thrive in places that have been willing first to allow the market to develop, and then introduced the right regulation in order to ensure entirely justifiable and important mechanisms, like consumer protection principles, which are essential when digital financial services are developing quickly. We, as investors, want to work with governments on these issues, not against.” Localised approaches are also important given the sheer diversity of African nations, especially from a payments perspective. “There is a large variation in account ownership between African countries. Some are at advanced stages

We believe access to financial services is essential for progress. Financial inclusion moves people from being untapped and isolated members of our economic system to thriving and contributing participants Kamran Siddiqi, group executive for Central and Eastern Europe, Middle East and Africa (CEMEA) at Visa

International Finance Magazine Jul - Sep 2015

of electronic payment adoption, while others are just starting their journeys,” said Monehin. Yet, these issues aside, the benefits are clear. “Our ultimate goal is to create a world beyond cash, and extend the benefits of electronic payments to the unbanked and underbanked,” Monehin said. “It is estimated that about 90 per cent of transactions in Africa are still carried out in cash. To address this, we are directly working with diverse industry stakeholders to build electronic payments ecosystem to drive usage of electronic payments.” Siddiqi agrees there is significant room for “major expansion” in card reach with markets being so cash heavy. “As we educate more and more individuals and talk to the benefits of card over cash, such as smart money management, security and convenience, an increase is

likely,” Siddiqi said. This focus requires a great level of investment. MasterCard has created regional hubs for its businesses in Africa - North Africa, West Africa, East Africa, Southern Africa and South Africa and has set up an office at the centre of each hub, in Lagos, Nairobi, Casablanca, Cairo and Johannesburg. “We employ local talent, who understand local market forces, challenges, dynamics and regulatory environments,” Monehin said. Aside from the flagship initiatives, much behindthe-scenes work goes in to make sure the “ecosystem” MasterCard and Visa need is developing properly. Monehin said MasterCard invests heavily in improving infrastructure, training merchants and issuers, broadening its business model, growing its operations and rolling out educational campaigns. “We are rewiring our

existing network in Africa with more reliable satellite and broadband connections to address infrastructure challenges, helping central banks and governments create sophisticated national payment systems that enable financial inclusion,” he said. “In the last few years, we have grown our operations dramatically. We now operate in 53 out of 55 markets that make up the continent. The only ones we do not operate in are Eritrea and Sudan due to US sanctions.” Education is also critical to the move towards cashless societies. “Citizens need to understand the benefits of electronic payments and how to apply them. Consumer outreach and education is essential to MasterCard’s comprehensive approach. In partnership with various financial institutions, MasterCard is running several awareness and education

campaigns to aid the understanding, adoption and usage of electronic payment products such as debit, credit and prepaid cards,” Monehin said. That said, advancements in technology are offer “unprecedented potential” for economic growth and productivity, driving a more empowered, inclusive planet. “While we can’t talk about financial inclusion without talking about cash, we can’t talk about cash without the need to move beyond it – to move to electronic forms of payment,” Monehin said. “Payments innovation and simplification is the key driver for inclusion. It is not just about making payments – it is about bringing efficiencies and cost reduction to the way the world works.” IFM editor@ifinancemag.com

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The smile is

widening

Hereâ&#x20AC;&#x2122;s why: throughout 2014, Metro Bank grew by a staggering 118% Peter Taberner

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fter the 2008 financial crash, the reputation of the banking world took a battering, although new banks on the high street such as the Metro Bank in the UK, are putting a smile back on the face of the industry. Founded in 2010 by American entrepreneur Vernon Hill, Metro Bank has become the UK’s first new high street bank in

a century. Hill created the Commerce Bank in the United States, which he eventually sold for $8.5 billion in 2007. His British project succeeded due to a customer service based model, a new kind of bank which did not exist in the UK. The gap in the market was there to pounce upon. Up to now, there are 35 Metro Bank branches.

The approach of the Metro Bank is centred around convenience for their customers. At present, it is the only bank where you can open an instant account, allowing customers to walk in and out of a branch with a fully functioning account. A process that can be completed in as little as 20 minutes. Other initiatives include safety deposit boxes that can accessed seven days a week and 24 hour properly staffed contact centres. And, a mobile app which

gives customers the option to temporarily block and unblock their cards via their phones. Quirky services are also part of the customer service equation, with baby changing facilities available, alongside coin counting “magic money” machines. There is even a service for dogs, where customers are allowed to bring their canine friends into an outlet for water and treats, with some stores going as far as offering a free dog micro chipping service. A Metro Bank spokesperson enthused: “Based on the principles of a retailer that happens to be a bank, Metro Bank is com-

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mitted to offering unparalleled levels of service, which includes opening its stores seven days a week for 362 days of the year, for the convenience of its customers. Unlike other UK banks, Metro Bank’s strategy is to over invest in its facilities and people, and part of this is opening more stores.” “The Metro Bank wants to offer the best customer service experience across all of its platforms, be it in-store, via its UK-based contact centres, and through online and mobile services.” “We open our stores early and late. On weekdays, Metro Bank stores are open 8am – 8pm, at weekends, and also on public holidays.” The Metro Bank, alongside the Secure Trust, Aldermore, Shawbrook, Tesco, Virgin and Handelsbanken banks, are part of a new

wave of “challenger” banks; muscling in on the UK market, to provide competition to the banking establishment, including Barclays and the HSBC. Last year, the British Banking Association (BBA) published its competition report, outlining why the challenger banks have progressed. Technological changes and a pro-competition regulatory regime have fuelled the cause for new entrants into the banking industry. As in the case of the Metro Bank, the different business models from the established banks, has handed them a distinct competitive advantage. Included in the report are figures from the Investec Specialist Bank, which revealed that mortgage lending from five challenger banks — Aldermore, Metro

International Finance Magazine Jul - Sep 2015

Bank, Shawbrook Bank, Tesco Bank and Virgin Money — reached around £35.5 billion in 2013. The share of the mortgage lending market for providers outside of the top six lenders — Lloyds, Barclays, HSBC, RSB, Santander UK and Nationwide — grew to 28.8% two years ago. Research from the global investment banking firm Jefferies, conducted by Joseph Dickerson, suggested that there is more room to manoeuvre for the challenger banks, reflecting the deleveraging of larger banks. The study estimates that the market share of the challenger banks could even double by 2018, if they remain at their current rate of growth. Traditionally strong banks might cede four or five points of growth, as they will have to reduce loan

“

There is no target demographic when it comes to customers. As a community bank, Metro Bank is a champion of businesses and has an almost even split when it comes to lending between retail customers and businesses Spokesperson, Metro Bank

Last year, the bank’s business customers accounted for 64% of the total deposits. The bank’s commercial activities have enabled them to play their part in the UK’s recovering economy to deposit ratios, leaving £5 billion of revenue there for the taking for the “challengers”. Throughout 2014, Metro Bank grew by a staggering 118%, with the total amount of deposits increasing to a total of £2,867 million, from £1,315 million at the end of the final quarter of 2013. Total loans grew to £1,597 million, a year on year increase of 112%, leaving the bank’s capital ratios in good shape. The first quarter of the this year has seen even more positive figures, as Metro Bank can celebrate attracting over 500,000 customer accounts, from personal and business clients. Deposits continued to spiral upwards reaching £3,375 million. The bank has now achieved quarterly growth of 18%, and 109% of growth year on year, as new stores opened in Brighton, Cambridge and Southend during the first three months of the year. Lending to businesses remains the

key priority for Metro Bank’s loans portfolio; business received 45% of their total lending for the first quarter of the year. Last year, the bank’s business customers accounted for 64% of the total deposits. The bank’s commercial activities have enabled them to play their part in the UK’s recovering economy. The Metro Bank spokesperson reflected: “There is no target demographic when it comes to customers. As a community bank, Metro Bank is a champion of businesses and has an almost even split when it comes to lending between retail customers and businesses.” “Face to face relationships are vital for all our customers, including businesses of all sizes. All of our stores have local business managers, and all of our business customers have a relationship manager who understands their business and its needs. We manually underwrite all our loans, allowing us to treat every customer as

an individual, taking into account their unique circumstances.” Metro Bank has become a huge success story. With an army of 1,500 well trained staff to facilitate the company’s vision, this part of the banking industry continues to sport a wide smile. IFM editor@ifinancemag.com

The challenger banks • • • • •

Aldermore Metro Bank Shawbrook Bank Tesco Bank Virgin Money

At your service Metro Bank Founder: Vernon Hill Started operations: 2010 Branches: 35 Working hours: 8 am – 8 pm Open seven days a week for 362 days of the year »

Vernon Hill, Founder, Metro Bank

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Going

nuclear Miriam Mannak

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In September 2014, South Africa signed a strategic partnership with Russia worth a trillion rand (ÂŁ56 billion), which will result in the construction of eight nuclear reactors

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fter signing agreements with Russia and China and holding consultations with the US, Japan, and other nuclear players, South Africa has made a clear statement with regards to the future of its energy mix. Experts are not convinced. The price tag is the main worry, and the fact that nuclear won’t solve the country’s immediate energy needs. When it comes to nuclear energy, the world is a bit of a mixed bag. On the one hand, quite a few countries are getting rid of their nuclear power plants. Take Germany. Since 2011, the country has closed at least eight reactors. The remaining ones will be shut down by 2022, if all goes well. Other countries however, like South Africa, are expanding their nuclear

footprint. In September last year, Africa’s second largest economy signed a strategic partnership with Russia. Worth a trillion rand (£56 billion), the agreement will see the construction of eight nuclear reactors. These plants, which are expected to be connected to the grid in 2023, will have a joined capacity of 9.6 Gigawatt. This is significant. The Rainbow Nation currently has only one nuclear power plant. The Koeberg reactor, outside of Cape Town, was built by France’s Framatome, now Areva, and commissioned in the mid-1980s. Owned and operated by South Africa’s main energy producer Eskom, the plant has a capacity of 1800MW. This equals 4% of Eskom’s total energy production capacity (±44,000MW). “The agreement with Russia provides for comprehen-

International Finance Magazine Jul - Sep 2015

sive collaboration in other areas of the nuclear power industry, including construction of a Russian technology-based multipurpose research reactor, assistance in the development of South African nuclear infrastructure, education of South African nuclear specialists in Russian universities and other areas,” said the South African energy department in a statement, in response to the signing of the partnership with Moscow. Not too long after that, Pretoria and Beijing signed three cooperation pacts. These precursors to procurement will shape extensive nuclear project financing frameworks between South Africa’s Standard Bank Group, China’s Nuclear Power Technology Corporation and the Industrial and Commercial Bank of China.

Other prospective nuclear players have been consulted too, including the US, Republic of Korea, France and Japan. “The National Development Plan (NDP) enjoins us to do thorough investigations on various aspects of the nuclear power generation programme before a procurement decision is taken,” says the department of energy in a statement. “Nuclear vendor parade workshops form part of the government technical investigation in preparation of a procurement decision.” The question is whether these nuclear expansion plans, which according to the newspaper Business Day could cost between R400 billion (£22 billion) and R1.4 trillion (£79.5 billion), are financially viable. The South African economy hasn’t been faring well lately. Last year, the

Despite uncertainties, the nuclear expansion plans have been hailed as good news for those who want to invest in South Africa. The reasoning is that energy is scarce, thus a very valuable commodity GDP expanded by 1.5%, the slowest growth rate since the recession five years ago. Last year’s growth is even more disappointing when looking at the 2004-2008 period, when the Rainbow Nation’s GDP increased by 4.92% per year on average. The ongoing energy crisis is not helping either. The problems, which have resulted in chronic power outages, are costing the economy close to £5 billion every year, says the department of public works. Despite these and other woes, South Africa is planning to fund most of its nuclear expansion programme itself. “We know exactly what we need,” President Jacob Zuma said during his most recent State of the Nation Address (SONA) two months ago. “We are now well-informed. We are moving ahead.” Interestingly enough, the NDP has not considered the financing of these new power stations in the fiscal 2015-2018 framework. A treasury spokesman was quoted in the media as saying that “the question of how nuclear would be paid for has not yet arisen because the process had not yet reached that stage.” This has made experts sceptical. Referring to Zuma’s annual speech, Johan Muller, energy analyst at Frost & Sullivan, says, “I

have yet to hear the motivation behind nuclear and, more importantly, the funding and practical implications of it.” Despite these uncertainties, the nuclear expansion plans have been hailed as good news for those who want to invest in South Africa. The reasoning is that energy is scarce, thus a very valuable commodity. A recent report by Earthlife Africa however, denounces the investment-friendliness of nuclear in South Africa. “Building a nuclear power plant has always been one of the most risky investment decisions because of the very poor record of nuclear power plants being built to time and cost, and being operated efficiently and cheaply,” writes author Steve Thomas, professor at Greenwich University, UK. “The economic record of South Africa’s existing nuclear plant at Koeberg is mediocre... took significantly longer to build than expected and reliability has been much worse than expected.” Thomas adds that the failed multi-billion rand Pebble Bed Modular Reactor programme, in which the government invested over half a billion pounds, has shown that nuclear in South Africa is difficult to get off the ground. The plans were mothballed five

years ago after it failed to find private investors. “This demonstrates that obtaining finance will be a major barrier to nuclear ordering in South Africa,” he writes. “The simplest way to get finance would be … to allow Eskom to build the plant with an explicit assurance that whatever costs are incurred can be passed on to consumers. In short, consumers would be signing a blank cheque.” The Democratic Alliance (DA), South Africa’s largest opposition party, says the nuclear expansion plans – apart from being too expensive – won’t solve the country’s current energy problems. “The DA is not opposed to nuclear energy. It has to be part of the mix,” said party leader Helen Zille during a recent press conference, adding that more effort should go into the roll-out of renewable sources. “I am prepared to put good money on a bet that says within 15 years the technology in renewable energies would be so advanced that we probably would not need (more) nuclear.” IFM

“

The economic record of South Africa’s existing nuclear plant at Koeberg is mediocre... took significantly longer to build than expected and reliability has been much worse than expected Steve Thomas, professor at Greenwich University, UK

editor@ifinancemag.com

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COUNTRY FOCUS: Paraguay

The unpretentious

superstar Kamilia Lahrichi

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COUNTRY FOCUS: Paraguay

Paraguay maintains robust growth in the midst of sluggish Latin American economies

oreign banks like BBVA, shops like Pizza Hut, TGI Friday, and companies like Samsung and even Porsche, have mushroomed on the Avenida Aviadores de Chaco, the main road from Paraguay’s Silvio Pettirossi International Airport to the capital Asuncion – indicative of the South American country’s economic achievements over the last decade. About 25 years ago, Paraguay was under Alfredo Stroess1

ner’s fist rule – the most enduring dictator in the region. This US-backed and anti-communist former president isolated his landlocked country of six million inhabitants for 35 years, until 1989. His leadership prompted an economy based on the contraband of cigarettes, coffee, cocaine and cars. Today, however, Paraguay is the fastest-growing economy in Latin America – despite the regional economic slowdown. Neighbouring countries have suffered from declining commodity prices, downturn in the Brazilian and Argentine markets, and sluggishness in top partners’ economy like China. Buoyant growth While regional growth plummeted from about 2.5 in 2013 to 0.8 in 2014 — the slowest in more than a decade except for 20091 — Paraguay grew by 5.8% in the last quarter of 2014. On average, it grew by 3.3% in the last decade.

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COUNTRY FOCUS: Paraguay

Paraguay grew by 5.8% in the last quarter of 2014. On average, it grew by 3.3% in the last decade

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Between 2003 and 2008, its commodity-based economy enjoyed robust growth thanks to higher commodity prices globally, growing demand and advantageous weather conditions for agriculture. Its economy heavily depends on agricultural production and foreign trade, namely soybean and beef. The World Bank set out that both made up about 40% of the country’s total exports in 2013. Outlook for this economic powerhouse is positive. An April 2015 report2 titled “Uneven Growth: Short- and Long-Term Factors” and released by the IMF forecasted that Paraguay’s economy is expected to expand by 4% this year, compared with 0.9% for Latin America and the Caribbean. 2 3

“In reality, the official forecast of Paraguay’s government is maintained at 4.5% for 2015,” says Humberto Colman, Director of Fiscal and Macro Policy in Paraguay’s Ministry of Finance in Asunción. Although the fall of commodity prices affected Paraguay’s grain exports, the country overcame an economic downturn by relying on other sectors. “The growth of the last five years can be explained by the dynamism of other sectors, such as construction, manufacturing […] and services,” says Mr. Colman. For instance, the construction sector — which expanded the most in 2014 with a 14% growth — has registered an average expansion of 7.8% annually in the past five years. Services grew by 7% a year

http://www.imf.org/external/pubs/ft/weo/2015/01/ http://www.worldbank.org/en/country/paraguay/overview

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and industry by 5.3% a year over the same period. “There is a big housing deficit in Paraguay, estimated at one million homes, and there is a shortage of offices too,” says Amilcar Ferreira, President of Consultora SEI, a consulting firm in Asunción specialising in financial management and strategy. Paraguay’s government is implementing a public works program to attract investments of $1 billion a year. Economic achievements In addition, the country enjoys a rather stable exchange rate and “historically high” international reserves, according to the World Bank3. It amounted to over $6.6 billion in March 2015. The government has consolidated macroeconomic

stability in the last decade. Between 2004 and 2011, the fiscal surplus averaged 1% of its GDP, official data pointed out. Inflation reached 4.5% in 2015, which was below the Central Bank’s target of 5%. The South American nation also introduced adequate fiscal and monetary stimulus packages after the economy fell to 3.8% in 2009, due to lower demand for commodities globally. This enabled the country to expand by 13% the following year – the highest level in South America. Besides, Paraguay has become an attractive market for foreign investment – benefitting from lower production cost and a large and young labour force. It is the third easiest country to do business with in the region – after Peru

COUNTRY FOCUS: Paraguay

The cost of agriculture land is lower than in other Latin American countries, which has driven investment from neighbouring countries

and Chile – according to the Doing Business 2015 report4. The report assesses regulations in business areas, such as the ability to start a company, protect investors, get a credit, deal with construction permits, resolve insolvency, register property, enforce contracts, pay taxes and trade with foreign countries. In agriculture in particular, the cost of the land is lower than in other Latin American countries, which has driven investment from neighbouring countries. 4 5 6

Many Brazilians own land in Paraguay’s eastern region, which produces most of the country’s soybean production. This has triggered social discontent – amid long-lasting battles over land disputes between the powerful Paraguayan landed elite and poor farmers. Moody’s Investors Service hence upgraded Paraguay’s government bond and issuer ratings in March 20155. The credit rating firm rewarded the country for strengthening its fiscal policies – with its 2013 fiscal

responsibility law and income tax reforms, spurring infrastructure investment, enhancing governance and diversifying its economy. Moving away from agricultural dependence Yet, Paraguay remains a largely agricultural country. It is the world’s fourth largest soy supplier. It also exports bovine meat, corn and wheat – mainly to Brazil , Russia, Germany and the US6. “Paraguay still depends on agribusiness (25% of its GDP in 2014), which in turn

depends on climate and rainfall’s variations,” says Mr. Ferreira. “These explain the volatility in Paraguay’s growth, although this [agricultural] dependence has decreased in recent years with a greater diversification of the economy.” For example, Paraguay’s GDP reached a record high of 12.9% in the first quarter of 2013, after dropping to -5% a year earlier – a historic low. In 2011-12, the South American nation’s agricultural exports, namely beef, plummeted due to severe

http://www.corpax.com/bairexport/DoingbusinessParaguay.pdf https://www.moodys.com/research/Moodys-upgrades-Paraguays-government-bond-rating-to-Ba1-from-Ba2--PR_320602 https://atlas.media.mit.edu/en/profile/country/pry/

The informal economy accounts for almost half of its $29 billion GDP, according to a November 2014 study by the local organization Pro Development Paraguay

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COUNTRY FOCUS: Paraguay

Ciudad Del Este, the second largest city, is flooded with street vendors, microenterprises and malls selling counterfeited goods

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drought and the outbreak of the foot-and-mouth disease – a highly contagious virus affecting cattle. Exports to Paraguay’s top markets were suspended. Uruguay, Brazil and Argentina banned meat imports from their ill neighbour, as Paraguayan soldiers slaughtered and buried a large amount of cattle. “We seek to expand the scope of medium and long-term financing for the farming and livestock sector to confront the negative shocks that could be caused by adverse climatic conditions,” says Mr. Colman, from Paraguay’s Ministry of Finance. He also mentions the government’s actions to improve agricultural technology. One key solution to address drought problems is the Itaipu dam, the planet’s largest in terms of energy generation. It is the second

largest dam after China’s Three Gorges Dam. Itaipu, which is owned by both Paraguay and Brazil, enables use of the hydraulic resources of Parana river to produce cheap and clean energy. With its 20 generators producing 14,000 MW, the dam serves about 75% of Paraguay’s energy demand and 17% of Brazil’s. “Under the table” Paraguay’s exceptional economic performance does not take into account the huge informal sector – undocumented and untaxed transactions that are not included in the GDP. About 320 kilometres away from the capital, Ciudad del Este is flooded with street vendors, microenterprises and malls selling counterfeited goods from across the globe. Just a few kilometers away from Argentina and Brazil, this commercial hub is a

International Finance Magazine Jul - Sep 2015

transit port to the two giant markets. Paraguay’s informal economy accounts for almost half of its $29 billion GDP, according to a November 2014 study by the local organisation Pro Development Paraguay (Pro Desarollo Paraguay in Spanish). It indicated that the country’s underground sector amounts to about $30 million worth of goods a day. This number – 47% – stands above the regional average of 41%. This vast sector of the economy highlights how Paraguay is trapped in the past, due to widespread corruption and cronyism. The South American nation remains a poor country with an unemployment rate that stood at 6.5% in January 20157. Despite the big colonial houses with large gardens on the side of the roads throughout the country, one

“

The country has grown economically in the past few years but there is still a lot of people suffering from poverty Javier, a 33-year old taxi driver in Luque, a town at the outskirts of Paraguay’s capital

COUNTRY FOCUS: Paraguay

in four Paraguayans is poor and one in 10 is extremely poor, according to data from the World Bank. Although poverty rates have declined in the past 10 years, it affected nearly 24% of the population in 2013. “The country has grown economically in the past few years but there is still a lot of people suffering from poverty,” explains Javier, a 33-year old taxi driver in Luque, a

town at the outskirts of Paraguay’s capital. “If you have a job here, you eat well and get dressed properly, but you don’t have a future in which you are likely to buy a house,” he explains. IFM editor@ifinancemag.com

The clandestine economy I n the San Pedro department, one of Paraguay’s most agriculture dependent regions, 250 kilometres north of the capital Asunción, fields of stevia hide a large and illegal production of marihuana. The South American nation is the largest marihuana producer in the region and the second largest in the world, after Afghanistan. About three hours driving away from Asunción, the soil of the wet local roads suddenly turns from light beige to earth tones, amid small producers’ agricultural fields. In some provinces, such as Amambay and Canindeyu, the local economy significantly depends on drug trafficking. At the national level, the trade contributes markedly to the country’s $29 billion GDP. “In regard to [marihuana], we are aware that an important percentage of the economy operates within the informal or underground economy,” says Humberto Colman, Director of Fiscal and Macro Policy in Paraguay’s Ministry of Finance in Asunción. “It is generally associated with criminal activities and smuggling.”

7 8 9

Paraguay’s National Anti-drug Secretariat (SENAD8 is its acronym in Spanish) estimated that there are about 5,000 to 8,000 hectares of illegal plantations of marijuana in the country. The organisation set out that the South American nation produces 48,000 to 30,000 tonnes of marihuana a year – as one hectare produces 6,000 kilos of the drug. SENAD also determined that about 20,000 people cultivate marihuana in the country of 6.8 million inhabitants. Personal consumption of the plant is decriminalised in the highly Catholic nation, even though the law on drugs 1,340/88 criminalises its production and marketing. One can thus carry up to 10 grams. Yet, being help in possession of over 10 grams is considered a crime and the consumer can go to jail. About 80% of Paraguay’s marijuana production is smuggled into Brazil — a market of 200.4 million consumers — through the loose and lawless tri border between Paraguay, Argentina and Brazil, and light aircraft, SENAD reported. The rest of the production goes to Argentina, Uruguay and Chile. There has been a government crackdown on marihuana producers. On April 27, 2015, SENAD officials burned more than 3,900 kilos

of marijuana in a natural reserve in Paraguay’s Itapúa department. About four tons of marihuana were harvested9 there. In addition, the organisation seized more than $25 million kilos worth of marijuana from January to April 201510 . Earlier in January 2015, Paraguayan anti-drug agents set fire to six hectares of marijuana worth $3.6 million dollars, in the northeast of Paraguay. Yet, next-door Uruguay’s decision to be the first nation on the planet to legalise the production and trade of marihuana in 2013 is likely to impact drug trafficking in Paraguay. Paraguayan officials criticised Montevideo’s decision as they expect an increase in marijuana and drug consumption. “We are more than convinced that that is going to stimulate domestic consumption there and therefore trafficking of marijuana,” said Rojas, Head of the National Anti-drug Secretariat of Paraguay. According to Rojas, marijuana prices in Uruguay “are much higher” than in Paraguay. “There will be more Paraguayan marijuana than in Uruguay and at lower cost,” he said.

http://www.tradingeconomics.com/paraguay/unemployment-rate http://www.senad.gov.py/

http://www.senad.gov.py/noticia/12467-destruyeron-mas-de-3900-kilos-de-marihuana-en-reserva-san-rafael.html#.VUe0rNNViko 10 http://www.senad.gov.py/archivos/documentos/RESUMEN_l61n19aa.PDF

Jul - Sep 2015 International Finance Magazine

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OPINION

Opinion

120 Conrad Warren

The evolution of

Deep Value

Investment The strategy has now become a platform for specialised Deep Value Finance funds

International Finance Magazine Jul - Sep 2015

OPINION

eep Value Investing (DVI), as an investment strategy, continues to be ardently practised by fund managers across the globe, even in the face of a rapidly changing and volatile investment landscape. The strategy, with origins as a more specialised, balance sheet focused approach to value equity investment, has now become a platform for specialised Deep Value Finance funds. It is interesting to note that the strategies of many specialised Deep Value Equity (DVE) funds have remained unchanged pre2008 until now. This may suggest that DVE strategies are relatively resilient to volatile macroeconomic conditions, and an analysis of some of the more commonly used DVE valuation metrics can support that argument. Valuation metrics, such as: Tangible Assets minus Liabilities (net positive real assets); negative enterprise value (more cash than market capitalisation);

P/BV < 1 (companies trading at less than the value of their booked net assets). These are strategies with a focus towards intrinsic balance sheet valuation arbitrage, with the majority of exposure at a microeconomic level. However, it is also at the microeconomic level where the majority of the risk sits. The average balance sheet valuation is far from efficient. So, to have an investment strategy with the majority of the exposure towards balance sheet valuations implies that there is a certain level of inefficiency in the strategy, which makes analysis, management and diversification paramount to overall success. When all of these elements are executed optimally, risk adjusted returns can often be above market, which is why DVI has garnered an almost cultlike following. A more recent application of DVI principles has been practised by the small number of specialized Deep Value Finance (DVF) funds. Similar to DVE funds, the

core strategies of DVF funds vary, yet still maintain fundamental DVI principles. Strategies like: (i) targeting borrowers that cannot access senior debt due to high gearing ratios, yet have high free cash-flow margins; (ii) High-yield, low LTV, collateral backed loans; (iii) short-term structured bridge finance. These DVF funds seek to capitalise on the deep value in a company’s intrinsic solvency and their ability to service debt. Essentially, credit rating arbitrage, or an even more verbose description – “a specialised special situations fund”. Way ahead Real estate as an asset class would be a logical next focus for Deep Value Investors, and in many ways, could be the most efficient application of DVI principles. Real estate is inherently far easier to value than both equity and debt, and as an asset class, sits below both equity and debt in a measure of risk and me-

dian rate-of-return (RoR). One suggested approach would be to focus analysis towards “off-the-plan” (OtP) property investments from well capitalised developers. These OtP investments often come with a significant discount to completed market value of the properties. Furthermore, OtP investments often come with guaranteed RoR on the properties over a set period of time. There is, of course, a certain level of risk to the investment strategy, but what is clear is that real estate as an asset class can provide an organic environment for both balance sheet and cash yield arbitrage. Acquiring an asset at a significant discount locks in the balance sheet capital gain. Guaranteed yield is leveraged due to the discounted acquisition of the principal multiplier. As mentioned, there is always going to be a high level of risk in a relatively aggressive and technical investment strategy such as DVI. However, with adequate amount of diligence in the analysis and execution of the strategy, there will continue to be many opportunities moving forward for Deep Value Investment. IFM editor@ifinancemag.com

Conrad Warren is Managing Director of Makati Capital Partners

Jul - Sep 2015 International Finance Magazine

121

OPINION

Damian Young 122

Challenges of

regulation and Fintechs

For the most part, the fear that Fintech companies would usurp banks has not come to pass

he banking industry has seen tremendous changes in the past 10 years. The financial crash resulted in an overhaul of regulation that damaged the reputation of banks. Coupled with a lack of internal innovation in banks, this crisis allowed Fintech upstarts to grab share in the industry. This has created a new, fractured financial landscape where traditional banks face the challenge of protecting market share from challengers, and answering regulation while trying to benefit from rising interest rates.

International Finance Magazine Jul - Sep 2015

Technology and innovation are driving this change in the digital banking world. While this innovation is challenging traditional banks, it also provides the tools with which banks can answer new regulation, like Basel III, while maintaining profitability, building more stability, and operating more transparently and fairly. Basel III, in short, is designed to improve banksâ&#x20AC;&#x2122; ability to absorb shocks, improve risk management and balance sheet governance while enhancing transparency. These new measures have changed capital requirements for banks,

OPINION

introduced new liquidity and funding measures, and instituted new leverage ratios. Answering Basel III means that customer type, relationship type, and channel type will need to be categorised resulting in a new set of challenges for deposits managers and treasury managers. To answer these challenges, having accurate but versatile data is essential. However, banks have been slow in their move to overhaul technology systems to analyse vast amounts of data and react to the modelling requirements needed to answer Basel III. On top of this, we see new Fintech industry entrants have been able to step into the arena using their innovative business models and cutting edge technology to take chunks of banksâ&#x20AC;&#x2122; more profitable product lines, such as lending and payments. These companies are nimble, agile, and wellfunded and brimming with

top technology and talent. The acceptance of these new entrants has been accelerated by the damaged reputation of the banking sector from the financial crash. For the most part, the fear that these Fintech companies would completely usurp banks has not come to pass. This is mainly due to their limited focus and limited customer insight. Fintech startups have a lot to learn about customer behaviour to be successful full line bank replacements. Despite this though, they are still taking profits away from banks at a time where interest rates are at a low and banks are working to answer the most revolutionary piece of banking regulation in a generation. Banks can overcome these two challenges with the same answer. Using data analytics, banks can price fairly by incorporating all segment, economic and regulatory variables into pricing decisions, therefore

answering regulation whilst providing a much needed answer to the Fintech startups with more fine-tuned offerings. Pricing more segments and products faster and more effectively will allow banks to win and protect their market share while growing responsibly by understanding and optimising the drivers of profitability across their portfolio. This will result in an improved customer experience and deeper market insights. Banks should use the deep data analytics available to understand the drivers of customer behaviour. They can then ensure that product design fits with this customer behaviour while satisfying Basel III measures. Banks must also use data to inform business strategies, such as optimisation, while remaining compliant to Basel III. Answering Basel III and combating Fintech challengers while remaining profit-

able is not easy for banks, but data analytics technology can give banks the edge they need. Banks will also find that they are in a better situation than they assume they are in when answering these challenges. Banks now have access to vast amounts of customer data. And through the continued introduction of and improvement of customer facing technology, such as mobile banking apps and websites, this will only continue to grow. The data banks hold is the envy of new industry challengers and a key element in answering regulation. Banks that have invested in their technology offering, either through partnering with a Fintech company or internal technology innovations, will be in a position to be most competitive; they can leverage more and better data to answer customer demands, maximise marketing efforts, easily integrate new services, and be able to satisfy the regulatory requirements. Banks can use data analytics technology to have a detailed understanding of their customers and to price based on this understanding, providing the transparency needed to answer Basel III and pricing, and segmentation savvy to take advantage of rising interest rates. IFM editor@ifinancemag.com

Damian Young is Vice-President of Banking for Nomis Solutions

Jul - Sep 2015 International Finance Magazine

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Go to

financial experts, rather than

an institution

Lars Oberle, Chairman of FINANZ KONZEPT AG

International Finance Magazine Jul - Sep 2015

ADVERTORIAL

Thatâ&#x20AC;&#x2122;s the advice of Lars Oberle, Chairman of FINANZ KONZEPT AG Tell us about your firm. Finanz Konzept AG was founded in the principality of Liechtenstein in 2001. The location in Zurich, Switzerland was added in 2004. In 2010, the headquarters was relocated to Zurich. We are authorised as an asset manager in Switzerland and is controlled and regulated by the supervision of securities. It has been a member of the Swiss Financial Analysts Association since 2006. Its asset management is a form of investment which guarantees that your goals, wishes and commitments are realised forcefully. Do not entrust your money to an institution. Choose financial experts committed to your financial success.

portfolio strategy well-suited to the market environment. We base our impartial investment approach on a solid fundamental assessment of the markets and in doing so we observe shortterm dominant factors such as cash flow and market psychology. As our client, you are entitled to expect something special. Superior performance and consistent focus on your particular needs are an absolute must for us. We seek to establish long-lasting customer relations based on trust, loyalty and reliability. Your personal advisor speaks your language and always takes time for you. Of course, you are entitled to expect complete privacy and discretion for generations to come.

Why should customers opt for Finanz Konzept and Switzerland? As a privileged customer of our company, you will benefit from the strategy of a globally active asset management activity. Discretion and anonymity are additional benefits, which you can enjoy due to our location. Moreover, purchase power stability (thanks to regularly low inflation rates, long term capital charges and healthy public finances) guarantees a healthy investment climate in Switzerland. Internationally recognised institutions regularly rank Switzerland in first place when it comes to long-term stability. These facts all speak in favour of our location. FINANZ KONZEPT AG is free from conflicts of interest. Our complete impartiality enables us to design a

What can clients expect from Finanz Konzept? Every client is unique. The basis for a solid partnership is regular personal contact. This allows individual portfolio strategies to be developed, which can always be adjusted to suit current situations and wishes. Our clients stand to benefit from our many years of experience in the form of personal support and a professional investment policy. Together with you, we define the investment strategy and invest your assets in accordance with your specific wishes and your individual risk preferences, and we inform you regularly about the status of your portfolio. Being aware of your occupational and family background is a prerequisite for successful private client banking. We consider it to be of utmost importance that we are

true to this, provided that we fulfil our task with the necessary respect, utmost loyalty and absolute discretion. The pronounced expert and social competence of our advisors is a guarantor for long-term customer relations based on trust. Sustainable financial success for you and your family is the objective of all of our activities. How do you retain your clients? We offer tailor-made structured products suited to your individual capital protection and yieldincrease requirements. Entrepreneurial thinking is key to successfully advising companies and institutions. It is the only way to ensure a sustainably positive performance. By continually keeping abreast of developments in the financial world, our experts have clear insight into which factors are influencing the markets of the future. As a result, we are able to offer you comprehensive expertise on all questions concerning financing, interest and currency management, corporate finance counselling and portfolio management before discussing and deciding upon further course of action together with you. This way you will be best placed to react dynamically in a continually changing market place and introduce the appropriate solution in all situations. How do you cater to the different needs of clients? Many entrepreneurs have to deal with complex

asset and family structures. Finanz Konzept provides an integral consultancy service, which is equal to the task of dealing with the complexity of the task. We specialise in the personal support of entrepreneurs through phases of radical changes. Furthermore, we create shareholding plans for family members, managers or other employees and we develop a carefully considered inheritance plan. Clients who wish to purchase, collect, preserve, sell or insure art will benefit from our profound know-how. As neutral experts, we form a discreet link between collectors and other participants in the art market, such as galleries, art dealers and auction houses. Our clients profit this way from our many years of experience dealing in art and our international network of contacts established over many years. What makes Finanz Konzept stand out in the crowd? We concentrate all of our efforts on meeting the personal expectations and we guarantee that we will provide our customers with outstanding service as regards security, discretion and exclusivity. Our aspiration is to find the best solutions for you, and our name stands for nothing less than that. Our small but efficient team performs its tasks with passion to offer you superior results based on mutual trust, discretion and common goals. IFM editor@ifinancemag.com

Jul - Sep 2015 International Finance Magazine

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COMPANY nEWS

Amwalak.com launches finance comparison site

126

mwalak.com has launched its finance comparison services in Saudi Arabia, allowing users to find, compare and apply for personal finance products from just one website. Amwalak.com is part of compareit4me.com, the largest comparison site in the Middle East with operations in UAE, Qatar, Kuwait and Bahrain. Like its parent company, Amwalak aims to bridge the gap between users and banks by listing financial products such as credit cards and loans from Saudi Arabia’s leading banks. Jon Richards, CEO of the compareit4me group, says, “By listing each and every product, we allow users to easily compare the whole market and find the best products for them. At the same time, we give banks the chance to reach new customers who are further down the decision funnel, thanks to our useful information and guides.” The launch of Amwalak. com comes at a time when the banking industry is thriving in Saudi Arabia, which is widely considered a key market to the global growth of Islamic finance. The industry is also rife with demand from both retail

and commercial customers. Saudi banks’ combined assets are estimated to be worth over SAR1.6 trillion ($427 billion), which cements its place as the second-largest financial asset base in the GCC region. The country’s economy remains buoyant, with current foreign currency reserves standing at $750 billion. In launching their services to the Saudi market, the team at Amwalak is keen to stress on the importance of comparing all the banks and their offers before applying for any facility. Samer Chehab, COO of compareit4me, says, “Tak-

International Finance Magazine Jul - Sep 2015

ing out any kind of debt is a big deal and shouldn’t be taken lightly. The competition between banks is good for consumers; we see many different types of rewards attached to certain products and they can be great. However, it’s important to look beyond simple cash back offers or shopping discounts and get to the important details, such as interest rate, monthly costs and terms.” Amwalak.com aims to build on the hugely successful year enjoyed by compareit4me.com, which was voted Best Finance Comparison Site in the UAE by IFM Awards, and Best Com-

parison Site in the Middle East by Global Banking and Finance Review. “We want to democratise consumer finance in the Middle East and the first step towards achieving that is facilitating accurate product comparisons. The banks we have spoken to in Saudi Arabia have been welcoming the idea of financial comparison and understand that this is a win-win for consumers and banks alike,” adds Richards. IFM editor@ifinancemag.com

Calendar

26-27 August 2015 Global Payment Summit (Payment systems)

MARK YOUR

Calendar

Singapore

3-5 August 2015 The International Conference on Global Economics (Global Economics)

1-4 September 2015 Asia Pacific Mining Exhibition (Mining) Sydney, Australia

8-10 September 2015 International Metallurgy Industry Expo (CIMIE) (Metals)

22-24 September 2015 E-PaymentIndia Expo (E-Payment) New Delhi, India

29 September -1 October 2015 IT & Business (Information Technology) Stuttgart, Germany

30 September -2 October 2015 Deck Expo (Shipping & Railway) Chicago, USA

Beijing, China

8-10 September 2015 Cloud Connect China (Cloud Computing) Shanghai, China

1-4 October 2015 Energy generation and conservation (Energy) Augsburg, Germany

10-11 September 2015 Oil & Gas Technology Conference & Exhibition (Oil & Gas)

5-6 October 2015 Emerging Tech (Technology) London, UK

Beijing, China

15-16 September 2015 THE ENERGY EVENT 2015 (Energy trade show) Birmingham, UK

3-5 November 2015 Airtec (Aerospace)

Frankfurt, Germany

Birmingham, UKÂ

12-14 August 2015 OIL POWER MINING 2015 (Oil, Power, Mining) Orlando, USA

17-18 September 2015 Southern Asia Ports, Logistics and Shipping (Shipping) Mumbai, India

9-11 November 2015 Unconventional Resources Conference & Exhibition Asia Pacific (Unconventional Resources) Brisbane, Australia

Jul - Sep 2015 International Finance Magazine

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COLUMN OUT OF OFFICE

‘I Love action related sports activity’ Carsten K Rath, CEO of Lifestyle Hospitality & Entertainment Group, is recognised as the leading expert in service excellence Suparna Goswami Bhattacharya

What do you look forward to after work? I love to surf, swim and play tennis. This invigorates me for the working week and tennis in particular allows me to develop a competitive spirit. What are your favourite leisure activities? I love to travel and write books as both broaden my mind and allow me to think creatively. When travelling, you get the opportunity to meet different people from many facets of life. Your hobbies? I love any action related sports activity, whether participating or watching. Another hobby is shopping, particularly for shoes. The craftsmanship that goes into producing a beautiful pair of shoes is extremely fascinating and I do love a signature pair. Do you travel a lot? Yes. My last destination was Fuerteventura on a surfing holiday. It wasn’t too far to travel, but felt miles away in terms of relaxation. Do you buy the latest

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International Finance Magazine Jul - Sep 2015

gadgets? I pride myself on being in touch with the latest innovations to inspire me in all elements of my life. It is extremely important to be up to date with the latest technology and writing, as popular culture is constantly evolving. Which was the last gadget/book you purchased? A travel bag, which has proved exceptionally useful as I do love to travel regularly and take important belongings with me in style. The latest book I read was Hummeldumm by Tommy Jaud. It is a fantastically witty book. What is your favourite food? I cannot ever say no to Sashimi. Japanese food, in particular, is masterfully created and sashimi is vitamin-rich, freshly prepared and aesthetically unique. On the sweeter side, cupcakes are definitely my favourite! IFM editor@ifinancemag.com